Abbott Laboratories
Shih-Yi Chang, Richie Hartz, Anastasia Sutjahjo
Nov.27,2012
Agenda
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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
 The established pharmaceutical
products segment includes a
broad line of branded generic
products.
 These products are no longer
protected by patents and face
increased competition from
generic manufacturers.
Vascular Products
 The vascular products segment
manufactures, markets, and sells a
wide range of coronary,
endovascular, vessel closure, and
structural heart devices for the
treatment of vascular diseases.
Nutritionals
 Manufactures and markets a line of
pediatric and adult nutritional products.
 These products are distributed to
wholesalers, retailers, health care
facilities, and government agencies
under a variety of names.
Diagnostic Products
 The diagnostic products segment is
engaged in manufacturing, marketing,
and selling of diagnostic systems and
tests
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%20i
n%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%20i
n%20the%20News/emerging_markets_seven_keys_to_kingdom2.pdf
Industry overview
 Federal funding for Medicare and Medicaid
 The patent cliff in 2011 began hurting
is expected to decrease during 2012
revenue in 2012 and threatens future sales.
 Healthcare reform is expected to boost sales  Funding for prescription drugs is expected
to increase by 2013, representing an
as more individuals gain prescription drug
opportunity for the industry.
coverage in 2014.
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
patents
Retail drug store have little
bargaining power while hospitals
and government have more
bargaining power
Obamacare cause uncertainty
Low
Chemical inputs as
well as labeling and
packaging products are
relatively homogeneous.
High
High cost of R&D and
capital expenditure pose a
substantial obstacle for
new companies
High
Severe competition from generic
drugs manufacturers after patent
protection expires
High R&D cost and highly regulated
clinical trial process
Low
Brand name drug
protected by patent
Alternative
medical treatment
are not widely used.
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:
Acquisitions strengthened Abbott's
presence in diverse healthcare segments
and territories
Increased focus on R&D enhances
medical devices and nutritional portfolios
Humira drives Abbott’s proprietary
pharmaceutical business growth
Weakness:
Alleged illegal marketing practices
resulting in costly settlement
Weak launch portfolio increasing
reliance on Humira
Opportunity:
Abbott’s proposed split into two
healthcare companies
Alliances likely to help Abbott in
strengthening its product pipeline
Successful launch of approved
products in major markets
Threat:
Healthcare reform in the US could
negatively impact the company's
profitability
Regulatory hurdles may affect
intended benefits from proposed split
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
Spin-Off: Two Independent, public traded Companies
Abbott: The diversified medical products company
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
Enterprise Value
Plus Excess Cash
Interest Bearing Debt
Assumptions
$121,814.12
8,097.00
15,501.00
Discount Rate
9.93%
ROE
Market Capitalization
Shares Outstanding
$114,410.12
1,580.00
17.50%
Beta
0.325
Value Per Share
$72.41
Comparable Analysis
millions
Enterprise Value
Market Capitalization
EBIT
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
24,512
Price/
Company
Sales
Book Value
Pfizer Inc.
18.88 x
2.88 x
2.2 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
64.72
Low
Earnings/Share $
Sales
Gross Profit
8608.7 $ 11,452 $ 39,414 $
Metrix
Earnings
Implied Price
EBITDA
Median
Weight Applied to Median Price
High
4.09 $ 77.22 $ 80.90 $ 93.13
33%
Sales/Share
$ 25.08 $ 69.97 $ 72.23 $ 72.73
33%
BV/Share
$ 17.09 $ 37.60 $ 41.02 $ 56.23
33%
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
Low
Metrix
Earnings/Share $
Median
High
Weight Applied to Median Price
2.31 $
32.59 $ 45.62 $ 52.52
33%
Sales/Share
$ 13.93 $
37.46 $ 38.85 $ 40.39
33%
BV/Share
$
20.80 $ 28.51 $ 45.93
33%
8.67 $
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
12.5 x
4.07 x
3.38 x
Amgen
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