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April 9, 2012 HEALTH CARE (PHARMACEUTICALS)

Henry Fund Research

Abbott Laboratories (ABT) Investment Recommendation SELL

Nick Johnson, [email protected]

Current Price $61.30

Target Price Range $57-65

Source: Yahoo! Finance

Key Stock Statistics152-Week Price Range $46.29-62.57

Market Capitalization (B) $96.39

Shares Outstanding (M) 1,570

Institutional Ownership 65.7%

INVESTMENT THESIS

(-) Abbotts growth in revenues and profits are highlydependent on Humira (2011 sales of nearly $8 billion orapproximately 21% of Abbotts sales) which will likelyface competition from Pfizers JAK-3 inhibitor in 2012as well as generic competition in 2017. Growth inHumira has been strong and is forecasted to stay in thelow double digits which will make Abbott even moredependent on Humira over the next few years.

(+) Part of the S&P 500 Dividend Aristocrats (i.e. agroup of companies that have increased dividends for atleast 25 straight years), Abbott has successfullyincreased their dividend per share for 39 straight years.While their dividend yield is a modest 3.3%, investorscan count on annual increases from management. Thefirm has a strong balance sheet and no major patentsexpiring until Humira in December 2016. Abbott isexpected to continue this even after the split.

(+) The acquisitions of Piramal Healthcare and SolvayPharmaceuticals allow Abbott to strategically build theirpipeline and to gain further access to emergingmarkets, in particular India. Emerging marketscurrently make up nearly 25% of Abbotts revenue and

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currently make up nearly 25% of Abbott s revenue and

Henry Fund ResearchTHE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

EXECUTIVE SUMMARY

Abbott Laboratories is a diversified health care

company that designs and manufactures productsacross five reported segments: proprietarypharmaceutical, established pharmaceutical,nutritionals, diagnostics, and vascular. The firm hashad strong growth over the past five years, largely dueto the success of Humira, a rheumatoid arthritismedicine, which now generates nearly $8 billion inrevenue or approximately 21% of Abbotts sales2.While Humiras patent does not expire until December2016, Abbott will likely face competition as early as thisyear from Pfizers JAK-3 inhibitor which will dramaticallyimpact share price.

Management has announced that the company will bedivided into two companies by the end of 2012. Onewill retain the proprietary pharmaceutical segment (aswell as Humira) and be called AbbVie. The other willmanage the rest of the firm and will keep the AbbottLaboratories name. While the split is intended tounlock shareholder value, it may end up hurtingmargins and profitability.

Abbotts management is dedicated to increasing itsdividends per share as they have successfully done forthe past 39 straight years. They are part of theprestigious S&P 500 Dividend Aristocrats and will try toretain this title after splitting into two. Much of Abbottsgrowth comes from emerging markets and this trendwill likely continue as developed markets are predicted

to remain stagnant over the next five years whileemerging markets are forecasted to grow at a CAGR of20%10. Abbott made a string of acquisitions in 2010 tostrengthen its drug pipeline and have better access tothese markets However due to Abbotts reliance on

including Humira7. The company plans to make the

separation complete by the end of 2012.

Source: Abbott Laboratories 2011 10-K

Pharmaceuticals represent a majority of Abbottsrevenue, with proprietary and established productsgenerating $17 billion and $5.4 billion in 2011,

respectively

2

. Abbotts largest product is Humira, ananti-arthritis medicine, with nearly $8 billion in revenueand 21% growth for 2011. Growth for Humira isexpected to slow to low double digits in 2012.

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Source: Abbott Laboratories 10-K (2006-2011)

In order to break down Abbotts revenue, it is best toanalyze each segment individually because eachsegment has its own forecasted growth, risk and lifecycle.

Proprietary Pharmaceutical Products

The proprietary pharmaceutical division is composed of

a variety of branded pharmaceutical products currentlycovered by patents. Management has announced thatthis segment will be its own publically traded companyby the end of 2012, named AbbVie

7. The major

concern for this segment is competition for its majorproduct, Humira, first with Pfizers JAK-3 inhibitor thenfrom generic competition when Humira loses its patentin December 2016. Already showing promising resultsfrom Phase III trials, Pfizers JAK-3 inhibitor may steal

significant market share if it continues to perform well inlate-stage trials.

In addition, Roches rheumatoid arthritis drug, Actemra,will likely report trial data later this year or early 2013

8

Kaletra (also marketed as Aluvia and Norvir) HIV infection

Lupron (also marketed as Lucrin and Lupron

Depot) palliative treatment for prostate cancerand treatment for endometriosis and anemia

Synagis respiratory syncytial virus AndroGel low testosterone Ultane and Sevorane anesthesia Zemplar hyperparathyroidism Creon pancreatic exocrine insufficiency

To analyze the proprietary pharmaceutical segment, wefurther split the segment into pipeline and existingproducts. Managements guidance calls for flat to lowsingle digit growth until 2015 with growth largely comingfrom Humira including organic growth and newapplications of the compound. Our forecast hasexisting products growing at a 3% rate until 2016, atwhich time Humira will lose its patent. We forecast a50% drop across the entire segment in 2017 as few ofthe products in their current pipeline have the potentialthat Humira has. Direct competition could steal market

share by the end of 2012 which would dramaticallyeffect revenue and share price.

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Biaxin, Klaci, and Klaricid anti-infectiveclarithromycin

Influvac influenza vaccine

Serc Meniere disease and vestibular vertigo Brufen treatment for pain, fever, or

inflammation Synthroid hypothyroidism Duspatal and Dicetel irritable bowel

syndrome Duphaston numerous gynecological disorders Adomet, Heptral, Transmetil, Samyr, and

Donamet treatment of intrahepatic

cholestasis Duphalac regulation of the physiological

rhythm of the colon Lipanthy and TriCor dyslipidemia Teveten and Physiotens hypertension

While this segment has shown strong growth in recentyears, it was largely due to Abbotts string ofacquisitions. With cash purchases of SolvayPharmaceuticals in February 2010 for $6.1 billion andPiramal Healthcare in September 2010 for $2.2 billion,Abbott made large investments to increase thissegment and its drug pipeline2. Without additionalacquisitions, management has provided guidance oflow single digit growth for 2012 in this segment and weforecast 3% growth going forward unless Abbott wereto continue making acquisitions.

million containers of powdered Similac infant formula inthe US because there was a remote possibility that itmay contain small insect parts and beetle larvae4.

However, management announced on their 4th

quarterearnings call that the company has since regained allmarket share lost during the recall and hadreestablished itself as the infant formula market leaderonce again.

Source: Abbott Laboratories 10-K (2006-2011) and Henry FundEstimates

Management believes this will be one of Abbottsfastest growing segments over the next five years dueto growth from emerging markets. They believe theworldwide market will grow from $30 billion to $40billion by 2015 and have set guidance with a doubledigit CAGR and revenue of $9-$10 billion by that time.However, in the past five years, nutritionals has only

had one year of double digit growth and the lowestmargins, currently at 13%. We forecast a 7% growthrate for this segment which is above the five yearhistoric average, but much lower than managements

l ti i ti f t

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Informatics and automation solutions for labuse

Full line of hematology systems and bloodanalysis

i-Stat point of care diagnostic systems

Source: Abbott Laboratories 10-K (2006-2011) and Henry FundEstimates

While management forecasts that this segment willgrow more slowly than its other segments, they dobelieve that it can increase operating margins from 14%in 2010 to 20% in 2012

4. We agree and project

revenue growth of 4% throughout our forecast perioddue to the expected launch of a number of new assays,but keep margins relatively flat due to and additionalmedical device tax that is part of the healthcare reformlaw.

