Kelbon's excellent analysis of Abbott inspired me to look into Abbott again after 18 months. As with everything in the pharmaceutical sector, there are plenty of unknowns and guessesAbbot has a good dividend yield now around 4% and a 58% payout ratio. The CFFO and a CFFFO after capex suggests the dividend is safeDebt is high and when the 10K appears, needs to be looked at before buying. Debt to capital is 46%The rest of the storyAbbott is a diversified company but the biggest part of the business is pharmaceuticals and an investment in Abbott is only as good as the pharma business right now.Growth and percentages of segmentsTwelve Months Ended 12/31/10 % Change vs. 12M 2009 ========================= Sales Reported forex operationsl ==================================================== Total Sales $35,167 14.30 1.20 13.10International $19,974 20.70 2.20 18.50U.S. $15,193 6.80 6.80---------------------------------------------------- Total Pharma $19,894 20.70 1.00 19.70International $11,150 28.30 1.90 26.40U.S. $8,744 12.20 12.20---------------------------------------------------- Total Nutri $5,532 4.70 1.80 2.90International $2,943 11.10 3.60 7.50U.S. $2,589 (1.80) (1.80)---------------------------------------------------- Total Diag $3,794 6.00 1.60 4.40International $2,791 5.70 2.10 3.60U.S. $1,003 6.90 6.90---------------------------------------------------- Total Vascular $3,194 18.60 1.00 17.60International $1,532 40.20 2.50 37.70U.S. $1,662 3.90 3.90--------------------------------------------------- Other Sales $2,753 1.00 0.60 0.40---------------------------------------------------- percentages pharmaceutical 57% nutrition 16% diagnostics 11% vascular 9% other 8% I like Abbott but its future worries me. It is priced for patent losses –namely Tricor. There may even be some discounting for the 2016 expiration of HumiraAs we can see in the table above, the pharmaceutical segment is more than half of revenue and is the fastest growing segment. Pharmaa is around 33% Humira. Humira’s success is the Achilles heel for Abbott and its success a blessing and a curse. The best way to value Abbott is to let it drop revenue for the Tricor loss over 5 years and then try to estimate the impact of flat to down Humira. It is impossible to know if Humira will be replaced by a follow-on. It can’t be done now because a protocol is not yet in place for approval. We might need to assume the worst.Merck was another company I looked through that has some patent expirations and a Remicade challenge that could significantly cripple revenue growth. At present I like Merck better as a pharmaceutical company. Its losses are clearer with no biologic issues to cloud forecasts. It also has a superior late stage pipeline that will help make up the lossesMerck is less attractive in one respect and that is its pure play pharmaceutical model. Like JNJ, Abbott has other revenue sources outside of pharmaceuticals that help even the out the bumps in pharmaceuticals. pharmaceuticalsAbbott has three important drug franchises –Humira, Kaletra, and Tricor/TrilipixHumira’s patent is good until 2016, but the near-term is going to be threatened by competition. At launch in 2003, there was Remicade  Enbrel , and Amevive  as major competitors. Now there are two new entrants with less frequent dosing from JNJ—Simponi and Stelara. Humira is the biggest drug in Abbott’s portfolioKaletra is a combination HIV medication that may start to see sales erosion in 2013. The other franchise is for cholesterol as adjunctive therapy and that is Tricor/Trilipix. This is a drug that was first used back in the 1960’s. It should have been unbranded years ago but Abbott has managed to hang onto it through as series of reformulations and repackaging to extend its branded life. Tricor is in the most immediate danger and may be the reason Abbott has recently joined the rest of big pharma in the trenches with pricing that is reflective of big potential revenue lossesThe Tricor story is ugly and shows the worst side of Abbott. It has been redone over the years to qualify for extended patent coverage by altering the dosing and the delivery. Dosage has been changed three times and the delivery form has gone from capsules to pills. By 2012, Teva may be able to call their generic a Tricor generic and the Tricor revenue will be cut in half shortly thereafter. Tricor does around $1.2 billion per year. Trilipix is a bit different and it is Abbott’s attempt to take business away from Tricor and put doctors into the habit of writing Trilipix on prescriptions. It is time released. The patent is good to 2025. It is similar to the move AstraZeneca made from Prilosec