Date: 12 November 2013
Jing Chen
Hisham Haider Dewan
Harout Sahakian
1
Agenda
Company overview
Holding information
Macro-economic overview
Industry analysis
Equity market expectations
Financial analysis
Financial projections
Valuation tools
Recommendation
2
Introduction to Abbott Laboratories
Founded in 1888
Headquartered in Abbott Park, IL
91,000 employees worldwide
Increased dividend payouts for 41 consecutive years
Independent directors make up 91% of the company’s board
3
Source: Abbott Investor Relation, Annual Report 2012
Business Segments
Established
Pharmaceuticals
Diagnostics
Nutritionals
Vascular
Manufactures
branded generic
pharmaceuticals
worldwide and sells
these products
outside the US
Manufactures,
markets, and sells
diagnostic systems
and tests
Produces and sells a
broad line of pediatric
and adult nutritional
items
Includes coronary,
endovascular, vessel
closure, and structural
heart devices sold
worldwide
4
Source: Abbott Laboratories 10K filing page 1-5, 10Q Q3 FY2013 page 11
Revenue Breakdown by Segment 2013
Diabetes Care & Other
6%
Vascular
14%
Medical Optics
Other
5%
1%
FQ3 2013
Nutritionals
30%
Nutritionals
EPD
Diagnostics
Vascular
Diagnostics
21%
Diabetes Care & Other
EPD
23%
Medical Optics
Other
5
Source: Abbott Laboratories 10Q FY2013 Q3 page 11
Where Does Abbott Sell?
6
Source: Abbott Laboratories 10K FY2012 page 33
Revenue by Segment
Figures in $mil.
2000
1800
1635
1600
1400
1235
1200
1125
1000
800
Nutritionals
747
600
EPD
Diagnostics
Vascular
400
Diabetes Care & Other
Medical Optics
200
Other
0
FQ1 2011
FQ2 2011
FQ3 2011
FQ4 2011
FQ1 2012
FQ2 2012
FQ3 2012
FQ4 2012
FQ1 2013
FQ2 2013
FQ3 2013
7
Source: Bloomberg Revenue by segment for ABT US Equity
Spin Off
In 2012, Abbott spun off its
pharmaceutical segment into a
publicly traded company,
AbbVie, Inc.
Each shareholder of Abbott
received one share of AbbVie,
Inc. (NYSE: ABBV)
8
Source: Abbott Laboratories 10K FY2012 page 1, AbbVie, Inc. 10K FY2012 page 1
Current Holdings
400 shares
4/27/11 - Bought 200 shares @ 52.05
11/08/11 - Bought 100 shares @ 52.91
12/11/12 - bought 100 shares @ 65.77
Total Purchase Price (adjusted for split) = $10,687
Current Market Value = $15,160
Holding period return = 41.85%
9
Macro-economic Overview
Slowing growth in BRICS countries
Increasing number of physician visits1
Adults aged 65 and over 13.7% of US population & rising
High birth rates in emerging markets
Increasing socio-economic status in emerging markets
Increasing emphasis on disease prevention
Changing regulatory environment
Source: 1. IBISWorld Industry Report 33451b Medical Device Manufacturing in the US October 2013, page 4
2. US Census Bureau http://quickfacts.census.gov/qfd/states/00000.html
10
Health Care Industry
Total Expenditures
• $5 trillion globally
• United States
spending = $2
trillion
As a Percentage of
GDP
• United States =
17.7%
• Second highest is
Netherlands at
11.9%
Per Capita (adjusted
for US PPP)
• United States =
$8,507
• Second highest is
Norway at $5,669
Source: OECD. Health Data 2013. Frequently Requested Data. http://www.oecd.org/els/health-systems/oecdhealthdata2013-frequentlyrequesteddata.htm
11
Industry Growth in the US
Medical Device Manufacturing in
2013
Glucose Meter Manufacturing in
2011
Obesity Medication
Manufacturing in the US in 2013
Laboratory Information
Management Systems in 2013
Meal Replacement Product
Manufacturing in 2011
12
Sources: IBISWorld Industry Reports: a) Medical Device Manufacturing in 2013, b) Glucose Meter Manufacturing in 2011, c) Obesity Medication Manufacturing in the
US in 2013, d) Laboratory Information Management Systems in 2013, e) Meal Replacement Product Manufacturing in 2011
U.S. Forecast Sales Growth
Category
OTC
Sports Nutrition
Vitamins & Dietary Supplements
Weight Management
Herbal/Traditional Products
Allergy Care
Pediatric Consumer Health
Consumer Health
2012 – 2017 CAGR
.7%
6.9%
4.1%
1.2%
1.6%
1.8%
1.8%
2.8%
13
Source: Passport. Consumer health in the U.S. April 2013. Pg 20.
