Abbott Labs' Branded Generics Segment: A Brief Look

| About: Abbott Laboratories (ABT)
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Summary

Abbott Labs has been working behind the scenes to make its branded generics segment more efficient.

It has diversified itself of unproductive assets, but makes strategic acquisitions in emerging markets.

The large insider buys are also good for investor confidence.

About 20% of Abbott's (NYSE:ABT) total global annual sales of $20bn comes from its long list of generic drugs. In some ways, this is very safe money because of a number of factors. One, it takes a long, long time - or a lot of money - to produce a catalogue of generics large enough to make meaningful money. Not everybody can do it. Small players find it especially difficult to cope. That is why there is hardly any small player in the global generics market. Two, while entry barrier to the generics field is technically low, the lack of financial incentive actually makes competition somewhat difficult against established players. Three, it is difficult for regional generic players to become global. This business is very low margin; it just doesn't generate enough to sustain marketing on a global scale. And four, not every generic drug is easy to make, and sometimes physicians will prefer branded generics over non-branded ones.

Given the factors above, at least a fifth of Abbott's total sales is very well protected from market headwinds. This is not a claim all big pharma can make. We hear every year of one or the other big pharma heading towards a patent cliff or stiff competition - Roche (OTCQX:RHHBF), or Gilead (NASDAQ:GILD), for example, has had such troubles in recent times. Abbott is very protected from such things because it has found for itself a unique niche. It spends very little on R&D, it has very little of the catalytic effect common to other biotechs, it doesn't have PDUFA dates, or trial results dates etc.; basically it is a very safe, boring, dividend-paying company. For a lot of investors, including some insiders, this can be a very attractive investment proposition in the current state of biotech.

Speaking of insider buying, CEO Miles White just spent close to $60m buying Abbott stocks this year. This is the largest insider purchase I have come across in recent times. This certainly boosts my confidence in the stock.

Abbott has been quietly consolidating its generics segment, diversifying its non-performing assets in the form of its first world generic business, which it sold off to Mylan (NASDAQ:MYL) for 110 millions of MYL shares. This sale was a long time coming for Abbott. Year over year, the company had been seeing steadily increasing operational sales in 14 key emerging markets including the BRICS nations, while its generic drugs sales in developed markets were declining steadily. With this divestiture, Abbott is simply re-positioning itself as one of the largest players in the high growth emerging markets. In India, it was already one of the largest generics sellers; now it has a similar presence in Latin America as well. The entire Asian continent now accounts for a third of Abbott's total revenues, and much of this comes from the branded generics segment.

Abbott used to have a segment called the Proprietary Pharmaceutical Products, which was one of its five revenue-generating segments. This segment did R&D and produced newly approved drugs. Abbott spun off the R&D and new drugs sections out as AbbVie, and Hospira before that. Then it made a number of critical generic acquisitions, adding to the Established Pharmaceutical Products segment. Finally, it divested itself of its US generics business with the Mylan sale. Today, this segment only manufactures and sells generic drugs outside the US. This is the sort of strategic consolidation that has made Abbott's generics business efficient.

Abbott has a long list of branded generic drugs, many of them, like Brufen and Duphalac - household names around the world. Many of these came through its own research, or through historical acquisitions. However, the principal manner in which products were added to the catalogue was through Abbott's own research for its Proprietary Pharmaceutical Products. With this research-based proprietary pharmaceuticals business now divested, the only way to add products to this branded generic catalogue is through acquisitions. Abbott has been carefully making acquisitions ex-US, notably with the $2.9bn 2014 purchase of CFR Pharmaceuticals, Latin America's largest generic pharma company.

The CFR acquisition added some 1000 different generic products across markets in Latin America and parts of Southeast Asia. It will also add about $1bn to Abbott's annual sales figures. This more than doubled Abbott's presence in the Latin American branded generics market.

In 2014, also, for about $305m, Abbott acquired Veropharm, a leading Russian pharma company, and established a manufacturing footprint in that country, as well as acquired a broad range of some 100 generic products. Total sales from the segment increased to 34.1% in 2015 as a result. Abbott has been in Russia since over 40 years, but it did not have a manufacturing presence until now.

Abbott's focus seems to be away from R&D and more towards boring but low-risk healthcare in the form of generics, nutritional products, and diagnostics. In the generics segment, as I just discussed, it has taken a number of strategic steps to consolidate its business and make it more efficient. Effectively, this puts a large chunk of Abbott's revenues in a low-risk shelf, out of the reach of market volatility. Its 2.6% dividend yield adds to the attraction. It is also quite a range bound stock, and right now, it is trading near the middle of its 52-week range. If you are interested in a dividend paying, solid, blue chip, boring, low risk stock, Abbott is one good way to go in 2017.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.