Abbott-Laboratories

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					                 UNIVERSITY OF OREGON                                                                       November 20, 2009
                                                                                                              Healthcare Sector
                               INVESTMENT GROUP

ABBOTT LABORATORIES
                                                                                               SELL

Stock Data
Price (52 weeks)                  $41.27 - $57.39
Symbol / Exchange                 ABT / NYSE
Beta                              0.71
Shares Outstanding                1.546 B
Average Daily Volume              7,913,310
Current Market Cap                $82.912 B
Current Price                     $53.63
Dividend                          $1.60
Dividend Yield                    2.98%

Valuation (Per Share)
DCF Analysis                      $51.51
Comparables Analysis              $47.66
Current Price                     $53.63
Target Price                      $49.59

Summary Financials (in thousands)
                                  2008A
Revenue                           $29.528 B
Net Income                        $4.882 B
Operating Cash Flow               $7.148 B

BUSINESS OVERVIEW
Abbott Laboratories is a pharmaceutical company whose principal business is the discovery, development,
manufacture, and sale of a broad and diversified line of health care products. The company was founded in 1888
by Dr. Wallace C. Abbott and incorporated in 1900. Headquartered in Abbott Park, Illinois, Abbott started out
delivering medical granules to improve patient care. In 1916, Abbott shifted its focus to synthetic (chemical)
medicines. This decision jumped the company into a long period of growth characterized by strategic
acquisitions and constant scientific pursuit. In 1929, Abbott was initially listed on the Chicago Stock Exchange.
By the mid-twentieth century, Abbott had risen to a new level both scientifically and commercially. New
products, including penicillin and other antibiotics, paired with sales and marketing innovations led to great
commercial growth during this time. The second half of the twentieth century showed constant growth and
continued specialization for the company. In recent years, Abbott has continued to adjust to a very dynamic
                                           Covering Analyst: Jack Dukeminier
                                            Email: jdukemin@uoregon.edu



The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational.
Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be.
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Abbott Laboratories                                                         University of Oregon Investment Group
                                                                                                http://uoig.uoregon.edu

healthcare industry through new business ideas and a reorganization. The company is currently considering
several business acquisitions but still manages to keep its focus on providing quality healthcare products for
patients in all stages of life.

As of year-end 2008, Abbott Laboratories employed around 69,000 employees and had revenues of $29.5
billion. Approximately 50% of revenues came from international sales. Abbott’s products are categorized into
four revenue segments: Pharmaceutical Products, Nutritional Products, Diagnostic Products, and Vascular
Products.


PRODUCTS OVERVIEW
Pharmaceutical Products
Abbott Laboratories’ pharmaceutical products include a broad line of adult and pediatric medicines, which are
manufactured, marketed, and sold worldwide. Most of these products are only available through prescriptions
or physician recommendations. Generally, pharmaceutical products are sold directly to wholesalers,
government agencies, health care facilities, specialty pharmacies, and independent retailers.

Pharmaceutical products made up about 53% of total sales revenue for Abbott Laboratories in 2008. Total sales
in the pharmaceutical products segment were up 14.2% in 2008 compared to 2007. Medicines in the segment
treat a very wide range of problems including: HIV/AIDS, rheumatoid arthritis, Crohn’s Disease, autoimmune
disorders, migraines, epilepsy, bipolar disorder, obesity, thyroid disease, high cholesterol, hypertension,
dyslipidemeia, and all types of cancer. Though a few key products drive sales in the pharmaceutical segment,
Abbott offers over 100 medicines in the pharmaceutical area.
Key Products
Humira          Humira is used to reduce the signs and symptoms of moderate to severe rheumatoid arthritis in
                adults. The drug is intended to prevent further damage to bones and to help patients more
                easily perform daily activities. Humira can also be used to reduce signs and symptoms of
                certain types of moderate to severe juvenile arthritis in children over 4 years of age. In addition
                to treating rheumatoid arthritis, Humira also is used to reduce the signs and symptoms of
                Crohn’s Disease in adults who have not responded positively to traditional treatments.

Kaletra         Kaletra is used for adults and children 2 years of age or older who are infected with the HIV
                virus, the virus that causes AIDS. Kaletra works by inhibiting an enzyme that the HIV virus needs
                to multiply. The drug is known as Aluvia or Norvir in areas outside the United States.

