abott laboratories

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Datamonitor Company Analysis: Abbott Laboratories HC00068-001/Published 08/2012

Datamonitor. This brief is a licensed product and is not to be photocopied Page 1

COMPANY ANALYSIS

Abbott Laboratories

Datamonitor Healthcare Company Analysis: Big PharmaAbbott 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


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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 [email protected].

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 [email protected].

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.


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SCOPE OF ABBOTTANALYSIS

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 Ex-US Big Pharma

Abbott Laboratories AstraZeneca plc

Amgen Inc. Bayer AG

Bristol-Myers Squibb Co Boehringer Ingelheim

Eli Lilly & Co. F. Hoffmann-La Roche Ltd

Johnson & Johnson GlaxoSmithKline plc

Merck & Co., Inc. Novartis AG

Pfizer Inc. Novo Nordisk A/S

Sanofi

US Mid Pharma Ex-US Mid Pharma

Allergan Inc. Actelion Ltd.

Baxter International Inc. CSL Limited

Biogen Idec Inc. H. Lundbeck A/S

Celgene Corporation Les Laboratoires Servier

Forest Laboratories Inc. Menarini

Gilead Sciences Inc. Merck KGaA

Shire plc

UCB S.A.

Japan Pharma

Astellas Pharma Inc. Mitsubishi Tanabe Pharma Corp.

Chugai Pharmaceutical Co., Ltd Otsuka Pharmaceutical Co., Ltd

Daiichi Sankyo Co., Ltd Shionogi & Co., Ltd

Dainippon Sumitomo Ph. Co., Ltd Takeda Pharmaceuticals Co., Ltd

Eisai Co., Ltd

Big Pharma comprises companies with annual prescription pharmaceutical sales of more than $10bn that are not headquartered inJapan.

Mid Pharma comprises companies with annual prescription pharmaceutical sales of less than $10bn that are not headquartered inJapan.

Japan Pharma comprises companies headquartered in Japan.

Source: Datamonitor D A T A M O N I T O R

If you have any questions about this analysis or Datamonitors coverage of other established companies, please contact us

on [email protected].


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PharmaVitae Explorer database

Please visit the PharmaVitae Explorerdatabase for online access to full sales, product and financial data. The PharmaVitae

Explorercontains 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 D A T A M O N I T O R

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.


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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.


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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 collectivelygenerating 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 lower-

margin sectors.


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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 areexpected 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 thenewly 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


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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 D A T A M O N I T O R


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Executive Summary



Table 2: Abbott key product overview ($m), 201117

Product 2011 ($m) 2017 ($m) 201117diff

Notes

Humira 7,932 11,136 +3,204 Increased sales on indication expansion; will account for 48.9% ofAbbott pharmaceutical revenues in 2017

Sevorane 756 846 +90 Anesthetic drug; modest growth in emerging markets expected

AndroGel 875 731 -144 Testosterone gel loses market share in US

Synthroid 638 690 +52 Continued protection from generics due to bioequivalence issues

Creon 630 607 -23 US patent expiry offset by emerging market growth in near term

Lupron 810 565 -245 Decline due to US patent expiry; depot formulation offers relative barrierto generics after 2013 expiry

Kaletra 1,170 546 -624 Anti-HIV drug, intense competition from newer therapies, US genericerosion following patent expiry in 2015

Biaxin 542 524 -18 Ex-US revenues of antibiotic

TriCor/Trilipix 1,692 450 -1,242 Fibrate franchise under threat when earlier formulation TriCor issubjected to generic substitution for the first time from 2012

Influvac 210 373 +164 Influenza vaccine gained in Solvay acquisition

Duodopa 93 345 +252 Intestinal L-dopa gel used for Parkinsons disease, in development forUS market

daclizumab 0 311 +311 Gained in facet acquisition, anti-interleukin-2 humanized antibody indevelopment for multiple sclerosis

Duphaston 223 286 +63 Branded generic from Solvay used in female reproductive indications

Betaserc 233 283 +50 Branded generic from Solvay used in Mnires disease

Total prescriptionpharmaceuticals

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 beeliminated by continued growth of best-seller Humira

Note: totals may not sum due to rounding.