Vascular Products

Abbott manufactures and markets a broad line ofcoronary, endovascular, vessel closure, and structural

2

remained relatively flat over the last three years from$2.7 billion to $2.9 billion. We forecast 2% growth overthe forecast period to reflect the historic average growth

rate.Dividends

Abbott is one of 51 companies in the 2012 S&P 500Dividend Aristocrats. This list is made up of companiesthat have increased dividends for no less than 25straight years. With an increase in 2011, Abbott hasincreased their dividend for 39 straight years and has apayout ratio of over 60%. The company hasannounced plans to continue this trend with thecombined 2012 dividend of Abbott Laboratories andAbbVie to be greater than the 2011 Abbott Laboratoriesdividend

4. We predict that AbbVie (the proprietary

pharmaceutical division) will hold a dividend yield closeto the industry average of 4%, while AbbottLaboratories will hold a yield closer to 2%. Thecompany has shown great dedication to keep growingits dividend and with a current yield of 3.3%, weforecast that both firms will continue this tradition.

Source: Abbott Laboratories 2011 10-K

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also indicated that growth was slowing to 16% from25.7% the previous quarter. With slowing growth forHumira, but increasing international growth for their

other segments, Abbott should continue to have strongrevenue gains in 2012, but gross margins areforecasted to decrease to 58% due to changes inproduct mix.

Abbotts management was extremely positive duringtheir earnings call. They announced their commitmentto a strong dividend including a payout of over $3 billionin 2011 as well as a strong stock performance with ashareholder return of 22% in 2011 leading large-cap

medical device companies and near the top of large-cap pharmaceutical companies. Abbott provided fewadditional details about the split, but maintained thatboth companies will be well-positioned large-cap firmswith strong balance sheets and cash flows, diversifiedproduct lines with global presence, and investment-grade credit ratings. Management remained concernedover movements in the exchange rates and believedthat it would have a negative effect of approximately

2.5% of sales in 2012, but would not affect their bottomline due to exchange rate forwards. We fully expectthat Abbott will continue to perform well over the nextyear, close to managements expectations, but remainconcerned about the companys dependence onHumira.

AcquistionsAbbott acquired Solvay Pharmaceuticals, PiramalHealthcare, and Facet Biotech in 2010 in order to

strategically build their pipeline and to gain furtheraccess to emerging markets, in particular India. In2011, Abbott did not acquire any additional firms, butdid not rule out opening its pocketbook again in 2012.

mentioned above, nearly 25% of Abbotts revenues nowcome from emerging markets and this acquisitionhelped to solidify their position, especially in India.

Finally, Abbott purchased Facet Biotech for $430 millionin September of 2010. This acquisition increased

Abbotts mid and late stage pipeline. In particular, itprovided access to Facets biologic for multiplesclerosis, Daclizumab

2. Biologics, such as Humira, are

large molecule compounds and are derived from livingmatter or organisms. They are harder to replicate, butless capital intensive to get FDA approval. Currently inPhase III trials, Daclizumab may provide a solid entry

into the Multiple Sclerosis market for Abbott.

Pipeline News

With competition facing Humira as soon as this year,Abbott must find a way to replace any lost revenue withtheir drug pipeline. Much of Abbotts current Phase IIIportfolio is focused on finding additional applications forHumira, but their Phase II portfolio is large and diverse.

Abbotts Drug Pipeline (as of October 2011)

Phase I Phase III

ABT-308 ABT-450 Linifanib Humira

ABT-413 ABT-267 Navitoctax Humira

ABT-436 ABT-333 Navitoctax Humira

ABT-354 ABT-072 Navitoctax Dacllzumab

ABT-500 Humira Navitoctax Duodopa

ABT-110 BT-06 Vellparib Elotuzumab

ABT-272 BT-061 Vellparib Linifanib

ABT-521 ABT-126 Vellparib Bardoxolone Methyl

ABT-199 ABT-126 Vellparib Zemplar IV

ABT-348 ABT-630 Vellparib

ABT-767 ABT-652 Vellparib

ABT-806 Atrasentan

Phase II

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common strain in Asia. While Phase II studies (PILOTand CO-PILOT) have been positive, Abbott will nothave commercialization of any product until 201513. At

that point, Bristol, Gilead, and Vertex will already havetheir products to market although they will not be anoral cocktail. While Abbott estimates the market at over$12 billion by 2015, there will be increased competitiongoing forward12. This increases the risk that Abbottlacks the necessary drug pipeline to compete after theloss of Humira.

INDUSTRY TRENDS

BiologicsBiologics or large molecule compounds are medicinesderived by living matter or organisms and are expectedto grow from 20% of the pharmaceutical market tonearly half by 20169. This increase is largely due tobiologics carrying a high price and requiring less capitalto obtain FDA approval which provides for a higherreturn on investment. In addition, these products arefar more difficult to replicate compared to small-

molecule chemicals which creates a higher barrier toentry, and therefore, less risk of competition. However,under legislation passed in the Healthcare Reform Act,biosimilar (i.e. generic) versions of biological productscan be approved on a shortened track and with lessdata which eliminated the unlimited exclusivity thatpreviously existed for biologics. Biologics now arelimited to 12 years of exclusivity in the US. Humira,

Abbotts most profitable compound, is a biologic which

may make it more difficult to replicate when it doescome off patent in 2016. However, Humiras truecompetition is likely from other brandedpharmaceuticals with better results such as PfizersJAK-3 inhibitor

growth in revenues. In particular, Abbotts acquisitionof Piramal Healthcare helped to open the Indian marketfor Abbott. With stagnant to slow growth expected in

developed markets, Abbott is well positioned tocapitalize on the growth in emerging markets.

Emerging markets have also presented significantchallenges to drug manufacturers. First, withprescription drug costs largely coming out-of-pocket in

emerging markets, it has made the industry morecyclical than in the past and decreased margins. Toexacerbate the problem, countries that have been hitsignificantly hard by the global recession, such asRussia and Mexico require their citizens to bear the

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After years of preparation, 2011 marked the beginningof the patent cliff for major pharmaceuticals. Patenteddrug manufacturers are expected to lose $255 billion in

total revenue, with decreased revenues of $21 billion in2011 and $33 billion in 20125. In short, there has been

a significant increase in competition from generic drugmanufacturers. The chart above outlines the largestexpirations and their manufacturers. While Abbott willlose patents on two drugs with sales totaling $2 billionin the next few years, Humira is Abbotts primaryconcern over the next five years. With severalacquisitions in 2010 as well as organic development ofa drug pipeline, Abbott has tried to position itself for theloss of patents in its proprietary segment.

In order to survive the patent cliff, pharmaceuticalshave tried multiple strategies including aggressivepricing (branded drug prices increased by 9.7% in

2010), mergers and acquisitions, and licensing andpartnership programs5. In addition, significant cost-

reduction efforts have been implemented, including theelimination of over 100,000 jobs across the industry inthe past three years. Even R&D budgets, the life bloodof pharmaceuticals, have been cut recently, headlinedby Pfizers decision to reduce its estimate of 2012 R&Dby $2 billion. However, R&D across the industry isexpected to continue to grow at above 5% in the nearterm and remain between 14%-18% of revenues

5.

Firms that cut R&D budgets will be forced to findstrategic partnerships or acquisitions. While Abbott isnot a pure play pharmaceutical company (i.e. only 44%of sales are from proprietary pharmaceuticals), theyhave kept R&D expenses around 10% of sales, wellbelow the industry average of 14%-18%. We forecastfor this trend to continue with R&D expenses at 10% ofsales.

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agree with this strategy because developing orphandrugs, even with extended benefits, requires thepharmaceutical firm to accept additional risks due to the

limited number of patients available.