Synthroid       Synthroid has several different uses, all stemming from problems with the thyroid gland. It can
                be used to treat hypothyroidism, a condition where the thyroid gland does not produce enough
                of a certain hormone. The drug can also help to decrease the size of an enlarged thyroid gland,
                a condition known as goiter. Finally, Synthroid is effective in treating thyroid cancer.

Nutritional Products
Abbott Laboratories’ nutritional products include a broad line of adult and pediatric products, which are
manufactured, marketed, and sold worldwide. The company produces some of the world’s most trusted names
in adult, pediatric, and healthy living products. Nutritional products are generally marketed and sold to
institutions, wholesalers, retailers, health care facilities, and government agencies.




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Abbott Laboratories                                                           University of Oregon Investment Group
                                                                                                  http://uoig.uoregon.edu

Nutritional products made up about 17% of total sales revenue for Abbott Laboratories in 2008. Total sales in
the nutritional products segment were up 12.2% in 2008 compared to 2007. Products in the segment include
several popular consumer brands. The company also offers nutritional products and feeding devices to patients
with special feeding needs due to food allergies, injury, illness, respiratory conditions, and gastrointestinal
impairment. Though most sales in the nutritional products segment are driven by a few consumer brands,
Abbott offers 9 products in this segment.
Key Products
Similac          Similac is an entire line solely dedicated to infant nutrition. 3 products (regular, iron enhanced,
                 and omega-3/omega-6 enhanced) are available for infants ages 0-6 months that are intended to
                 replace or supplement regular breast feeding. 2 products (regular and omega-3/omega-6
                 enhanced) are available for infants ages 6-24 months. These products are intended to promote
                 continued growth as well as bridge nutritional gaps common in making the transition to table
                 foods. Similac also offers a formula for premature babies that provides extra nutrients infants
                 need for growth and development. Products are offered for infants with special needs such as
                 lactose intolerance and multiple allergies, as well.

Ensure          Ensure is a nutritional drink intended for adults that offers complete, balanced nutrition with
                essential vitamins and minerals that promotes improved overall health and energy. Ensure is
                lactose-free and comes in many different variations including Ensure Plus, Ensure High Protein,
                Ensure Fibre, and Ensure Pudding.

Glucerna        Glucerna is a nutritional line specifically intended for individuals living with diabetes. Glucerna
                has been clinically proven to provide more consistent blood glucose levels than standard
                medical nutritional drinks and snack bars. Glucerna is available in both nutrition shakes and
                snack bars.

Diagnostic Products
Abbott Laboratories’ diagnostic products include a wide range of diagnostic instruments, which are
manufactured, marketed, and sold worldwide. Diagnostic products include tests that are used worldwide in
hospitals, reference labs, and blood banks. Abbott intends for its diagnostic products to provide health care
professionals and patients with fast, convenient, and accurate test results. Diagnostic products are generally
marketed and sold to hospitals, laboratories, clinics, and physicians’ offices.

Diagnostic products made up about 10% of total sales revenue for Abbott Laboratories in 2008. Total sales in
the diagnostic products segment were up 13.2% in 2008 compared to 2007. Products in the segment include
instruments that diagnose a range of serious health issues including infectious diseases, cancer, diabetes, and
genetic conditions. Though most sales in the diagnostic products segment are driven by a few key products,
Abbott offers 27 products in the segment.
Key Products
ARCHITECT       ARCHITECT is a diagnostic instrument capable of testing for many different health issues in the
                areas of drug abuse/toxicology, general chemistry, metabolic, specific proteins, and therapeutic
                drug monitoring. In all, ARCHITECT can conduct over 85 specific tests. ARCHITECT is able to
                conduct about 1200 tests per hour, enough to meet most laboratory testing needs.

m2000           m2000 is an instrument that automates the extraction, purification, and preparation of DNA and
                RNA samples from patients. The instrument is also capable of detecting and measuring


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Abbott Laboratories                                                          University of Oregon Investment Group
                                                                                                 http://uoig.uoregon.edu

                infections such as HIV and HPV. m2000 has multiple validity checks to ensure improved
                accuracy.

