As part of my MBA, I took one of the more interesting companies in the Cambridge area and analysed their strategy, and cost structure from a macro/micro perspective and provided recommendations at the very bottom of the post. Conveniently located down the road from my house, Abcam is one of the biggest success stories of Cambridge there is…the biotech amazon of antibodies! I plan to release my previous 3 year’s worth of MBA studies on biotech companies, with confidential information redacted, such as Abcam over the coming months. Enjoy!

“I want Abcam to be to antibodies what Amazon is to books” – Dr Jonathan Milner, Founder and CEO of Abcam (1998-2016)

Background

Abcam is an AIM-listed life science manufacturer and distributor of scientific research tools for use in protein research worldwide, headquartered in Cambridge, England, with 11 worldwide distribution hubs. Their core business is antibody production (70%), immunoassays (18.5%) and other catalog products (11.5%) with an antibody research market share of 21%. Abcam has a unique business model and was the first to adopt an ecommerce model within the life science industry and sell antibodies online, tapping into the boom of internet usage as shown in figure 1 below. Whilst previously companies took an approach of selling antibodies with little quality standards, for Abcam, antibody quality and superior customer service and experience are paramount.

In 2019, 70% of Abcam’s revenue was based in the USA, Europe, Middle-east and Africa contributed 20% and it also sold 10% in ‘other’ (primarily China) (Abcam, 2019). The company has grown substantially since its listing in 2005, growing from £2.5m in revenue to £259m in 2019. Abcam has won many prestigious business awards, including the ‘Profit by Design’ award, in recognition of its pioneering use of a website as a sales tool (Abcam, 2019). Due to this growth, and its numerous acquisitions over the years (MitoSciences in 2011, Epitomics in 2012 and Firefly BioWorks in 2015) comparative numbers shall be used to measure its performance versus its competitors, including: Profit margin (%) and Return on Capital Employed (ROCE) (%).

In comparison to its industry, and nearest competitor, Merck Millipore (Merck), Abcam has strong revenue growth from 2006-2011. However, it has more recently struggled to adapt to macro and micro economic factors that will be explored further in this report. Whilst revenue continues to grow, as shown in table 1, profit margins and ROCE have trended to decrease over time (as compared in figure 2).

Vulnerabilities and costs

Input costs for antibodies are low, with the main input costs being both labour (both manufacturing and marketing) and the use of rabbits’ spleens – antibodies being the produce of the serum of spleen within a rabbit when exposed to an antigen and subsequently harvested.

Interestingly, Abcam utilises its highly-qualified employees for marketing purposes, stating ‘over 212 PhDs’ as one of its USPs. Accordingly, these will be classified as quasi-fixed costs due to their training and Abcam’s reluctance to let them go in economic uncertainty.

An overview of the costs for Abcam for the financial years 2018 and 2019 are shown below in table 2 (Abcam, 2019):

Year	2018	2019
Fixed Costs
Depreciation Owned Assets	4,500,000	4,800,000
Total Machinery and Property Hire	5,400,000	8,900,000
Research & Development	16,000,000	15,000,000
Variable Costs
Wages & Salaries	49,700,000	56,000,000
Social Security Costs	6,100,000	6,800,000
Pension Costs	2,900,000	3,500,000
Directors’ Remuneration	3,061,000	3,858,000
Other Emoluments	2,153,000	2,826,000
Number of employees	1,054	1,155
(Of which are PhDs)	210	212
Quasi-fixed Costs
Employment costs	£13,860,000 (210 PhDs out of 1,054 total employees)	£13,992,000 (212 PhDs out of 1,151 total employees)

Abcam runs a hybrid business model, where originally it was a distributor of antibodies, it has, over time, changed to a split whereby it manufactures 25% of the antibodies in-house and is a distributor of the other 75% manufactured by other companies. This is due to its business strategy of expanding into new markets that will be explored later.

Accordingly, two main business models that Abcam operates within that show different supply curves:

In-house antibody manufacturing	Antibody distribution from third-party suppliers
Figure 3 – Short-run curves of Abcam’s in-house model	Figure 4 – Short-run curves of Abcam’s distribution model
In this model, the Average Total Cost (ATC) curve is steeper until Q* and the fixed costs are accounted for. The cost rises more gently beyond ATCmin as the additional cost is marginal as employees handle larger volumes per batch production, but do not get paid more/output.	The ATC curve is almost flat and ‘saucer’ shaped in the distribution model as Abcam purchases antibodies as required from its suppliers in its distributor model. As output increases, it gains discounts from its suppliers until it reaches a capacity point from its suppliers (availability of rabbits and expertise from scientists to generate antibodies) where it then increases.

