Abbott Laboratories Strategic Plan

1. Abbott LaboratoriesStrategic Plan Blue Team Dima Batalov Jason Keenaghan Lois Ray Beth Ann Zehnbauer

2. Agenda • INTRODUCTION • Business Case / Problem • EXTERNAL ASSESSMENT - Opportunities & Threats • General Environment • Competitive Environment • Competitor Analysis • INTERNAL ASSESSMENT - Strength & Weaknesses • Culture and Leadership • Organizational Structure, • Value Chain Analysis & Identification of Core Competence • Financial Ratio Analysis • STATEGIC CHOICE • SWOT Analysis: Models • Recommendations • Managerial Implications

3. Abbott Laboratories • Corporate Overview • Headquarters in Abbott Park, Illinois • 71,819 employees (total) • Healthcare: Pharmaceuticals Industry • Discover, develop, manufacture, and sell a diversified line of healthcare products • Sells products throughout the world • Retailers, wholesalers, hospitals, healthcare facilities, laboratories, physicians’ offices, and government agencies

4. Abbott has 5 major business segments Pharmaceutical Products Diagnostic Products Hospital Products Ross Products International Net sales 2000: $13.7 billion 2001: $16.3 billion 2002: $17.7 billion Business Segments

5. Markets products in 130 countries International segment sells pharmaceutical, hospital, and nutritional products 38% of corporate revenues from outside of U.S. (2002) Global Reach

6. Major Products

7. History (1888 – 1970) • 1888: Founded by Dr. Wallace C. Abbott • 1896: Alkaloidal Clinic Publishing Company (15 employees) • 1915: Changed name to Abbott Laboratories • 1929: IPO on the Chicago Stock Exchange • 1937: Established several international subsidiaries; first time listed on NYSE • 1952: Introduced erythromycin (antibiotic) • 1967: Edward Ledder (president) decided to diversify outside of pharmaceuticals • 1977: Begin licensing agreement with Takeda Chemical Industries (Japan)

8. History (1970 – present) • 1970s: Recalls 3.4 million IV units; Sucaryl declared carcinogenic by FDA • 1980: Net sales top $2 billion fueled by several acquisitions • 1984: Net sales top $3 billion; #1 U.S. company in medical nutritionals • 1990: 370 lawsuits concerning synthetic hormone allegedly causing cancer • 1995: FDA approves Depakote and Prevacid • 1999: $100 million settlement with FDA over alleged manufacturing flaws • 1999: Miles White is named Chairman/CEO

9. Alliances and Acquisitions • December 1999: Acquired rights to Omnicef from Warner-Lambert Company • March 2001: Alliance with Millennium Pharmaceuticals (diabetes and obesity) • March 2001: Acquired pharmaceutical business from BASF (Knoll Pharmaceuticals) • November 2001: Acquired Vysis, Inc. • May 2002: Acquired Biocompatibles International PLC (medical stents) • June 2002: Alliance with Celera Diagnostics (molecular diagnostic products)

10. Vision Abbott’s vision is to be the world’s premier healthcare company by being the best healthcare supplier, employer, business partner, investment, and neighbor. Central Purpose To develop breakthrough healthcare products that advance patient care for diseases with the greatest unmet medical needs. Vision & Central Purpose

11. Problem Statement • Facing an industry that is wrought with intense competition and a growing tendency towards consolidation, what actions must Abbott Laboratories take in order to position itself for long-term success?

12. General Environment

13. Economic • Market growth in pharma industry (9%) • Increasing demand for pharma products (4%) • Low interest rate (1.3%) and inflation rate (3%) • U.S. healthcare spending rose 9% to $4.1 trillion in 2002 • Slowly growing economies (consumer spending and GDP) • U.S. Federal budget deficit projected for 2004 ($200 billion) • Increasing unemployment rate (6.3%) • Volatile stock market with eroded consumer confidence • Healthcare cost containment • Decreased government spending on social programs

14. Demographic • Aging population of baby boomers • Over-55 segment in the U.S. will soon reach 17% of the entire U.S. population • Baby boomers use more prescription drugs • Increase in life expectancy (79 years of age) As the general population ages and life expectancy increases, the number of people requiring treatment for chronic conditions such as Alzheimer's and cancer will rise accordingly. Thus, this should see the demand for pharmaceuticals increase on a global scale.