Vascular Products
Abbott Laboratories’ vascular products include a broad line of coronary, endovascular, and vessel closure
devices, which are manufactured, marketed, and sold worldwide. Abbott’s vascular products are known for
their safety, effectiveness, and ease of use in treating patients. The company is focusing on improving patient
care by combining the latest medical device innovations, world class pharmaceuticals, and research and
development.
Vascular products do not currently make up a huge amount of Abbott Laboratories’ total sales revenue (Around
7%). Total sales in the vascular products segment, however, have risen dramatically in the past few years. Sales
rose 328% in 2006, 54% in 2007, and 35% in 2008. So far, in 2009, vascular products are accounting for nearly
10% of total sales revenue for Abbott. Products in the segment include a wide range of devices used in the
treatment of patients with vascular disease. Though most sales in the vascular products segment are driven by a
few key products, Abbott offers 25 products in the segment.
Key Products
Xience V         Xience V is Abbott Laboratories’ most recent, technologically advanced stent for the treatment
                 of coronary artery disease. The Xience V stent uses the proven technology of the MINI VISION
                 stent along with an effective drug coating that helps to open and prevent re-narrowing of
                 narrowed arteries. Though still a very young product, the Xience V stent has been billed as
                 technologically superior to its competitors and is already seeing a huge increase in its market
                 share.

MINI VISION     MINI VISION is Abbott Laboratories’ first cobalt chromium stent for small vessels. The device
                features thinner struts, which have been proven to lower vessel injury. The alloy is also much
                stronger than stainless steel, which allows the MINI VISION to have 45% reduced metal volume
                as compared to its competitors.

StarClose       StarClose is a vascular closure system that features innovative design ideas in the clip. The
                system is designed to promote the primary healing process to achieve a secure close of femoral
                artery access sites following vascular procedures.

BUSINESS AND GROWTH STRATEGIES
For fiscal year 2009, Abbott Laboratories will focus on several key areas. First, the company plans to continue
leveraging its staple drug, Humira. Sales in the drug have increased from $2.0 billion in 2006 to $4.5 billion in
2008, and Abbott forecasts sales of Humira to increase 25% in 2009. The increased revenue will stem from
continued research and development as well as selling support dedicated to maximizing the worldwide potential
of the drug. In addition, Abbott is studying two possible extra applications for the drug.

Abbott Laboratories also plans on maximizing its market share in new worldwide markets. Over half of the
company’s total sales revenue comes from international markets and much of its recent growth has been due to
increased international sales. International sales rose 23.9% in 2007 and 24.1% in 2008. So far in 2009,
international sales have only risen 0.7%, but this is more of a reflection of a relatively stronger U.S. dollar. Net
international sales increased 8.0% in the first six months of 2009, including a 10.5% increase in the second
quarter. The relatively stronger U.S. dollar has decreased international sales in 2009 by 13.0%. With this taken
into account, Abbott expects to see steady continued increases in sales revenue from international markets.


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Abbott Laboratories                                                         University of Oregon Investment Group
                                                                                                http://uoig.uoregon.edu



Abbott Laboratories also hopes to continue its growth in the vascular products segment. Research is being
performed on new devices in the segment, including a drug eluting stent and a bioabsorbable stent. After huge
gains in 2006 – 2008, the vascular products segment has seen a 38.3% sales revenue increase in the first nine
months of 2009.

In February 2009, Abbott Laboratories acquired the outstanding shares of Advanced Medical Optics, Inc (AMO).
AMO is a marketer of ophthalmic surgical technology and devices as well as eye care solutions. AMO was
acquired for approximately $1.4 billion, and was financed through long-term debt. Abbott also acquired $1.5
billion in debt from the transaction. Abbott acquired AMO in hopes of taking advantage of increasing demand
for vision care technologies due to population growth and demographic shifts.

Abbott Laboratories has recently engaged in acquiring several smaller health care service companies. In October
2009, Visiogen Inc. was acquired for $400 million. Visiogen Inc. specializes in eye care products for patients with
cataracts. Also in October 2009, Abbott bought Evalve, which specializes in non-surgical treatments for patients
with heart disease. Evalve was acquired for $410 million. Of perhaps more importance, in September 2009, an
agreement was reached to obtain Solvay’s pharmaceutical business. Solvay has the capabilities to produce a
vaccine for the recent outbreak of the swine influenza. The agreement was for $6.6 billion and is expected to
close in the first quarter of 2010.