Overall, Abcam as a company has vulnerability somewhere in-between these two models as described and compared to Merck below.

Type-1 Vulnerability

Merck has fixed assets of £102m in 2017 compared to Abcam’s £29m on similar revenues (2017: £286m and £217m respectively) providing Merck with more exposure to economic shocks (as shown in figure 5). This creates a steep flute-shape prior to Q1* as it has to recover its ongoing fixed costs. Abcam on the other hand has less type-1 vulnerability with a fixed cost/turnover percentage of 11.2% as it purchases antibodies and distributes them from suppliers. However, as output increases beyond Q₁*, Merck generates scales of economy compared to Abcam, being in control of its own supply of antibodies it is able to produce these at a lower variable cost. With its large manufacturing facility, the potential manufacturing capabilities of antibodies being produced is also greater by Merck – the overall trade-off for Abcam is flexibility and lower vulnerability, at the cost of productivity.

Abcam therefore can be seen as an ‘online retailer’ that confers a low type-1 vulnerability at an expense of vertical integration and control of its supply chain.

Type 2 Vulnerability

As shown in its annual report (Abcam, 2019), the largest proportion of input costs are its cost of goods (2019: £76.7m) corresponding to 30.3% of turnover. There is then relatively little value added to the cost of purchasing the antibodies: distribution costs and ecommerce then make the rest of the costs. As the main suppliers of antibodies are from the USA, exchange rates, commodity costs and political factors affect the cost of importation that will be explored. There are a great deal of suppliers to choose from so the influence of these suppliers is negligible and will also be explored.

Abcam’s second largest input costs, due to the requirement of a highly-qualified workforce, are wages, and therefore it is vulnerable to the cost of wages increasing above inflation (2019: £56m). Abcam does however, whether deliberately or inadvertently, benefit from its geographical location to suppress this input cost of wage growth. Due to the specialist skill set required, once Abcam has its employees situated in Cambridge, they have little leverage to demand higher wage growth due to lack of market competition for their skills. The majority of antibody-related employment are situated in San Diego or Boston, USA, in the highly-concentrated biotechnology clusters (Biotechnology Innovation Organisation, 2019) as shown in figure 6. This is a contributing factor (alongside USA’s higher GDP) in the difference in the average wages received between Merck (Boston-based) and Abcam (Cambridge-based) employees in 2017: £57,322 and £47,860 respectively.

Market exposure

Micro

Abcam has several brands, products and markets it operates within, as summarised by figure 7 below.

Abcam’s penetration of the $3bn proteomic research reagents is high, with 21% market share, as shown in figure 8. However, this market can be seen as a monopolistic market due to the number of competitors, with a three-firm ratio of 46%. 14% of the market consists of ~250 other competitors; this is because of the low economy of scale for antibody production with little capital equipment required so sellers have free entry and exit into the market. Similarly, the number of independent buyers is large, providing Abcam with an unique opportunity to scale with its ecommerce model.

Porter’s Five Forces

Analysing the market in which Abcam operates using Porter’s Five Forces (Porter, 1979), figure 10 shows that ‘new entrants’ and ‘degree of rivalry’ are critically important in Abcam’s survival and are explored further. Interestingly, ‘supplier’s power’, once highly important to Abcam, is now diminished due to Abcam’s increased purchasing power as it has scaled. Together these two forces will be looked into more depth to explain Abcam’s growth over the past 8 years.

As there are already a number of established companies in the market that Abcam operates, the degree of rivalry is high. This high number of rival competitors can be explained by the minimum efficient scale of industry. As shown in figure 11 by LAC₁, the minimum efficient scale of producing antibodies for the proteomic markets is low. At Q₁, multiple companies are competing with Abcam, therefore its strategy is to move to q₂ (diagnostic and therapeutic markets) and have a cost curve similar to LAC₂, an oligopology where only a few firms can meet the demand.

