Christopher Kim Pratik Kothary Clifford Leung Avinash Nagarajapages.stern.nyu.edu/~iag/presentations/2008-2009/ABT.pdf · Pratik Kothary Clifford Leung Avinash Nagaraja. Company Snapshot

Christopher Kim

Pratik Kothary

Clifford Leung

Avinash Nagaraja

Company Snapshot

• Diversified healthcare products maker:

– Drugs, Medical Devices/Equipment, and

Nutritional Products

• Founded in 1888, went public in 1929

• Now operates in 130 countries with 72,000 employees

• With $29.5B of revenues, 9th largest

‘Big Pharma’ company

Founder: Wallace Calvin Abbott

Thesis

The healthcare industry has reached an

unprecedented period of transition, out of

which Abbott is optimally positioned to

outperform its competitors.

Agenda

1. Industry Overview

2. Company Overview

3. Product Analysis

4. Risks

5. Valuation

Industry Overview

How Big Pharma Works

High

R&D

15.8%

Low

COGS

18.0%

High

SG&A

32.6%Percent

of

Revenue

(4 yr Avg)

Porter’s Five Forces

Profit Margin

23.9%

Era of Transition

• Big patent cliff in 2010-12– Big Pharma on average: approx $5.1 billion of revenue will be exposed

to competition

• M&A and consolidation across the industry– Pfizer-Wyeth, Merck-Schering Plough, Roche-Genentech

• Vulnerable weakness across industry =

Blockbuster drug model still viable?

Threats to Growth

• Government– Healthcare reform

– Negatives: increasing price rebates,

drug reimportation

– Positive: new research funding,

increased coverage

• Recession– Not so recession proof

• Generic drug competition

No wonder…

Is Medicaid Reform Really a Problem?

Segment Analysis For Top Drug Companies

Company % U.S.

Revenues*

Est. %

Govt. Biz

% At Risk

Exposure

Abbott Labs 48% ~8% ~4%

Bristol-Myers 59% ~14% ~9%

Johnson &

Johnson 51% ~9% ~5%

Merck & Co. 56% ~10% ~6%

Eli Lilly & Co. 54% ~18% ~10%

Pfizer, Inc. 42% ~6% ~3%

Wyeth, Inc. 47% ~5% ~2%

*Revenues include all operations, not just Pharmaceuticals

Abbott’s Status:• Low exposure to Medicaid• High % of sales outside US

Opportunities for Growth

• "Health care is the growth industry of the 21st century.“– Wall Street Journal

• Growth in health-care spending is likely to rebound when the recession ends, a function of the enormous advances in medical technology and Americans' strong appetite for health care.

• President Barack Obama named the sector one of his three pillars of the future U.S. economy, alongside energy and education.

• Health expenditures as a share of gross domestic product have more than tripled in the past 50 years to about 16% today, and the government's Centers for Medicare and Medicaid Services say that figure is likely to hit 20% within a decade.

Reasons to be Excited

• Coming out of recession

• International market

• Baby boomers aging

– 19% of the US pop. by 2030

– Longer life expectancy = buy more drugs for a

longer time

– Rising incidence of chronic disease

The population of disabled elderly in the United States is growing rapidly. The number of Americans who will suffer functional disability due to arthritis, stroke, diabetes, coronary artery disease, cancer, or cognitive

impairment is expected to increase at least 300% by

2049.1

-US dept. of Health and Human Services

The Company

Among Health Care Industry

• 9th in Total Annual Sales ($29.53 billion)

• 8th in Market Cap ($65.93 billion)

• One of the most diversified companies in the

Health Care industry

Business Segments

• Pharmaceuticals

• Vascular

• Diagnostic

• Nutritional

• Diabetes and Other

Diversification

Diversification

• Durable goods

– T5000 Biosensor System

• Used for research, disease surveillance, forensics

• Government agencies like FBI, CDC, university big customers

– Freestyle Lite used for glucose monitoring

• 170 million with diabetes in US alone

• 40 million in India expected to grow

• Biologics – far harder for generics to mimic and manufacture

• Nutritional Products

Biotechnology

• Biotechnology will fuel growth

• Biologics is still one of the bright

• Lucrative new therapies

• Above-average sales and earnings

growth

Asian Power!

• Singapore plant opening

• Products:

infant formula

follow-on formula

growing-up milk

China’s Increasing Medical

Expenditure

How Effective is Your R&D?

Company Abbot J&J PFE Teva Merk Eli Lilly Novartis GSK

Net Income $4880 $12949 $8104 $635 $1768 $958 $2249 $1286

R&D $2699 $7577 $7945 $2188 $1169 $951 $1767 $802

NI/ R&D 1.81 1.71 1.02 0.29 1.51 1.01 1.27 1.60

In $ millions

Key Numbers

Abbot Industry Avg.

Net Sales (2008) $29.6 million $31.9 million

1-Year Sales Growth 13.9% 5.5%

1-Year Net Income Growth 35.3% 9.1%

Profit Margin 16.5% 18.4%

Ratios

Company Mkt. Cap P/E ROE

Abbott

Laboratories

69.1 B 14.30 26.86%

Johnson & Johnson 142.1 B 11.25 30.17%

Pfizer 90 B 11.11 13.10%

Industry Average -- 14.10 21.50%

Product Analysis

Humira

• Abbott’s Gem Product for Rheumatoid Arthritis

• An estimated 46 million Americans affected

• Continually finding new uses for Humira which has

boosted earnings even more

– Crohn’s Disease: 1.4 million Americans affected

– Psoriatic Arthritis

• Combination of strong RA plus new uses will increase

market penetration for years

Humira Sales 04’ - 08’

2007

$3.0b

11.8%

2008

$4.5b

15.3%

2006

$2.0b

9.1%2005

$1.4b

6.3%

2004

$0.85b

4.3%

Xience V

• Drug-eluting heart stent released in mid-2008

• Already a leader with approximately 30% of the

market share: $1.2b revenues in 2008

• Recent research report stated that Xience

performs better over three years than its leading

competitor, Boston Scientific’s Taxus

• Top-selling stent (rapid market penetration)

because of superior quality

Xience V

• $2,000 a piece

• No cost wars

• 1-3 yr contract

• Low cardiac death rate of 0.5% over three

years; Taxus had 3-8x higher death rate

• Xience: major adverse cardiac events 6.4%,

14.9& Taxus (over three years)

Heart Disease in America

• 72 million Americans live every day with some

form of heart disease

• 63% (approx 191 million) of Americans are

overweight with a Body Mass Index (BMI) in

excess of 25.0

• According to Global Industry Analysts, the

market for coronary stents is slated to exceed

$7.2 B by 2012

Pipeline

• Strong late-stage Pipeline

– 9 major regulatory approvals in 2008 and

expecting several this year

• Acquisition of Kos Pharmaceuticals adds

significant growth opportunity to Vascular

Care

• Acquisition of Advanced Medical Optics

Risk

Risks

• Industry-Wide

– Obama healthcare reform

– Generic drug competition

– Patent cliffs

– Difficulty nature of drug innovation

• Company-Specific

– Humira sales

– Patent expiration of Depakote

Valuation