RECENT NEWS
Abbott profit up on Humira demand, special gain – October 14, 2009
Abbott Laboratories said its third quarter profit rose 37% on strong demand for its Humira arthritis drug and
nutritional products. The reported profit topped Wall Street forecasts and was in line with Abbott’s targets.
This came as a relief to investors as rival health care company Johnson and Johnson reported disappointing sales
earlier in the week. Sales of Humira rose 24% to $1.49 billion, well ahead of Wall Street estimates. Total sales
rose 3.5% in the quarter, thanks to strong growth from pharmaceuticals, vascular products, and nutritional
products. After the report and the subsequent rise in Abbott’s full-year forecast, shares rose 3%. Abbott shares
are now trading at about 12 times the expected 2010 per-share earnings. – reuters.com

Abbott records a 35% reduction in oil and gas usage – October 1, 2009
Abbott Laboratories has managed to reduce its demand for fossil fuels by 35%, compared to a 2006 baseline.
The company’s original goal was to cut oil and gas consumption by 12% by 2011. Most of the gains were thanks
to a new system that is able to capture waste heat and reuse it to heat or cool water. Other gains came from
solar panels in select facilities and energy efficient building designs. – seekingalpha.com

Big pharma jumps back into flu business – September 30, 2009
Three U.S. pharmaceutical companies announced vaccine deals this week. Abbott Laboratories spent $6.6
billion to buy the drugs unit of Solvay, a Belgian-based company. Solvay’s cell-based flu vaccine production
facility can make both seasonal and pandemic influenza vaccines. The U.S. government has already committed
$1.8 billion to companies to make a swine flu vaccine. The announcements came as a relief to infectious disease
experts who are worried about a swine flu pandemic and have seen the number of companies producing
influenza vaccines decrease in recent years. – reuters.com

Abbott stent outperforms but not in diabetics-study – September 23, 2009



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Abbott Laboratories                                                        University of Oregon Investment Group
                                                                                               http://uoig.uoregon.edu

Abbott Laboratories’ Xience V heart stent outperformed rival Boston Scientific’s older Taxus Element stent on a
measure of safety and effectiveness. In a study of 3,690 patients Xience reduced serious stent complications by
38%. Xience reduced stent clots by 74%. There was no difference between Xience and Taxus in diabetics.
Currently, Abbott Laboratories’ Xience stent leads the market share of the stent market at about 29% of the
share. – reuters.com

INDUSTRY
Industry Overview
Abbott Laboratories operates in the United States mainly in the pharmaceuticals industry. The pharmaceuticals
industry is primarily concerned with developing, producing, and marketing drugs licensed for use as
medications. The pharmaceuticals industry is extremely large, with worldwide prescription drugs spending
reaching around $650 billion in 2006. The United States is the largest consumer of the industry, accounting for
nearly half of all revenues. The industry is characterized by a few very large companies, often given the name
“Big Pharma.” The largest pharmaceuticals company in the world is Novartis (Switzerland) with over $53 billion
in revenues. The largest company operating out of the United States is Pfizer with over $48 billion in revenues.
Abbott Laboratories is the 10th largest pharmaceuticals company with total revenues topping $29 billion.
Though the size of many pharmaceutical companies is staggering, the industry remains highly competitive, with
no company having more than a 10% market share.

Growth Outlook
Although the growth in the pharmaceuticals industry has been steady in recent years between 5 – 10% annually,
growth estimates for the near future have lowered dramatically. With the slowed global economy, the industry
has only grown 1 – 2% in 2009, and this slower growth is expected to continue through 2010. Growth is
expected to level out by 2012 at 5 – 10%. The impact from the slowed global economy on the pharmaceuticals
industry, however, has been relatively small when compared with other industries.
The growth outlook for the pharmaceuticals industry is driven by 4 main factors aside from the global economy:

Emerging international markets
Currently, seven international emerging markets exist: China, Brazil, Mexico, South Korea, India, Turkey, and
Russia. China is already the 6th largest pharmaceuticals market in the world, and growth rates for these markets
are expected to be around 15%. The growth in these markets may account for up to 40% of the total growth in
the industry by 2013.

