Abott Laboratories

COMPANY ANALYSIS
Abbott Laboratories
Datamonitor Healthcare Company Analysis: Big Pharma
Abbott Laboratories is a global broad-based healthcare company with commercial interests spanning pharmaceuticals, diagnostics, medical devices, ophthalmology, and nutritionals. In 2011, Abbott posted total revenues of $38.9bn, making it one of the leading healthcare product providers worldwide. Spurred by M&A, Abbott has successfully grown all of its businesses over the historical period of 200511. Focusing specifically on prescription pharmaceuticals, where a number of acquisitions have taken place, Abbott has gone on to record sizable sales growth. Rx sales have grown at an 8.4% compound annual growth rate (CAGR) between 2005 and 2011, rising substantially from $14.0bn to $22.7bn. Abbotts pharmaceutical sales outlook will be dramatically altered by imminent restructuring, which will see the separation of Abbotts research-driven pharma portfolio away from the rest of the business to become a standalone company, known as AbbVie. Historically, Abbotts pharma business has been driven by a combination of organic growth and incidental M&A events. Acquisitions of Kos (Niaspan [nicotinic acid]), Solvay (AndroGel [testosterone], Creon [pancrelipase]), and Piramal have all instantly lifted Abbotts pharma sales, while organic growth for a number of key product lines, such as Humira (adalimumab) and TriCor/Trilipix (fenofibrate), has boosted Abbotts pharma revenue stream more gradually. Moving forward, Humira will remain the companys principal growth driver, while patent expiries will see Niaspan, Kaletra (lopinavir + ritonavir), TriCor, and Zemplar (paricalcitol), among others, erode significant sales from Abbotts top line. Abbott is heavily reliant on Humira, which will itself face potential biosimilar erosion from 2016, to compensate for products at high risk from generic erosion over the forecast period. Since Abbott has limited pipeline expectations providing only modest sales of around $400m by 2017, the contribution from marketed products like Humira will be instrumental in dampening the impact of patent expiries. The imminent separation of its innovative pharma business, AbbVie, will create two rather distinct companies in terms of operating performance, with AbbVie likely to exhibit higher profit margins due to its core focus on the volatile, higher-margin pharmaceutical sector, while Abbott will assume a more stable business model in lower-margin sectors. Reference Code: HC00068-001 Publication Date: August 2012
Datamonitor Company Analysis: Abbott Laboratories

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HC00068-001/Published 08/2012 Page 1
About Datamonitor Healthcare
ABOUT DATAMONITOR HEALTHCARE

Datamonitor Healthcare provides a total business solution to the pharmaceutical and healthcare industries. Its services reflect its expertise in therapeutic, strategic, and e-health market analysis and competitive intelligence.
About Datamonitors Company Analysis team

Datamonitors company analysis team consists of a number of dedicated company analysts, who work closely with Datamonitors disease teams to offer in-depth analysis of the prescription pharmaceutical industry from a corporate perspective. The team covers three distinct groups of companies: Established pharma Containing leading prescription pharmaceutical companies, which account for an estimated 70% of annual industry sales. Emerging pharma Analysis of key emerging pharmaceutical companies with some of the most talked-about pipeline candidates. Generics and biosimilars In-depth analysis of the leading generics and biosimilars companies.
For more details on Datamonitor's company analysis coverage, please contact pharmavitae@datamonitor.com.
Data sourcing
Sales data
All Datamonitor company analysis is based on company-reported sales and financials data. For details around our forecasting methodology, please contact pharmavitae@datamonitor.com.
Analyst consensus
All prescription pharmaceutical forecasts have been made by Datamonitor. However, PharmaVitae also uses analyst consensus (from at least three individual brokers) to derive non-prescription pharmaceutical sales and operating cost ratio forecasts.

SCOPE OF ABBOTT ANALYSIS

As an established company, Abbott Laboratories sits within Datamonitors Big Pharma peer set. Datamonitor's analysis focuses on the companys corporate strategy, marketed portfolio, pipeline potential, and financial position through to 2017. Table 1: Datamonitors established pharmaceutical company coverage, 2012
US Big Pharma Abbott Laboratories Amgen Inc. Bristol-Myers Squibb Co Eli Lilly & Co. Johnson & Johnson Merck & Co., Inc. Pfizer Inc.
Ex-US Big Pharma AstraZeneca plc Bayer AG Boehringer Ingelheim F. Hoffmann-La Roche Ltd GlaxoSmithKline plc Novartis AG Novo Nordisk A/S Sanofi
US Mid Pharma Allergan Inc. Baxter International Inc. Biogen Idec Inc. Celgene Corporation Forest Laboratories Inc. Gilead Sciences Inc.
Ex-US Mid Pharma Actelion Ltd. CSL Limited H. Lundbeck A/S Les Laboratoires Servier Menarini Merck KGaA Shire plc UCB S.A.
Japan Pharma Astellas Pharma Inc. Chugai Pharmaceutical Co., Ltd Daiichi Sankyo Co., Ltd Dainippon Sumitomo Ph. Co., Ltd Eisai Co., Ltd Mitsubishi Tanabe Pharma Corp. Otsuka Pharmaceutical Co., Ltd Shionogi & Co., Ltd Takeda Pharmaceuticals Co., Ltd
Big Pharma comprises companies with annual prescription pharmaceutical sales of more than $10bn that are not headquartered in Japan. Mid Pharma comprises companies with annual prescription pharmaceutical sales of less than $10bn that are not headquartered in Japan. Japan Pharma comprises companies headquartered in Japan.
Source: Datamonitor
DATAMONITOR
If you have any questions about this analysis or Datamonitors coverage of other established companies, please contact us on pharmavitae@datamonitor.com.

PharmaVitae Explorer database

Please visit the PharmaVitae Explorer database for online access to full sales, product and financial data. The PharmaVitae Explorer contains Datamonitors forecasts and historical company-reported sales for more than 1,500 drugs spanning the top 50 pharma and biotech companies together with companies historical and forecast operating cost and profit data. Figure 1: The PharmaVitae Explorer
Source: Datamonitor, PharmaVitae Explorer
DATAMONITOR
Analysis structure
Executive summary
The executive summary brings together all of the key findings of the profile into an overview of the companys prospects to the end of the forecast period, including an analysis of the companys key strengths, weaknesses, opportunities, and threats (SWOT analysis).
Strategic insight
The strategic insight chapter analyzes the strategic implications of the companys outlook, identifying key challenges facing the company and discussing areas where the company has gained a strategic advantage over its competitors.
Company overview
The company overview chapter details the companys history and current structure, outlining any other business sectors in which the company operates.

Operating performance analysis

Bringing together Datamonitors prescription pharmaceuticals sales forecast and analyst consensus forecasts for other business units and costs, the operating performance analysis chapter analyzes the companys historical and forecast financial performance.
Data sourcing
Sales data
All Datamonitor PharmaVitae company profiles use company-reported sales and financials data.
Analyst consensus
All prescription pharmaceutical forecasts have been made by Datamonitor. However, the Company Analysis team also uses analyst consensus (from at least three individual brokers) to derive non-prescription pharmaceutical sales and operating cost ratio forecasts.