Source: PhRMA

Health Care Reform

President Barack Obama signed the Patient Protectionand Affordable Care Act (PPACA) on March 23, 2010.

The health care overhaul bill has remained underimmense political and judicial scrutiny since its signing.The Supreme Court recently heard arguments, andbased on the Justices questions, most pundits believethe individual mandate portion of the law will beoverturned8. The official verdict is expected in June.While much of the outcome of reform is still unknowndue to many provisions being implemented in 2013-2020 and uncertainty whether the act will remain law,there has already been large consequences. Profitmargins have been squeezed by discounts given bybranded prescription drug manufacturers to patients inthe Medicare Part D plan doughnut hole2. In fact,Abbott incurred a one-time $60 million expense in 2010

depending on the opinion of the Supreme Court in Juneand whether they appeal a portion of the law.

MARKETS AND COMPETITIONAbbott competes across several different industries inthe health care sector. It is often classified as apharmaceutical since almost 60% of its revenue comesfrom those segments. However, Abbott also competesin medical device and nutritional markets that have fardifferent characteristics. For this reason, its maincompetitors are multinational corporations such asJohnson & Johnson and GlaxoSmithKline who are

diversified health care companies and do not rely solelyon biopharmaceuticals for income.

One Year Stock Return ABT, JNJ, GSK


Johnson & Johnson (JNJ)

The well-known company, Johnson & Johnson,

operates in three core segments: medical devices anddiagnostics, consumer healthcare, andpharmaceuticals. Within its pharmaceutical segment,65% of its revenue stems from small molecule chemicalcompounds and the remaining 35% comes from

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focused their resources on biologics and vaccines. Likemany of its competitors, GlaxoSmithKline has alsoinstituted cost-reduction plans including cuts to R&D

and the reduction in 3,000-4,000 positions by the end of2012. Sales of their US pharmaceutical segmentincreased 2% in 2011, but cost-saving measureshelped push their operating income up 13%9. With over30 drugs in late-stage FDA trials, GlaxoSmithKlinehopes to replace their current portfolio with new drugsover the next few years, but cuts in R&D put futuregrowth at risk. There may be short term life inGlaxoSmithKline, but we do not believe they are aviable long term target at this time.

Pfizer (PFE)

Pfizer, the global pharmaceutical company, operates intwo core segments: biopharmaceutical and diversified.With over 42% of their revenue in drugs that will losetheir patent protection before 2013, Pfizer has searchedfor strategies to protect their future

5. First, in 2009, they

acquired Wyeth in order to augment their research inbiopharmaceutical drug development. Pfizer has also

increased their presence in the generic drug market, inparticular, protecting its largest revenue source, Lipitor.Finally, Pfizer has dramatically cut R&D costs to try toimprove the bottom line. Sales in Pfizers USpharmaceutical segment saw a 4.2% decrease in salesas well as an 8.0% decrease in operating income in20119. A weaker pipeline of drugs, decreased R&Dspending, and attempts to protect drugs past theirpatent reveal that Pfizer may have difficulties in 2012

and beyond. In order to grow, Pfizer will be forced topay premiums to acquire clinical stage firms and is notin a beneficial position to take advantage of marketopportunities.

Bristol has operated solely in the biopharmaceuticalindustry since 2009. With the impending expiration oftheir most profitable drug, Plavix, Bristol is searching for

opportunities to replace nearly one third of its revenue.Due to strong investments in R&D as well as a string-of-pearls acquisition strategy, Bristol is considered tohave one of the best drug pipelines in the industry,headlined by Eliquis (cardiovascular) and Yervoy(oncology). With a dividend yield of 4.2% and a strongdrug pipeline, Bristol appears to be a very attractivestock.

Comparable Company Comparison


ECONOMIC OUTLOOK

The key macroeconomic factor affecting Abbott is theunemployment rate. Nearly 60% of US workers receivehealth insurance from their employers, and as theunemployment rate drops, more individuals become

covered5

. As the economy has improved, theunemployment rate has continued to drop, reaching8.2% in March of 2012. Henry Fund consensus is thatthe economy will continue its slow recovery and thatunemployment will continue to drop to approximately

JNJ GSK PFE MRK BMY ABT

Market Cap (B): 179.3 111.6 163.0 117.0 55.5 96.4

Revenue (B): 65.0 43.7 67.4 48.1 21.2 38.9

Operating Margin: 25% 37% 29% 21% 33% 40%

EPS (ttm): 3.49 1.03 1.28 2.02 2.18 3.03

P/E (ttm): 18.7 43.7 16.5 19.1 15.1 20.4

PEG (5 yr expected): 2.07 0.92 3.26 2.51 12.1 8.66

P/B (ttm): 2.89 19.05 1.79 5.14 3.41 3.95

ROA (ttm): 9.37% 12.66% 6.45% 6.26% 13.64% 8.40%

ROE ( ttm) : 17.02% 58.78% 10.23% 11.24% 33.39% 20.00%

Current Ratio (mrq): 2.38 1.08 2.06 2.04 1.97 1.54Dividend Yield (ttm): 3.6% 5.4% 3.8% 4.2% 4.1% 3.3%

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Consumer confidence and spending are also twoimportant drivers for the pharmaceutical markets.Prescription drugs account for the highest percentage

of out-of-pocket medical expenses for individuals under65 on private insurance6. For the highest level of

prescription drug utilization, higher consumerconfidence and spending are required. Our expectationis that both these indicators continue to improve, butlike the unemployment rate, very slowly.

Source: Trading Economics

Finally, the real GDP growth rate provides a basicindicator for the overall health of the economy. This

drivers influence on Abbott largely stems from itsinfluence on the previously mentioned drivers. Ahealthy GDP growth rate will positively influence theunemployment rate which will lead to more insuredindividuals with more spending. Henry Fund consensusestimates predict GDP to stay above 3.0% for the nexttwo years.

CATALYSTS FOR GROWTH

Humira

Abbotts biggest catalyst for growth still lies with Humirafor the next few years. With several additional usescurrently in Phase III trials, management hasannounced guidance of low double digit growth inHumira in 2012. However, this catalyst is alsoAbbottslargest risk. Pfizer is expected to enter the market in2012 with its JAK-3 inhibitor which may steal marketshare. To analyze this risk, we performed a scenarioanalysis to better understand the effects Humira had on

Abbotts overall stock price. This analysis is containedin the Valuation section.

Aging Demographics

The aging baby boomer generation in the USrepresents a large segment of current customers that isexpected to increase their consumption ofpharmaceuticals as they age. In fact, elderly (i.e.patients over the age of 60) patients already account for33% of industry sales and with life expectancy ratescontinuing to rise, the number of elderly in this countryis projected to increase to nearly 80 million by 2040

5,15.

This phenomenon is not unique to the United States.The percentage of world population over the age of 60is projected to grow from 11.0% in 2010 to 21.8% in20505. In short, the market for pharmaceuticals to theelderly has strong long-term growth potential. ForAbbott, Humira for rheumatoid arthritis, stents forcardiovascular disease, and oncology drugs to treat

cancer will cater to a population that is aging around theworld.

Emerging Markets

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INVESTMENT POSITIVES

Humira has led Abbott to strong growth across its

diversified health care products. While its growth isslowing, it is still expected to be in the low doubledigits driving revenue and profit for the next year.

Abbott has consistently increased dividends over thelast 39 years to become a part of the S&P 500Dividend Aristocrats. This trend is expected tocontinue even after Abbott splits into two separatepublicly-traded companies.

Splitting the firm into two may unlock value to

shareholders increasing the share price. In addition,the diversified health care firm (retaining the nameAbbott Laboratories) will be able to focus on itsentire business and eliminate concerns over Humira.