Supplier’s power

As shown, Abcam’s suppliers’ power is fairly weak. Due to a large number of independent potential suppliers to Abcam, it is able to suppress price increases via competition and auctions for its business. Furthermore, due to the lack of differentiation between an antibody and the low switching costs, overall the supplier’s power can be considered as low. As identified in figure 12, the threat of forward integration of Abcam’s suppliers (and become similar to Merck) can be seen as a risk, and as such Abcam has been purchasing its own suppliers and re-brands all of its supplier’s products to its customers in order to mitigate this.

New entrants

The entrance of new competitors can be seen to have an adverse affect on Abcam’s margins, as can be explained in figure 13, creating a downward pressure on price due to relatively free-entry into the market.

To mitigate the threat of new entrants, Abcam has increased its endogenous sunk costs, investing in optional fixed assets and marketing in order to raise its prices and lower its variable costs. Whereas the minimum efficient scale for the distribution of antibodies is fairly low, it has since strategically influenced the level and nature of costs (Sutton, 1991).  With 10 distribution hubs as well as Abcam’s own brand of antibodies, it is not a case of manufacturing or distribution, but achieving the value of the brand. This is a sunk cost that competitors could not recoup if exiting the market.

Furthermore, Abcam uses its wealth of customer data, much like Amazon, to its benefit, shown by an investment of £2.1m and £2.0m in 2018 and 2019 respectively in ERP and technology stacks.  By understanding purchasing behaviour, Abcam is able to pre-order antibodies with its suppliers for faster delivery to its customers. Due to the volume and market share, Abcam is able to statistically do this to an extreme degree of accuracy that competitors would struggle to manage demand and stock, creating additional technological and learning curve barriers not easily replicated.

Combining these two forces of Porter’s Five forces together (new entrants and supplier’s power) can explain the decreasing profit margins and cost of goods over time, as per figure 14 below.

Cost of goods decreased over time from 2000 to 2012, which is reflective of the purchasing power of Abcam and its ability to gain volume discounts. A slight increase from 2015-present represents its business model of bringing manufacturing in-house as it slowly increases its productivity as it starts to learn and validate the manufacturing process.

Furthermore, profit margins went from negative in the year 2000 (-76%) to its peak in 2011 (38.5%) and have been in decline ever since. Once gaining first-mover advantage, increasing competition have shifted the demand curve and caused a downward affect on price, as shown in figure 13.

Macroeconomic exposure

As Abcam sells the majority of its products in the USA, it is compared to the GDP of USA, as shown below, as well as compared to its peer company, Merck.

GDP exposure

As discussed previously, Merck has a high type-1 vulnerability, and therefore a downturn in the economy in 2008 led to a severe decrease in ROCE and profit margin, as shown in the figures above, reflected in the 2009 financial accounts. Alternatively, Abcam is sheltered from these macroeconomic affects. With little fixed assets in 2008 and 2009 it was able to be flexible and responsive. There is however a large decrease in ROCE in 2012 due to the acquisition of Epitomics and its corresponding assets. Abcam has started its strategy to manufacture in-house but has yet to experience scale of economy between the two companies post-acquisition. It has also failed to capitalise on these investments as shown in its turnover after 2012. In 2014, Abcam’s turnover was £127.9m and 2019 it was £259.9m. However, this additional £131.9m revenue only contributed £12.8m in profit before tax, a 9% increase. A lot of this is held as cash-in-bank (2019: £87.1m, 2012: £17.48m) and increased inventory that is required due to its in-house manufacturing strategy. Further unsuccessful acquisition attempts of other suppliers (eg. Horizon Discovery in 2018) have failed to increase ROCE (Reuters, 2019).

Exchange rates

Abcam is not affected severely by exchange rate fluctuations as, although being UK-based, both its suppliers and customers are predominantly US-based. Hedging against currency fluctuations has negated the US dollar $)/GBP (£) exchange fluctuations.

Government Debt

The majority of Abcam’s revenue currently comes from publically-funded healthcare funds. The largest of these funds, the National Institute of Health (NIH), is situated in the USA, funding over $22bn of life science research, including the proteomic industry in which Abcam operates (NIH, 2019). Accordingly, the cyclical funding and government debts of the USA are of interest, as if the government elects to reduce this burden it would impact on the funding of its customers and a decrease in sale of its antibodies could potentially ensue.

The following figure shows the debt/GDP ratio as well as total debt over time for USA, Abcam’s biggest market.