Executive Summary
EXECUTIVE SUMMARY Key findings

Abbott Laboratories is a global broad-based healthcare company with commercial interests spanning pharmaceuticals, diagnostics, medical devices, ophthalmology, and nutritionals. In 2011, Abbott posted total revenues of $38.9bn, making it one of the leading healthcare product providers worldwide. Spurred by M&A, Abbott has successfully grown all of its businesses over the historical period of 200511. Focusing specifically on prescription pharmaceuticals, where a number of acquisitions have taken place, Abbott has recorded sizable sales growth, with an 8.4% compound annual growth rate (CAGR) between 2005 and 2011, rising substantially from $14.0bn to $22.7bn. Abbotts pharmaceutical sales outlook will be dramatically altered by imminent restructuring, which will see the separation of Abbotts research-driven pharma portfolio away from the rest of the business to become a standalone company, known as AbbVie. In this separation, a range of branded generic products collectively generating around $4bn in annual sales will be retained by Abbott. Ignoring this separation, however, we can get an overall picture of how Abbotts pharmaceutical business is set to perform. Current expectations are extremely flat, with sales forecast to increase by just $46m between 2011 and 2017, an outlook that does, however, disguise significant shifts in sales at the product level, where a number of major expiries are set to occur. Historically, Abbotts pharma business has been driven by a combination of organic growth and incidental M&A events. Acquisitions of Kos, Solvay, and Piramal have all instantly lifted Abbotts pharma sales, while organic growth for a number of key product lines, such as Humira (adalimumab) and TriCor/Trilipix (fenofibrate), has boosted Abbotts pharma revenue stream more gradually. Moving forward, Humira will remain the companys principal growth driver, while patent expiries will see Niaspan (nicotinic acid), Kaletra (lopinavir + ritonavir), TriCor, and Zemplar (paricalcitol), among others, erode significant sales from Abbotts top line. Abbott is heavily reliant on Humira, which will itself face potential biosimilar erosion from 2016, to compensate for products at high risk from generic erosion over the forecast period. Since Abbott has limited pipeline expectations, providing only modest sales of around $400m by 2017, the contribution from marketed products like Humira will be instrumental in dampening the impact of patent expiries. With sales across both pharmaceutical and indeed the rest of Abbotts healthcare business expected to be flat, the company is set to achieve only modest improvements in its profit margin over the forecast period. Of course, the imminent separation of its innovative pharma business, AbbVie, will create two rather distinct companies in terms of operating performance, with AbbVie likely to exhibit higher profit margins due to its core focus on the volatile, higher-margin pharmaceutical sector, while Abbott will assume a more stable business model in lowermargin sectors.

Executive Summary
Abbott prescription pharmaceutical sales outlook

Historically, Abbott has enjoyed impressive sales growth in the prescription drug market, achieving double-digit annual sales growth in all but 2 years between 2005 and 2011. The only dips occurred following the 2006 termination of Abbotts US co-promotion agreement with Boehringer Ingelheim, which had generated sales of $2.4bn in 2005, and in 2009, although only by 1.3%, due to the arrival of generic Depakote (valproic acid). In all, the Illinois-based firm saw annual prescription pharmaceutical revenues increase by $8.7bn, equaling a compound annual growth rate (CAGR) of 8.4% over 200511, making Abbott the fifth fastest-growing company in the Big Pharma peer set over this timeframe. Abbotts growth can largely be attributed to the emergence of Humira (adalimumab), which recorded sales of $7.9bn in 2011, a $6.5bn increase between 2005 and 2011. M&A has also played a major role in Abbotts growth, executing major revenue-boosting deals for Kos Pharma, Solvay, and Piramal. Looking ahead, Abbott is faced with an uphill task to maintain growth over the forecast period as generics are expected to impact a number of its established brands. Despite further growth from Humira, which will alone account for just less than half of Abbotts total prescription pharma sales by 2017, the decline of TriCor/Trilipix (fenofibrate/fenofibric acid), Niaspan (nicotinic acid), and Kaletra (lopinavir + ritonavir) will offset this significantly. Such is the neutralizing impact of these expiries, the overall balance of play will be flat for Abbotts pharma business, with a marginal sales increase of $46m expected between 2011 and 2017. Abbott has a relatively sparse late-stage pipeline and will rely mainly on marketed therapies like Humira to drive growth. Faced with limited growth prospects, Abbott Laboratories has set in motion the process to separate its pharmaceutical business from the rest of the company, which is focused more on devices, diagnostics, and medical products, as well as Abbotts branded generics business. AbbVie, the name by which the new business will be known, is expected to be separated out before the end of 2012, the current plan being to issue shares in the newly formed company to existing shareholders. AbbVie will retain all of Abbotts "innovative" pharmaceuticals, but will not have ownership of Abbotts branded generics sold outside the US, such as those obtained in the Solvay acquisition, which will remain part of Abbotts business under the "established pharmaceutical" umbrella. According to Abbott, the resulting company (AbbVie) will have annual revenues of approximately $18bn, offering high returns (typically higher than those in the other areas in which Abbott operates) as well as high levels of innovation, and will be focused predominately on the major markets of the US, Japan, and the EU. In making this move, Abbott is following a similar strategy to companies like Bristol-Myers Squibb, which has stripped out non-pharma operations in order to realize a strict focus on innovative pharma in major healthcare markets, and to ensure both the survival and prosperity of corporate performance as challenges in the pharma industry intensify. Additionally, in assuming this model, Abbott has primed the spin-off entity for takeover or merger. The potential that a company from Big Pharma will indeed step in to acquire AbbVie is quite high given the ease of integration enabled by AbbVies streamlined business model as well as the desirability of its portfolio, notably Humira. A number of companies, such as AstraZeneca (which already has an association with Abbott

Executive Summary
through the Humira/CAT legacy agreement), Eli Lilly, and Bristol-Myers Squibb could be tempted into doing a deal with Abbott in the run-up to the separation.
Figure 2:
Abbotts prescription pharmaceutical performance, sales ($m) and growth rate (%), 200517
Source: Datamonitor; company-reported information
DATAMONITOR

Executive Summary
Table 2:
Abbott key product overview ($m), 201117
Product
2011 ($m) 2017 ($m)
201117 Notes diff
Humira Sevorane AndroGel Synthroid Creon Lupron Kaletra Biaxin TriCor/Trilipix Influvac Duodopa daclizumab Duphaston Betaserc
7,932 756 875 638 630 810 1,170 542 1,692 210 93 0 223 233
11,136 846 731 690 607 565 546 524 450 373 345 311 286 283
+3,204 Increased sales on indication expansion; will account for 48.9% of Abbott pharmaceutical revenues in 2017 +90 Anesthetic drug; modest growth in emerging markets expected -144 Testosterone gel loses market share in US +52 Continued protection from generics due to bioequivalence issues -23 US patent expiry offset by emerging market growth in near term -245 Decline due to US patent expiry; depot formulation offers relative barrier to generics after 2013 expiry -624 Anti-HIV drug, intense competition from newer therapies, US generic erosion following patent expiry in 2015 -18 Ex-US revenues of antibiotic -1,242 Fibrate franchise under threat when earlier formulation TriCor is subjected to generic substitution for the first time from 2012 +164 Influenza vaccine gained in Solvay acquisition +252 Intestinal L-dopa gel used for Parkinsons disease, in development for US market +311 Gained in facet acquisition, anti-interleukin-2 humanized antibody in development for multiple sclerosis +63 Branded generic from Solvay used in female reproductive indications +50 Branded generic from Solvay used in Mnires disease
Total prescription pharmaceuticals
22,730
22,776
+46 Overall sales projection is flat for Abbotts pharmaceutical division (soon to be spun out as AbbVie), as generic erosion will be eliminated by continued growth of best-seller Humira
Note: totals may not sum due to rounding.
Source: Datamonitor prescription pharmaceutical sales forecasts; company-reported information

DATAMONITOR

Executive Summary
Abbott financial outlook

Abbott has combined its strong historical growth at the top line with growth at the operating profit level, which increased by $1.4bn between 2005 and 2011. Operating costs have also risen sharply, however, meaning that Abbotts profits have not risen in relation to total revenues; revenues grew at a 6-year compound annual growth rate (CAGR) of 9.7% compared with profit growth at a CAGR of 4.7%. Abbotts M&A growth strategy has been instrumental both in terms of driving sales and providing cost-saving opportunities, although these have not yet been fully realized by Abbott, since total operating costs have almost doubled from $18bn in 2005 to $33bn in 2011. The imminent separation of its pharma business from the rest of its operations will help to improve transparency in this regard and will better position the resulting companies to realize operating efficiencies. Although the financial outlook for Abbott does not currently take into account the imminent separation of its pharma business, which will dramatically alter the companys financial configuration, it is still possible to gauge how the company is set to perform as a whole. As things stand, the companys financial outlook is rather flat, as growth across both sales lines and costs lines is expected to slow on current balance. The impact of Abbotts diversified business model has generally hampered the companys ability to achieve profit margins of around 30%, which are more typical of Big Pharma, and with Abbotts imminent restructuring, significant cost savings could yet be realized, particularly across what will become its innovative pharma business, AbbVie. If Abbotts separation works, Abbott will retain the shape of a business made up of nutritionals, medical devices, diagnostics, and mature pharmaceuticals, which will be more defensive in terms of revenue generation but perhaps less profitable. In contrast, the spun-out entity, AbbVie, will be focused on innovative pharma and will thus have higher margins but be more susceptible to the typical challenges facing innovative drug companies, such as patent expiry and drug development failures. Ultimately, the threat of a fairly flat operating performance has given Abbott the motivation to carry through its separation, something it is of course no stranger to, having successfully divested its injectables-focused business, Hospira, a number of years ago. In terms of its overall pharma business in its current state, key positive levers for profitability will be the continued strength of Humira (adalimumab), potential cost savings and synergies yet to be realized following the consolidation of Solvay, Facet Biotech, and Piramal Healthcare, and the expansion of both new and existing brands in established and emerging geographies. The biggest threats to Abbotts pharma businesses remain patent expiries and subsequent generic erosion, the failure to generate cost savings, and drug development setbacks.