The growth in emerging markets will be a key for thepharmaceutical industry as a whole, but Abbottstands to earn substantial returns. With double digitgrowth in health care spending, emerging marketswill provide a large majority of the growth for healthcare companies. Abbott has positioned itself wellwith the acquisition of Piramal Healthcare to aid inthe development of the Indian market.

Abbott has no major patent expirations until Humirain December 2016. This should provide them ampletime to continue to develop and improve their drugpipeline to replace this revenue when it is lost togenerics.

INVESTMENT NEGATIVES Humiras dominance in the market will not last

forever. Abbott may start to lose market share in2012 ith titi f Pfi it k it

addition, the new law creates an excise tax onmedical devices.

VALUATIONAbbott is currently fully valued based on our discountedcash flow and economic profit model. Sensitivityanalysis reveals that the model is most affected byWACC assumptions (e.g. beta), continuing valuegrowth rate, gross margin percentages, sales growthforecasts and the marginal tax rate. With a three yearweekly beta of 0.40 and a low risk free rate of 3.36%,Abbott has a very low weighted average cost of capital

of 5.05% which places increased value on distant cashflows. For example, increasing the beta to 0.6 will dropthe value of firm down to the low $50s. In addition,continuing value growth rates are given extraimportance due to the low WACC. Distant cash flowsare discounted at low rates which increases theirpresent value.

Due to Abbotts dependence on Humira, we ran a threestage scenario analysis to analyze the effects on the

share price. Our base case reflects low single digitgrowth in Humira in 2012 and 2013, before leveling offto mid to low single digits in 2014-2016. In 2017, afterlosing its patent, sales fall 50%. We expect an 80%likelihood of this occurring. Our bear case reflects ascenario in which Pfizers JAK-3 inhibitor becomes abest-in-class drug and steals large amounts of marketshare starting in 2012. This forecasts a DCF value of$50.49. We provide a 10% likelihood of this occurring.

Finally, our best case scenario provides that Humiracontinues to grow at low double digit rates byincreasing market share and receiving FDA approval fornew applications until 2017 at which point it loses 50%of its revenue This provided a DCF value of $72 93

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promising Hepatitis C compounds, could hurt futureearnings. If there was a change in dividend policy,particularly a failure to increase dividends per share, a

reevaluation would be necessary. Finally, any changesin government health care spending or the health carereform law must be closely analyzed to estimate itseffect on Abbott.

REFERENCES1Yahoo! Finance, http://finance.yahoo.com

2Abbott Laboratories 2006-2011 10-K.

3

US Food and Drug Administration, http://www.fda.gov/44th Quarter Earnings Call, Abbott Laboratories.Transcript access from http://www.thestreet.com/

5Standard & Poors, Industry Survey; Healthcare:Pharmaceuticals, December 1, 2011.

6Pharmaceutical Research and Manufacturers ofAmerica (PhRMA), http://www.pharma.org/7Wall Street Journal, Abbotts AbbVie Draws Mixed

Reaction, March 21, 2012. Accessed through Factiva.

8Morningstar Equity Research, Abbott Laboratories,March 21, 2012.

9IBISWorld Industry Report 32541a, Brand NamePharmaceutical Manufacturing in the US, December2011

10IMS Health, http://www.imshealth.com/

11Dow Jones Business News, Abbott Labs 4Q NetRises 12%; Sales Miss Views, January 25, 2012.Accessed through Factiva.

12Abbott Laboratories http://www abbott com/

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Abbott Laboratories

Revenue Decomposition

(in millions) Net Sales

Fiscal Years Ending Dec. 31 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E

Durable Growth 11,210 12,229 13,560 14,528 16,642 18,496 19,303 20,152 21,045 21,986 22,977 24,021

Nutritionals 4,313 4,388 4,924 5,284 5,532 6,006 6,426 6,876 7,358 7,873 8,424 9,013

(Growth) 2% 12% 7% 5% 9% 7% 7% 7% 7% 7% 7%

Diagnostics 2,843 3,158 3,575 3,578 3,794 4,126 4,291 4,463 4,641 4,827 5,020 5,221

(Growth) 11% 13% 0% 6% 9% 4% 4% 4% 4% 4% 4%

Diabetes Care and Medical Optics 1,843 2,073 2,080 2,725 2,797 2,951 3,010 3,070 3,132 3,194 3,258 3,323

(Growth) 12% 0% 31% 3% 6% 2% 2% 2% 2% 2% 2%

Established Pharma 2,211 2,610 2,981 2,941 4,519 5,413 5,575 5,743 5,915 6,092 6,275 6,463

(Growth) 18% 14% -1% 54% 20% 3% 3% 3% 3% 3% 3%

Proprietary Pharma 10,184 12,022 13,727 13,545 15,331 17,022 17,533 18,103 18,953 19,863 21,141 12,682

Base 10,184 12,022 13,727 13,545 15,331 17,022 17,533 18,059 18,601 19,159 19,733 9,867

18% 14% -1% 13% 11% 3% 3% 3% 3% 3% -50%

Pipeline - - - - - - - 44 352 704 1,408 2,816

700% 100% 100% 100%

Innovative Driven Devices 1,082 1,663 2,241 2,692 3,194 3,333 3,566 3,816 4,083 4,369 4,675 5,002(Growth) 54% 35% 20% 19% 4% 7% 7% 7% 7% 7% 7%

Net Sales 22,476 25,914 29,528 30,765 35,167 38,851 40,402 42,071 44,081 46,218 48,793 41,705

(Growth) 15% 14% 4% 14% 10% 4% 4% 5% 5% 6% -15%

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Abbott Laboratories

Income Statement

(in millions except per-share data)

Fiscal Years Ending Dec. 31 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E

Net sales 30,765 35,167 38,851 40,402 42,071 44,081 46,218 48,793 41,705

Cost of products sold 13,209 14,665 15,541 16,969 17,670 18,514 19,411 20,493 17,516

Research & development expenses 2,744 3,724 4,129 4,040 4,207 4,408 4,622 4,879 4,171

Acquired in-process research & development expenses 170 313 673 808 841 882 924 976 834

Selling, general & administrative expenses 8,406 10,376 12,757 11,717 12,201 12,784 13,403 14,150 12,094

Total operating cost & expenses 24,529 29,079 33,099 33,534 34,919 36,587 38,361 40,498 34,615

Operating earnings 6,236 6,088 5,752 6,868 7,152 7,494 7,857 8,295 7,090

Interest expense 520 553 530 697 739 726 759 789 823

Interest income 138 105 85 56 58 60 62 64 66

Income from the TAP Pharmaceutical Products Inc. joint venture - - - - - - - - -

Net foreign exchange gain (loss) (36) 11 50 - - - - - -

Other income (expense), net 1,375 62 (159) - - - - - -

Earnings from continuing operations before taxes 7,194 5,713 5,199 6,227 6,470 6,827 7,159 7,570 6,333

Taxes on earnings from continuing operations 1,448 1,087 470 1,177 1,223 1,290 1,353 1,431 1,197

Earnings from continuing operations 5,746 4,626 4,728 5,050 5,247 5,537 5,806 6,139 5,136

Gain on sale of discontinued operations, net of taxes - - - - - - - - -

Net earnings 5,746 4,626 4,728 5,050 5,247 5,537 5,806 6,139 5,136

Year end shares outstanding 1,551 1,547 1,570 1,555 1,542 1,531 1,520 1,512 1,512

Net earnings (loss) per common share - basic 3.71 2.98 3.03 3.25 3.40 3.62 3.82 4.06 3.40

Cash dividends declared per share 1.60 1.76 1.92 2.27 2.38 2.53 2.67 2.84 2.89

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Abbott Laboratories

Balance Sheet

(in millions)