to the little purple pill Nexium. It did work for them.Instead of concentrating on new drugs and developing and spending on a pipeline, Abbott has spent money delaying the inevitable and conducting trials on different doses and medication packaging with no real benefit to anyone except their cholesterol portfolio revenue. It’s legal and it works, but it only delays their day of reckoning and that was time and money that might have been better spent looking for something new. For the first time in recent years, Abbott has provided a table of drug-by-drug revenue for the biggest drugs. This is an improvement in their reporting.Pharmaceuticals Q4 2010Global Sales % Change vs. 4Q09 ============================== Sales Reported forex Operational======================================================== HUMIRA $1,879 13.00 (2.40) 15.40TRILIPIX/TriCor $499 19.20 19.20Kaletra $341 (9.80) (1.80) (8.00)Niaspan $286 12.70 12.70Lupron $200 (7.20) (0.10) (7.10)Synthroid $160 8.30 0.70 7.60 Pharmaceutical sales annual 2010Global Sales % Change vs. 12M09 ================================ Sales Reported forex operational ======================================================== HUMIRA $6,548 19.30 0.30 19.00TRILIPIX/TriCor $1,582 18.30 18.30Kaletra $1,255 (8.10) 0.30 (8.40)Niaspan $927 8.40 8.40Lupron $748 (6.50) 1.40 (7.90)Synthroid $555 10.60 2.00 8.60Total drug sales for 2010 were $19.9 million. Humira is 33% of that and Tricor/Trilipix is 8%Abbott does not tell us the numbers for Tricor and Trilipix separately and no analyst asked. That makes it difficult to know how successful the transition is. Tricor/Trilipix revenue is a $1.6 billion per year blockbuster and at least part of that will be lost when Teva gets the generic. That could be as early as March. I have read unofficially that around 30% of Tricor sales have shifted to Trilipix. Credit Suisse reported Tricor sales of $310 million in Q1 and Trilipix sales of $109 million. That would indicate that Abbott could be at risk for around $1.2 billion in Tricor patent losses. It looks like the loss will start in 2012 according to the CC. Kaletra deserves mention. It is a combination HIV drug with an expiration in 2013 as far as substance patent is concerned. This could be another expiry that will effect revenue. There are multiple use/indication patents that may keep at least some of the revenue with Abbott and extend through 2020 including pediatric indications.Humira is safer as biologic follow-ons are not as predictable for generic competition for small molecules. The biggest threat to Humira is competition. Growth has slowed in 2010. From the CC regarding Humira—there is not a lot of solid information, but there are two interesting things: sales are going to slow and Wall Street is keeping Abbott’s price down in response. Abbott responds with a lot of generalities and bottom line is that we may not be able to model the effect of competition or biologic follow-ons but should be prepared for bad news. We have 5 years as investors to collect dividends, but if Abbott disappoints beyond current Wall Street expectations there could be permanent or at least very long lasting loss of capital.Comments on Humira were not very helpful in the CC. Analysts are clearly worried about itDavid Lewis - Morgan StanleyFirst starting off on HUMIRA. Clearly management has a view about the sustainability of HUMIRA that's a little different from sentiment or consensus, so maybe you just can share with us some of the things people are not appreciating about the sustainability of HUMIRA franchise? Miles WhiteWe know that some of the competitive offerings coming will compete, they will have success, they will have some level of success and we also know it will take them some years to establish themselves to have that success. HUMIRA is a very large product, as you know, and we've obviously studied all those things very carefully and in lot of detail. I think that the analyst community or the Street or investment community sometimes takes a fairly precipitous, sudden look at things and think that things happen very quickly when they don't. And I think that trends, whether it be competitive products or Biosimilars or other things that will affect the biologics market, will happen less precipitously than what you see happening to an Oral Solid that is a primary cure drug. The models are not the same; they're not going to be the same. That's not to say there won't be impacts on HUMIRA. There will be. Obviously HUMIRA's growth will slow, at some point it will begin to decline, but it will be a large and robust product, because it's a very, very fine product in terms of what it