Executive Summary
Figure 3:
Abbotts financial performance ($m), 200517
Source: company-reported information; Datamonitor prescription pharmaceutical sales forecasts; analyst consensus forecasts
DATAMONITOR

Executive Summary
Table 3:
Abbotts financial performance ($m), 201117
2011 ($m)
2017 ($m)
201117 diff Comments
Rx pharma Other revenues Total revenues
22,730 16,121 38,851
22,776 17,154 39,930
+46 Very flat outlook as positive drivers are neutralized by negative resistors +1,033 +1,079 Growth slowdown due to negative forces impacting prescription pharma business
COGS S,G&A R&D Other operating expense
-15,541 -12,756 -4,129 -1,075
-16,262 -13,129 -4,230 0
-721 -373 -101 +1,075
Operating profit
5,350
6,310
+960 Steady operating profit expectations provide Abbott with impetus to perform separation in search of greater efficiencies across its diverse businesses
Note: totals may not sum due to rounding. COGS = cost of goods sold; S,G&A = selling, general, and administrative expenses.
DATAMONITOR

Executive Summary
SWOT analysis
Strengths
Multiple M&A deals in the pharma space, such as Solvay, Facet, Piramal, and Kos, have diversified Abbotts therapy area offerings and global geographic presence. Approval of additional indications for Humira (adalimumab) and Abbotts strong branding have led to an increase in total sales. Humira sales are expected to increase by $3.2bn between 2011 and 2017, making it the biggest selling pharmaceutical with overall sales of $11.1bn in 2017. As part of Abbotts M&A strategy, the company has also been acquiring companies in a number of nonpharmaceutical markets, thus diversifying its healthcare portfolio. Along with organic growth, the overall result has been an increase in non-pharmaceutical revenues from $8.3bn in 2005 to $16.1bn in 2011. With a significant non-pharma revenue base now in place, Abbott has taken the decision to split its innovative pharma business (naming it AbbVie) from its diversified offerings across nutritionals, diagnostics, and devices (as well as its ex-US mature branded generics portfolio) in search of greater transparency and better long-term investor returns.
Weaknesses
As evidenced by Abbotts launch portfolio, the companys late-stage pipeline is relatively weak, contributing only an additional $429m over the forecast period. Much of the companys development is in Phase II, soon to enter Phase III, so its pipeline potential will not be realized until after the forecast period. With a weak launch portfolio and declining sales of a number of key products, Abbotts reliance on Humira sales is quite prominent. This dependency is forecast to increase to almost 50% by 2017, a figure that will be even higher when the AbbVie separation is complete, since around $4bn from mature pharmaceutical products will be retained by Abbott, leaving Humira accountable for an even higher percentage of AbbVies resulting sales. Many of Abbotts key products will face patent expiration over the forecast period. Notable examples of forthcoming patent expires include TriCor (fenofibrate), Niaspan (nicotinic acid), Kaletra (lopinavir + ritonavir), and Zemplar (paricalcitol), erosion of which will greatly undermine the position of the newly formed AbbVie over the coming years, placing yet further pressure on Humira.
Opportunities
Abbott is intent on remaining innovative across a number of therapy areas. Currently, the company has compounds spanning oncology, hepatitis C, multiple sclerosis, immunology, endometriosis, urology, neurology, and psychiatry. A lot of these are in Phase II, meaning that AbbVie will not truly commercially benefit from these developments until beyond 2017. A key growth strategy of Abbott has been geographic expansion, as seen with its 2010 acquisition of Piramal Healthcare Solutions. This deal instantly gave Abbott a presence in India, one of the fastest-growing emerging markets, as well as diversifying its product portfolio. It is thought that Abbotts newfound Indian presence will be retained by the company when it spins off its innovative pharma operations, as outlined by the companys

Executive Summary
intention for AbbVie to focus on the developed markets, while Abbott will itself seek growth from developing markets. The spin-off of AbbVie is a clear piece of opportunism by Abbott, as it appears to have done as much as it can within innovative pharma and has therefore taken the decision to move towards revenue streams with greater long-term stability. With challenges intensifying, the philosophy is that Abbotts innovative pharma business will be better positioned to respond to these challenges if it operates alone, with higher margins and therefore higher levels of cash to invest in growth opportunities.
Threats
As outlined, a number of Abbotts key products are facing the prospect of generic erosion over the coming years, including TriCor/Trilipix, Niaspan, and Kaletra. The resulting threat is obvious, with more than $4bn in annual revenues at risk of disappearing over the next 6 years. Competition from new, advanced therapies in Abbotts key disease markets may also negatively impact sales, one example being the launch of Pfizers Janus kinase inhibitor tofacitinib, which could impact the market share of Abbott's leading franchise, Humira. Given how heavily Abbott, and subsequently AbbVie, relies on Humira, the threat of biosimilars to Abbotts longterm commercial performance is significant. The primary patent on Humira expires on December 31, 2016, around which time Datamonitor anticipates the entry of the first biosimilars for other monoclonal antibodies such as Rituxan (rituximab; Biogen) and Remicade (infliximab; Johnson & Johnson). The entry of Remicade biosimilars could indirectly impact Humiras market share, while the entry of direct biosimilar competition would be even more detrimental to Abbott. However, should biosimilars come into play, Abbott may derive some additional protection from intellectual property associated with the Humira Pen delivery device.

Table of Contents
TABLE OF CONTENTS
About Datamonitor Healthcare About Datamonitors Company Analysis team Data sourcing Scope of Abbott analysis 3 PharmaVitae Explorer database Analysis structure Data sourcing Executive Summary Key findings Abbott prescription pharmaceutical sales outlook Abbott financial outlook SWOT analysis Strategic Insight Launch/core/expiry analysis M&A dictates Abbotts corporate strategy in run-up to AbbVie separation Abbott has the leading share of the lucrative autoimmune disorder market Weak pipeline undermines growth expectations Innovative pharma split imminent Company Overview Key findings Background Corporate structure M&A history Operating Performance Analysis Key findings 29 29 29 30 31 33 33 19 19 21 22 24 25 6 6 7 10 13 4 4 5 2 2 2
Reconciliation between PharmaVitae-formatted prescription pharma sales and company-reported total sales, 200511 34 Operating costs and profit analysis Appendix Exchange rates About Datamonitor Healthcare 40 40 40 35

Table of Contents
Ask the analyst Datamonitor consulting Disclaimer 41 41 41

Table of Contents
TABLE OF TABLES
Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8: Table 9: Table 10: 11 Table 11: Table 12: 17 Table 13: Datamonitors established pharmaceutical company coverage, 2012 Abbott key product overview ($m), 201117 Abbotts financial performance ($m), 201117 Abbott launch, core, and expiry portfolio overview ($m), 201117 AbbVie product portfolio sales ($m), 201117 AbbVie operating performance ($m), 201117 Abbott key merger and acquisition deals, 200111 Total Abbott sales by business unit ($m), 200511 Abbott operating revenue/cost analysis ($m), 200511 3 9 12 19 26 27 31 34 37
Abbott operating cost ratio analysis (percentage of total revenues), 2005 37 Abbott operating revenue/cost analysis ($m), 201117 38
Abbott operating cost ratio analysis (percentage of total revenues), 2011 39 Exchange rates, 2012 40

Table of Contents
TABLE OF FIGURES
Figure 1: Figure 2: rate (%), 200517 Figure 3: Figure 4: Figure 5: (%), 200517 Figure 6: The PharmaVitae Explorer 4
Abbotts prescription pharmaceutical performance, sales ($m) and growth 8 Abbotts financial performance ($m), 200517 Abbott launch/core/expiry configuration ($m), 201117 11 20
Leading companies in the immunology and inflammation biologics space 22 Abbott operating revenue/cost analysis ($m), 200517 36