Cash & cash equivalents 8,809 3,648 6,813 6,578 5,916 6,360 6,765 7,362 7,231

Investments 1,123 3,676 1,285 1,328 1,372 1,418 1,466 1,515 1,566

Trade receivables, net 6,542 7,184 7,684 8,080 8,414 8,816 9,244 9,759 8,341

Finished products 2,289 2,059 2,221 2,424 2,524 2,645 2,773 2,928 2,502

Work in process 448 384 432 404 421 441 462 488 417

Materials 527 746 631 808 841 882 924 976 834

Total inventories 3,265 3,189 3,284 3,636 3,786 3,967 4,160 4,391 3,753

Deferred income taxes 2,364 3,076 2,701 2,971 3,268 3,594 3,954 4,349 4,784

Other prepaid expenses & receivables 1,211 1,545 2,003 2,020 2,104 2,204 2,311 2,440 2,085

Total current assets 23,314 22,318 23,769 24,613 24,860 26,360 27,899 29,816 27,761

Investments 1,133 302 378 391 404 418 432 446 461

Land 546 649 634 734 834 934 1,034 1,134 1,234

Buildings 4,010 4,334 4,467 4,967 5,467 5,967 6,467 6,967 7,467

Equipment 11,325 11,814 12,216 13,216 14,216 15,216 16,216 17,216 18,216

Construction in progress 605 577 699 899 1,099 1,299 1,499 1,699 1,899

Less: accumulated depreciation & amortization 8,867 9,403 10,143 10,930 11,819 12,798 13,860 14,996 16,198

Net property & equipment 7,619 7,971 7,874 8,887 9,798 10,618 11,356 12,021 12,619

Intangible assets, net of amortization 6,292 12,152 9,990 8,991 8,092 7,282 6,554 5,899 5,309

Goodwill 13,200 15,930 15,705 15,705 15,705 15,705 15,705 15,705 15,705

Other assets 858 790 2,561 2,561 2,561 2,561 2,561 2,561 2,561

Total assets 52,417 59,462 60,277 61,147 61,420 62,945 64,507 66,448 64,416

Short-term borrowings 4,978 4,350 2,348 3,341 3,514 3,716 3,934 4,188 3,793

Trade accounts payable 1,281 1,536 1,721 1,778 1,851 1,940 2,034 2,147 1,835

Salaries, wages & commissions 1,117 1,329 1,260 1,414 1,472 1,543 1,618 1,708 1,460

Other accrued liabilities 4,363 6,015 7,855 6,868 7,152 7,494 7,857 8,295 7,090

Dividends payable 621 681 754 808 841 882 924 976 834

Income taxes payable 442 1,308 515 1,177 1,223 1,290 1,353 1,431 1,197

Obligation due to TAP Pharmaceutical Products 36 - - - - - - - -

Current portion of long-term debt 211 2,045 1,027 719 - 321 500 750 500

Total current liabilities 13,049 17,262 15,480 16,106 16,054 17,186 18,219 19,494 16,708

Yen notes - - 321 321 321 - - - -

Notes 11,000 12,000 11,000 11,000 11,000 11,000 10,500 9,750 7,000

Euro notes - - - - - - - - -

Debentures - - - - - - - - -

Other long-term debt 266 524 719 976 1,230 1,766 2,515 3,531 6,590

Long-term debt 11,266 12,524 12,040 12,297 12,551 12,766 13,015 13,281 13,590

Post-employment obligations & other long-term liabil i ties 5,202 7,200 8,231 7,819 7,428 7,057 6,704 6,369 6,050

Total liabilities 29,518 36,986 35,751 36,221 36,033 37,008 37,938 39,143 36,348

Common shares 8,258 8,745 9,817 10,736 11,654 12,572 13,491 14,409 14,409

Common shares held in treasury, at cost 3,310 3,917 3,687 5,687 7,687 9,687 11,687 13,687 13,687

Earnings employed in the business 17,054 18,927 20,907 22,389 23,931 25,563 27,277 29,094 29,857

Accumulated other comprehensive income (loss) 897 (1,279) (2,511) (2,511) (2,511) (2,511) (2,511) (2,511) (2,511)

Total equity 22,899 22,476 24,526 24,926 25,387 25,937 26,570 27,305 28,067

Total liabilities and equity 52,417 59,462 60,277 61,147 61,420 62,945 64,507 66,448 64,416

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Abbott Laboratories

Cash Flow Statement

(in millions)

Fiscal Years Ending Dec. 31 2012E 2013E 2014E 2015E 2016E 2017E

Net Income 5,050 5,247 5,537 5,806 6,139 5,136

Depreciation and Amortization 1,786 1,788 1,789 1,790 1,791 1,792Change in deferred income -270 -297 -327 -359 -395 -435

Change in

Trade receivables -397 -334 -402 -427 -515 1,418

Inventories -352 -150 -181 -192 -232 638

Prepaid expenses -17 -83 -101 -107 -129 354

Trade accounts payable 57 73 88 94 113 -312

Salaries, wages & commissions 154 58 70 75 90 -248

Other accrued liabilities -987 284 342 363 438 -1,205

Dividends payable 54 33 40 43 52 -142

Income taxes payable 662 46 67 63 78 -234

Net cash from operating activities 5,740 6,666 6,924 7,148 7,430 6,762

Increase in short term investments -43 -45 -46 -48 -49 -51

Increase in long term investments -13 -13 -14 -14 -15 -15

Capital Expenditures -1,800 -1,800 -1,800 -1,800 -1,800 -1,800

Change in other assets 0 0 0 0 0 0

Net cash from investing activities -1,856 -1,858 -1,860 -1,862 -1,864 -1,866

Proceeds from short term borrowing 994 173 202 217 254 -395

Change in current portion of long term debt -308 -719 321 179 250 -250

Issuance/Repayment of long term debt 257 254 215 249 266 309

Payment of post-employment obligations -412 -391 -371 -353 -335 -318

Proceeds from issuance of common stock 918 918 918 918 918 0

Payment of dividends -3,569 -3,705 -3,905 -4,092 -4,322 -4,373

Repurchases of common stock -2,000 -2,000 -2,000 -2,000 -2,000 0

Net cash from financing activities -4,120 -5,469 -4,620 -4,881 -4,969 -5,027

Net change in cash -235 -661 444 405 597 -131

Cash at beginning of the year 6,813 6,578 5,916 6,360 6,765 7,362

Cash at the end of the year 6,578 5,916 6,360 6,765 7,362 7,231

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Abbott Laboratories

Common Size Income Statement


Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of products sold 42.94% 41.70% 40.00% 42.00% 42.00% 42.00% 42.00% 42.00% 42.00%

Research & development expenses 8.92% 10.59% 10.63% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%

Acquired in-process research & development expenses 0.55% 0.89% 1.73% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

Selling, general & administrative expenses 27.32% 29.51% 32.84% 29.00% 29.00% 29.00% 29.00% 29.00% 29.00%

Total operating cost & expenses 79.73% 82.69% 85.19% 83.00% 83.00% 83.00% 83.00% 83.00% 83.00%

Operating earnings 20.27% 17.31% 14.81% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00%

Interest expense 1.69% 1.57% 1.36% 1.73% 1.76% 1.65% 1.64% 1.62% 1.97%

Interest income 0.45% 0.30% 0.22% 0.14% 0.14% 0.14% 0.13% 0.13% 0.16%

Income from the TAP Pharmaceutical Products Inc. joint venture 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net foreign exchange gain (loss) -0.12% 0.03% 0.13% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Other income (expense), net 4.47% 0.18% -0.41% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Earnings from continuing operations before taxes 23.38% 16.25% 13.38% 15.41% 15.38% 15.49% 15.49% 15.51% 15.18%