Source: Datamonitor prescription pharmaceutical sales forecasts; company-reported

information D A T A M O N I T O R


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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.


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Executive Summary



Figure 3: Abbotts financial performance ($m), 200517

Source: company-reported information; Datamonitor prescription pharmaceutical sales

forecasts; analyst consensus forecasts D A T A M O N I T O R


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Executive Summary



Table 3: Abbotts financial performance ($m), 201117

2011 ($m) 2017 ($m) 201117 diff Comments

Rx pharma 22,730 22,776 +46 Very flat outlook as positive drivers are neutralized bynegative resistors

Other revenues 16,121 17,154 +1,033

Total revenues 38,851 39,930 +1,079 Growth slowdown due to negative forces impactingprescription pharma business

COGS -15,541 -16,262 -721

S,G&A -12,756 -13,129 -373

R&D -4,129 -4,230 -101

Other operating expense -1,075 0 +1,075

Operating profit 5,350 6,310 +960 Steady operating profit expectations provide Abbottwith impetus to perform separation in search of greaterefficiencies across its diverse businesses


COGS = cost of goods sold; S,G&A = selling, general, and administrative expenses.




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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 non-

pharmaceutical 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


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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 canwithin 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 long-

term 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.


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Table of Contents



TABLE OF CONTENTS

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

200511 34

Operating costs and profit analysis 35Appendix 40Exchange rates 40About Datamonitor Healthcare 40


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Table of Contents



Ask the analyst 41Datamonitor consulting 41Disclaimer 41


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Table of Contents



TABLE OF TABLES

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

Exchange rates, 2012 40


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Table of Contents



TABLE OF FIGURES

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


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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 201117diff

201117 CAGR(%)

Launch 0 0 70 140 211 322 430 +430 n/a

Core 3,433 2,814 2,654 2,604 2,556 2,536 2,385 -1,048 -5.9

Expiry 19,297 20,212 20,259 19,900 20,289 20,314 19,961 +664 0.6

Total 22,730 23,026 22,983 22,644 23,056 23,171 22,776 +46 0.0


CAGR = compound annual growth rate.

Source: Datamonitor; company-reported information (global) D A T A M O N I T O R


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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

0

5,000

10,000

15,000

20,000

25,000

2011 Launch Core Expiry 2017

Sales($m)

+430

-1,048

+664

Source: Datamonitor; company-reported information (global) D A T A M O N I T O R


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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 onmajor markets like the US, EU, and Japan.


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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 D A T A M O N I T O R

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


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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 vivoantibody 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 stil l 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.


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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.


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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, wi ll 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 l ikely 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.


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Strategic Insight



Table 5: AbbVie product portfolio sales ($m), 201117

2011 2012 2013 2014 2015 2016 2017 201117diff

201117CAGR (%)

Humira 7,932 8,932 9,794 10,481 11,002 11,178 11,136 +3,204 5.8

TriCor/Trilipix 1,692 1,464 546 532 508 481 450 -1,242 -19.8

Kaletra 1,170 1,116 1,068 978 945 841 546 -624 -11.9

Niaspan 976 820 687 105 50 35 22 -954 -46.9

AndroGel 875 820 757 778 816 844 731 -144 -3.0

Lupron 810 756 707 666 629 595 565 -245 -5.8

Sevorane 756 767 779 800 816 831 846 +90 1.9

Synthroid 638 645 666 680 687 690 690 +52 1.3

Creon 630 792 876 778 722 655 607 -23 -0.6Norvir 408 461 549 204 152 101 98 -310 -21.1

