Abbott Laboratories

Shih-Yi Chang, Richie Hartz, Anastasia Sutjahjo

Nov.27,2012
Agenda
• Introduction
• Company Overview
• Macroeconomic & Industry Review
• Equity Performance
• Financial Analysis & Projections
• Recommendation
 Current Holding
April 2011
Acquired 200 shares @ $52.10
November 2011
Acquired 100 shares @ $52.91
November 23, 2012
 Current position: 300 shares @ $64.47/share

 Market value: $19,341

 15% of the total portfolio

Company overview
Abbott Laboratories
 Abbott Laboratories is a diversified pharmaceuticals and healthcare
products company. Abbott was founded in 1900 and went public in 1929.
 Major operations in the US, the Netherlands, Germany, Japan, Italy, France,
Canada, the UK and Spain.
 The company primarily operates in five segments: proprietary
pharmaceutical products, nutritional products, established pharmaceutical
products, diagnostic products, and vascular products.

Proprietary pharmaceutical

 The proprietary pharmaceutical division is composed of a variety of branded

pharmaceutical products currently covered by patents.
 These products are sold under various brands that include Humira,TriCor,
TriLipix, Simcor, Niaspan, Synagis, AndroGel, Creon, Synthroid, Zemplar, Lupron,
Ultane and Kaletra
 Management has announced that this segment will be its own publically traded
company by the end of 2012, named AbbVie.
 Company overview
Established Pharmaceuticals Nutritionals

 The established pharmaceutical  Manufactures and markets a line of

products segment includes a pediatric and adult nutritional
broad line of branded generic products.
products.  These products are distributed to
 These products are no longer wholesalers, retailers, health care
protected by patents and face facilities, and government agencies
increased competition from under a variety of names.
generic manufacturers.
Vascular Products Diagnostic Products
 The vascular products segment  The diagnostic products segment is
manufactures, markets, and sells a engaged in manufacturing, marketing,
wide range of coronary, and selling of diagnostic systems and
endovascular, vessel closure, and tests
structural heart devices for the
treatment of vascular diseases.
Industry overview

 Aging population and increasing incidence of chronic disease will increase the
demand of pharmaceutical industry.
 The percentage of world population over the age of 60 is projected to grow from
11% in 2010 to 21.8% in 2050.
Source: US Bureau of the Census
Industry overview
US unemployment rate

 As the economy has improved, the unemployment rate has continue to drop,
reaching 7.9% in October 2012
 Nearly 60% of US workers receive health insurance from their employers, and
as unemployment rate drops, more individuals become covered.
 As the number of the US workers and families with health insurance increases,
the demand for pharmaceutical products and nutritional products increase.
Source: US Bureau of Labor Statistics
Industry overview
New Geographic bases:

“Pharmerging markets” –China,

India, Brazil, Russia, Turkey, Mexico,
and South Africa are forecast to drive
industry growth to 2020.

Chinese government implement its

policy to significant expand healthcare
system and will replace Japan as the
world’s second-biggest market for
drugs after the US by 2016

Source: http://www.imshealth.com/ims/Global/Content/Corporate/Press
%20Room/IMS%20in%20the
%20News/emerging_markets_seven_keys_to_kingdom2.pdf
Industry overview

 By 2014, IMS predicts the “pharmerging 17” will match the size of
Europe and Japan combined, adding $140 billion of incremental sales
 Emerging markets represent a great opportunity for Abbott
Source: http://www.imshealth.com/ims/Global/Content/Corporate/Press
%20Room/IMS%20in%20the
%20News/emerging_markets_seven_keys_to_kingdom2.pdf
 Industry overview

 The patent cliff in 2011 began hurting  Federal funding for Medicare and Medicaid
revenue in 2012 and threatens future sales. is expected to decrease during 2012
 Healthcare reform is expected to boost  Funding for prescription drugs is expected
sales as more individuals gain prescription to increase by 2013, representing an
drug coverage in 2014. opportunity for the industry.
Source: IBIS, Brand name pharmaceutical manufacturing in the US
Industry overview
 In the next few years, numerous
patents on blockbuster drugs will
expire. The brand name
pharmaceutical manufacturing will
face the loss of patent protection
and competition from generic
drugs manufacturing firms.
 When faced with potential
revenue decrease from loss of
patent protection, majors players
in the industry started to adopt
new business models:
1. Cost down
2. Use of new technology
3. Product diversification
4. Strategic alliance.