Taxes on earnings from continuing operations 4.71% 3.09% 1.21% 2.91% 2.91% 2.93% 2.93% 2.93% 2.87%

Earnings from continuing operations 18.68% 13.15% 12.17% 12.50% 12.47% 12.56% 12.56% 12.58% 12.31%

Gain on sale of discontinued operations, net of taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net earnings 18.68% 13.15% 12.17% 12.50% 12.47% 12.56% 12.56% 12.58% 12.31%

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Abbott Laboratories

Common Size Balance Sheet


Cash & cash equivalents 28.63% 10.37% 17.54% 16.28% 14.06% 14.43% 14.64% 15.09% 17.34%

Investments 3.65% 10.45% 3.31% 3.29% 3.26% 3.22% 3.17% 3.11% 3.76%

Trade receivables, net 21.26% 20.43% 19.78% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00%

Finished products 7.44% 5.85% 5.72% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%

Work in process 1.46% 1.09% 1.11% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%

Materials 1.71% 2.12% 1.63% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

Total inventories 10.61% 9.07% 8.45% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%

Deferred income taxes 7.68% 8.75% 6.95% 7.35% 7.77% 8.15% 8.55% 8.91% 11.47%

Other prepaid expenses & receivables 3.94% 4.39% 5.15% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%

Total current assets 75.78% 63.46% 61.18% 60.92% 59.09% 59.80% 60.36% 61.11% 66.56%

Investments 3.68% 0.86% 0.97% 0.97% 0.96% 0.95% 0.93% 0.91% 1.11%

Land 1.78% 1.85% 1.63% 1.82% 1.98% 2.12% 2.24% 2.32% 2.96%

Buildings 13.04% 12.32% 11.50% 12.29% 13.00% 13.54% 13.99% 14.28% 17.91%

Equipment 36.81% 33.59% 31.44% 32.71% 33.79% 34.52% 35.09% 35.28% 43.68%

Construction in progress 1.97% 1.64% 1.80% 2.22% 2.61% 2.95% 3.24% 3.48% 4.55%

Less: accumulated depreciation & amortization 28.82% 26.74% 26.11% 27.05% 28.09% 29.03% 29.99% 30.73% 38.84%

Net property & equipment 24.77% 22.67% 20.27% 22.00% 23.29% 24.09% 24.57% 24.64% 30.26%

Intangible assets, net of amortization 20.45% 34.55% 25.71% 22.25% 19.23% 16.52% 14.18% 12.09% 12.73%

Goodwill 42.91% 45.30% 40.42% 38.87% 37.33% 35.63% 33.98% 32.19% 37.66%

Deferred income taxes & other assets 2.79% 2.25% 6.59% 6.34% 6.09% 5.81% 5.54% 5.25% 6.14%

Total assets 170.38% 169.09% 155.15% 151.35% 145.99% 142.79% 139.57% 136.18% 154.46%

Short-term borrowings 16.18% 12.37% 6.04% 8.27% 8.35% 8.43% 8.51% 8.58% 9.09%

Trade accounts payable 4.16% 4.37% 4.43% 4.40% 4.40% 4.40% 4.40% 4.40% 4.40%

Salaries, wages & commissions 3.63% 3.78% 3.24% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%

Other accrued liabilities 14.18% 17.10% 20.22% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00%

Dividends payable 2.02% 1.94% 1.94% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

Income taxes payable 1.44% 3.72% 1.33% 2.91% 2.91% 2.93% 2.93% 2.93% 2.87%

Obligation in connection with conclusion of the TAP Pharmaceutica 0.12% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Current portion of long-term debt 0.69% 5.82% 2.64% 1.78% 0.00% 0.73% 1.08% 1.54% 1.20%

Total current liabilities 42.42% 49.09% 39.84% 39.86% 38.16% 38.99% 39.42% 39.95% 40.06%

Yen notes 0.00% 0.00% 0.83% 0.79% 0.76% 0.00% 0.00% 0.00% 0.00%

Notes 35.76% 34.12% 28.31% 27.23% 26.15% 24.95% 22.72% 19.98% 16.78%Euro notes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Debentures 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Other long-term debt 0.86% 1.49% 1.85% 2.42% 2.92% 4.01% 5.44% 7.24% 15.80%

Long-term debt 36.62% 35.61% 30.99% 30.44% 29.83% 28.96% 28.16% 27.22% 32.59%

Post-employment obligations & other long-term liabilities 16.91% 20.47% 21.19% 19.35% 17.66% 16.01% 14.51% 13.05% 14.51%

Total liabilities 95.95% 105.17% 92.02% 89.65% 85.65% 83.95% 82.08% 80.22% 87.16%

Common shares 26.84% 24.87% 25.27% 26.57% 27.70% 28.52% 29.19% 29.53% 34.55%

Common shares held in treasury, at cost 10.76% 11.14% 9.49% 14.08% 18.27% 21.98% 25.29% 28.05% 32.82%

Earnings employed in the business 55.43% 53.82% 53.81% 55.41% 56.88% 57.99% 59.02% 59.63% 71.59%

Accumulated other comprehensive income (loss) 2.92% -3.64% -6.46% -6.21% -5.97% -5.70% -5.43% -5.15% -6.02%

Total equity 74.43% 63.91% 63.13% 61.69% 60.34% 58.84% 57.49% 55.96% 67.30%

Total liabilities and equity 170.38% 169.09% 155.15% 151.35% 145.99% 142.79% 139.57% 136.18% 154.46%

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Abbott Laboratories

Value Driver Estimation

(in millions unless otherwise noted)


Net sales 30,765 35,167 38,851 40,402 42,071 44,081 46,218 48,793 41,705

Cost of products sold 13,209 14,665 15,541 16,969 17,670 18,514 19,411 20,493 17,516

Research & development expenses 2,744 3,724 4,129 4,040 4,207 4,408 4,622 4,879 4,171

Acquired in-process R&D expenses 170 313 673 808 841 882 924 976 834Selling, general & administrative expenses 8,406 10,376 12,757 11,717 12,201 12,784 13,403 14,150 12,094

Removal of Operating Lease Interest Expense 19 24 20 20 20 20 20 20 20

EBITA 6,254 6,112 5,772 6,888 7,172 7,513 7,877 8,314 7,109

Income tax provision 1,448 1,087 470 1,177 1,223 1,290 1,353 1,431 1,197

(-) Tax on non-operating income 279 34 (4) 11 11 11 12 12 12

(+) Tax on non-operating losses 98 105 100 132 140 137 144 149 156

(+) Operating Lease Interest Expense 19 24 20 20 20 20 20 20 20

Adjusted Taxes 1,285 1,182 594 1,318 1,371 1,436 1,505 1,587 1,360

Change in deferred taxes 99 (712) 376 (270) (297) (327) (359) (395) (435)

NOPLAT 5,068 4,218 5,553 5,300 5,503 5,751 6,013 6,332 5,315

Normal cash (10% of revenue or actual) 3,076 3,517 3,885 4,040 4,207 4,408 4,622 4,879 4,171

Trade receivables 6,542 7,184 7,684 8,080 8,414 8,816 9,244 9,759 8,341

Inventory 3,265 3,189 3,284 3,636 3,786 3,967 4,160 4,391 3,753

Prepaid expenses 1,211 1,545 2,003 2,020 2,104 2,204 2,311 2,440 2,085

Total Operating Current Assets 14,094 15,434 16,856 17,777 18,511 19,396 20,336 21,469 18,350