Strategic Insight
STRATEGIC INSIGHT Launch/core/expiry analysis

A companys product portfolio can be divided into four categories based on product lifecycle position/status as a generic: Launch Patented products launching between 2011 and 2017. Expiry Products that have lost patent protection or will expire (lose patent protection) between 2011 and 2017. Core Marketed products with patent protection between 2011 and 2017. Generic "True generic" products that were launched (or are expected to launch) without patent protection as copies of already marketed products. The distribution of changes in annual product sales between 2011 and 2017 across these categories can be used to dissect the drivers and resistors behind a companys growth prospects. Typically, launch products will generate high growth rates as they penetrate the addressable market, making a positive contribution to the change in annual sales between 2011 and 2017. In contrast, expiring products, if subject to generic competition, will experience a rapid sales decline, with the consequence that the expiry category will often make a negative contribution to the change in annual sales between 2011 and 2017. The core category can make either a positive or a negative contribution to the change in annual sales between 2011 and 2017, depending on the sales performance of the core marketed portfolio. Likewise, the generic category can make either a positive or a negative contribution depending on generic market dynamics. Table 4 summarizes Abbotts launch, core, and expiry portfolio sales performance over 201117. Table 4: Abbott launch, core, and expiry portfolio overview ($m), 201117
2011
2012
2013
2014
2015
2016
2017
201117 diff
201117 CAGR (%)
Launch Core Expiry
0 3,433 19,297
0 2,814 20,212
70 2,654 20,259
140 2,604 19,900
211 2,556 20,289
322 2,536 20,314
430 2,385 19,961
+430 -1,048 +664
n/a -5.9 0.6
Total
22,730
23,026
22,983
22,644
23,056
23,171
22,776
+46
0.0
Note: totals may not sum due to rounding. CAGR = compound annual growth rate.
Source: Datamonitor; company-reported information (global)
DATAMONITOR

Strategic Insight
When looking at Abbotts outlook segmented by lifecycle stage, it is possible to get an accurate view of how the company is currently positioned to perform in the long term. The current expectation for Abbott is one of poor pipeline performance over the next 6 years, with only $430m in sales coming from new molecular entities. In terms of expiry threat, Abbott is overall neutral, which is primarily down to the fact that Humira (adalimumab), which will expire over this timeframe, is set to continue growing and will thus override the negative sales trends of the remaining components within Abbotts expiry portfolio. The result is a positive growth expectation of $664m from the companys expiry portfolio. Core sales, which in Abbotts case are made up of a diverse group of mature products, will suffer negative sales growth of just over $1bn between 2011 and 2017. The sales trends across all three portfolios will effectively neutralize each other, resulting in a flat sales balance for Abbott of $46m on current reflection. Figure 4: Abbott launch/core/expiry configuration ($m), 201117
25,000
+430 -1,048
20,000
+664
Sales ($m)
15,000
10,000
5,000
0 2011 Launch Core Expiry 2017

DATAMONITOR
Source: Datamonitor; company-reported information (global)

Strategic Insight
M&A dictates Abbotts corporate strategy in run-up to AbbVie separation

Abbott has engaged in significant M&A activity since the turn of the century, spending more than $23bn on a range of distinct businesses. Major M&A deals performed by Abbott in the past include those for BASF AGs pharmaceutical division, Knoll Pharmaceuticals, Guidant's vascular business, and Kos Pharmaceuticals, while its most recent major deals have been the acquisitions of Advanced Medical Optics and Visiogen in 2009, and those of Solvay, Facet Biotech, and Piramal Healthcare Solutions during 2010. With sales slowing, Abbott has frequently turned to M&A in order to drive growth, becoming prolific in the identification and execution of deals, as well as maximizing returns from the subsequent restructuring of its consolidated companies. Much of Abbotts M&A focus has been on bringing in established products, thereby achieving an instantaneous impact on its top line. Of the companys most recent pharmaceutical acquisitions, that of Solvay, previously identified by Datamonitor as being a likely M&A target for Abbott, achieved an instant expansion for the company. In contrast, that of Facet Biotech was an R&D-motivated merger in attempt by Abbott to strengthen its otherwise weak pipeline. The Piramal deal had an altogether different rationale, to give Abbott a presence in the Indian market, which is one of the fastest-growing healthcare markets. Following a flurry of M&A activity, Abbott will likely continue to seek out M&A opportunities in keeping with its historical strategy. Even after its imminent restructuring, with the separation of innovative pharma from the rest of the company, the newly formed entities are likely to follow suit. What remains of Abbott will focus on deals in the diagnostic, device, and nutritionals space, or indeed deals to gain entry into new, emerging geographies, while AbbVie will likely use the returns from what will be a high-margin operation to acquire companies with attractive drug development pipelines that have existing revenues under growing threat from generics.
Indian market expansion

Abbotts relentless M&A growth strategy was continued by its move to buy Indias leading drug business, Piramal Healthcare. The deal had a purchase price of $3.72bn and will facilitate Abbotts long-term growth strategy outside of the US, which has already been significantly strengthened by the acquisition of Solvay. At the time, the deal for the Indian company represented the second in the space of a week for Abbott, after it forged a partnership with Zydus Cadila. Abbott expects the size of the Indian drug market to more than double by 2016, and the acquisition of Piramal Healthcare offers the company a direct route to tap into this commercial potential as it provided Abbott with 350 branded generic products. Datamonitor expects the addition of Piramal to add close to $1bn in sales by 2017. Given the strategic blueprint that Abbott has laid out for its imminent restructuring, with Abbott retaining hold of "established pharmaceuticals" in the developing markets, it is thought that the legacy Piramal business will remain part of Abbott rather than being transferred to the newly formed innovative pharma company AbbVie, which will itself predominately focus on major markets like the US, EU, and Japan.

Strategic Insight
Abbott has the leading share of the lucrative autoimmune disorder market
Abbotts leading product, both in terms of sales and long-term growth contribution, is the self-injectable fully human monoclonal antibody (MAb) treatment Humira (adalimumab). Like many of the leading biologics in the autoimmune disorder space, Humira is targeted against tumor necrosis factor alpha (TNF-alpha), a potent pro-inflammatory mediator that plays a pivotal role in a wide range of human inflammatory diseases. Humira was first launched in the US in January 2003 for adults with moderately to severely active rheumatoid arthritis (RA) and has since made rapid clinical progress, gaining authorization to be used for a much wider range of immunological diseases across the seven major markets (the US, Japan, France, Germany, Italy, Spain, and the UK) and the rest of world (RoW) territories. Humira is now also indicated for psoriatic arthritis, ankylosing spondylitis, Crohn's disease, psoriasis, ulcerative colitis, and juvenile RA, which is a comprehensive range of autoimmune disorder approvals.
Figure 5:
Leading companies in the immunology and inflammation biologics space (%), 200517
Source: Datamonitor, PharmaVitae Explorer, July 2012
DATAMONITOR
The above chart depicts the market shares of the leading companies in the immunology and inflammation (I&I) biologic space. Abbott is sat in the number one spot in terms of market share, which, in 2011, stood at 28.3% of the I&I biologic sales among the leading eight companies in this segment. Abbott has assumed this market-leading position due to the considerable success of Humira as the first fully human, self-injectable anti-TNF biologic, as well as the fact that Humiras

Strategic Insight
competitors, chiefly Enbrel (etanercept; Amgen/Pfizer/Takeda) and Remicade (infliximab; Johnson & Johnson), are sold through region-specific partnerships. In Humiras case, Abbott is almost solely responsible for its marketing (the exception being in Japan, where Eisai promotes the drug), and as such, Abbott has retained a higher portion of worldwide sales for its therapy than other companies. In this regard, if added together, Remicade marketers Johnson & Johnson and Merck, and Enbrel marketers Pfizer and Amgen are much closer to Abbott in terms of market share.
Abbotts heavy reliance on Humira continues