Pricing
Although companies can acquire patents to protect new medical innovations, stiff competition will always exist
in the pharmaceuticals industry. In recent years, much of the revenue growth in the industry was probably due
to increased prices. Increased competition, including threats from generic drugs, may cause prices to fall in the
future, hurting the growth rate of the industry.

Possible health care bill
In recent months, the United States government has proposed passing health care reform. Currently, no bill has
been passed, and there is ongoing debate about what the bill should contain. If a bill were to pass that
increased health care insurance to more residents in the United States, it would certainly affect the
pharmaceuticals industry. Many experts have hypothesized how such a bill would affect the industry, but it is
difficult to distinguish a definite pattern among them. Though demand for pharmaceuticals would almost



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Abbott Laboratories                                                        University of Oregon Investment Group
                                                                                              http://uoig.uoregon.edu

certainly increase, it is unknown whether possible increased competition or government regulations would
lower prices for pharmaceutical products.

Exchange rates
As mentioned before, over half of all sales revenue in the pharmaceuticals industry comes from outside of the
United States. Because of this, exchange rates directly influence company revenues.

Research and Development
In order to remain competitive with other companies, spur innovation, and to continue introducing new
products, companies in the pharmaceuticals industry have very high research and development costs. In 2008,
Abbott laboratories spent $2.7 billion on research and development, nearly 10% of its total revenues.
Surprisingly, this was at the lower end of the spectrum with companies such as Pfizer and Novartis spending
closer to 15% of their total revenues on R & D. To protect companies’ investments in R & D, patents are
commonly awarded to medicines in the pharmaceuticals industry. A typical patent will last 20 years and ensures
that no other company can use specific proportions of ingredients in a particular medicine.

Even with patent protection, pharmaceutical companies are under constant bombardment from international
competition and generic drugs. Generic drugs usually get around the patent problem by using different
proportions of active ingredients along with alternative other ingredients. Generic drugs are typically sold for
much less than name-brand drugs because generic drug companies do not have to spend nearly as much on R &
D (The name-brand pharmaceuticals essentially do it for them). Though it is very difficult to put an exact
number on how much generic drugs have hurt revenues, Abbott Laboratories has experienced significant
underperformance with its drug Depakote due to generic drug competition.

S.W.O.T. ANALYSIS
Strengths
     History of very steady growth.
     Very diversified product line.
     Pharmaceuticals industry commonly referred to as a “safe haven” for investors during recessions.
Weaknesses
        Slower than average growth in last year.
        Sales revenues rely strongly upon a few “staple” products (Humira, Xience V).
        Low returns relative to rest of market (Low Beta).
Opportunities
        Many new emerging worldwide markets.
        Possible health care bill may increase demand for products greatly.
        Many chances to enter new markets and increase current market shares through acquisitions of smaller
         companies.
Threats
        Competition from international companies.
        Competition from generic drugs.
        Possible health care bill may decrease prices for medicines.


CATALYSTS
Upside

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Abbott Laboratories                                                          University of Oregon Investment Group
                                                                                                 http://uoig.uoregon.edu


       Capturing market share in emerging markets.
       Research and Development continuing to consistently offer new products.
       Main drugs continue to outperform expectations.
Downside
       Prices regulated heavily worldwide.
       Sales hurt dramatically for certain drugs because of generic drug competition.

PORTFOLIO HISTORY
The University of Oregon Investment Group currently holds Abbott Laboratories stock in its Tall Firs Portfolio.
We currently hold 249 shares at a cost basis of $12,613.36, or about $50.66 per share. With its current price of
$53.63, our investment is now worth $13,353.87. As of November 12, the UOIG has a purchase return on its
stock in Abbott Laboratories of 5.08%


COMPARABLES ANALYSIS
When performing my comparables analysis for Abbott Laboratories, I first sought out companies that have
similar, competitive products in the pharmaceuticals industry. Once I had found Abbott’s main competitors in
the industry, I found the companies who had both similar levels of long-term debt as well as total sales
revenues. Finally, I attempted to choose companies that have similar market betas compared to Abbott.
Although there were certainly no companies with an exact match to Abbott, I was able to find 4 companies with
very similar business structures. The 4 companies I used for my comparables analysis were Merck and Co. Inc.,
Bristol-Myers Squibb, Johnson and Johnson, and Pfizer.