does. So the biggest difference I think that we may have with the Street over the trajectory of HUMIRA is what the shape of the trajectory looks like and over how many years. And whether pipeline offering’s coming and so forth, obviously, replace and continued the growth in our patented Pharma business overtime. I think when you look at the entire mix of products, whether it's in the coming portfolio or how HUMIRA does or the geographic mix, we don't happen to share Wall Street's view. So I think the only unfortunate thing to that we’ll only be right once we've been right, which is years out and if investors choose to believe otherwise, well, they're going to miss a company that keeps steadily growing double digits. I can't say how many times I've had people project we couldn't keep doing this. And it's not smoke and mirrors and it's not magic, we manage. I guess we could do a better job communicating and explaining. At this point, I'd say I think a lot of the fears around HUMIRA have been overblown. It will face competition. It will decline at some point. The rate and timing of that will be, I believe, different than what has been projected Acquisitions in pharmaceuticalsAbbott has been acquiring more than it has in the past few years. In one or two instances, they may have overpaid in an effort to get late stage drugs into the pipeline and for geographic expansion. Reported May 26,2010 closed September 2010Abbott Laboratories agreed to buy Piramal Healthcare Ltd.'s generic-drugs unit for $3.72 billion, the latest in a series of deals by Western drug makers to strengthen their presence in emerging markets including India.The increased competition for these businesses is raising the purchase price on many deals. Moody's Investor Services said Friday that it would review its ratings for a portion of Abbott debt for possible downgrade because Abbott will have significant short-term borrowings and modest cash levels in the wake of the Piramal and other recent deals.Abbott recently has expanded in emerging markets with the acquisition of Belgium's Solvay Pharmaceuticals and a collaboration with India's Cadila Healthcare Ltd. for the supply and licensing of generic drugs.One appeal of emerging markets is that individuals, and not governments, pay for a big portion of health-care costs. Mr. White said about 70% of the Indian market is self-pay, which means Abbott's business there won't be as vulnerable to the budget belt-tightening seen in European health programs.Abbott said the deal would give it the No. 1 position in the Indian pharmaceuticals market, with a market share of about 7%. Foreign drug makers have been circling India for buyouts to gain direct access to India's fast-growing generics market. Low production costs and skilled scientific talent make Indian acquisitions attractive.Wells Fargo analyst Larry Biegelsen called the Piramal deal "bold" but the price tag "hefty," which may have resulted from bidding by multiple prospective buyers.Under the agreement, Piramal Healthcare will receive an upfront payment of $2.12 billion, plus $400 million annually for four years beginning next year. The deal, which is subject to approval of Piramal Healthcare's shareholders but expected to close in the second half, won't affect Abbott's earnings forecast.With Piramal, Abbott now estimates the growth of its Indian pharmaceutical business to approach 20% annually, with expected sales of more than $2.5 billion by 2020.The base India business is $500 million at present The rest of the company’s Q4 2010 results and guidance• diluted earnings per share of $1.30, an increase of 10.2% • gross margin was 60.6%, up 2.3% due to improved operating performance• R&D 10% of sales.Pharmaceutical sales in Q4 increased more than 22%, driven by 30% growth in the international business and 14% in the U.S. HUMIRA operational sales [ excludes the impact of forex] increased 15% in the quarter. Full year global sales increased 19%, which was in line with our expectations. Abbott is applying for ulcerative colitis indications for Humira in the US and Europe. That will keep them on more competitive footing with Remicade—more indications equals more revenueFull year 2011 forecast for HUMIRA is in the low teen—down from recent growth rates. That will be SOP going forward until it flattens and declines.Niaspan sales for Q4 were $286 million -- up nearly 13%. Full-year Niaspan sales were more than $921 million. Global TRILIPIX/TriCor sales in Q4 increased 19%, including the international contribution from Solvay. In the U.S., sales were flat. In 2011, expect a modest decline for TriCor/TRILIPIX in the U.S. The 2011 U.S. guidance