Source:
http://www.pppmag.com/documents/V6N9GenericDrugsSupp/p8_9.pdf
 Industry overview
Unit: USD, thousand

Company 2011 Revenue 2011 R&D Cost R&D/Revenue(%)

Abbot Laboratories 38,851,259 4,129,414 10.63%
Johnson& Johnson 65,030,000 7,548,000 11.61%
Pfizer 67,425,000 9,112,000 13.51%
Merck 48,047,000 8,467,000 17.62%

 Brand name pharmaceutical

manufacturers’ expenditure on
research and development (R&D)
correlates to the number of new
drugs released.
 As R&D increases, the industry has
more opportunities to discover
products that generate revenue.
 This driver is expected to increase
slowly during 2012.
Source: IBIS, Brand name pharmaceutical manufacturing in the US
Industry overview
 High and increasing globalization:
During the past five years, the level of globalization has
increased, with a number of cross-border M&A
transactions and a growing trend toward collaborative
alliance in R&D and marketing

 On going consolidation:
Pharmaceutical companies continue to face several key restrictions to
growth in their markets. M&A is a necessary strategic tool for
industry companies to lower the impact of these restrictors to
revenue and margins.

 Health care reform:

Healthcare reform will support the revenue growth of pharmaceutical
industry as it extends coverage to more people. However, reform
will reduce profit margins by lowering drug costs for consumers.
 Industry overview
Moderate
High price during the life of
High
patents High cost of R&D and
Retail drug store have little
capital expenditure pose a
bargaining power while hospitals substantial obstacle for
and government have more new companies
bargaining power
Obamacare cause uncertainty

Low
Low
Brand name drug
Chemical inputs as
protected by patent
well as labeling and
Alternative
packaging products are High
Severe competition from generic medical treatment
relatively homogeneous.
drugs manufacturers after patent are not widely used.
protection expires
High R&D cost and highly regulated
clinical trial process
Equity Snapshot

Source: Bloomberg
Equity Snapshot

Source: Bloomberg
Company overview
 Pharmaceuticals represent a
majority of Abbott’s revenue,
with proprietary and
established products
generating $17 billion and $5.4
billion in 2011, respectively.

 Abbott’s largest product is

Humira, an anti-arthritis
medicine, with nearly $8
billion in revenue for 2011,
account for 21% of the total
sales

Source: Abbott, Annual report 2011

 Company overview

Source: Abbott, Annual report 2011

 The United States generated 41% of Abbott’s revenue in 2011, compared to

43% in 2010 and 47% in 2009.
 Abbott has increasingly relied on international markets, and emerging
markets in particular, to grow revenue.
Company overview

 2012 EPS forecast: $3.83-3.85

 Management announced a 51 cent dividend for Q3 2012 - the 355th
quarterly dividend since 1924
Company overview
Major acquisition: Increase product lines through acquisition
Year Company Strategic Fit
2001 Knoll Acquired the right of drug Humira, which
treats rheumatoid arthritis and a highly
profitable drug
2004 Therasense Acquired products for diabetes treatment
2005 Guidant Acquired several vascular products
2009 Advanced Medical Optics Started vision eye care division
2009 Solvay pharmaceuticals Expanding its presence in emerging
markets and enhancing its portfolio of
pharmaceutical products

2010 Piramal Healthcare (India) Expanded pharmaceutical portfolio abroad

and become India’s largest drug company
Company overview
SWOT Analysis
Strength: Weakness:
Acquisitions strengthened Abbott's Alleged illegal marketing practices
presence in diverse healthcare segments resulting in costly settlement
and territories Weak launch portfolio increasing
Increased focus on R&D enhances reliance on Humira
medical devices and nutritional portfolios
Humira drives Abbott’s proprietary
pharmaceutical business growth

Opportunity: Threat:
Abbott’s proposed split into two Healthcare reform in the US could
healthcare companies negatively impact the company's
Alliances likely to help Abbott in profitability
strengthening its product pipeline Regulatory hurdles may affect
Successful launch of approved intended benefits from proposed split
products in major markets into two companies
Company overview
Mid- to Late-Stage Programs

Source: http://www.abbottinvestor.com/phoenix.zhtml?c=94004&p=irol-presentations
 Company overview
Spin-Off: Two Independent, public traded Companies

