The Business Of

Healthcare | AbbVie | What Do They Do?

Morning All!

Welcome back to The Business Of! So, before the break, we explored The Business Of Fast Food. And broke down the business models of McDonald’s, Huel and PepsiCo.

This week we start a new 3-week series and I’m super excited for it. Because it’s not the easiest industry to understand. But it’s one of the most valuable industries in the world. We’re going to be diving into The Business Of Healthcare! (I wanted to call it ‘The Business Of Drugs’. But I thought saying drugs in the subject line would cause the emails to bounce!)

Now, don’t worry if you don’t really have a clue about healthcare or pharmaceuticals. We’re going to simply explain what these companies do. How these firms make money. The costs involved. And over the next 3 weeks, we’re going to be looking at these 3 massive companies;

• AbbVie - manufactures drugs. #35 company in world by market cap.

• CVS Health - sells drugs. #10 company in world by revenue.

• UnitedHealth - a health insurer. #9 company in world by revenue.

Today, we’ll set the scene by giving the industry some context and going through the value chains. So without further ado… !

Healthcare Bigger Than Tech… Surely Not?!

Alright, first off - why are we even diving into the US healthcare industry? It doesn’t seem like an obvious sector to analyse. Well, what if I told you that out of the top 50 most valuable companies in the world (by market cap). 8 of them are in the tech industry.

And you’ll obviously have heard of these tech companies - Apple, Microsoft, Amazon etc. But would you believe it… there’s another industry that has even more companies in the top 50! That’s right… it’s the US healthcare industry with 10!

Now, this shocked me. And I’m sure it’ll surprise a few of you! Especially if you’re outside the US. But these US healthcare companies are absolutely huge. And over the next 3 weeks, we’re going to really dig into why they’re so big. And how it impacts US society. Now, let’s crack on with an overview of the value chain!

The Flow of Drugs vs The Flow of Money

So, there’s actually 2 separate value chains to think about here. One is for the flow of drugs. And the other is for the flow of money. Let’s first start with the flow of drugs. And there’s 3 main players involved here:

Drug manufacturers: These companies, like Pfizer and AbbVie, make the world’s most important drugs. The COVID vaccines were a good example!

Wholesale distributors: These companies, like McKesson, are the middlemen - they buy drugs from the manufacturers. And then sell them to pharmacies.

Pharmacies: These companies, like Boots (in the UK) and CVS (in the US) are where people with conditions go to get their drug prescriptions.

But there’s another side to the story. Because we’ve just gone through the flow of drugs. But who actually pays for all of this?! And where does health insurance fit in? Well, the image below gives us the flow of money. And there’s 2 more players involved here…

Health insurer: These companies, like UnitedHealth, receive monthly premiums from people. And they cover most/all of the cost for the drug by indirectly paying the pharmacy through the pharmacy benefit manager.

Pharmacy benefit manager (PBM): These companies, like Express Scripts, co-ordinate payments between several players. They negotiate discounts with drug manufacturers and pass these discounts onto health insurers. PBMs also collect money from health insurers to pay the pharmacies. CVS Health actually has a pharmacy division and a PBM division so we’ll look at this more next week!

This might seem a little complicated right now. And you know what… it is! The US healthcare industry has so much jargon and confusion. But trust me, it’ll get less complicated. And I’m hoping that by the end of the next 3 weeks, we’ll all have a decent understanding of things! By the way, page 10 in this document, gives a really clear graphic of how the flow of money works. I recommend checking it out!

The Biggest Blockbuster Drug… Ever!

Okay, so let’s chat briefly about AbbVie - the focus for our first week. We know they manufacture drugs. But first question - what kind of drugs do they manufacture?

Well, the table below gives us the answer. AbbVie manufactures drugs in 5 fields. Immunology, Oncology, Neuroscience, Aesthetics, and Eye care.

And it’s AbbVie’s job to discover drugs in these areas. Develop them. And then sell them so that people suffering from the conditions mentioned in the table above can be cured.

This week, we’ll dive into which of these 5 product types make the most money for AbbVie. We’ll look at what costs are required to develop all these drugs. And just to whet the appetite for tomorrow - one particular drug that AbbVie sells is called Humira. Which had made ~$200 billion in sales over its lifetime - making it the best-selling drug of all time!

26th Jun 2023

Nigel Jacob CFA