for pharma is mid- to high- single-digit growth and international will be low double-digit growth including the partial year contributions to Solvay and Piramal. The over-the-hill branded mature products portfolio will add $5 billion in full year 2011. But that will include some drugs already counted in pharma in 2010.The vascular business worldwide sales increased 14% and international vascular Q4 sales grew 37% driven by drug-eluting stents XIENCE and XIENCE PRIME. Global DES franchise sales were approximately $470 million and that's up 25% from a year ago. International markets now account for 60% of the DES businessJapan is the second-largest DES market, with market sales of $500 million to $600 million annually. In the U.S., XIENCE maintained market share leadership with more than 30% share in the fourth quarter.The absorbable stent has been approved in Europe. ABSORB is the world's first drug-eluting bioresorable vascular scaffold, or BVS device. It restores blood flow by opening a clogged vessel and providing support to the vessel until the vessel dissolves completely, leaving patients with a treated vessel---free of a permanent metallic implant. ABSORB will be made available in select sized to a limited number of centers in Europe later this year and into 2012. Vision Care and AMO sales were $280 million in the quarter and more than $1 billion for the full year 2010. International sales were up double digits this quarter. U.S. sales were up nearly 7% in Q4. In 2011, Abbott expects high-single-digit reported sales growth Global diagnostics revenue was up 4% in Q4, with U.S. diagnostics sales up more than 8%. In Core Laboratory Diagnostics, that includes immunochemistry and hematology, reported global sales were up 1%. In China, sales were up more than 50% The molecular business sales were up 21%. In the U.S., there is a steady increase in sales for the recently approved Realtime HBV assay. The assay runs their proprietary 2000 system and is intended to help manage care for patients with chronic hepatitis B on antiviral therapy. The Nutritional global sales were flat in Q4. U.S. sales were impacted by the product recall announced last September for Similac formula. International sales were up nearly 8% in line with guidance Similac is resolving recovery efforts and inventory is near normal operating levels. Since the initial recall in September, Similac has maintained its number one hospital share position unbelievably. As a result of the recall, there will be a difficult comp in the first half of 2011 with U.S. sales down in the mid-single-digits. These are all small operating segments compared to pharmaceutical but combined do make up around half of the business. This gives Abbott some better protection against patent expirations than a company like Merck. None of these segments looks particularly weak and combined growth could be high single-digit to even low to mid-teen growthMore Guidance2011 EPS will be in the range of $4.54 to $4.64--double-digit growth is the midpoint of the range.Revenue will be high-single-digit growth including the contribution from the acquisition of Solvay Pharmaceuticals, which closed in February of 2010; and Piramal Healthcare Solutions, which closed in September 2010. It is impacted by the U.S. healthcare reform; European pricing and the Similac recall in the first half. The gross margin should increase slightly over the 2010 60.2%, reflecting underlying and favorable product mix and efficiencyinitiatives, partially offset by the impacts from U.S. healthcare reform and European pricing measuresR&D spend will be around 10% of sales.SG&A will be around 27+% of sales. This reflects some SG&A leverage and the negative impact of the pharmacy business expense associated with U.S. healthcare reform.Q1 2001 EPS will range between $0.88 to $0.90, the midpoint of which would reflect double-digit growth. This excludes $0.32 per share, expenses associated with acquisition integration, cost reduction initiatives and in-process R&D related to the Reata collaboration. Revenue growth will be in the mid-teens sales for Q1 including the impact of the Solvay and Piramal acquisitions.PipelineIt is better than the last time I looked. Most has been acquired. It is still relatively weak and not much is on the cusp of approval. It is unlikely it will produce a blockbuster in the next 5 years2010, ABT spent 10% of sales or $3.5 billion in R&D They added a total of four new molecular entities that are in late stage development and have nearly 20 new molecular entities and indications in Phase II or III. This includes unique compounds for hepatitis C, chronic kidney