Accounting for almost half of overall revenues, Humira is central to the success of Abbotts pharma business. Although expectations are currently very positive, the antibody therapy is faced with a number of potential negative forces that could undermine Abbott significantly. Competition for market share is increasing with new launches in the autoimmune disorder space, while the threat of biosimilars is growing, which coupled with the fact that Humiras primary patent expires in 2016 could give rise to sharp sales erosion. Historically, Humiras uptake has been impressive in all territories. In 2011, the drug continued to enjoy impressive growth, with sales up 21.1% year-on-year to $7.9bn. Humira accounted for 41.1% of Abbotts total pharmaceutical revenues stream in 2011, making it the companys most important product by a significant margin. Rival anti-TNF therapies such as Remicade, Simponi (golimumab; Johnson & Johnson), Enbrel, and Orencia (abatacept; Bristol-Myers Squibb), as well as Pfizers late-stage oral Janus kinase inhibitor tasocitinib, provide the biggest competitive threat to Humira, although Humira boasts a number of advantages over earlier-to-market therapies such as Remicade and Enbrel. Humira has a resistance profile that is comparable, if not superior, to that of the overall market leader Enbrel, which is a fusion protein comprising the extracellular domain of human p75 TNF linked to the Fc portion of human IgG1. Although Enbrel offers low potential for an in vivo antibody reaction, Humiras fully human sequencing makes it even less likely to elicit an undesired immunological response. Remicade is chimeric and therefore possesses the least desirable homogeneity profile of the three anti-TNF biologics. Humira is also available in a convenient subcutaneous delivery pen, which was granted US Food and Drug Administration approval in June 2006. This, along with its favorable dosing regimen, gives Abbotts offering a significant competitive advantage over other options in the anti-TNF space, and could make it the long-term therapy of choice. Although anti-TNF biologics are still dominant on the market, a shift is being seen toward the use of non-TNF biologics as a first-line therapy. This prescribing trend is expected to increase over the forecast period, especially after the launch of tasocitinib in 2012. In Phase III trials, tasocitinib demonstrated high efficacy and no new safety signals were recognized. Rheumatologists believe tasocitinib has the potential to be a treatment-changing drug, and will achieve blockbuster status in the forecast period, potentially taking market share away from Humira. The availability of bioequivalent copies of other members of the anti-TNF therapeutic class, notably Remicade, could become a genuine threat if the infrastructure for biosimilar substitution is put in place by the time of Remicades patent expiry in 2014. Humiras patent is itself expected to offer protection from generics at least out to 2016 in the US and 2018 in all other territories, thereby affording Abbotts flagship product long-term insulation from biosimilars.

Strategic Insight
Despite growing competition, physicians continue to favor Humira in the anti-TNF drug class and in growing indications. As such, Datamonitor expects sales of Abbotts flagship biologic to continue expanding over the forecast window. Relying so heavily on one product, however, renders Abbotts long-term position exposed to the fortunes of its antibody therapy.
Weak pipeline undermines growth expectations

An understrength pipeline represents a major weak point for Abbott currently. The company has the lowest launch sales expectations across all of Big Pharma, with just five new launches set to contribute combined annual sales of around $430m by 2017. With limited late-stage opportunities internally, hindered by a number of failures, the acquisitions of Solvay and Facet Biotech have marginally boosted Abbotts pipeline. M&A and co-development agreements have been a central feature of Abbotts attempts to strengthen its late-stage pipeline, but many of these promising drug candidates have also been withdrawn or discontinued. Externally sourced programs such as Certriad (rosuvastatin + fenofibric acid; co-developed with AstraZeneca), Gralise (gabapentin; acquired from Solvay), SLV-308 (pardoprunox; acquired from Solvay), and Flutiform (formoterol + fluticasone; partnered with Skye Pharma) were all late-stage pipeline products no longer under consideration by Abbott. Internal programs such as ABT874 (briakinumab) and Vicodin CR (hydrocodone bitartrate + acetaminophen) have seemingly hit a wall in their regulatory progression and are now unlikely to reach market. It was previously hoped that Certriad would strengthen Abbotts aging dyslipidemia portfolio with forthcoming patent expiries of TriCor (fenofibrate) and Niaspan (nicotinic acid). However, in December 2010, Abbott and AstraZeneca announced that they no longer planned to develop Certriad as it was no longer deemed to be commercially attractive following a Complete Response Letter from the US Food and Drug Administration. Similarly, Abbott returned marketing rights for both Flutiform and Gralise after regulatory failures. These setbacks and a number of other delays to late-stage programs, including the recent withdrawal from registration of ABT874 and earlier setback to Vicodin CR, demonstrate the underperformance of Abbotts pipeline and put the company under increasing pressure to deliver surviving members of its pipeline to market. Abbott is expected to launch five new products over the forecast period, namely daclizumab in multiple sclerosis, ABT869 (linifanib) in advanced hepatocellular carcinoma, bardoxolone in chronic kidney disease, elotuzumab in multiple myeloma, and elagolix in endometriosis. Collectively, these will contribute sales of $430m by 2017, a very modest contribution that will do little to reduce Abbotts reliance on Humira and aging members of its portfolio like Kaletra (lopinavir + ritonavir) and TriCor. Abbott relies heavily on Humira, which is itself set to lose patent protection in 2016, which coupled with a weak pipeline gives Abbott very little room for expansion in the near future. However, Abbotts late-stage pipeline could generate higher revenues than currently thought, particularly beyond this 6-year forecast window, and the company has a few promising compounds further down in Phase II that might hold the key to unlocking future value.

Strategic Insight
Innovative pharma split imminent

In October 2011, Abbott announced that it would split up its business to form two separate companies, one focused on diverse medical products, the other focused on research-based ("innovative") pharmaceuticals. In doing so, Abbott hopes to enhance existing shareholder value by creating two companies with "unique investment identities, business profiles and attributes." The medical products company, which retains the Abbott name, will consist of Abbott's existing portfolio of medical devices, diagnostics, nutritionals, and mature pharmaceuticals, and will be concentrated across a wide range of geographies. The research-based pharmaceutical company, named AbbVie, will include Abbott's current portfolio of proprietary pharmaceuticals and biologics, and will concentrate mainly on higher-margin, established markets as well as growing share in emerging markets. The rationale behind this wholesale restructuring is strong, with overall synergies between its low-margin medical products business and high-margin pharmaceuticals business being quite limited. Although the diverse medical products business exhibits a better long-term revenue profile, in terms of sustainability, it is typically less profitable than the high-margin innovative pharmaceutical business, which conversely has a less stable long-term revenue profile due to the typical impacts of pharmaceutical product lifecycle, and maturity, such as patent expiry. Given the distinct features and challenges of research-based pharma compared with Abbotts remaining business interests, imminent separation will offer a range of strategic benefits, such as improved transparency, higher returns (and therefore capital available for investment), and a more clearly defined operating structure, focusing on major healthcare markets and indeed advancement through research. Abbott estimates that the research-based pharma company, AbbVie, will have annual revenues approaching $18bn, with around $4bn in annual pharmaceutical sales retained by Abbott. Key products for AbbVie will include Humira (adalimumab), TriCor/Trilipix (fenofibrate), Kaletra (lopinavir + ritonavir), Niaspan (nicotinic acid), Lupron (leuprolide), and AndroGel (testosterone), among others, which are principally products that derive a high portion of revenues from major markets such as the US. Table 5 shows the projected sales performance of the newly formed AbbVie research-based pharma company split out into constituent products. Continued success for Humira will see it remain a key sales driver, accounting for more than half of AbbVies anticipated sales in 2013, while a number of other major products, such as Kaletra, TriCor, and Niaspan, will not fare so impressively as they will suffer major sales declines at the hands of generic competition over the next few years. Faced with the decline of these brands, the timing of this separation is crucial for Abbott, as it is hoped that the separation will generate operating efficiencies that will protect the company from expiries and ensure the long-term survival of its prescription pharma business. Similarly, should AbbVie become the subject of a merger agreement, Abbott will be positioned to gain maximally from the sale of its innovative pharma asset before the impact of patent expiry sets in. Table 5 shows the major constituents that will make up AbbVie on its formation. Clearly, the company will not have as diverse a portfolio as Abbott or indeed other similarly sized companies, with much of its revenues being tied up in Humira. Also evident are the near-term declines that will likely face AbbVies other best-selling product lines. Indeed, with a poorly equipped pipeline, AbbVie is somewhat burdened with growth resistor products, making it susceptible to decline over the forecast period. The continued growth of Humira will be the companys saving grace in this regard.