Accounts payable 1,281 1,536 1,721 1,778 1,851 1,940 2,034 2,147 1,835

Salaries, wages & commissions 1,117 1,329 1,260 1,414 1,472 1,543 1,618 1,708 1,460

Other accrued liabilities 4,363 6,015 7,855 6,868 7,152 7,494 7,857 8,295 7,090

Dividends payable 621 681 754 808 841 882 924 976 834

Income taxes payable 442 1,308 515 1,177 1,223 1,290 1,353 1,431 1,197

Total Non-Interest Bearing Current Liabilities 7,824 10,868 12,105 12,045 12,540 13,148 13,786 14,556 12,416

Net operating working capital 6 ,270 4,567 4 ,751 5,732 5 ,971 6,248 6 ,550 6 ,913 5 ,935

Net PP&E 7,619 7,971 7,874 8,887 9,798 10,618 11,356 12,021 12,619

Capitalized operating leases 412 541 435 478 526 579 636 700 770

Other operating assets 7,150 1 2,942 12,551 1 1,552 10,653 9,843 9,115 8,460 7,870

Other operating liabilities - - - - - - - - -

Total Invested Capital 21,452 26,020 25,610 26,648 26,948 27,288 27,658 28,093 27,193

NOPLAT 5,068 4,218 5,553 5,300 5,503 5,751 6,013 6,332 5,315

Beginning Invested Capital 19,175 21,452 26,020 25,610 26,648 26,948 27,288 27,658 28,093

Change in invested capital 2,277 4,568 (410) 1,038 299 340 370 435 (900)

Return on Invested Capital (ROIC) 26.43% 19.66% 21.34% 20.70% 20.65% 21.34% 22.03% 22.89% 18.92%

Free Cash Flow 2,790 (350) 5,963 4,262 5,204 5,411 5,642 5,896 6,215

Economic Profit 4,099 3,135 4,239 4,007 4,158 4,390 4,635 4,935 3,896

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Abbott Laboratories

Weighted Average Cost of Capital (WACC) Estimation

WACC

Risk Free Rate 3.36%

Equity Risk Premium 4.80%Beta 0.4

Cost of Equity 5.28%

Pre-Tax Cost of Debt 4.50%

Tax Rate 18.90%

After-Tax Cost of Debt 3.65%

Market Capitalization 96,264

Book Value of Debt 15,415Capitalized Operating Leases 435

Enterprise Value 112,114

% Equity in Capital Structure 85.9%

% Debt in Capital Structure 14.1%

WACC 5.05%

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Abbott Laboratories

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

CV Growth of NOPLAT 1.00%

CV ROIC 18.92%

WACC 5.05%NOPLAT 2017 5,315

EP 2017 3,896

Fiscal Years Ending Dec. 31 2012E 2013E 2014E 2015E 2016E CV

DCF Model

Free Cash Flow 4,262 5,204 5,411 5,642 5,896 124,312

PV of FCF at 12/31/2011 4,057 4,716 4,667 4,633 4,609 97,172

PV of Operating Assets 119,855

(+)Excess Cash and Marketable Securities 4,590(-)Debt and Equivalents 15,415

(-)PV of Operating Leases 435

(-)Pension Liability 8,231

(-)PV of ESOP 1,154

12/31/2011 Intrinsic Equity Value 99,211

Intrinsic Value Today 100,440

DCF Share Value Today 63.96$

EP Model

Economic Profit 4,007 4,158 4,390 4,635 4,935 96,219

PV of EP at 12/31/2011 3,814 3,768 3,787 3,806 3,858 75,212

PV of Operating Assets 119,855

(+)Excess Cash and Marketable Securities 4,590

(-)Debt and Equivalents 15,415

(-)PV of Operating Leases 435

(-)Pension Liability 8,231

(-)PV of ESOP 1,154

12/31/2011 Intrinsic Equity Value 99,211

Intrinsic Value Today 100,440

EP Share Value Today 63.96$

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Abbott Laboratories

Fundamental P/E Valuation Model

Fundamental P/E Model

CV growth of EPS 1.0%CV ROE 18.3%

CV Payout Ratio 85.2%

CV Retention Ratio 14.8%

Cost of Equity 5.28%

2012E 2013E 2014E 2015E 2016E CV

Earnings Per Share 3.25 3.40 3.62 3.82 4.06 3.40

P/E Multiple 22.09EPS(CV) 3.40

Future Stock Price 75.04

Dividends Per Share 2.27 2.38 2.53 2.67 2.84

Discounted Cash Flows 2.16 2.15 2.17 2.18 2.20 58.02

Intrinsic Value at 12/31/2011 68.87$

Intrinsic Value Today 69.77$

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Abbott Laboratories

Relative Valuation Model

Ticker Company Price Sales 2011A Sales 2012E Sales 2013E P/S 2011 P/S 2012 P/S 2013

JNJ Johnson & Johnson 65.34$ 65.0 66.4 69.8 1.0 1.0 0.9MRK Merck & Co Inc 38.88$ 48.1 47.3 46.0 0.8 0.8 0.8

NVS Novartis AG 55.84$ 51.6 58.2 58.7 1.1 1.0 1.0

GSK GlaxoSmithKline 45.02$ 45.8 45.1 46.9 1.0 1.0 1.0

BMY Bristol-Myers Squibb 33.68$ 21.2 18.0 17.0 1.6 1.9 2.0TEVA Teva Pharmaceuticals 45.06$ 18.3 21.9 22.7 2.5 2.1 2.0

Average 1.3 1.3 1.3

ABT Abbott Laboratories 61.30$ 38.85 40.40 42.07 1.6 1.5 1.5

Implied Value:

P/E 2011 51.32$

P/E 2012 51.77$

P/E 2013 53.73$

Average 52.27$

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Abbott Laboratories

Key Management Ratios


Liquidity Ratios

Current Ratio 1.79 1.29 1.54 1.53 1.55 1.53 1.53 1.53 1.66 Current Assets/Current Liabilities

Cash Ratio 0.76 0.42 0.52 0.49 0.45 0.45 0.45 0.46 0.53 (Cash + Equivalents)/Current Liabilities

Interest Coverage Ratio 12.00 11.01 10.85 9.85 9.67 10.32 10.35 10.52 8.61 EBIT/Interest Expense

Activity or Asset-Management Ratios

Assets to Sales 1.70 1.69 1.55 1.51 1.46 1.43 1.40 1.36 1.54 Total Assets/Sales

Inventory Turnover 4.37 4.54 4.80 4.90 4.76 4.78 4.78 4.79 4.30 Cost of Goods Sold/Avg. Inventory

Accounts Receivable Turnover 5.12 5.12 5.23 5.13 5.10 5.12 5.12 5.14 4.61 Net Receivable Sales/Average Receivables

Financial Leverage Ratios

Debt to Equity 0.72 0.84 0.63 0.66 0.63 0.65 0.66 0.67 0.64 BV Debt/BV Equity

Debt Ratio 0.56 0.62 0.59 0.59 0.59 0.59 0.59 0.59 0.56 Total Liabilities/Total Assets

Debt to Non-Cash Assets 0.69 0.71 0.69 0.68 0.67 0.67 0.67 0.68 0.65 Total Liabilities/(Total Assets - (Cash + Equivalents))

Profitability Ratios

Operating Margin 20.3% 17.3% 14.8% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% Operating Profit/Sales

Net Profit Margin 18.7% 13.2% 12.2% 12.5% 12.5% 12.6% 12.6% 12.6% 12.3% Net Income/Sales

Free Cash Margin 9.1% -1.0% 15.3% 10.5% 12.4% 12.3% 12.2% 12.1% 14.9% Free Cash Flow/Sales