disease, neuroscience and pain management, women's health, immunology and oncology.The hepatitis C treatment landscape is expected to change rapidly over the next several years and will evolve considerably even after the newest therapies come to market. In HCV, it's not about arriving first but arriving with the best treatment according to Abbott. This will only apply if they bring a better drug to market. The Abbott approach is looking for drugs with multiple mechanisms of action. Currently they are developing an HCV protease inhibitors and based on data to date shows promising antiviral activity. It is one of five different Phase II HCV programs that will be underway by year-end. However, Phase II is years away from market. What we want to see is late Phase III that would have time to be approved and start contributing to sales. In the near-term, this is weak.Through the agreement with Reata Pharmaceuticals, they acquired the rights to bardoxolone [excluding certain Asian markets]. It's a compound for chronic kidney disease that will enter Phase III in the first half of this year. It is intended to rescue pre-dialysis diabetic damaged kidneys and restore function. This would be a blockbuster if approved but is years away from market. To date, no treatment has been shown to reverse disease progression. Bardoxolone could change the treatment landscape as well as have a significant economic benefit to the healthcare system.In neuroscience they have 14 compounds in human trials for conditions including from pain, Alzheimer's disease, and multiple sclerosis. Daclizumab is a biologic for multiple sclerosis obtained through the acquisition of Facet last year. It's currently in Phase III studies and has the potential to offer enhanced efficacy over many existing MS therapies along with a good safety profile. There is a lot of competition already on the market for MS including a new oral from Novartis. Here first to market will be an advantage unless the ABT drug is superior.The oncology pipeline includes a number of new molecular entities in clinical development for more than a dozen different cancer types. Elotuzumab [through the Facet acquisition]has demonstrated very good response rates in relapsed multiple myeloma, the second most common blood cancer in the U.S. they will begin Phase III in early 2011In Vascular Abbott is adding models to the Xience stent-- XIENCE NANO and XIENCE PRIME and the absorbable stent is almost ready for launch in Europe MitraClip treats significant mitral regurgitation. It's the most common structural heart defect and causes numerous downstream effects such as congestive heart failure, stroke and eventually death. MitraClip is on the market in Europe --- FDA advisory panel review should come in 2011.The takeaway is that these are all years away from market—daclizumab, bardoxolone and elotuzumab are the closest at Phase III initiation. Phase III can take 1 to 3 years and is the most rigorous and expensive phase involving hundreds to thousands of patients. This is where a lot of disappointments happen. Abbott has only three candidates. There is a chance none will make it through.While the pipeline is better, it is still not one of the better pipelines in the sector. Any valuation will have to be done expecting no help from new pharmaceutical drugs in the next 5 years or more. Vascular is only 9% of revenue and will not be much help offsetting pharmaceutical losses. The good news is the only quantifiable losses will be Kaletra at $1.3 billion and Tricor at $1.1 billion. That is only 12% of pharmaceutical revenue at risk and is much less than most of the rest of the sector is facing. It works out to just 6% of total revenue.Valuing AbbottThere is nothing about them at present to suggest a lot of price appreciation to the upside. On the other hand, they seem to be in a far less tenuous position than most of the rest of big pharma, with a small percentage of their revenue at risk from patent expiration. Humira’s dominance is worrisome but the decline will likely not be fast and sharp due to a 2016 patent expiration [unless follow-on biologics become SOP]. It’s growth will slow and flatten. That may be enough to take Abbott’s price down a little and it could take several years. In the meantime, it pays close to 4% Debt is a concern. In March 2010, following the acquisition of Facet[multiple myelome Phase III drug]Moody’s reaffirmed an A1 rating and a negative outlook. Since then, Abbott bought Piramal in India. Since the 10K is not out, we have to wait to look at the debt structure as it stands now. At September it was still A1 with outlook stable. In March 2010, Abbott was