Patient Protection & Affordable Care Act
Healthcare coverage available
to all Americans
An attempt to keep costs lows
Changes how care is paid for
Annual Fee on “branded
prescription pharmaceutical
manufacturers and importers”
ABT no longer subject to such
fees
Source: http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions
14
Risks to Abbott
Increased
regulation
Loss of patents,
trademarks, or
intellectual
property
Delays in
regulatory
approval of
new products
Increased delay Product liability
in receipt of
claims
payments from
government
entities
15
Industry Porter's Five Forces Analysis
Threat of new entrant (Low)
Suppliers (Low)
• High barriers to entry
• “Big pharma” companies are dominant
• Prolonged drug and medical device approval process
• Patent expirations
• Suppliers generally have little room for negotiation because of
the number of suppliers, supplying generic items
• Component suppliers for medical devices often are stronger
Rivalry among existing firms
(High)
Buyer bargaining power (Medium)
Substitute products (Medium)
• Most of the medication is prescribed by the doctors
• Managed care providers are consolidating
• Drug retailers have little bargaining power
• Government agencies have high bargaining power
• Pricing pressure
• Threat from generic competition
• Generic companies are increasing focused on establishing
global operations
16
Life Cycle
17
Source: http://marygardiner.wordpress.com/2013/05/28/product-cycles/
SWOT Analysis of Abbott
Strengths
Weaknesses
•
•
•
•
• Operating and gross margin lower than
competitors
• Company is overly dependent upon mature
products whose patents may expire in near
future
Consistent growth in revenue
Geographical diversity
Diversified business operations
Brand recognitions
Opportunities
Threats
• Emerging market growth
• Changing demographics
• New developments in technology
•
•
•
•
•
Stringent Government regulations
Competitive landscape
Uncertain R&D outcomes
Legal proceedings
Product recalls
18
Recent Financial Performance
2013 Q3 EPS $0.55 above consensus estimate of $0.51
Decline in Nutritionals business because of Fonterra recall
MitraClip approved In U.S.
Diagnostics 3Q 2013, total diagnostic sales of $1,125M
(+10.5%cc)
Established products third quarter sales grew 0.6% excurrency (+0.7% YTD)
Medical Devices sales was up 3.9% reported
Source: 1. http://www.nasdaq.com/earnings/report/abt ; Source 2: ABBV 8K filing
19
Equity Performance
Source: Google Finance Feb 06, 2013 to Nov 11, 2013
20
Technical Analysis
Source: Google Finance Feb 06, 2013 to Nov 11, 2013
21
Quarterly Ratio Analysis
Profitability
Return on Assets %
Return on Capital %
Return on Equity %
Liquidity
Current Ratio
Quick Ratio
Avg. Days Sales Out.
Avg. Days Inventory Out.
Avg. Days Payable Out.