                                Merck and Co. Inc. (20%)
                                 Merck and Co. Inc provides products for human and animal health primarily in
                                 the United States. The company’s largest product segment is its human
                                 pharmaceuticals segment, which offers both therapeutic and preventative
agents. The company’s products include, but are not limited to, treatments for asthma, hypertension, heart
failure, osteoporosis, diabetes, atherosclerosis, migraines, hair loss, arthritis, and prostate problems. Merck also
has a vaccines line that offers many different products, including one for the influenza.

Although Merck and Co. Inc. has slightly smaller revenues than Abbott Laboratories, it offers very similar types
of products in the pharmaceuticals industry. Also, Merck operates with similar levels of long-term debt as well
as cash when compared to Abbott. Although the company does have a significantly higher market beta than
Abbott, I felt the many similarities in business structure and products offered justified its use in my comparables
analysis.

                               Bristol-Myers Squibb Co. (40%)
                               Bristol-Myers Squibb Co. engages in the discovery, manufacturing, marketing, and
                               sale of pharmaceutical and nutritional products worldwide. Products in the
                               pharmaceuticals segment include treatments for cardiovascular problems,
                               oncology problems, and psychiatric disorders. Products in the nutritional segment
                               include infant and adult formulas. The company is also performing research on
                               many new compounds intended for therapeutic use.




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Abbott Laboratories                                                       University of Oregon Investment Group
                                                                                              http://uoig.uoregon.edu

Bristol-Myers Squibb Co. has a very similar business structure compared to Abbott Laboratories. Like Abbott,
the company operates mainly in the pharmaceuticals industry but also offers nutritional products. Although
Bristol-Myers Squibb Co. has slightly smaller revenues than Abbott, it does have very similar gross margins as
well as long-term debt. Also, the company has a similar market beta when compared with Abbott.

                                Johnson and Johnson (20%)
                                 Johnson and Johnson engages in the research and development, manufacture,
                                 and sale of a broad range of health care products worldwide. Johnson and
Johnson’s pharmaceuticals segment offers products in therapeutic areas including anti-infective, antipsychotic,
cardiovascular, contraceptive, dermatology, neurology, pain, and urology. The company also offers prescription
products for many diseases and disorders and has a diagnostic products segment.

Besides being an overall larger company in both enterprise value and revenues when compared with Abbott
Laboratories, Johnson and Johnson has many of the same qualities. The company offers many products in the
pharmaceuticals industry as well as in the diagnostic products segment. The company has very similar levels of
excess cash on hand, but a lower amount of long-term debt. Also, Johnson and Johnson has a similar market
beta when compared with Abbott.

                             Pfizer Inc. (20%)
                             Pfizer Inc engages in the discovery, manufacture, marketing, and sale of
                             prescription medicines for humans. The company’s pharmaceuticals segment
                             offers products for the treatment of high cholesterol, cardiovascular problems,
                             Alzheimer’s disease, arthritis pain, bloodstream infections, and erectile
                             dysfunction.

Although Pfizer is one of the larger pharmaceutical companies in the world, it still shares many common
characteristics as the smaller Abbott Laboratories. Along with similar levels of long-term debt, Pfizer also has
similar amounts of excess cash on hand, and offers many products in the same segments. The company also has
similar gross profit margins and operating cash flows. Finally, Pfizer has a slightly higher market beta than
Abbott, but not too high to exclude it from my comparables analysis.

Valuation Multiples
When trying to find the true market value of Abbot Laboratories in my comparables analysis, I decided to use 4
multiples: EV / Revenue, EV / Gross Profit, EV / EBITDA, and EV / OCF. I used EV / Revenue because it allowed
me to compare how well the companies produce sales revenue relative to their enterprise value. I used EV /
Gross Profit because it allowed me to compare operating efficiencies between the companies. I used EV /
EBITDA because it showed me how well each company is able to turn revenues into profits. Finally, I used EV /
OCF because it showed how effective each company is in generating cash flows from its sales revenues, which,
in turn, will be accessible by the shareholders.

DISCOUNTED CASH FLOW ANALYSIS
For my discounted cash flow analysis of Abbott Laboratories, I mainly used the percentage of revenues method
to estimate future expenses and, in turn, future cash flows. After finding the present value of the future cash
flows of the company, I was able to estimate the implied stock price.