Zemplar 406 359 193 119 90 86 83 -323 -23.2

Synagis 578 597 610 618 623 626 628 +49 1.4

Duodopa 93 106 147 192 246 303 345 +252 24.4

Rest of portfolio 562 573 677 781 896 1,058 1,204 +642 13.5

Total revenues 17,527 18,206 18,055 17,713 18,183 18,325 17,951 +423 0.4





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Strategic Insight



Table 6: AbbVie operating performance ($m), 201117

2011 2012 2013 2014 2015 2016 2017 201117diff

201117CAGR (%)

Revenues 17,527 18,206 18,055 17,713 18,183 18,325 17,951 +423 0.4

COGS -4,732 -4,825 -4,694 -4,517 -4,546 -4,490 -4,308 +424 -1.6

S,G&A -6,135 -6,281 -6,139 -5,934 -6,000 -5,956 -5,744 +390 -1.1

R&D -2,804 -3,004 -3,069 -3,100 -3,273 -3,390 -3,411 -606 3.3

Operating profit 3,856 4,096 4,153 4,162 4,364 4,490 4,488 +632 2.6


CAGR = compound annual growth rate; COGS = cost of goods sold; S,G&A = selling, general, and administrative expenses.


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


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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.


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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.


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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 nutri tional 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.


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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 Knoll Pharmaceuticals Acquisition 6,900 Added rights for Humira, Synthroid,Rytmonorm/Rythmol, and Reductil/Meridia

2006 Guidant vascular Acquisition 4,100 Xience V and ZoMaxx drug-eluting stents

2006 Kos Pharmaceuticals Acquisition 3,700 Lipid management portfolio comprisingNiaspan and Advicor. Also added CardizemLA and Teveten, both for hypertension

2009 Advanced Medical Optics Acquisition 1,400 Refractive technologies, corneal products,contact lens cleaning systems, eye drops

2009 Visiogen Acquisition 400 Ophthalmic medical devices

2010 Solvay Acquisition 6,200 Additional $3.5bn in annual pharma sales;AndroGel, Creon, Lipanthyl

2011 Facet Biotech Acquisition 450 Anti-interleukin-2 receptor monoclonalantibody daclizumab for multiple sclerosis,pipeline oncology, and immunologybiologics

2011 Piramal Healthcare Solutions Acquisition 2,120 Indian generics business

Source: Datamonitor; MedTRACK D A T A M O N I T O R

M&A strategy

Abbott has been very active in M&A since the turn of the century, with acquisitions of Perclose (a leading arter ial 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


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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.


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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.



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.


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Reconciliation between PharmaVitae-formatted prescription pharma sales and company-reported total sales, 200511

Table 8: Total Abbott sales by business unit ($m), 200511

2005 2006 2007 2008 2009 2010 2011 200511CAGR (%)

Pharmaceuticals 13,990 12,756 14,632 16,708 16,486 19,894 22,435 8.2

Nutritionals 3,937 4,313 4,388 4,924 5,284 5,532 6,006 7.3

Diagnostics 2,680 2,843 3,158 3,575 3,578 3,794 4,126 7.5

Vascular 253 1,082 1,663 2,241 2,692 3,194 3,333 53.7

Other 1,478 1,482 2,073 2,080 2,725 2,753 2,951 12.2

Total revenues 22,338 22,476 25,914 29,528 30,765 35,167 38,851 9.7




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.


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Operating costs and profit analysis



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.


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

Source: company-reported information; Datamonitor prescription pharmaceutical

sales forecasts; analyst consensus forecasts D A T A M O N I T O R


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Operating costs and profit analysis, 200511

Table 9: Abbott operating revenue/cost analysis ($m), 200511

2005 2006 2007 2008 2009 2010 2011 200511CAGR (%)