Avg. Cash Conversion Cycle
Source: Capital IQ Ratios based on quarterly data
Q1 FY 2013
2.8%
4.0%
8.8%
Q2 FY 2013
3.7%
5.2%
8.4%
Q3 FY 2013
3.8%
5.2%
13.4%
Q1 FY 2013
1.8x
1.2x
Q2 FY 2013
1.8x
1.2x
Q3 FY 2013
1.7x
1.1x
95.4
119.0
95.1
119.3
66.4
98.3
38.3
126.3
67.0
104.8
37.6
134.1
22
Quarterly Ratio Analysis
Solvency
Q1 FY 2013
Total Debt/Equity
31.3%
LT Debt/Equity
15.3%
Total Liabilities/Total Assets
46.9%
Asset Turnover
Total Asset Turnover
Fixed Asset Turnover
Accounts Receivable Turnover
Inventory Turnover
Q2 FY 2013
35.4%
15.2%
47.7%
Q3 FY 2013
34.7%
14.3%
46.1%
Q1 FY 2013 Q2 FY 2013 Q3 FY 2013
0.4x
0.5x
0.5x
3.1x
3.8x
3.7x
3.7x
5.5x
5.5x
3.0x
3.7x
3.5x
23
Source: Capital IQ Ratios based on quarterly data
Valuation
DCF, Comparable, Ben Graham’s formula
24
Cost of Capital
Weighted average cost of capital calculation
Weighted average cost of
debt
3.43%
Weights
Cost of equity using CAPM
7.70%
60%
ROE
13.16%
40%
Cost of equity using goal
post method
9.89%
Market value of debt
8,262.95
12.37%
Market value of equity
58,522.90
87.63%
Tax rate
20.00%
Number of shares
outstanding
1574.466
WACC
9.00%
Cost of equity using CAPM
Beta
Market risk premium
(Rm-Rf)
10 year treasury yeild
Cost of equity using
CAPM
0.84
6.00%
2.66%
7.70%
25
Free Cash Flow to Firm
EBIT
Less: Taxes
Plus:
Depreciation &
Amortization
Less: Capital
Expenditures
Less: Change in
Net Working
Capital
Free Cash Flow to
Firm
2013
$3,038.10
($110.42)
2014
$3,191.44
$0.00
Projection Period
2015
2016
$3,393.86 $3,817.71
$652.37
$738.65
$1,729.16
$1,729.16
$1,729.16
$1,729.16
$1,729.16
$1,729.16
($779.61)
($810.79)
($843.23)
($876.95)
($912.03)
($948.51)
$902.76
($131.21)
$205.48
$204.81
$238.28
$247.81
$3,195.30
$4,241.01
$3,421.94
$3,726.45
$3,801.49
$3,955.93
2017
$4,002.24
$779.59
2018
$4,194.14
$771.04
26
Discounted Cash Flow Value
WACC
9.0020%
Implied Enterprise Value
$66,468.57
Less: Debt
($8,262.95)
Value of equity
$58,205.62
Shares Outstanding
1,574.47
Estimated price per share
$36.97
27
DCF – Sensitivity to WACC and Perpetuity
Growth Rate
Discount rate
Growth rate
2.50% 3.00% 3.50% 4.00% 4.50%
8.50% $34.91 $37.65 $40.95 $44.97 $50.00
9.00% $31.99 $34.27 $36.97 $40.20 $44.15
9.50% $29.49 $31.41 $33.65 $36.30 $39.47
28
Comparable Companies
Company Name
Market Cap $Mil. Total Revenue $Mil.
Amgen Inc. (NasdaqGS:AMGN)
83,731
18,086
Baxter International Inc. (NYSE:BAX)
35,395
14,644
Boston Scientific Corporation (NYSE:BSX)
15,542
7,126
Bristol-Myers Squibb Company (NYSE:BMY)
84,468
16,135
Johnson & Johnson (NYSE:JNJ)
261,519
70,515
Medtronic, Inc. (NYSE:MDT)
57,155
16,665
Merck & Co. Inc. (NYSE:MRK)
134,087
44,450
Pfizer Inc. (NYSE:PFE)
204,634
56,246
St. Jude Medical Inc. (NYSE:STJ)
16,406
5,451
Stryker Corporation (NYSE:SYK)
27,587
8,891
Zimmer Holdings, Inc. (NYSE:ZMH)
14,981
4,563.2
29
Comparable Analysis
Multiple
Multiple value (X) Estimated price per share
P/E
23.01
$41.94
Fair P/E estimate
20.27
$38.11
Forward P/E (Capital IQ)
15.59
$31.70
P/B
3.46
$52.33
P/S
3.41
$49.33
TEV/EBITDA
11.64
$28.33
TEV/EBIT
14.51
$27.99
TEV/Total Revenues
3.23
$46.75
Estimated price per share using
$39.56
all of the comparable ratios
Weight
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
100%
30
Benjamin Graham's formula
Current (normal EPS 2013)
Expected annual growth rate (%)
Estimated price per share
$1.99
5.00
$36.79
31
Key Decision Driver
Upside
Diversified portfolio of established products
Strong and growing international presence
Consistent growth in revenue and earnings
Downside
Potential risk of litigation and product recalls
Prolonged regulatory approval process
Failure to deliver new products
32
Recommendation
HOLD
Current stock price $37.90 as of Nov 11 , 2013
DCF $36.97
Comparable $39.56
Ben Graham $36.79
33