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Abbott Laboratories                                                          University of Oregon Investment Group
                                                                                                 http://uoig.uoregon.edu


Revenues
Estimating future revenues drives the entire discounted cash flow analysis, so I was very careful in how I went
about my estimations. I first read through Abbott Laboratories’ most recent 10K and 10Q to obtain a feel about
how Abbott’s management feels about its potential revenues in the future. Overall, management has a very
confident feel about sales in the future. For example, Abbott estimates that sales of its drug Humira may
increase by 25 – 30% in the next year. After reading through the 10K and 10Q, I then found information about
the pharmaceuticals industry in general. Though estimates varied slightly, they had a definite pattern to them.
Sales have remained fairly constant in 2009 when compared to 2008. Slower growth is expected in the industry
for the next 2 – 3 years, followed by stronger growth after 2012 (Probably closer to 8 – 10% annually).

Finally, I researched Abbott’s historical revenue growth relative to the rest of the industry. I found that Abbott
generally has outgrown the total revenues of the pharmaceutical industry. The reason for this is most likely
because of the nature of the companies in the industry. The pharmaceuticals industry is defined by a large
amount of mergers and acquisitions. Very few companies mature in the industry without being acquired by one
of the larger “Big Pharma” companies. By acquiring many up-and-coming companies, Abbott, along with most
of the major players in the industry, has been able to consistently outgrow total sales in the industry. Below, I
discuss future revenues in each of Abbott’s product segments.

Pharmaceutical Segment
After double-digit growth in 2007 and 2008, 2009 has marked a rough year for sales in the pharmaceuticals
industry. So far, sales have been stagnant and are expected to be down over 7% on the year. Pharmaceuticals
products are set to rebound slightly in 2010, but sales are still expected to decrease with the slowing of the
worldwide economy. After 2010, pharmaceutical products are expected to grow at faster rates as worldwide
demand from emerging markets increase. By 2015, sales will grow at rates very similar to pre-2009 times. After
2015, such high growth will probably be unsustainable with increased international competition.

Nutritional Segment
Nutritional products have managed to see solid growth despite the slowing global economy. I have projected
growth in nutritional products to increase steadily along with the rest of the industry until 2012. After this year,
I expect sales in the segment to increase at a decreasing rate, as Abbott is currently not conducting research on
any new products.

Diagnostic Segment
Similar to the nutritional segment, I expect sales in the diagnostic segment to mirror growth in the industry as a
whole. With few new products in the works, sales should increase with more demand, but will most likely fade
after 2013

Vascular Segment
Abbott’s vascular segment has shown huge gains in the past few years and has managed double-digit gains even
in 2009. With several new products already in testing, I expect sales in this segment to increase at about 20%
annually until 2013. With such high growth being undoubtedly unsustainable in the relatively small vascular
products market, I expect growth to slow but still remain solid throughout the final 5 years of my analysis.

Other Products
Abbott’s other products mainly include diabetic testing supplies, and, with several new monitors set to hit the
market, I forecast solid gains in this area in the near future. Sales growth should slow shortly mainly because
other products should make up a larger portion of total sales for the company.

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Abbott Laboratories                                                           University of Oregon Investment Group
                                                                                                  http://uoig.uoregon.edu



Cost of Products Sold
Abbott Laboratories’ gross margins have remained solid around 57% for the last few years. I am forecasting a
slight decrease in gross margins for the coming decade mainly because of probable price reductions due to new
international competition, probable price controls, and generic drugs.

Research and Development
Abbott Laboratories’ research and development is mainly concentrated in the pharmaceuticals products
segment. With current research and development expenses at the lower end of the industry average, in order
to remain competitive and continue introducing new products, Abbott will have to increase its research and
development department. I have forecast R & D expenses to increase closer to the industry average by 2017.

Selling, General, and Administrative
Although S, G, & A expenses have been very consistent in recent years, I have forecasted a decrease relative to
total revenues. Abbott Laboratories has recently undertaken a project to streamline all managerial and
administrative decisions, and numbers from the first 3 quarters of 2009 have already shown a slight decrease in
S, G, & A expenses.