Strategic Insight
Table 5:
AbbVie product portfolio sales ($m), 201117
2011
2012
2013
2014
2015
2016
2017
201117 diff
201117 CAGR (%)
Humira TriCor/Trilipix Kaletra Niaspan AndroGel Lupron Sevorane Synthroid Creon Norvir Zemplar Synagis Duodopa Rest of portfolio
7,932 1,692 1,170 976 875 810 756 638 630 408 406 578 93 562
8,932 1,464 1,116 820 820 756 767 645 792 461 359 597 106 573
9,794 546 1,068 687 757 707 779 666 876 549 193 610 147 677
10,481 532 978 105 778 666 800 680 778 204 119 618 192 781
11,002 508 945 50 816 629 816 687 722 152 90 623 246 896
11,178 481 841 35 844 595 831 690 655 101 86 626 303 1,058
11,136 450 546 22 731 565 846 690 607 98 83 628 345 1,204
+3,204 -1,242 -624 -954 -144 -245 +90 +52 -23 -310 -323 +49 +252 +642
5.8 -19.8 -11.9 -46.9 -3.0 -5.8 1.9 1.3 -0.6 -21.1 -23.2 1.4 24.4 13.5
Total revenues
17,527
18,206
18,055
17,713
18,183
18,325
17,951
+423
0.4
Source: Datamonitor
DATAMONITOR

Strategic Insight
Table 6:
AbbVie operating performance ($m), 201117
2011
2012
2013
2014
2015
2016
2017
201117 diff
201117 CAGR (%)
Revenues COGS S,G&A R&D
17,527 -4,732 -6,135 -2,804
18,206 -4,825 -6,281 -3,004
18,055 -4,694 -6,139 -3,069
17,713 -4,517 -5,934 -3,100
18,183 -4,546 -6,000 -3,273
18,325 -4,490 -5,956 -3,390
17,951 -4,308 -5,744 -3,411
+423 +424 +390 -606
0.4 -1.6 -1.1 3.3
Operating profit
3,856
4,096
4,153
4,162
4,364
4,490
4,488
+632
2.6
Note: totals may not sum due to rounding. CAGR = compound annual growth rate; COGS = cost of goods sold; S,G&A = selling, general, and administrative expenses.
Source: Datamonitor
DATAMONITOR
In terms of operating performance, AbbVie has every chance of being a >20% margin business, despite increasing pressures at the top line. The focus on prescription pharmaceuticals, which typically offer higher margins than Abbotts other business areas such as diagnostics and nutritionals, will help to tip the balance in favor of AbbVie as far as its bottom line goes. Higher gross profits associated with the relatively low manufacturing costs of pills and narrow portfolio (somewhat contradicted by Humiras expensive production process), and a refined commercial focus on major markets, which could result in lower S,G&A spend, will collectively provide a platform for improved operating profits, despite continued R&D investment. Based on a multiple of around 12 times estimated operating profits of around $4bn, AbbVie would have a market cap in the region of $45bn50bn, effectively pricing it out of a straightforward cash acquisition. If AbbVie is the subject of M&A interest, a deal would likely be conducted through an all shares deal, or a mix of shares and cash, with a number of companies potentially lining up to get their hands on what will become the best-selling prescription pharmaceutical worldwide, Humira. While it seems unlikely, a number of struggling Big Pharma companies could be motivated into a merger with AbbVie, gaining ownership of its prized assets while realizing operational synergies in the process. AstraZeneca, which already has a connection with Abbott through its acquisition of CAT, the original developers of Humira, is one such company that fits the bill, as is Eli Lilly, another company with big expiry-driven declines over the next few years. Although AbbVie will be perfectly structured for M&A, the company itself is unlikely to seek such a move unless an offer is made that will be difficult to ignore. Ultimately, Abbotts decision to separate its research-based pharma offering is a strong strategic move after what has been a difficult period for the company, at least in terms of pipeline productivity. Challenges are intensifying across all disease areas that Abbotts pharma business operates in, and although Humira continues to add impressively to its top line, the opportunities for diversified growth are limited for Abbott. The company will feel that its innovative pharma business will be

Strategic Insight
better prepared to deal with imminent challenges if it existed in a standalone operating structure, with greater transparency and indeed cash flow thanks to its focus on higher-margin pharmaceuticals. Investors have been assured that their existing Abbott shares will convert into a volume of shares in AbbVie and Abbott paying a dividend equal to that if they remained a single company, while from a long-term earnings perspective, it will be hoped that the move will strengthen the earnings potential of each business, notably that of AbbVie. These assets could of course be best utilized if absorbed by a company of similar structure and focus, allowing the realization of synergies and therefore higher levels of profitability on revenues generated by AbbVies assets. To this end, the M&A route could be the best way forward for AbbVie.

Company Overview
COMPANY OVERVIEW Key findings

Abbott Laboratories is a global broad-based healthcare company with commercial interests spanning pharmaceuticals, diagnostics, medical devices, ophthalmology, and nutritionals. In 2011, Abbott posted total revenues of $38.9bn, making it one of the leading healthcare product providers worldwide. Abbott has shaped much of its recent corporate development through M&A. One of the most significant acquisitions in terms of the expansion of Abbotts prescription pharmaceutical business was unquestionably that of BASF AGs pharmaceutical operations, in a transaction worth $6.9bn. This deal saw the transfer of Knoll Pharmaceuticals the core component of this acquisition to Abbotts control, giving the company significant synergies in a number of important areas and instantly boosting both Abbotts sales potential and its R&D capacity, particularly across its non-native areas of Europe and Japan. The deal also gave the company vital access to monoclonal antibody (MAb) technology, including the transfer of the rights to Humira (adalimumab), which remains the most valuable remnant of the deal. Abbott is active in M&A expansion across all healthcare segments, with a view to broadening its business focus and reducing its exposure to the competitive pressures that exist in the prescription pharmaceutical market. However, Abbott has remained committed to expansion within pharmaceuticals and has demonstrated this through a number of major acquisitions. To this end, acquisitions completed by Abbott since that of Knoll include cardiovascular specialist Kos Pharmaceuticals, the pharmaceutical business of Solvay, US early/late-stage development company Facet Biotech, and Indian pharmaceutical giant Piramal Healthcare Solutions. Having invested heavily in its pharmaceutical business, Abbott is readying its first major spin-off since that of Hospira with the separation of its research-based pharmaceutical business, which will start life as a new company called AbbVie. This separation is to be completed before the end of 2012 and will be executed as a new share issue to existing holders of Abbott stock, with the resulting shares in Abbott and AbbVie paying a combined dividend of equal value to that which would have been paid had Abbott maintained its existing structure. The separation represents an important step in the evolution of Abbott, as clearly it feels that its research-based pharmaceutical business will be better prepared to deal with the challenges it faces if it is operated as a standalone business, and one with higher margins and better cash flow than those currently exhibited by the multidisciplinary Abbott.
Background
Abbott Laboratories is a global broad-based healthcare company with commercial interests spanning pharmaceutical, diagnostic, vascular, and nutritional markets. It employs 90,000 people across over 130 countries worldwide, and operates global activities from its suburban headquarters in Chicago, Illinois. In 2011, Abbott posted total revenues of $38.9bn, making it one of the leading healthcare companies worldwide. Abbott is also among the top 100 largest companies worldwide in terms of market capitalization. Abbott invests heavily in R&D, spending $4.1bn in 2011.

