ABBOTT A Promise for Life Investment Managers: Jonathan Barki Su Chen Lele Liang (Layla) Nan Liang Ran Mu (Renee) Presented: November 3, 2011 ABBOTT A Promise for Life Transaction History Bought 200 shares at $52.05 on April 28, 2011 Current Price: $52.88 (as of Nov 2) Unrealized gain of $166, 1.59% (as of Nov 2) Holding value excluding cash -2 WFR - WFR 1 1% 3% WAG 16% ABT 10% AEO 19% MOS 12% DO - 1 3% MCD 18% JKHY 12% DO - 2 6% ABBOTT A Promise for Life Macroeconomics Defensive / recession-proof Healthcare sector Change in consumers’ behavior – postpone healthcare Source: Capital IQ ABBOTT A Promise for Life Healthcare Reform Pharmaceutical firms set aside $80 billion over the next 10 years to reduce drug costs Challenged to finance the initial costs of drug reform 12 year exclusivity period on biologics before they face competition from generic alternatives Tax credit for small biotech companies No government intervention News Source: http://www.rsc.org/chemist ryworld/News/2010/March/ 25031003.asp ABBOTT A Promise for Life Global Demographics Source: Google data ABBOTT A Promise for Life Global Consumption Power ABBOTT A Promise for Life Stock Performance Source: Capital IQ ABBOTT A Promise for Life Industry Current Revenue US and Europe markets: growth slows down Emerging markets: robust growth Source: IBIS World, April 18, 2011, P54 ABBOTT A Promise for Life Industry Revenue Outlook Source: IBIS World, April 18, 2011, P56 ABBOTT A Promise for Life Industry Characteristics Concentration -Players: low -Geography: high -New launch: high Life cycle -growth (40-50 Years) Market size -growing ($980 Bn sales) Rivalry -high Barrier to entry Regulation -high - heavy Source: IBIS World, April 18, 2011, P10 ABBOTT A Promise for Life Industry Main Players Source: IBIS World, April 18, 2011, P34 ABBOTT A Promise for Life Industry Cost Structure Source: IBIS World, April 18, 2011, P25 ABBOTT A Promise for Life Industry Key Factors Key sensitivities: Population age, Systems and tech, attitudinal change and regulation Key success factors: Brand names, tech sharing arrangements, R&D, product development and financing arrangement Hold-back factors: Patent expirations, competition, a depleted product pipeline, regulatory, price pressures and deteriorating public opinion Source: IBIS World, April 18, 2011, P32 ABBOTT A Promise for Life New Drug New Chemical Entity: with patent– monopoly high risk - time: 10-15 year - money: $800million- $1billion - probability of success: 1 out of 5,000 to 10,000 high return Generic Drug: no patent– competition low risk low return Source: Drug Discovery and Development, innovation.org ABBOTT A Promise for Life Drug Pipelines- New entity Pre- Clinical Clinical Clinical FDA Post- clinical Trials Trials Trials Review & marketing Testing Phase I Phase II Phase III Approval Testing Drug Discovery In lab: 3-6 years # enter into stage 5,00010,000 250 In hospital: 6-7 years 5 0.5-2 years 1 1-2 years In Market ABBOTT A Promise for Life Current Abbott Pharmaceuticals Nutritional Products Diagnostic Products Vascular Products Others ABBOTT A Promise for Life Pharmaceuticals- diseases Neurological disease -Alzheimer, Parkinson Immunology -Crohn’s disease Oncology -cancer Kidney Disease Pain Source: Abbott Investor Day 2011 ABBOTT A Promise for Life Pharmaceuticals- diseases Neurological disease -Alzheimer, Parkinson Immunology -Crohn’s disease Oncology -cancer Kidney Disease Pain Chronic diseases persistent demand Complex diseases high price ABBOTT A Promise for Life Pharmaceuticals- Products Main Brands: ABBOTT A Promise for Life Pharmaceuticals- Products Main Brands: HUMIRA (48%) -Crohn’s disease TriCor/Trilipix (10%) - Lipid disorders Source: Abbott Investor Day 2011 ABBOTT A Promise for Life Current Abbott- Review According to sale HUMIRA Brand Drugs Pharmaceuticals Other Branded Drugs Generic Drugs I Generic Drugs Generic Drugs II Nutritional Products Nutritional Products Nutritional Products Diagnostic Products Diagnostic Products Diagnostic Products Vascular Products Vascular Products Vascular Products ABBOTT A Promise for Life Spin off – End of 2012 According to sale HUMIRA Brand Drugs Pharmaceuticals Other Branded Drugs Generic Drugs I Generic Drugs