Prescription pharmaceuticalsales

13,990 12,756 14,632 16,708 16,486 19,894 22,730 8.4

Other revenues 8,348 9,720 11,282 12,820 14,279 15,273 16,121 11.6

Total 22,338 22,476 25,914 29,528 30,765 35,167 38,851 9.7

COGS (10,641) (9,815) (11,422) (12,612) (13,209) (14,665) (15,541) 6.5

S,G&A (5,496) (6,350) (7,408) (8,436) (8,406) (10,376) (12,756) 15.1

R&D (1,821) (2,255) (2,506) (2,689) (2,744) (3,724) (4,129) 14.6

Other operating expense (17) (2,014) 0 (97) (170) (313) (673) 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 D A T A M O N I T O R

Table 10: Abbott operating cost ratio analysis (percentage of total revenues), 200511

2005 2006 2007 2008 2009 2010 2011 200511ppt

Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 +0.0

COGS (47.6) (43.7) (44.1) (42.7) (42.9) (41.7) (40.0) +7.6

S,G&A (24.6) (28.3) (28.6) (28.6) (27.3) (29.5) (32.8) -8.2

R&D (8.2) (10.0) (9.7) (9.1) (8.9) (10.6) (10.6) -2.5

Other operating expense (0.1) (9.0) 0.0 (0.3) (0.6) (0.9) (1.7) -1.7

Operating profit 19.5 9.1 17.7 19.3 20.3 17.3 14.8 -4.7


COGS = cost of goods sold; ppt = percentage point change; S,G&A = selling, general, and administrative expenses.



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Operating cost and profit analysis, 201117

Table 11: Abbott operating revenue/cost analysis ($m), 201117

2011 2012 2013 2014 2015 2016 2017 201117CAGR (%)

Prescription pharmaceuticalsales

22,730 23,026 22,983 22,644 23,056 23,171 22,776 0.0

Other revenues 16,121 16,527 16,789 16,958 17,056 17,117 17,154 1.0

Total 38,851 39,552 39,772 39,602 40,111 40,288 39,930 0.5

COGS (15,541) (15,839) (16,050) (16,161) (16,215) (16,245) (16,262) 0.8

S,G&A (12,756) (12,934) (13,053) (13,112) (13,122) (13,127) (13,129) 0.5

R&D (4,129) (4,180) (4,214) (4,225) (4,228) (4,229) (4,230) 0.4

Other operating expense (673) (732) 0 0 0 0 0 (100.0)

Operating profit 5,753 5,868 6,455 6,104 6,547 6,686 6,310 1.6



Source: company-reported information; Datamonitor prescription pharmaceutical

sales forecasts; analyst consensus forecasts D A T A M O N I T O R


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Table 12: Abbott operating cost ratio analysis (percentage of total revenues), 201117

2011 2012 2013 2014 2015 2016 2017 201117ppt

Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 +0.0

COGS (40.0) (40.0) (40.4) (40.8) (40.4) (40.3) (40.7) -0.7

S,G&A (32.8) (32.7) (32.8) (33.1) (32.7) (32.6) (32.9) -0.0

R&D (10.6) (10.6) (10.6) (10.7) (10.5) (10.5) (10.6) +0.0

Other operating expense (1.7) (1.9) 0.0 0.0 0.0 0.0 0.0 +1.7

Operating margin 14.8 14.8 16.2 15.4 16.3 16.6 15.8 +1.0


COGS = cost of goods sold; ppt = percentage point change; S,G&A = selling, general, and administrative expenses.




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Appendix



APPENDIX

Exchange rates

Table 13: Exchange rates, 2012

Currency code Currency name National currency unit per US dollar*

AUD Australian dollar 1.032313

CHF Swiss franc 1.127967

CNY Chinese renminbi 0.154933

DKK Danish krone 0.186736

EUR Euro 1.391287

INR Indian rupee 0.021346GBP British pound 1.60376

USD US dollar 1

JPY Japanese yen 0.012547

* average for 2011.

Source: OANDA D A T A M O N I T O R


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Datamonitor Healthcares services are based on specialist market analysis teams covering the following areas:

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immunology and inflammation

infectious disease

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oncology

urology

womens health

strategic analysis


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Appendix

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