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Abbott Laboratories _ABT_

VIEWS: 5 PAGES: 29

									                 ABBOTT LABORATORIES (ABT)
April 21, 2011   SHOAIB HAROON | ANGELA JIANG
Agenda
   Company Overview
   Industry Analysis
   Competition and SWOT Analysis
   MD&A
   Financial Analysis
   Valuation
   Recommendation
  Company Overview
     Founded in 1900 by Dr. Wallace C. Abbott
     Discovery, development, manufacture, and sale of
      diversified line of healthcare products
     6th largest global pharmaceutical provider
     Headquartered in Abbot Park, Illinois
     Employees about 90,000




Data from Google Finance
  Key Financials
     FY ‘09 Revenues: $30.76B up 4.2%
     Market Capitalization: $79.11B
     P/E: 17.19
     Current Share Price: $50.80
     Operating Margin: 17.31%
     Net Profit Margin: 13.15%
     RoA: 8.27%
     RoE: 20.45%
Data from Google Finance
     Major Products
Market Segment      Revenues %   Target End User               Major Products


Pharmaceuticals     53.60        Government, retailers         Humira, TriCor, TriLipix,
                                                               Synthroid

Diagnostic          11.60        Hospitals, blood banks,       Architect, Imx,
Products                         clinics                       Commander, Prism

Nutritional         17.20        Retailers, wholesalers, third Similac and Isomil
Products                         party distributors            brands

Vascular Products   8.80         Hospitals and Abbot           Xience V, Multi-Link,
                                 owned distribution centers    Starclose

Other               8.90         Healthcare facilities, mail   Blood glucose
                                 order pharmacies, public      monitoring meters and
                                 warehouses                    stripes, data
                                                               management software
Revenue Sources

                    8.90%


           8.80%
                                     Pharmaceuticals
                                     Nutritionals
       11.60%
                                     Diagnostics
                            53.60%   Vascular
                                     Other

           17.20%
Geographic Sales



              Others, 25%



                               U.S., 47%

     UK, 3%


               Eurozone, 21%
Industry Drivers
   M&A activity and licensing activity
       In-Licensing
       Both activities needed to maintain growth
   Cost Containment
       Regulation
   Increased use in generics
       Rising healthcare expenses
       Aging population
   Biologics
       New manufacturing methods
       Different treatments
   Part D
       Companies contributing to Medicare
       Donut hole
Industry Analysis
   Decelerating growth in recent years
     Limited projects in R&D pipelines
     Decreasing prescription drug needs

   Stabilizing growth through 2014
   Consolidating industry
   Increasing product diversification to maintain
    competition
     Cardiovascular and central nervous system sales most
      profitable
     Strong revenue gains from Emerging Markets
                              Industry Growth
                                Sales for Pharmaceuticals                      Growth Rate for Pharmaceuticals
                        660                                            6.00%
                        640
Revenue (In Billions)




                        620                                            5.00%
                        600
                                                                       4.00%
                        580
                        560                                            3.00%
                        540
                        520                                            2.00%
                        500
                        480                                            1.00%
                               2005   2006    2007    2008   2009
                                                                       0.00%
                                              Year                               2005     2006      2007     2008



                                                     Year Sales (Billions) Growth
                                                       2005          545.3
                                                       2006          571.5   4.80%
                                                       2007          601.4   5.20%
                                                       2008          625.6   4.00%
                                                       2009          644.2   3.00%
         Porter’s 5 Forces
             Threat of New
                Entrants                Buyer Power
                  Low                    Moderate


                             Industry
                              Rivalry
                               High

            Supplier Power              Threat of
                High                    Substitutes
                                          Low



Source: Company 10-K
Threat of New Entrants: Low
   New drugs requires large investments
   Consolidating industry
   Multiple drugs already exist for known conditions
Supplier Power: High
   Manufacturers supplying active ingredients critical
    to all parts of pharmaceutical industry
     R&D

     Current   production
   R&D requires new range of drugs
   Generally sold on contract basis
Buyer Power: Moderate
   More sales to pharmacies diversifying target
    markets
   Focus on marketing strategy
     Different effects of drugs
     Differentiation of products

   Increase in generic prescriptions increasing buying
    power
Threat of Substitutes: Low
   Patents protecting revenues
   Alternative treatments not widely used but
    available
   Generics more targeted towards OTC medicines
   Multiple drugs already exist for known conditions
Rivalry: High
   Top pharmaceutical companies using M&A to keep
    top market share
   High fixed costs and exit costs
   Multiple drugs competing to treat same problem
   Stress on marketing and sales
         Competition
              ABT is generally larger and more leveraged than its
               competitors with strong EPS
         Company                   Share Price    Market Cap   Debt /          2010 Revenue   LTM EPS ($)
                                   ($)            ($mm)        Equity          ($mm)
         Johnson & Johnson (JNJ)         64.39       165,678            0.30         61,587            4.8