Generic Drugs II Nutritional Products Nutritional Products Nutritional Products Diagnostic Products Diagnostic Products Diagnostic Products Vascular Products Vascular Products Vascular Products ABBOTT A Promise for Life After Spin Off Current Abbott New Pharmaceutical Company New Abbott: Diversified Medical Products Generic Drugs II HUMIRA Nutritional Products Other Branded Drugs Diagnostic Products Generic Drugs I Vascular Products ABBOTT A Promise for Life New Pharma. Company-Old Brands Old Brands with Patents (87%) 5 main brands Generic Drugs (13%) Potential New Drugs ABBOTT A Promise for Life New Pharma. Company-Old Brands Patent Expires!! ABBOTT A Promise for Life New Pharma. Company- R & D Bran Source: Abbott Investor Day 2011 ABBOTT A Promise for Life New Pharma. Company- R & D Bran In the short future:2014 Bardoxolone: 7 billion After next 10 years 32 drugs in clinical phase I-III E(succeeded new brands)=6 ABBOTT A Promise for Life Key Developments Source: Abbott Investor Day 2011 ABBOTT A Promise for Life Strategic Rationale Source: Abbott Investor Day 2011 ABBOTT A Promise for Life Product Segments Source: Abbott Investor Day 2011 ABBOTT A Promise for Life Geographic Expansion Source: Abbott Investor Day 2011 ABBOTT A Promise for Life Established Pharmaceuticals Over 500 branded generic products in portfolio “Driving efficiencies without compromising quality” Various structural changes Hundreds of new products in the pipeline Even split between Developed and Emerging Markets Source: Abbott Investor Day 2011 ABBOTT A Promise for Life Medical Devices Vascular Devices For heart diseases #1 in many facets Over 20 new products in pipeline Diabetes Care Fastest growing in insulindependent patients in the US Vision Care Source: Abbott Investor Day 2011 ABBOTT A Promise for Life Diagnostic Products Core Laboratory Diagnostics #1 in immunoassay #1 in blood screening Over 69,000 customers Molecular Diagnostics HIV tests Pioneering the development of bio-identification with Plex-ID Point of Care Diagnostics Market leader in bedside testing Source: Abbott Investor Day 2011 ABBOTT A Promise for Life Nutritional Products Pediatric Nutritionals 54% of sales #1 in the US Adult Nutritionals 46% of sales #1 worldwide Source: Abbott Investor Day 2011 ABBOTT A Promise for Life Financial Analysis Source: Capital IQ ABBOTT A Promise for Life Return on Invested Capital Source: Capital IQ ABBOTT A Promise for Life Dupont Analysis ABBOTT A Promise for Life Multiple Analysis 1 -Current ABT Johnson & Johnson: Pharmaceutical, Consumer, and Medical Devices and Diagnostics. Sanofi: Pharmaceutical, Vaccines and Diagnostics, Animal Health. Novartis AG: Pharmaceuticals, Vaccines and Diagnostics, Sandoz division, and Consumer Health. Pfizer Inc: Pharmaceutical, Animal health products, Consumer healthcare products, and Nutrition products. Merck & Co: Pharmaceutical, Vaccines, Biologic therapies, Animal Health, and Consumer Care Products. ABBOTT A Promise for Life Comparables Valuation 1 Company Forward P/E Price/Sale Price/Book JNJ 12.88 2.74 2.96 SAN 7.58 2.72 1.27 10.56 2.43 2.00 PFE 8.59 7.80 1.70 MRK 9.15 3.27 1.92 ABT 10.62 1.56 3.30 High 65.33 185.49 55.94 low 38.45 37.01 21.53 Mean 50.20 81.30 37.15 Price 1 56.22 NOVN ABBOTT A Promise for Life Multiple Analysis 2 -After Split New Pharmacy Pfizer Inc (PFE) Merck & Co. Inc (MRK) Eli Lilly & Co (LLY) GlaxoSmithKline PLC (GSK) New ABT Global Nutrition 30% GNC Holding Inc. (GNC) Amway Malaysia Holdings Bhd (KLSE:AMWAY) Vitamin Shoppe (VSI) Medical 18% Vascular Solutions Inc. (VASC) Boston Scientific (BSX) Merit Medical Systems, Inc (MMSI) Diagnostics 22% Quest Diagnostics and Laboratory (DGX) Bio-Reference Laboratories Inc. (BRLI) Laboratory Corp. of America Holdings (LH) Established Pharma 28% Mylan, Inc. (MYL) Watson Pharmaceuticals, Inc. (WPI) ABBOTT A Promise for Life Comparables Valuation 2 ABBOTT TEV1 27,626,582.61 TEV2 48,653,375.84 Total EV 76,279,958.46 -debt 12,523,517.00 +Cash 3,648,371.00 Equity Value # of shares Price 67,404,812.46 1,550,000.00 43.49 ABBOTT A Promise for Life Valuation DCF: $69.09 80% Comps 1: $56.22 10% Comps 2: $43.49 10% Final Valuation: $65.24 ABBOTT A Promise for Life Recommendation BUY 100 @ Current