Abbott Laboratories

Shih-Yi Chang, Richie Hartz, Anastasia SutjahjoNov.27,2012

Agenda

• Introduction• Company Overview• Macroeconomic & Industry Review• Equity Performance• Financial Analysis & Projections• Recommendation

Current Holding

April 2011Acquired 200 shares @ $52.10November 2011 Acquired 100 shares @ $52.91November 23, 2012 Current position: 300 shares @ $64.47/share Market value: $19,341 15% of the total portfolio

Company overviewAbbott 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 overviewEstablished Pharmaceuticals

Vascular Products

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.

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.

Nutritionals

The diagnostic products segment is engaged in manufacturing, marketing, and selling of diagnostic systems and tests

Diagnostic 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.

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

US unemployment rate

Industry overview

Source: US Bureau of Labor Statistics

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.

Industry overviewNew 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

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

Industry overview

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 revenue in 2012 and threatens future sales.

Healthcare reform is expected to boost sales as more individuals gain prescription drug coverage in 2014.

Federal funding for Medicare and Medicaid is expected to decrease during 2012

Funding for prescription drugs is expected to increase by 2013, representing an 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

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%

Industry overview

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.

Unit: USD, thousand

Source: IBIS, Brand name pharmaceutical manufacturing in the US

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.

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

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

HighSevere competition from generic drugs manufacturers after patent protection expiresHigh R&D cost and highly regulated clinical trial process

HighHigh cost of R&D and capital expenditure pose a substantial obstacle for new companies

LowBrand name drug protected by patentAlternative medical treatment are not widely used.

ModerateHigh price during the life of patentsRetail drug store have little bargaining power while hospitals and government have more bargaining powerObamacare cause uncertainty

LowChemical inputs as well as labeling and packaging products are relatively homogeneous.

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

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

Source: Abbott, Annual report 2011

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

Company overview

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 overviewSWOT Analysis

Strength:Acquisitions strengthened Abbott's presence in diverse healthcare segments and territories Increased focus on R&D enhances medical devices and nutritional portfoliosHumira drives Abbott’s proprietary pharmaceutical business growth

Weakness:Alleged illegal marketing practices resulting in costly settlementWeak launch portfolio increasing reliance on Humira

Opportunity:Abbott’s proposed split into two healthcare companiesAlliances likely to help Abbott in strengthening its product pipelineSuccessful launch of approved products in major markets

Threat:Healthcare reform in the US could negatively impact the company's profitabilityRegulatory hurdles may affect intended benefits from proposed split into two companies

Company overviewMid- to Late-Stage Programs

Source: http://www.abbottinvestor.com/phoenix.zhtml?c=94004&p=irol-presentations

AbbVie: The research-based pharmaceutical company

Company overviewSpin-Off: Two Independent, public traded Companies

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

Abbott: The diversified medical products company

Company overviewSpin-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 RatePlus Excess Cash 8,097.00 9.93%Interest Bearing Debt 15,501.00

ROEMarket Capitalization $114,410.12 17.50%

Shares Outstanding 1,580.00 Beta0.325

Value Per Share $72.41

millions Enterprise ValueMarket 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$

Comparable Analysis

Earnings 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

Price/Company

Low Median High

Earnings/Share 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%

ABT PriceWeight Applied to Median PriceMetrix

Implied Price 64.72$

Comparable Analysis

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

Price/Company

New Abbott

Low Median High

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%

ABT Price

Weight Applied to Median PriceMetrix

Implied Price 37.66$

Comparable Analysis

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

Price/Company

AbbVie

Low Median High

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%

Weight Applied to Median Price

AbbVie Price

Metrix

Implied Price 37.84$

Recommendation

Buy 100 Shares @ Market PriceUndervalued based on both multiples and DCFArtificial pullback represents buying opportunityDiversification of the portfolio is less, given

increased position, but deemed worth the risk