         Sanofi-Aventis (SNY)            38.06        94,054            0.16         45,468            5.9

         Medtronic, Inc. (MDT)           40.68        43,053            0.70         15,834            3.0

         Boston Scientific (BSX)           7.08       10,665            0.48          7,806          (0.7)

         Merck Ltd. (MRK)                34.04           231              --           117             0.9

         Novartis A.G. (NVS)             57.92            61            0.38             39            0.9

         Abbott (ABT)                    50.80        79,360            0.84         35,167            3.0


Source: Capital IQ as of 4/20/11
                                                                                                  Ap
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                                                                                                  M           20




                                                                                                                      -20.00
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Source: Capital IQ as of 4/20/11
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                                                                                                                                                                       Competition



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                                   Index: JNJ, SNY, MDT, BSX, 2 more (Market Cap) - Index Value
                                                                                                         19 0
                                                                                                            -2
                                                                                                  De           01
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                                                                                                         06 0
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                                                                                                  Fe -20
                                                                                                     b-         1
                                                                                                         07 1
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                                                                                                     ar          11
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                                   Abbott Laboratories (NYSE:ABT) - Share Pricing




                                                                                                  Ap          20
                                                                                                      r- 0 11
                                                                                                           8-
                                                                                                              20
                                                                                                                 11
SWOT Analysis
Strengths                                  Weaknesses
   Market leader in lucrative I&I space      Weak pipeline with only 3 drug
   Very diverse dyslipidemia portfolio        launches expected out to 2014
   Strong revenue base across multiple       Increasing reliance on flagship drug
    healthcare segments                        Humira
                                              Weak IP position; faces generic
                                               erosion

Opportunities                              Threats
   Pursue M&A to strengthen pipeline         Continued litigation with J&J and
   Collaboration with AstraZeneca             Bayer on patent position of Humira
    could reinforce Abbott’s positon in       New biological launches threaten
    the US dyslipidemia market                 market share in autoimmune disorder
                                               space
         Management Discussion & Analysis
             Reshape business portfolio for long-term growth
                Focus       on acquiring early and late stage pipeline
                       technologies and growth platforms
                        Solvay Pharmaceuticals (pharma)
                        Advanced Medical Optics (vision care)
                        Visiogen (vision care)
                        Evalve (stuctural heart repair)

                Invest      $2.9bn on R&D




Source: Company 10-K
         Management Discussion & Analysis
             Grow Pharmaceuticals business internationally
                Leverage   Humira in emerging markets
                Acquisition of Solvay Pharmaceuticals to create
                 presence in Eastern Europe
             Focus on US growth for Nutrition business
                New       product launches and leadership in infant formula
             Improve profitability for Medical Products business
                      Underwent thorough rebuilding process to improve
                       margins

Source: Company 10-K
DuPont Analysis
Financial Ratios
   ABT’s margins slightly trail competitors’ but its ability to take on
    leverage is shown by a strong ROE
    Company             Operating Margin   Net Margin   ROA          ROE


  Boston Scientific
       (BSX)                14.31%           7.00%      3.10%        4.92%

Johnson & Johnson
      (JNJ)                 26.33%          19.77%      13.50%      24.88%


Medtronic, Inc. (MDT)       30.53%          20.68%      10.84%      22.06%


  Merck Ltd. (MRK)          20.22%           1.87%      5.33%        1.66%


Sanofi-Aventis (SNY)        24.75%          17.07%      5.99%       11.23%


    Abbott (ABT)            18.93%          12.29%      8.27%       20.45%


     Industry               14.10%          10.10%      12.40%      13.80%
Debt Ratios
    ABT has the liquidity to capture the benefits of leverage while
     covering its debt obligations
    Company             Debt/Equity   Debt/Capital   Interest Coverage   Current Ratio


  Boston Scientific
       (BSX)              43.41%        30.27%             2.97              1.75
Johnson & Johnson
      (JNJ)               29.65%        22.87%             34.23             2.05

Medtronic, Inc. (MDT)     70.05%        41.19%             10.99             1.56

  Merck Ltd. (MRK)        31.49%        23.95%             13.01             1.86

Sanofi-Aventis (SNY)      15.51%        13.42%             20.59             1.99

