Biotech Values

[DewDiligence]

More on the “new” ABT (i.e. the remaining company after the AbbVie spinoff)…

http://online.wsj.com/article/SB10001424052702303990604577367760661436198.html

›Abbott Pins Hopes on Consumer Products

May 2, 2012, 12:50 p.m. ET
By CHRISTOPHER WEAVER

As Abbott Laboratories prepares to get down to basics as a consumer-products company, it is pinning its emerging-market ambitions in part on turmeric. And cumin and chili.

Abbott, which will split with its 124-year-old drug division later this year, is shifting its focus from breakthrough medicines like arthritis treatment Humira that command high prices in developed markets, to more basic products like nutrition supplements and generic drugs that can thrive in places like India, China and Vietnam.

Abbott's largest business by sales will be its $6 billion nutrition segment that includes the infant formula Similac, followed by generic drugs, vascular devices and diagnostic tests. Abbott projects that the nutrition business alone will grow to as much as $10 billion by 2015, with $4 billion in emerging markets. One way the Abbott Park, Ill.-based company says it will accelerate those products' growth in emerging markets is by injecting local panache.

"We'll be tailoring those businesses much more closely to market desires," said Chief Executive Miles D. White. Historically, international companies seeking to swell their presence in developing nations "did business as exporters," Mr. White said, selling U.S. products abroad. But, "for a lot of these major emerging markets, you have to fully put yourself there."

In one example of its strategy, Abbott's nutrition unit will launch a partnership with Indian drug maker Biocon Ltd., with the goal of developing products with local appeal [#msg-75186901]. Kiran Mazumdar-Shaw, Biocon's CEO, said Abbott can broaden its Indian foothold by cooking up nutritional drinks that merge local remedies—turmeric, she noted, is revered in India for its curative properties—with science.

One product Abbott says could emerge from its five-year contract with Biocon's Syngene unit is a supplement for diabetics—a fast-growing group of patients in India—that would control glucose spikes and come in flavors such as jal-jeera, a cumin and hot chili-based Indian refreshment.

It is a lesson that some consumer-products companies learned early on—for instance, Procter & Gamble markets hot-paprika-flavored Pringles in Hungary. But the nutritionals business has been slower to catch on, said Kaushik Ramakrishnan Shankar, a Chennai, India-based analyst for marketing consultant Frost & Sullivan. "You need to bring in local taste to any food product," he said.

This local focus is part of a larger strategy at Abbott to transplant its portfolio of lower-cost, nuts-and-bolts products to new markets to help replace the growth generated by big-ticket items like Humira, that could approach $9 billion this year.

As medical-supply companies search for growth outside the lagging economies of the developed world, they are increasingly focused on changing their marketing and manufacturing operations to fit those markets, said Kevin Davies, RBC Capital Markets' head of U.S. health-care investment banking. There, medical breakthroughs don't command the high prices they do in the West, so companies must focus on their basic operations to sell lower-margin products to "a massive population without premium prices," he said.

There are questions about whether Abbott and other companies can capture the full growth potential of developing markets. Abbott's emerging-market presence was bolstered by two 2010 deals to acquire generic drug makers Solvay and India-based Piramal for a combined $10 billion [#msg-41922225, #msg-50436738].

But that earlier spending could limit Abbot's ability to grow through future acquisitions, analysts said, a key tactic for overseas expansion. Abbott also tried to buy nutrition companies in 2010, but deals in India and China both fell through. Now, Mr. White said, Abbott's strategy will be based on organic growth.

In mid-April, Abbott reported 10% emerging-market growth in the first quarter of this year compared with a year earlier. But sales in those markets have been flat since the quarter ending June 2011, according to an analysis of company statements. Financial analysts expect Abbott's presence in emerging markets to buoy its stock, but question whether those markets can reliably fuel the nearly 10% overall annual revenue growth it projects after the split.

Abbott said emerging-market sales are subject to seasonal variation and currency fluctuations, and that its actual sales continued growing in those quarters. Last year, Abbott's overall emerging-market sales were $10 billion.

Abbott will also have a formidable competitor as Swiss food group Nestlé SA acquires drug maker Pfizer Inc.'s nutrition business in a deal announced in April, said Ildiko Szalai, a food analyst at Euromonitor International. Nestlé already controls more than 75% of the Indian consumer market for baby formula, according to Euromonitor data. The data does not include physician-directed nutritional sales, which are Abbott's historic focus.

Mr. White cast aside the implication that Abbott will be a less innovative company. "We're putting a lot of emphasis on the creation of new products within all of our businesses," Mr. White said, adding that he would increase research and development in each segment. Excluding the outgoing pharmaceutical unit, Abbott's research budget is about 7% of sales, according to J.P. Morgan Chase & Co. estimates, roughly average in the medical technology industry.

The company will still market cutting-edge gene-reading diagnostic tools and the first bioabsorbable stent [#msg-58615702], a device to prop open clogged blood vessels that is available in Europe. And Michael J. Warmuth, the Basel, Switzerland-based executive who oversees Abbott's international generic drug business, said the company defines innovation broadly, such as in packaging and the supply chain.

In 2010, the company opened a Singapore-based nutrition laboratory, after realizing, among other things, that the vanilla and strawberry flavors of its American seniors supplement, Ensure, didn't fly in Asia. It turns out, "one of the best flavors in the adult world in Asia is something like honey-lemon," said Robert H. Miller, who leads Abbott's global nutrition research.‹