AbbVie: The research-based pharmaceutical company

Product Mix  Annual Sales: Nearly $18 billion

 Portfolio: Numerous leading medicines,
including: Humira, Lupron, Synagis,
Zemplar, Kaletra, Creon, Duodopa,
Synthroid, Androgel and others.
 Pipeline: more than 20 new compounds
or indications in Phase 2 or 3
 Strategy focus:
• Continuing growth of leading brands
• Advancing specialty-focused
pharmaceutical pipeline
• Strong margins and robust cash flow

Source: http://www.abbottinvestor.com/phoenix.zhtml?c=94004&p=irol-presentations
 Company overview
Abbott: The diversified medical products company

Spin-Off: Two Independent, public traded Companies

Product Mix  Annual Sales: Approximately $22 billion

 Portfolio: Market-leading positions in
established pharmaceuticals, adult and
pediatric nutritionals, core laboratory
diagnostics, point of care and molecular
diagnostics, and medical devices.
 Strategy focus:
• Global and emerging markets presence.
Expanding geographically: products in
more than 130 countries with nearly 40%
of sales in emerging markets today.
Abbott is the leading pharmaceutical
company in India.
• Developing new technologies
Source: http://www.abbottinvestor.com/phoenix.zhtml?c=94004&p=irol-presentations
Financial Analysis
Financial Analysis
Discounted Cash Flow
Conclusion: DCF Assumptions

Enterprise Value $121,814.12 Discount Rate

Plus Excess Cash 8,097.00 9.93%
Interest Bearing Debt 15,501.00
ROE
Market Capitalization $114,410.12 17.50%

Shares Outstanding 1,580.00 Beta

0.325

Value Per Share $72.41

 Comparable Analysis
millions Enterprise Value
Market Capitalization EBIT EBITDA Sales Gross Profit
Pfizer Inc. $ 192,658 $ 177,953 $ 19,548 $ 26,843 $ 62,225 $ 50,069
Merck & Co. Inc. $ 137,923 $ 133,915 $ 11,196 $ 17,880 $ 47,824 $ 31,578
Johnson & Johnson $ 194,278 $ 193,628 $ 16,860 $ 20,259 $ 65,921 $ 45,015
Abbott Laboratories $ 107,356 $ 102,491 8608.7 $ 11,452 $ 39,414 $ 24,512

Price/ ABT Price

Company Metrix Weight Applied to Median Price
Earnings Sales Book Value Low Median High
Pfizer Inc. 18.88 x 2.88 x 2.2 x Earnings/Share $ 4.09 $ 77.22 $ 80.90 $ 93.13 33%
Merck & Co. Inc. 19.78 x 2.79 x 2.4 x Sales/Share $ 25.08 $ 69.97 $ 72.23 $ 72.73 33%
Johnson & Johnson 22.77 x 2.9 x 3.29 x BV/Share $ 17.09 $ 37.60 $ 41.02 $ 56.23 33%

Implied Price $ 64.72

Comparable Analysis
New Abbott
Price/
Company
Earnings Sales Book Value
Baxter International Inc. 14.13 x 2.69 x 5.3 x
Merck & Co. Inc. 19.78 x 2.79 x 2.4 x
Johnson & Johnson 22.77 x 2.9 x 3.29 x

ABT Price
Metrix Low Median High Weight Applied to Median Price
Earnings/Share $ 2.31 $ 32.59 $ 45.62 $ 52.52 33%
Sales/Share $ 13.93 $ 37.46 $ 38.85 $ 40.39 33%
BV/Share $ 8.67 $ 20.80 $ 28.51 $ 45.93 33%

Implied Price $ 37.66

Comparable Analysis
AbbVie
Price/
Company
Earnings Sales Book Value
Pfizer Inc. 18.88 x 2.88 x 2.2 x
Bristol-Myers Squibb 17.54 x 2.85 x 3.87 x
Amgen 12.5 x 4.07 x 3.38 x

AbbVie Price
Metrix Low Median High Weight Applied to Median Price
Earnings/Share $ 2.38 $ 29.80 $ 41.81 $ 45.01 33%
Sales/Share $ 14.39 $ 41.02 $ 41.45 $ 58.57 33%
BV/Share $ 8.96 $ 19.70 $ 30.27 $ 34.66 33%

Implied Price $ 37.84

Recommendation
 Buy 100 Shares @ Market Price
Undervalued based on both multiples and DCF
Artificial pullback represents buying opportunity
Diversification of the portfolio is less, given
increased position, but deemed worth the risk