at $55 and is down 20%. It overpaid for Facet in Moody’s opinion at $27 per share for the stock trading at $16<SNIPS from Credit Suisse>Restructuring program gets 2011 to where consensus already was. A newly announced restructuring of their US pharma business will lead to reduced expenses in 2011 forward. This likely helped the company reach a 2011 EPS guidance range that captures the current consensus estimate of $4.63. We await the earnings call for further details on the expected impact of this program.Humira growth close to expectations. Key question is how long can this last? Humira sales for the 4Q were $1.879 Bn, just above CS ($1.851 Bn) and consensus ($1.870 Bn). A significant overhang on ABT shares will remain in place however, as investors debate the expected impact oral agents for rheumatoid arthritis and potential biosimilars could have on Humira’s growth potential in the 2013 forward timeframe.Some <snips>from the S&PWe believe Abbott's success with its targeted acquisition strategy will be a key driver for the robust growth we forecast for ABT over the coming years. In early 2010, ABT acquired the pharmaceuticals division unit of Belgium-based Solvay SA. We view this deal positively, as it gave ABT full rights to cholesterol drugs Tricor and Trilipix, and provided for expansion in vaccines and emerging foreign markets. We also expect the company's cost-savings initiatives such as a planned 2% reduction in the sales force to improve margins as well.Risks to our recommendation and target price include failure to successfully integrate the Solvay acquisition, greater-than-expected competitive pressures in key markets, and possible pipeline setbacks.Our 12-month target price of $58 applies a peer- level multiple of 12.6X to our 2011 EPS estimate. We think this valuation is reasonable given ABT's growing franchises in diversified health care markets. Our discounted cash flow model, which assumes a WACC of about 8.3% and terminal growth of 2%, also implies intrinsic value of $58.As with all of big pharma, there are multitudes of variables and moving parts making value difficult. What I like to do in these cases is look at the worst and then see what kind of growth is being priced in at $45 by the market.Looking at pharma and the rest of the company separately, I gave them only 6.3% growth in 5 years. Tricor is going to disappear starting in 2012 and by 2016; there will be almost no income. Kaletra will do the same. That was a negative $2 billion. Humira will offset that loss, but how much? Being conservative I allowed them to get to $9 billion. The net is $1 billion.The rest of the company is given 8% and the combined growth is 6.3% for 5 years. Terminal rate is 3%. Beta is 1 and discount is 10.The value is $38. At $45 the market is looking for 8.5% by my model. That is about what Abbott is guiding. I may be a bit over-pessimistic about the drug segment.
% Change vs. 12M 2009 ========================= Sales Reported forex operationsl ==================================================== Total Sales $35,167 14.30 1.20 13.10International $19,974 20.70 2.20 18.50U.S. $15,193 6.80 6.80---------------------------------------------------- Total Pharma $19,894 20.70 1.00 19.70International $11,150 28.30 1.90 26.40U.S. $8,744 12.20 12.20---------------------------------------------------- Total Nutri $5,532 4.70 1.80 2.90International $2,943 11.10 3.60 7.50U.S. $2,589 (1.80) (1.80)---------------------------------------------------- Total Diag $3,794 6.00 1.60 4.40International $2,791 5.70 2.10 3.60U.S. $1,003 6.90 6.90---------------------------------------------------- Total Vascular $3,194 18.60 1.00 17.60International $1,532 40.20 2.50 37.70U.S. $1,662 3.90 3.90--------------------------------------------------- Other Sales $2,753 1.00 0.60 0.40---------------------------------------------------- percentages pharmaceutical 57% nutrition 16% diagnostics 11% vascular 9% other 8%
Global Sales % Change vs. 4Q09 ============================== Sales Reported forex Operational======================================================== HUMIRA $1,879 13.00 (2.40) 15.40TRILIPIX/TriCor $499 19.20 19.20Kaletra $341 (9.80) (1.80) (8.00)Niaspan $286 12.70 12.70Lupron $200 (7.20) (0.10) (7.10)Synthroid $160 8.30 0.70 7.60
Global Sales % Change vs. 12M09 ================================ Sales Reported forex operational ======================================================== HUMIRA $6,548 19.30 0.30 19.00TRILIPIX/TriCor $1,582 18.30 18.30Kaletra $1,255 (8.10) 0.30 (8.40)Niaspan $927 8.40 8.40Lupron $748 (6.50) 1.40 (7.90)Synthroid $555 10.60 2.00 8.60
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