I'm not sure how Robert Green can conclude that a 5% investment in MLNM makes ABT much more attractive (i.e. What's ABT's market cap; and how much does 5% of $2B represent?) yet still feel that the best way to play this is to buy ABT not MLNM. Certainly MLNM has more risk, but has he considered the reward side adequately?
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11:28 ET ******
Ahead of the Curve: Abbott Laboratories (ABT) 35.365 + 0.42 (+1.2%) One of the larger investment premises looming on the horizon is the healthcare premise. This boils down to a simple idea: a demographic bulge of aging baby boomers who will demand better and more healthcare services. How that demand gets paid for, whether by insurance companies or the government or individuals, is still a matter of debate - but the demand is clear. How to play this is still a question, but Abbott's purchase (filed last night with the SEC) of more than 5% of Millennium Pharmaceuticals (MLNM) provides a good starting point for discussion.
The healthcare industry is unusual in that it has market segments at opposite ends of the spectrum: extremely mature markets for traditional healthcare provision and development stage markets, primarily for new drugs. The biotech engineering revolution has great potential, but unlike computer technology revolutions, a biotech discovery has a long time-to-market cycle that involves government regulation and a more challenging patent environment. In addition, many biotech stocks are extremely highly valued on the prospect of "the big lottery ticket" discovery, such as a cure for cancer. These high valuations only raise the risk, however, if the science turns out to be wrong or unexpected complications occur. At the other end of the spectrum, the more mature companies in the healthcare space look boring as growth stocks, but the reasonable valuations and healthy dividends (pun intended) make them more attractive investments.
This Abbott Labs deal underscores a nice way to combine both ends of the spectrum of possible healthcare investment premises in a single stock. Abbott Labs has a distinct competitive advantage over: distribution. Most pure biotech companies are research and intellectual property oriented. Their aim is to discover a new drug, prove its effectiveness, get FDA approval, then license the drug for royalties. They will license it to a company like Abbott Labs that has a massive, experienced sales force (more than 10,000 reps). Millennium is one of the more interesting development companies and at one time had a market cap of almost $30 billion (today it is $2.2 billion). But they don't have anything remotely like Abbott's sales force and established distribution channels.
Abbott Labs also develops new drugs, however, it is a very diversified company with a very strong business in the non-proprietary "consumables" of the healthcare industry. This is the segment that will be driven strongly by the "aging-baby-boomer" thesis. It is just simple math that more sick people means more consumption of everything from rubber gloves to syringes. The diagnostics group also is driven by this thesis as more diagnostic tests are driven by insurance needs and most have a consumable aspect to them (a razor/razor blade model). With the nutrional division, this three groups comprise almost half of Abbott's revenues.
The investment in Millennium links one of the strongest, best diversified healthcare companies with one of the largest biotech companies with very interesting "big vision" pipeline projects. When (if) Millennium comes through on one of their several big projects, it is likely to be distributed by Abbott. This deal brings them a lot closer together. The best way to play a scientific discovery at Millennium is probably by buying ABT, not MLNM. The diversified nature of ABT greatly reduces the overall risk and is itself supported by the alternative demographic premise. A deeper investigation of Millennium's progress is probably now warranted, but the first impression is to make Abbott Labs a lot more attractive. - Robert V. Green, Briefing.com |
