Abbott Laboratories

1

• Abbott Laboratories
• Shih-Yi Chang, Richie Hartz, Anastasia Sutjahjo
• Nov.27,2012

2
Agenda

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

3
Current Holding

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

4
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.

5
Company overview
Established Pharmaceuticals
Nutritionals

• 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.

Vascular Products
Diagnostic Products

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

• 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.

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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
7
US unemployment rate
Industry overview

• 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
8
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 worlds second-biggest
  market for drugs after the US by 2016

Source http//www.imshealth.com/ims/Global/Conten
t/Corporate/Press20Room/IMS20in20the20News/eme
rging_markets_seven_keys_to_kingdom2.pdf
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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/Conten
t/Corporate/Press20Room/IMS20in20the20News/eme
rging_markets_seven_keys_to_kingdom2.pdf
10
Industry overview

• 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.

• 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.

Source IBIS, Brand name pharmaceutical
manufacturing in the US
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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/V6N9Generi
cDrugsSupp/p8_9.pdf
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Industry overview
Unit USD, thousand
Company 2011 Revenue 2011 RD Cost RD/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 (RD)
  correlates to the number of new drugs released.
• As RD 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
13
Industry overview

• High and increasing globalization
• During the past five years, the level of
  globalization has increased, with a number of
  cross-border MA transactions and a growing trend
  toward collaborative alliance in RD and marketing

• On going consolidation
• Pharmaceutical companies continue to face several
  key restrictions to growth in their markets. MA
  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.

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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

• High
• High cost of RD and capital expenditure pose a
  substantial obstacle for new companies

• Low
• Brand name drug protected by patent
• Alternative medical treatment are not widely
  used.

• Low
• Chemical inputs as well as labeling and packaging
  products are relatively homogeneous.

• High
• Severe competition from generic drugs
  manufacturers after patent protection expires
• High RD cost and highly regulated clinical trial
  process

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Equity Snapshot
Source Bloomberg
16
Equity Snapshot
Source Bloomberg
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Company overview

• Pharmaceuticals represent a majority of Abbotts
  revenue, with proprietary and established
  products generating 17 billion and 5.4 billion
  in 2011, respectively.
• Abbotts 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
18
Company overview
Source Abbott, Annual report 2011

• The United States generated 41 of Abbotts
  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.

19
Company overview

• 2012 EPS forecast 3.83-3.85
• Management announced a 51 cent dividend for Q3
  2012 - the 355th quarterly dividend since 1924

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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 Indias largest drug company
21
Company overview
SWOT Analysis

• Strength
• Acquisitions strengthened Abbott's presence in
  diverse healthcare segments and territories
• Increased focus on RD enhances medical devices
  and nutritional portfolios
• Humira drives Abbotts proprietary
• pharmaceutical business growth

• Weakness
• Alleged illegal marketing practices resulting in
  costly settlement
• Weak launch portfolio increasing reliance on
  Humira

• Opportunity
• Abbotts 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

22
Company overview
Mid- to Late-Stage Programs
Source http//www.abbottinvestor.com/phoenix.zhtm
l?c94004pirol-presentations
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Company overview
Spin-Off Two Independent, public traded Companies

• AbbVie The research-based pharmaceutical company

• 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

Product Mix
Source http//www.abbottinvestor.com/phoenix.zhtm
l?c94004pirol-presentations
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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.zhtm
l?c94004pirol-presentations
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Financial Analysis
26
Financial Analysis
27
Discounted Cash Flow
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Comparable Analysis
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Comparable Analysis
New Abbott
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Comparable Analysis
AbbVie
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Recommendation

• Buy 100 Shares _at_ 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