15. Socio-Cultural • Increasingly unhealthy lifestyles: • Increased cases of cancer due to smoking, obesity, poor diet, or lack of exercise • Better insurance coverage of aging population with low co-payments and increased diagnoses • Improving living standards ($37,000 GDP per capita) • Acceptance of Internet to buy pharmaceutical products • Shortened hospital stays • Healthier lifestyles of top 30% of the U.S. population • Utilization of alternative medicines • Chinese medicine, acupuncture, clinical ecology, or herbalism • Acceptance of generic drugs

16. Technological • Less invasive techniques and reduced side effects will become the focus of R&D of new and innovative products • Internet-based medical product and supply auction sites • Internet utilization for sales purposes • Emergence of BioTechnology • Lower R&D productivity • Use of technology as alternatives to prescription drugs

17. Regulatory • Rising number of prescription drugs losing patent protection will boost growth of the generic industry • FDA’s relaxation of marketing guidelines • DTC advertising • Changing Medicare plan • Government regulation of marketing campaigns abroad • Stricter governmental regulations around the world on R&D • FDA has become tougher on new drug approvals • Expiration of brand-name patents

18. Global • High growth potential in Middle East pharmaceutical market • Egypt • Israel • Turkey • Southeast Asian aging population is predicted to be the fastest growing markets for pharmaceuticals • South Korea • China • Singapore • Thailand • U.S. firms continue to build manufacturing and marketing infrastructures abroad to better serve local markets • Preference of generic drugs in Asian economies • Decrease in sales of pharmaceutical products in European and Japanese economies during the last five years

19. General EnvironmentRed Thread • Demographics • Aging population provides opportunities in certain segments • Trends in diseases drive future opportunities • Regulatory • Changes to FDA policies can greatly impact • Changes to patent protection could have huge impact • Changes to Medicare or implementation of National Healthcare • Direct to Consumer Advertising • Technology • Advances in biotech • Advances in computers to design new drugs/treatments

20. Competitive Environment

21. Economic Structure • Pharmaceutical Industry • Ethical Prescription • Brand • Generic • Non Prescription • Loose Oligopoly • Hundreds of companies, top 5 companies account for approximately 41% of U.S. sales • Industry sales 2002 $192.2 billion

22. Industry Overview • Ethical Pharmaceuticals • U.S. Sales • U.S. largest and fastest growing market • 2002 Sales $192.2 billion • Expected CAG 10%-11% 2002-2006 • CNS Drugs one of largest growing sectors • 14% increase over 12 months ending August 2002

23. Industry Overview • Generics • U.S. Sales • 2001: $11 billion • 8.3% of total market sales • 48% of total market prescriptions • Expected CAG 11% 2001-2006 • Average price generic $19.33 versus $65.29 for brand name product

24. Life Cycle Stage • Early Maturity • Pharmaceutical sales expected to slow to 9% over 2002-2006 period • Average annual gains 1996-2001 14% • Primary driver in increased revenues was price • 4% Increase in prescriptions written 2001 - 2002 • Industry consolidation • Product refinements –“Me Too” drugs • Transdermal patch • Time released versions of existing drugs

25. Porter’s 5 Forces Barriers to Entry Power of Suppliers Power of Buyers Industry Rivalry Availability of Substitutes

26. Threat of New Entrants • High barriers to entry • Economic – Huge R&D investment • Regulatory – FDA process • 1 in 5000 compounds make it to consumers • 1 in 20 New Drug Applications make it to market • Legal – patented drugs 8-10 year protection, risk of lawsuit based on drug’s side effect • 10-15 years for development at cost in excess of $800 million • Moderate growth • Incumbents certain to retaliate LOW

27. Threat of Substitutes • Ethical Prescription Drugs - LOW • Patients tend to follow doctor’s orders • Most drugs prescribed for specific indications – acute & chronic conditions • Biotech future threat • Over the Counter – MODERATE • Alternative therapies popular • Homeopathic • Lifestyle changes to treat non-acute ailments • Yoga, Massage Therapy, Exercise LOW/MODERATE

28. Power of Suppliers • Drug materials commoditized • Numerous suppliers LOW

29. Power of Buyers • Who are the Buyers? • Health Insurers/Providers • Pharmacy Benefit Managers - PBMs • (Caremark Rx, Advance PCS, etc.) • Managed care providers • Hospitals, nursing homes, acute care centers • Government – Medicaid • Retail pharmacies • Consumers/Patients • Uninsured

30. Power of Buyers • Health Insurers/Providers • Buy large quantities • Leverage to negotiate pricing • Can limit reimbursement on certain drugs • No threat of backward integration • Power to choose product brand HIGH