Interest Expense
Abbott Laboratories’ interest expense arises generally from its long-term debt. I have forecasted the interest
expense to increase slightly as Abbott continues to acquire new companies, which it has paid for with long-term
debt and cash reserves in the past.

Income Tax Expense
Abbott Laboratories enjoys a relatively low tax rate from both government incentive programs and operations in
foreign countries. Abbott expects its income tax rate to be between 17 – 19% for the next 2 years. After this, I
expect the tax rate to rise up to historical rates, around 20 – 22%.

Depreciation and Amortization
As Abbott continues to acquire new companies and capital, I expect depreciation and amortization costs to
increase slightly over time. This expense should mirror capital expenditures.

Net Working Capital
To forecast future net working capital, I first broke up current assets and current liabilities into their respective
items. Using the percentage of revenues method, I forecasted each item using its average percentage of total
revenues from 2005 – 2008. I do not see large changes in net working capital in the future, as current assets and
current liabilities have tended to be quite equal in the past for Abbott.

Capital Expenditures / Acquisitions
Because many mergers and acquisitions define the pharmaceuticals industry, I have forecasted Abbott’s capital
expenditures to remain fairly steady throughout. Capital expenditures tend to be low in some years and high in
others, so I have attempted to “smooth out” this expense with moderate contraction relative to revenues
throughout. By the terminal year, capital expenditures should be approximately equal to depreciation and
amortization.



                                                                                                                  11
Abbott Laboratories                                                         University of Oregon Investment Group
                                                                                               http://uoig.uoregon.edu


Beta
To find the beta for Abbott Laboratories, I had to use the Hamada Equation. I could not use a standard
regression because I was obtaining unreasonably low numbers (0.18 with a 5 year monthly and 0.38 with a 1
year weekly). First, I found the betas and the standard errors for the 4 comparable companies that I used. Next,
I found the debt-to-equity ratios for Abbott and the 4 comparable companies. By averaging the 4 betas and
debt-to-equity ratios and using the Hamada Equation with an assumption of a 35% tax rate, I was able to find an
industry beta. Then, by using this beta and Abbott’s actual tax rate and debt-to-equity ratio, I obtained a beta
for Abbott. The beta that I obtained seems very reasonable as it is in the range that most health care companies
fall into.

Cost of Debt
To find Abbott Laboratories’ cost of debt, I looked up its last issuance of bonds. The bonds have an interest rate
of 6.15% and are currently trading with a yield to maturity very similar to that.


RECOMMENDATION
Based on my qualitative and quantitative analysis, I am recommending a sell for all portfolios currently holding
stock in Abbott Laboratories. Weighting my discounted cash flow and comparables analysis equally, I attained a
target price of $49.59, which means that Abbott’s current price of $53.63 is an overvaluation of 7.5%. Although
Abbott will almost certainly remain a profitable company with steady growth, the projected future cash flows
along with the comparables analysis do not justify the price it is currently trading at.




                                                                                                               12
Abbott Laboratories                 University of Oregon Investment Group
                                                    http://uoig.uoregon.edu


APPENDIX 1 – COMPARABLES ANALYSIS




                                                                              13
Abbott Laboratories                           University of Oregon Investment Group
                                                              http://uoig.uoregon.edu


APPENDIX 2 – DISCOUNTED CASH FLOWS ANALYSIS




                                                                                        14
Abbott Laboratories                                       University of Oregon Investment Group
                                                                          http://uoig.uoregon.edu


APPENDIX 3 – DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS




APPENDIX 4 – BETA SENSITIVITY ANALYSIS




                                                                                                    15
Abbott Laboratories                University of Oregon Investment Group
                                                   http://uoig.uoregon.edu


APPENDIX 5 – REVENUE PROJECTIONS




                                                                             16
Abbott Laboratories                University of Oregon Investment Group
                                                   http://uoig.uoregon.edu


APPENDIX 6 – NET WORKING CAPITAL




                                                                             17
Abbott Laboratories      University of Oregon Investment Group
                                         http://uoig.uoregon.edu


APPENDIX 7 – SOURCES
www.sec.gov
www.finance.yahoo.com
www.google.com/finance
www.wikipedia.org
www.marketwatch.com
www.seekingalpha.com
www.abbott.com
www.reuters.com
www.sourcejuice.com
www.morningstar.com




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