Company Overview
Corporate structure
Pharmaceuticals
From its inception, Abbott has primarily been a pharmaceutical company. Currently, Abbott has pharmaceutical products for both adults and children in many therapy areas. Abbotts principal products include Humira (adalimumab), the TriCor (fenofibrate) franchise, Kaletra (lopinavir + ritonavir), and Niaspan (nicotinic acid).
Nutritionals
Abbotts nutritional division was established in 1932 with the introduction of Haliver Oil and Viosterol. At the present time, the nutritional division includes products for both adults and children, with products such as baby formula (Similac and Isomil) and the adult nutritional supplement, Ensure.
Diagnostics
In 1946, Abbott became the first pharmaceutical company to build a special laboratory for radioactive pharmachemicals, which would later allow the company to develop its diagnostic division. Upon the launch of Radiocaps in 1953, Abbotts diagnostic division was created, and it later expanded to include hematology systems diagnostics, in vitro diagnostics, molecular diagnostics, and the point-of-care systems.
Vascular
Upon the acquisition of Perclose, Inc. in 1999, Abbott launched its vascular division. Abbotts vascular division combines medical devices with pharmaceuticals to treat vessel diseases of the heart and arteries. Products include balloon stents (Emboshield and Xact Carotid Stent) and closure technologies (Perclose A-T, Perclose ProGlide, and Prostar).
Other
Included under Abbotts "other" businesses are its diabetes, vision technologies, and animal health products. The diabetes product line began in 2004 with the acquisition of TheraSense, Inc. and includes glucose monitoring systems, test stripes, and insulin syringes. After the acquisition of Advanced Medical Optics, Abbotts vision technologies products emerged. Abbotts animal health business was started by combining its pharmaceutical, nutritional, and medical device knowledge to develop healthcare for the veterinary market. These products, including animal pharmaceuticals, nutritional supplements, and critical care medical devices are currently marketed internationally.

Company Overview
M&A history
Table 7 details Abbotts key acquisitions over recent years that are equal to or exceed $400m. Table 7: Abbott key merger and acquisition deals, 200111
Year
Acquired company
Deal type
Value ($m) Comments
2001 2006 2006
Knoll Pharmaceuticals Guidant vascular Kos Pharmaceuticals
Acquisition Acquisition Acquisition
6,900 Added rights for Humira, Synthroid, Rytmonorm/Rythmol, and Reductil/Meridia 4,100 Xience V and ZoMaxx drug-eluting stents 3,700 Lipid management portfolio comprising Niaspan and Advicor. Also added Cardizem LA and Teveten, both for hypertension 1,400 Refractive technologies, corneal products, contact lens cleaning systems, eye drops 400 Ophthalmic medical devices 6,200 Additional $3.5bn in annual pharma sales; AndroGel, Creon, Lipanthyl 450 Anti-interleukin-2 receptor monoclonal antibody daclizumab for multiple sclerosis, pipeline oncology, and immunology biologics 2,120 Indian generics business
2009 2009 2010 2011
Advanced Medical Optics Visiogen Solvay Facet Biotech
Acquisition Acquisition Acquisition Acquisition
2011
Piramal Healthcare Solutions
Acquisition
Source: Datamonitor; MedTRACK
DATAMONITOR
M&A strategy
Abbott has been very active in M&A since the turn of the century, with acquisitions of Perclose (a leading arterial closure device manufacturer), BASF AGs pharmaceutical business (a deal that included the global operations of Knoll Pharmaceuticals), Guidant's vascular business, and TheraSense, a leading blood glucose-monitoring business. Recent M&A deals conducted by Abbott include cardiovascular specialist Kos Pharmaceuticals, Advanced Medical Optics, and, most recently, Solvay, Facet Biotech, and Piramal Healthcare Solutions, which will bolster Abbotts marketed and developmental portfolios. In 2004, Abbott spun off its hospital products business as Hospira, a wholly independent, publicly traded company. Hospira is now one of the largest global specialty pharmaceutical and medication delivery companies serving the hospital market. The company looked to follow this divestment with the sale of its diagnostics business unit to GE Healthcare for a proposed fee of over $8bn in a move that would have further enhanced Abbotts focus on its more profitable pharmaceutical business unit. However, this deal fell through and Abbott has since retained its diagnostics unit, which has been hampered by manufacturing issues. While Abbott has historically relied heavily on M&A as a growth strategy, the imminent separation of its pharmaceutical business will overshadow its other deal-making activities. Abbott has effectively used M&A to help grow its pharma

Company Overview
business to a critical level, at which point the company is now looking to major restructuring in order to provide the catalyst for long-term growth and indeed survival in the highly competitive prescription pharma market.

Operating Performance Analysis
OPERATING PERFORMANCE ANALYSIS Key findings

Abbott is positioned across a diverse range of healthcare segments. Pharmaceuticals provide the clear majority of sales, both in absolute terms and in terms of historical growth, with annual sales from pharmaceuticals increasing by $8.4bn between 2005 and 2011 to reach $22.4bn. All of Abbotts other business units recorded growth over this period, with the fastest expansion coming from its vascular business unit, which, like Abbotts efforts in other business units, was dramatically boosted by M&A deals (specifically the acquisition of Guidants vascular business). Overall, Abbott has achieved significant growth to become the multi-disciplinary healthcare giant that it is today. Total revenues have grown at an impressive compound annual growth rate (CAGR) of 9.7% over 200511, and while, of course, little of this growth has been derived from organic growth channels, with Abbott continually driven by M&A expansion and subsequent revenue growth from acquired product lines, it is now positioned as a leader across multiple fields. Abbott has combined its strong historical growth at the top line with growth at the operating profit level, which increased by $1.4bn between 2005 and 2011. Operating costs have also risen sharply, however, meaning that Abbotts profits have not risen in relation to total revenues; revenues grew at a 6-year CAGR of 9.7% compared with profit growth at a CAGR of 4.7%. The companys financial outlook is rather flat, as growth across both sales lines and cost lines is expected to slow on current balance. The impact of Abbotts diversified business model has generally hampered the companys ability to achieve profit margins of around 30%, which are more typical of Big Pharma, and with Abbotts imminent restructuring, significant cost savings could yet be realized, particularly across what will become its innovative pharma business, AbbVie. Key positive levers of profitability will be the strength of Humira (adalimumab), potential cost savings and synergies yet to be realized following the consolidation of Solvay, Facet Biotech, and Piramal Healthcare, realization of which will be impacted by the companys imminent restructuring, and the expansion of both new and existing brands in established and emerging geographies. The biggest threats to Abbotts pharma businesses remain patent expiries/loss of market exclusivity and subsequent generic erosion, the failure to generate cost savings, and further drug development setbacks.

Reconciliation between PharmaVitae-formatted prescription pharma sales and companyreported total sales, 200511
Table 8:
Total Abbott sales by business unit ($m), 200511
2005
2006
2007
2008
2009
2010
2011
200511 CAGR (%)
Pharmaceuticals Nutritionals Diagnostics Vascular Other
13,990 3,937 2,680 253 1,478
12,756 4,313 2,843 1,082 1,482
14,632 4,388 3,158 1,663 2,073
16,708 4,924 3,575 2,241 2,080
16,486 5,284 3,578 2,692 2,725
19,894 5,532 3,794 3,194 2,753
22,435 6,006 4,126 3,333 2,951
8.2 7.3 7.5 53.7 12.2
Total revenues
22,338
22,476
25,914
29,528
30,765
35,167
38,851
9.7
DATAMONITOR
Abbott has positioned itself across a diverse range of healthcare segments. Pharmaceuticals provide the clear majority of sales, both in absolute terms and in terms of historical growth, with annual sales from pharmaceuticals increasing by $8.4bn between 2005 and 2011, reaching $22.4bn in 2011. All of Abbotts other business units recorded growth over this period, with the fastest expansion coming from its vascular business unit, which, like Abbotts other business units, was dramatically boosted by M&A deals (specifically the acquisition of Guidants vascular business).
Abbott has continued to diversify its focus within healthcare with the acquisition of Advanced Medical Optics (now Abbott Medical Optics) in 2009, which helped to increase its "other" revenue line.
Overall, Abbott has achieved significant growth to become the multi-disciplinary healthcare giant that it is today. Total revenues have grown at an impressive compound annual growth rate of 9.7% over 200511, and while of course little of this growth has been derived from organic growth channels, with Abbott continually driven by M&A expansion and subsequent revenue growth from acquired product lines, it is now positioned as a leader across multiple fields.