31. Power of Buyers Consumers/Patients • Ethical Prescription • Small quantity purchases • Typically follow doctor’s recommendation • DTC advertising • Non Prescription • Threat of substitutes • Homeopathic, Exercise, Herbal • Low switching costs • Many manufacturers / brands MODERATE LOW

32. Industry Rivalry • Moderate industry growth overall • Niche/segments potential for high growth • New products that are accepted can drive long-term revenue streams • Increase in elderly population and use of maintenance drugs • Time to market is key HIGH

33. Where is the Power? Barriers to Entry Power of Suppliers Power of Buyers Industry Rivalry Availability of Substitutes

34. Industry AttractivenessRed Thread • New Entrants • High barriers to entry • High industry rivalry • Large investment – long time until payoff • Incumbents • Niche/segment opportunities • Overall moderate growth • Big payoff for blockbusters • High margins • Threat of new entrants low NOT ATTRACTIVE ATTRACTIVE

35. Industry AttractivenessRed Thread • Abbott • Niche segments show promising growth • Demographics offer strong opportunity for growth • Financial strength • Big payoff for blockbusters • Strong brand name ATTRACTIVE

36. Competitor Analysis Strategic Group Analysis Key Success Factors Competitor Analysis Model

37. Strategic Group Analysis

38. Strategic Group Analysis

39. Key Success Factors • Company size & market share • Patent protection • R&D expenditures / product pipeline • Strategic alliances • Marketing efforts • Global scope

40. Key Success Factors

41. Competitor Analysis Model

42. Competitor Analysis Model

43. Competitor ResponseRed Thread • Competitors are not satisfied with their current positions • Competitors are dedicated to their current successful products and will defend their existing market share • Abbott currently has higher total revenue than competitors, but is less successful in industry growth factors: R&D, strategic alliances, and marketing

44. Internal Assessment Leadership Culture Organizational Structure Value Chain

45. Culture • Work / Life Balance • Rated in top 10 employers in 2002 for Working Mothers • Ranked for 3rd best benefits packages in 2002 by Money magazine • Diversity • Minorities make up 1/3 of US workforce • Fortune magazine listed Abbott as one of the best companies in the country for its diversity practices and initiatives • Community & Social Initiatives • Abbott Access – fight against AIDS • Matching Gifts – millions of dollars to education, culture, art, civic and public policy

46. Leadership • Miles D. White • CEO and Chairman since 1999, joined Abbott in 1984 • Past experience - management consultant with McKinsey & Co. • Forward looking strategy • Before White as CEO, Abbott in doldrums with no blockbuster products • Strategy of acquisitions & alliances to strengthen pipeline • Enhanced investment in internal R&D • Top 9 senior managers have collective 176 years at Abbott and more experience in pharmaceuticals

47. Organizational Structure SBU Form of Multidivisional Structure

48. Organizational Infrastructure Human Resource Management Margins Technology Development / R&D Support Activities Procurement Margins Inbound Logistics Outbound Logistics Marketing And Sales Operations Service Primary Activities Value Chain

49. Value Chain – Abbott Pharmaceuticals Strong Financial Position Infrastructure Strong Corporate Culture –Top Rated by Fortune Forward Looking Strategy Driven by CEO Restructuring – Closed 10 Plants, Layoff 3% R&D Strong Strategic Alliances & Acquisitions R&D Investment – Lower than Competitors HR Commitment to Training / Diversity Good Benefits to Employees Helping Retention and Attraction of Talent Procurement Normal Procurement Practices INBOUND LOGISTICS Technology Inventory Management System Strengths Weaknesses Selecting suppliers to purchase raw materials and testing products, hiring the scientist and employees, and setting up the systems and plants to manufacture and design their products.

50. Value Chain – Abbott Pharmaceuticals Strong Financial Position Infrastructure Strong Corporate Culture –Top Rated by Fortune Forward Looking Strategy Driven by CEO Restructuring – Closing 10 Plants, Layoff 3% Strong Strategic Alliances & Acquisitions R&D Investment – Lower than Competitors R&D Weak Current Pipeline HR Commitment to Training / Diversity, Good Benefits to Employees Helping Retention and Attraction of Talent Procurement Technology FDA Approval Problems OPERATIONS Manufacturing Problems Poor Quality Strengths Weaknesses Operations for Abbott include the research required to discover new drugs and the manufacturing of the product.