Abbott Labs (NYSE: ABT) has jumped on the established-product-division bandwagon. The company has licensed 24 products from Zydus Cadila of India and has the option to market another 40. Abbott will sell the drugs in 15 emerging markets starting in 2012.
"Established products," as Abbott calls them, is a euphemism for "old and un-patentable drugs" that the company is still trying to sell, often overseas. Pfizer (NYSE: PFE) added an established-products division a few years ago. GlaxoSmithKline (NYSE: GSK) has expanded into South Africa and has a deal with Dr. Reddy's Laboratories (NYSE: RDY) to sell its drugs in emerging markets. Novartis (NYSE: NVS) has a huge generic-drug presence through its Sandoz division, and sanofi-aventis (NYSE: SNY) has entered the generic-drug market through a series of acquisitions.
There's plenty of growth available overseas and squeezing out profits is better than letting the drugs die, but I'm not sure the profit margins should get investors excited. Abbott says that 20% of its pharmaceutical sales come from emerging markets, but the real question is how much of its profits come from those areas. I'm willing to bet it's considerably less.
The reason drugmakers can throw off so much cash is because of their high margins. If they're going to enter a lower-margin business, they better do it right, and go all in. The way to compensate for lower margins is with monster sales; dabbling isn't going to cut it.
Abbott started the process with its acquisition of Knoll's pharmaceuticals business and more recently with the acquisition of Solvay Pharmaceuticals. But investors should look for more moves into emerging markets -- either internally or through acquisitions -- before the strategy starts contributing considerably to the bottom line.
Fool Tim Hanson thinks your portfolio needs to take a vacation to far-away markets.