    Abbott (ABT)          84.33%        45.75%             11.75             1.70

      Industry            17.30%        14.80%             17.50             2.70
         Comparable Valuation
              Trading comparables yield a valuation of $51.41/share at
               8.5x EBITDA (mean)
        Boston Scientific Corporation (NYSE:BSX)   NYSE:BSX     $7.08         $10,169.3    2.1x          7.3x
        Johnson & Johnson (NYSE:JNJ)               NYSE:JNJ     $64.39        $176,144.7   2.7x          8.5x
        Medtronic, Inc. (NYSE:MDT)                 NYSE:MDT     $40.68        $37,428.9    3.2x          7.4x
        Merck & Co. Inc. (NYSE:MRK)                NYSE:MRK     $34.04        $106,413.6   2.5x          10.8x
        Novartis A.G. (NYSE: NVS)                  NYSE: NVS    $11.24        $154.6       2.0x          11.5x
        Sanofi-Aventis (ENXTPA:SAN                 ENXTPA:SAN   $76.15        $64,706.9    2.2x          5.3x




        Abbott Laboratories (NYSE:ABT)             NYSE:ABT     $50.80        $74,446.50   2.53x         10.28x

        Sum m ary Statistics                                    Share Price   TEV          TEV/Revenue   TEV/EBITDA
        High                                                    $76.15        $176,144.7   3.2x          11.5x
        Low                                                     $7.08         $154.6       2.0x          5.3x
        Mean                                                    $38.93        $65,836.3    2.4x          8.5x
        Median                                                  $37.36        $51,067.9    2.3x          8.0x



Source: Capital IQ as of 4/20/11
DCF Valuation

                                                         Projected Year Ending Dec. 31,
                                                 2011       2012         2013          2014      2015

Sales                                         $38,332    $39,865      $41,061      $42,703    $44,839
EBT                                            $7,556     $7,694       $7,718       $7,204     $7,318
Plus: Interest Expense                          ($494)     ($678)       ($494)       ($910)   ($1,201)
EBIT                                           $8,050     $8,372       $8,212       $8,114     $8,519
Plus: Depreciation                             $3,085     $3,641       $3,623       $4,007     $4,572
EBITDA                                        $11,135    $12,013      $11,835      $12,121    $13,091
  EBITDA Margin                                 29.0%      30.1%        28.8%        28.4%      29.2%

Less: Taxes                                     1,467      1,517        1,544        1,441      1,464
Less: Capex                                    (1,917)    (1,196)      (1,232)      (1,281)    (1,345)
Less: Changes in NWC                              278        881          518         (377)    (1,119)

Unlevered Free Cash Flow                       $8,029     $8,419       $8,542       $9,776    $11,401
 Unlevered Free Cash Flow Growth Rate              na       4.9%         1.5%        14.5%      16.6%

Discount Rate                           11%
Discounted FCFs                                $7,241     $6,848       $6,267       $6,469     $6,805
DCF Valuation
    DCF yields a valuation of $64.76/share

    WACC Calculation
                                   Term inal Value Calculation
    CAPM                           Long-term Grow th Rate            2.5%
    Risk Free Rate        3.40%    Terminal Value                $139,568
    Market Risk Premium   6.40%    Discounted TV                  $83,301
    Beta                     0.3
    Cost of Equity        4.30%    Value / Share Calculation
                                   NPV of FCFs                    $33,631
    RoE                   20.50%   PV of TV                       $83,301
                                   Enterprise Value              $116,932
    Cost of Equity        18.88%
    Cost of Debt           5.50%
                                   Less: Net Debt                 $14,341
                                   Equity Value                  $102,591
    Capital Structure
    Debt                  55.30%
    Equity                44.70%   Shares Outstanding               1,556

    WACC                  10.87%   Value / Share                   $65.93
Valuation Summary
      DCF yields a valuation of $64.76/share
                                          LT Growth Rate
           $65.93        1.5%         2.0%        2.5%              3.0%             3.5%
             7.0%     $111.24       $121.40    $133.82        $149.35          $169.31
             9.0%      $77.97        $82.91     $88.62         $95.27          $103.14
    WACC




            11.0%      $58.78        $61.60     $64.76         $68.31           $72.33
            13.0%      $46.32        $48.10     $50.04         $52.18           $54.55
            15.0%      $37.59        $38.79     $40.08         $41.47           $42.99


      Comparables yield a valuation of $51.41/share
      Triangulated value of $58.67/share
               Triangulated Value
                                                         Price             Weight
               DCF                                         $65.93                   0.5
               Comps                                       $51.41                   0.5
               Triangulated Value                          $58.67
Recommendation
   Buy 200 shares of ABT at market
     Current price: $50.80
     Currently undervalued
       DCF: $64.76
         Comps: $51.41
         Triangulated: $58.67 (Price target)

								
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