Return on Assets 13.5% 8.8% 8.0% 8.4% 8.6% 9.0% 9.2% 9.5% 7.7% Net Income/Beg. Assets

Return on Equity 32.9% 20.2% 21.0% 20.6% 21.1% 21.8% 22.4% 23.1% 18.8% Net Income/Beg. BV Equity

Payout Policy Ratios

Dividend Payout 43% 59% 63% 70% 70% 70% 70% 70% 85% Dividend per Share/Earnings per Share

Total Payout including Repurchases 56% 76% 64% 110% 109% 107% 105% 103% 85% (Dividends paid + share repurchases)/Net income

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Sensitivity Analysis

CV Growth Rate of NOPLAT

63.96$ 0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00%

0.2 $67.47 $70.69 $74.33 $78.50 $83.32 $88.95 $95.61 $103.61 $113.41

0.3 $60.33 $62.87 $65.70 $68.90 $72.55 $76.73 $81.57 $87.26 $94.02

0.4 $54.36 $56.38 $58.63 $61.14 $63.96 $67.15 $70.79 $74.98 $79.86

Beta 0.5 $49.28 $50.92 $52.73 $54.73 $56.95 $59.44 $62.24 $65.42 $69.06

0.6 $44.91 $46.26 $47.73 $49.34 $51.13 $53.10 $55.30 $57.77 $60.55

0.7 $41.11 $42.23 $43.44 $44.76 $46.20 $47.79 $49.55 $51.50 $53.67

0.8 $37.78 $38.71 $39.71 $40.80 $41.99 $43.28 $44.70 $46.26 $47.99

0.9 $34.83 $35.61 $36.45 $37.36 $38.34 $39.40 $40.56 $41.83 $43.22

1.0 $32.20 $32.86 $33.57 $34.33 $35.15 $36.03 $36.99 $38.03 $39.16

WACC

63.96$ 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%

0.00% 72.00$ 62.57$ 55.02$ 48.84$ 43.69$ 39.33$ 35.59$ 32.34$ 29.49$

0.25% 75.69$ 65.30$ 57.10$ 50.46$ 44.96$ 40.34$ 36.40$ 33.00$ 30.04$

CV Growth 0.50% 79.91$ 68.38$ 59.41$ 52.23$ 46.35$ 41.44$ 37.28$ 33.72$ 30.62$

0.75% 84.78$ 71.87$ 61.99$ 54.19$ 47.86$ 42.63$ 38.24$ 34.48$ 31.25$

1.00% 90.46$ 75.86$ 64.90$ 56.37$ 49.53$ 43.94$ 39.27$ 35.31$ 31.91$

1.25% 97.17$ 80.46$ 68.19$ 58.80$ 51.38$ 45.36$ 40.39$ 36.20$ 32.63$

1.50% 105.22$ 85.82$ 71.95$ 61.54$ 53.43$ 46.93$ 41.61$ 37.17$ 33.40$

1.75% 115.07$ 92.16$ 76.29$ 64.64$ 55.72$ 48.67$ 42.95$ 38.22$ 34.24$

2.00% 127.38$ 99.77$ 81.36$ 68.18$ 58.29$ 50.59$ 44.42$ 39.36$ 35.14$

COGS%

63.96$ 38% 39% 40% 41% 42% 43% 44% 45% 46%

0.00% 65.40$ 64.38$ 63.35$ 62.32$ 61.30$ 60.27$ 59.25$ 58.22$ 57.32$0.25% 65.62$ 64.60$ 63.57$ 62.54$ 61.51$ 60.48$ 59.45$ 58.42$ 57.51$

0.50% 65.85$ 64.82$ 63.79$ 62.75$ 61.72$ 60.69$ 59.66$ 58.63$ 57.70$

P ro p P ha rm a G ro wt h ' 12 -' 16 0 .7 5% 6 6. 08$ 65.04$ 64.01$ 62.97$ 61.94$ 60.90$ 59.87$ 58.83$ 57.89$

1.00% 66.31$ 65.27$ 64.23$ 63.19$ 62.15$ 61.12$ 60.08$ 59.04$ 58.09$

1.25% 66.54$ 65.50$ 64.45$ 63.41$ 62.37$ 61.33$ 60.29$ 59.25$ 58.28$

1.50% 66.77$ 65.73$ 64.68$ 63.64$ 62.59$ 61.55$ 60.50$ 59.46$ 58.48$

1.75% 67.01$ 65.96$ 64.91$ 63.86$ 62.82$ 61.77$ 60.72$ 59.67$ 58.68$

2.00% 67.24$ 66.19$ 65.14$ 64.09$ 63.04$ 61.99$ 60.94$ 59.89$ 58.88$

2.25% 67.48$ 66.43$ 65.37$ 64.32$ 63.27$ 62.21$ 61.16$ 60.10$ 59.08$

2.50% 67.72$ 66.67$ 65.61$ 64.55$ 63.50$ 62.44$ 61.38$ 60.32$ 59.29$

2.75% 67.97$ 66.91$ 65.85$ 64.79$ 63.73$ 62.67$ 61.61$ 60.54$ 59.50$

SG&A%

63.96$ 26% 27% 28% 29% 30% 31% 32% 33% 34%

4% 76.75$ 71.64$ 66.52$ 61.41$ 56.29$ 51.18$ 46.06$ 40.99$ 36.27$

5% 77.72$ 72.55$ 67.38$ 62.22$ 57.05$ 51.89$ 46.72$ 41.59$ 36.82$

6% 78.72$ 73.51$ 68.29$ 63.07$ 57.85$ 52.63$ 47.42$ 42.22$ 37.40$

Nutritional Growth 7% 79.78$ 74.51$ 69.23$ 63.96$ 58.69$ 53.41$ 48.14$ 42.87$ 38.00$

8% 80.88$ 75.55$ 70.22$ 64.89$ 59.56$ 54.23$ 48.90$ 43.57$ 38.63$

9% 82.04$ 76.65$ 71.25$ 65.86$ 60.47$ 55.08$ 49.69$ 44.30$ 39.29$

10% 83.24$ 77.79$ 72.34$ 66.88$ 61.43$ 55.98$ 50.52$ 45.07$ 39.98$

11% 84.50$ 78.98$ 73.47$ 67.95$ 62.43$ 56.91$ 51.39$ 45.87$ 40.70$

Tax Rate

63.96$ 17% 18% 19% 20% 21% 22% 23% 24% 25%

4.0% 93.13$ 91.72$ 90.32$ 88.91$ 87.51$ 86.10$ 84.70$ 83.29$ 81.89$

4.5% 78.14$ 76.94$ 75.74$ 74.53$ 73.33$ 72.13$ 70.93$ 69.73$ 68.53$

5.0% 66.89$ 65.84$ 64.79$ 63.74$ 62.69$ 61.64$ 60.59$ 59.55$ 58.50$

WACC 5.5% 58.13$ 57.20$ 56.27$ 55.34$ 54.41$ 53.48$ 52.55$ 51.62$ 50.69$

6.0% 51.12$ 50.29$ 49.45$ 48.61$ 47.78$ 46.94$ 46.10$ 45.27$ 44.43$

6.5% 45.38$ 44.62$ 43.86$ 43.10$ 42.34$ 41.58$ 40.83$ 40.07$ 39.31$

7.0% 40.59$ 39.89$ 39.20$ 38.50$ 37.81$ 37.12$ 36.42$ 35.73$ 35.03$

7.5% 36.53$ 35.89$ 35.25$ 34.61$ 33.97$ 33.33$ 32.69$ 32.05$ 31.41$

8.0% 33.04$ 32.45$ 31.86$ 31.26$ 30.67$ 30.08$ 29.49$ 28.89$ 28.30$

abt_sp12

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