Fortunately for Abcam, the USA debt has generally been considered ‘safe’ by investors; holdings of Treasury bills has increased from 13% in 1988 to 31% in 2011 (The Balance, 2019). Abcam has benefited from this confidence to pay back debt and therefore government spending has increased. However, this may be a concern in the future, as the USA reaches the 100% debt/GDP ratio – cutbacks will be likely and this will impact on Abcam’s growth.

Internet Access

Internet access Year-on-Year (YoY) growth is declining as it reaches saturation point (2018: 90% access). Internet access, which in turn is strongly linked to total GDP, can be seen as an indicator for Abcam’s revenue growth, the two showing a strong correlation, With a recent decline in growth of an accessible population and interest in ordering antibodies online, Abcam’s revenue growth suffers proportionality. Furthermore, with increased internet access comes an increase in information, accessibility and technology associated with setting-up an ecommerce company successfully. This serves to reduce entry-barriers for competitors as they too can create and market antibodies online. This further squeezes margins and revenue growth that will be further analysed.

Non-macroeconomic events

In March 2019, Abcam opened a new distribution centre in the Netherlands as part of its Brexit contingency planning and global supply chain (Abcam, 2019). However, as over 71% of Abcam’s revenue comes from government-funding in the USA, the politics and, more specifically, the funding policies within in the USA are perhaps the most important driver of economic success for Abcam. An analysis of the NIH funding growth, compared to antibody use growth indicates a strong correlation as shown in table 3.

	2006-2018
GDP growth (%)	49%
NIH funding growth (%)	29%
Antibody use growth (%)	31%

As shown in figure 20, although there is an increase in NIH funding availability for customers to purchase antibodies from Abcam 2015-2018, this isn’t necessarily being translated into an increase in sales. Once the NIH funding budget is adjusted for inflation (2017: 2.74%, 2018: 2.95%), the inflation-adjusted 18.4% increase in NIH funding between 2015-2018 only translates into a 1.5% growth in antibody use by customers as shown in figure 21. This signals a saturation point for the total serviceable antibody market for Abcam, with customers not using more antibodies and explaining the recent decline in performance of Abcam.

Business strategy in context of the economy

Looking at 2008/2009 as a period of recession to analyse the effectiveness of Abcam’s business strategy, Abcam has growth on ROCE, profit margin, revenue and profit. By investing in the internet trend and adopting a novel business model as a distributor of antibodies rather than being a manufacturer/ seller, it was able to protect itself from economic shocks that its competitors experienced. Its market in 2008/2009 was stable and sheltered too as, although GDP decreased, government funding remained flat.

However, compared to its competitors and shown in the analysis throughout this report, the more recent challenges Abcam face now, and in the future are:

• A lack of large entry and exit barriers in the industry, placing Abcam in ‘strategic hell’ and perfect competition in the near future unless it can respond appropriately.
• A reliance on the USA’s economy (via total debt) and political policies as antibody funding is dependent on the NIH.
• A large proportion of input costs are quasi-fixed due to its need for highly-qualified employees.
• Apparent scales of diseconomy due to an adoption of two different business models as Abcam look towards new markets.
• Large barriers to entry with oligopolistic features within the diagnostics and therapeutic markets.

How well equipped is Abcam for 2020 and onwards?  

The macroeconomic environment hasn’t hugely influenced Abcam’s performance, however, in the future this will be more of a factor as the USA debt/ratio rises and it expands into other geographical markets with differing exchange rates. Inflation may also rise impacting on input costs and interest rates will also affect new-entrants’ ability to borrow and enter the market. Furthermore, its vulnerabilities will greatly increase in the future if Abcam continues to follow its strategy to enter new markets and produce a larger proportion of its own antibodies.

Price elasticity

One of Abcam’s primary concerns in the short term is its price elasticity. To overcome this challenge, it has sought to differentiate its products and erect barriers of entry through customer service (212 PhDs) and a unique knowledgebase (customer database, preferences etc.). Fortuitously, antibody demand is fairly constant (as shown in figure 21) owing in part to proteomic funding available. There are substitute technologies available, such as genomic and flow-cytometry technologies that would swap a consumer. However, as funding for antibodies is secured in 3-yearly cycles then, although in the short-run the elasticity is low, in the long-run, elasticity of antibodies is high as money can be swapped elsewhere.

Furthermore, as Abcam has the leading brand loyalty of any antibody producer, shown by Net Promoter Score (Abcam, 2019), any increase in price will lead to a smaller change in consumer habit compared to its competitors as consumers feel it is harder to substitute. This is diagrammatically represented in figure 23 below.