Operating costs and profit analysis

Abbott has combined its strong historical growth at the top line with growth at the operating profit level, which increased by $1.4bn between 2005 and 2011. Operating costs have also risen sharply, however, meaning that Abbotts profits have not risen in relation to total revenues; revenues grew at a 6-year compound annual growth rate (CAGR) of 9.7% compared with profit growth at a CAGR of 4.7%. Abbotts M&A growth strategy has been instrumental both in terms of driving sales and providing cost-saving opportunities, although these have not yet been fully realized by Abbott, since total operating costs have almost doubled from $18bn in 2005 to $33bn in 2011. The imminent separation of its pharma business from the rest of its operations will help to improve transparency in this regard and will better position the resulting companies to realize operating efficiencies. Although the financial outlook for Abbott does not currently take into account the imminent separation of its pharma business, which will dramatically alter the companys financial configuration, it is still possible to gauge how the company is set to perform as a whole. As things stand, the companys financial outlook is rather flat, as growth across both sales lines and costs lines is expected to slow on current balance. The impact of Abbotts diversified business model has generally hampered the companys ability to achieve profit margins of around 30%, which are more typical of Big Pharma, and with Abbotts imminent restructuring, significant cost savings could yet be realized, particularly across what will become its innovative pharma business, AbbVie. If Abbotts separation works, Abbott will retain the shape of a business made up of nutritionals, medical devices, diagnostics, and mature pharmaceuticals, which will be more defensive in terms of revenue generation but perhaps less profitable. In contrast, the spun-out entity, AbbVie, will be focused on innovative pharma and will thus have higher margins but be more susceptible to the typical challenges facing innovative drug companies, such as patent expiry and drug development failures. Ultimately, the threat of a fairly flat operating performance has given Abbott the motivation to carry through its separation, something it is of course no stranger to, having successfully divested its injectables-focused business, Hospira, a number of years ago. In its current state, key positive levers of profitability will be the strength of Humira (adalimumab), potential cost savings and synergies yet to be realized following the consolidation of Solvay, Facet Biotech, and Piramal Healthcare, realization of which will be impacted by the companys imminent restructuring, and the expansion of both new and existing brands in established and emerging geographies. The biggest threats to Abbotts pharma businesses remain patent expiries/loss of market exclusivity and subsequent generic erosion, the failure to generate cost savings, and further drug development setbacks.

Figure 6:
Abbott operating revenue/cost analysis ($m), 200517
DATAMONITOR

Operating costs and profit analysis, 200511

Table 9: Abbott operating revenue/cost analysis ($m), 200511
2005
2006
2007
2008
2009
2010
2011
200511 CAGR (%)
Prescription pharmaceutical sales Other revenues Total
13,990 8,348 22,338
12,756 9,720 22,476
14,632 11,282 25,914
16,708 12,820 29,528
16,486 14,279 30,765
19,894 15,273 35,167
22,730 16,121 38,851
8.4 11.6 9.7
(10,641) (5,496) (1,821) (17)
(9,815) (6,350) (2,255) (2,014)
(11,422) (7,408) (2,506) 0
(12,612) (8,436) (2,689) (97)
(13,209) (8,406) (2,744) (170)
(14,665) (10,376) (3,724) (313)
(15,541) (12,756) (4,129) (673)
6.5 15.1 14.6 84.4
Operating profit
4,362
2,042
4,579
5,694
6,236
6,089
5,753
4.7
Source: Datamonitor, company-reported information
DATAMONITOR
Table 10:
Abbott operating cost ratio analysis (percentage of total revenues), 200511
2005
2006
2007
2008
2009
2010
2011
200511 ppt
Total revenues
100.0
100.0
100.0
100.0
100.0
100.0
100.0
+0.0
(47.6) (24.6) (8.2) (0.1)
(43.7) (28.3) (10.0) (9.0)
(44.1) (28.6) (9.7) 0.0
(42.7) (28.6) (9.1) (0.3)
(42.9) (27.3) (8.9) (0.6)
(41.7) (29.5) (10.6) (0.9)
(40.0) (32.8) (10.6) (1.7)
+7.6 -8.2 -2.5 -1.7
Operating profit
19.5
9.1
17.7
19.3
20.3
17.3
14.8
-4.7
Note: totals may not sum due to rounding. COGS = cost of goods sold; ppt = percentage point change; S,G&A = selling, general, and administrative expenses.
DATAMONITOR

Operating cost and profit analysis, 201117

Table 11: Abbott operating revenue/cost analysis ($m), 201117
2011
2012
2013
2014
2015
2016
2017
201117 CAGR (%)
Prescription pharmaceutical sales Other revenues Total
22,730 16,121 38,851
23,026 16,527 39,552
22,983 16,789 39,772
22,644 16,958 39,602
23,056 17,056 40,111
23,171 17,117 40,288
22,776 17,154 39,930
0.0 1.0 0.5
(15,541) (12,756) (4,129) (673)
(15,839) (12,934) (4,180) (732)
(16,050) (13,053) (4,214) 0
(16,161) (13,112) (4,225) 0
(16,215) (13,122) (4,228) 0
(16,245) (13,127) (4,229) 0
(16,262) (13,129) (4,230) 0
0.8 0.5 0.4 (100.0)
Operating profit
5,753
5,868
6,455
6,104
6,547
6,686
6,310
1.6
DATAMONITOR

Table 12:
Abbott operating cost ratio analysis (percentage of total revenues), 201117
2011
2012
2013
2014
2015
2016
2017
201117 ppt
Total revenues
100.0
100.0
100.0
100.0
100.0
100.0
100.0
+0.0
(40.0) (32.8) (10.6) (1.7)
(40.0) (32.7) (10.6) (1.9)
(40.4) (32.8) (10.6) 0.0
(40.8) (33.1) (10.7) 0.0
(40.4) (32.7) (10.5) 0.0
(40.3) (32.6) (10.5) 0.0
(40.7) (32.9) (10.6) 0.0
-0.7 -0.0 +0.0 +1.7
Operating margin
14.8
14.8
16.2
15.4
16.3
16.6
15.8
+1.0
Note: totals may not sum due to rounding. COGS = cost of goods sold; ppt = percentage point change; S,G&A = selling, general, and administrative expenses.
DATAMONITOR

Appendix
APPENDIX Exchange rates
Table 13:
Exchange rates, 2012
Currency code
Currency name
National currency unit per US dollar*
AUD CHF CNY DKK EUR INR GBP USD JPY
Australian dollar Swiss franc Chinese renminbi Danish krone Euro Indian rupee British pound US dollar Japanese yen
1.032313 1.127967 0.154933 0.186736 1.391287 0.021346 1.60376 1 0.012547
* average for 2011.
Source: OANDA
DATAMONITOR

Datamonitor Healthcare provides a total business information solution to the pharmaceutical and healthcare industries. Its key strength is its in-house analysts and researchers, who have strategy, market, disease, and company expertise. Datamonitor Healthcares services are based on specialist market analysis teams covering the following areas: cardiovascular diseases central nervous system immunology and inflammation infectious disease respiratory oncology urology womens health strategic analysis

Appendix
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Datamonitor consulting
We hope that the data and analysis in this brief will help you make informed and imaginative business decisions. If you have further requirements, Datamonitors consulting team may be able to help you. For more information about Datamonitors consulting capabilities, please contact us directly at consulting@datamonitor.com.
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COMPANY ANALYSIS

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 1

About Datamonitor Healthcare

ABOUT DATAMONITOR HEALTHCARE

About Datamonitors Company Analysis team

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 2

About Datamonitor Healthcare

SCOPE OF ABBOTT ANALYSIS

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 3

About Datamonitor Healthcare

PharmaVitae Explorer database

Source: Datamonitor, PharmaVitae Explorer

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 4

About Datamonitor Healthcare

Operating performance analysis

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 5

EXECUTIVE SUMMARY Key findings

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 6

Abbott prescription pharmaceutical sales outlook

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 7

Source: Datamonitor; company-reported information

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 8

Abbott key product overview ($m), 201117

2011 ($m) 2017 ($m)

201117 Notes diff

Total prescription pharmaceuticals

Note: totals may not sum due to rounding.

Source: Datamonitor prescription pharmaceutical sales forecasts; company-reported information

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 9

Abbott financial outlook

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 10

Abbotts financial performance ($m), 200517

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 11

Abbotts financial performance ($m), 201117

201117 diff Comments

Rx pharma Other revenues Total revenues

22,730 16,121 38,851

22,776 17,154 39,930

COGS S,G&A R&D Other operating expense

-15,541 -12,756 -4,129 -1,075

-16,262 -13,129 -4,230 0

-721 -373 -101 +1,075

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 12

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 13

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 14

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 15

Datamonitor Company Analysis: Abbott Laboratories

HC00068-001/Published 08/2012 Page 16

Datamonitor Company Analysis: Abbott Laboratories