Competition

In the long-run, the erection of sustainable high entry barriers is critical for the longevity of Abcam’s performance in order to stop new firms from entering and stealing its supernormal profits. Due to the low barriers to entry in the industry, Abcam currently effectively employs artificial barriers instead, including: price discrimination/personalised pricing, branding, advertising and vertical integration. Abcam’s large cash reserves (2019: £83.2m) serve as a capability to purchase its suppliers/competitors with manufacturing facilities to both simultaneously reduce competition and gain manufacturing facilities to help with its strategy of entering new markets. The added benefit would be a decrease in downwards pressure on price with fewer competitors, a fall in price elasticity of demand and make price wars less likely.

Scalability

A decline in profitable productivity at Abcam is a problem, as it has become more difficult to manage (managers themselves require additional management) in a global business (profit/employee: 2019: £48,831, 2011: £108,118). Increasing agency costs and ownership and control being further separated have also contributed to diseconomies of scale. A study by Ichniowski et al. (1997) suggests that it is not enough to just have highly-qualified employees (like at Abcam), but rather tenure is linked to productivity (via validated learning) and so Abcam should seek to maximise this wherever possible via share, accelerated promotion, mentoring and cultural schemes.

This remains a concern for Abcam as it seeks to grow and enter new markets; it identifies ‘gaining educated personal’ as a primary concern for its future expansion in its accounts (Abcam, 2019). Specialisation training for employees would increase the productivity whilst also not raising wages exorbitantly (Begg & Ward, 2013). This is particularly relevant in Cambridge, where there are no competitors for employees to defect.

Vertical integrations

Abcam’s strategy of acquiring its suppliers makes sense for complicated contracts, and for future growth in the diagnostic and therapeutic markets where quality is paramount (for patient usage) and Abcam can control this complex supply chain. Furthermore, costs that would arise from enforcing and monitoring the outsourced contract are avoided (Begg & Ward, 2013). Due to its increase in quasi-fixed employment costs (and therefore type-1 vulnerability), Abcam can try and minimise its for times when output decreases, either via temporary contracts or contingent contracts/shares such as performance-related pay or via piece rates.

Expansion into new markets

As shown in figures 10 and 13, Abcam faces increasing competition in its current proteomic market, and faces tough markets to penetrate, with its expanded business into diagnostics and therapeutic markets. The three-firm concentration ratio indicates an oligopoly for these latter two as shown in the table below.

	Proteomic Research Reagents Market	Diagnostics	Therapeutics
Three firm concentration ratio	46%	52%	79%

Within the diagnostics and therapeutics markets there is an increased likelihood for companies to be colluding due to a few number of large buyers and sellers, lack of product differentiation and stability in both market demand and costs. Consequences of this may make it difficult for Abcam to penetrate these market areas.

Conclusion

Abcam, the ‘Amazon of antibodies’ has been internationally commended and highlighted as a company to watch in multiple business and innovation awards with its unique ecommerce business model (figure 24) (Cambridge Network, 2019).

“ Abcam has a proprietary information flywheel which builds up this data on our products quicker than any of our competitors. Typically a third of our data will come from our suppliers, a third from customers and a third from our own labs. The quicker you get the data, the more sales and the better the pricing.” – Dr Jonathan Milner (2016)

Abcam, utilising this ‘flywheel’ business model in combination with its vast customer information within its database is able to perform first-degree price discrimination and charge its customers different pricings based on: location, purchase history, viewing history and many others (Economic Review, 2016). This forms the foundations of Abcam’s success.

However, although the company continues to deliver supernormal profits, compared to its competitors and its historical performance and in recent years, it has faltered in its delivery. This is displayed through declining margins, ROCE and year-on-year revenue growth. Abcam is now caught in-between two strategies: becoming its own manufacturer in order to expand into new markets (diagnostics and therapeutics) and penetrating pre-existing market with proteomic tools. The company faces strategic hell in the future. Abcam needs to capitalise on its customer database and ecommerce model to look at other proteomic tools to serve its pre-existing antibody customers whilst re-evaluating its long-term strategy of entering the diagnostic and therapeutic markets. Its large cash reserves and current low UK interest rate for borrowing (0.75%) serves as a potential future avenue to vertical and horizontal integrations. Perhaps, just as Amazon once was a distributor of books, Abcam now needs to move beyond a distributor of ‘just’ antibodies.