Hua Haixing

Refky Saputra

Bradley CoynePresented October 28, 2014

OUTLINE Investment Thesis

Holding Information

Macroeconomics & Industry Overview

Company Overview & Business Segment

Financial Performance

Financial Projection & DCF

Financial Conclusion

INVESTMENT THESIS

Weak medical devices performance in the past two years. We foresee medical devices market to decline

Weak US Pharmaceutical business; whether the potential sell-off will bring decent reinvest return is undetermined

Overvalued comparing with its peers: traded at 28x trailing P/E while its peers are traded at 22x

Overvalued based on DCF valuation, despite the aggressive sales growth projection

16.00 21.00 26.00 31.00 36.00

25.46

25.46

24.20

28.67

33.77

28.67DCF

Blended

CompsInvestment Thesis SummaryRating: OvervaluedPrice Target: $26.22Recommendation Sale

HOLDING INFORMATION

As Per 10/27/2014:

Currently own 400 shares @ $26.72 (9.4% of Portfolio)

Cost of Position is $10,688

Current Share Price is $42.24

Value of Position is $16,896

Potential Gain $6,208 or 58%

Abbott is a 125 years old global healthcare company with unique mix of businesses and broadly diversified portfolio of market-leading products is

aligned with long-term healthcare trends in both developed and developing markets.

HEALTH CARE INDUSTRYNew Environment in Health Industry (2011 – 2020)

• Economic Volatility• Focus on Key Mature Markets and

Growth Markets• 7.6 % - 9.4% of global population

aged 65 +• Obesity Epidemic• Social Media• Specialist-Medicine business model

(proteins with annual revebue of $1 Bn per product

• Treatment for rare/acute deseases• Products marketed to healthcare

payers• Value based purchasing (using

outcomes)

Sources: http://www.pwc.com/gx/en/pharma-life-sciences/pharma2020/market-opportunities-and-outlook.jhtml

BUSINESS SEGMENTS

Nu-tri-

tionals31%

Med-ical De-

vices25%

EPD23%

Di-agnos-

tics21%

13Q4

Nu-tri-

tionals35%

Med-ical De-

vices26%

EPD15%

Diag-nostics

23%

14Q3

Sell-off of developed market EPD business

Source: Bloomberg ABT US Equity Financial Analysis

ESTABLISHED PHARMACEUTICAL

Sources: Data from Bloomberg ABT US Equity historical financial analysis

FY2013 14Q1 14Q2 14Q3

Total Sales Growth -2.87% -6.7% -0.2%

11.5%

(claimed)

-37.6%

(realized)

Key Emerging Market Growth N/A -9.23% 4.41% 5.06%

14Q3 -37.6% realized growth rate was due to sell-off of US EPD business to Mylan Inc. for 21% of its stake (Market Value approximately $4 bn or $2.57 per ABT share)

Company claimed that the 14Q3 Sales grow for 11.5% because they only kept the most profitable emerging market business

The past achieved emerging market growth was not as attractive

The company kept changing their reporting methods to fool the investors

NUTRITIONAL PRODUCTS

Source: http://www.minyanville.com/trading-and-investing/stocks/articles/boomer-stocks-stocks-to-watch-stocks/6/18/2012/id/41797

Products portfolio: 55%Pediatric, 45% Adult

Solid sales growth over the past three years; weak in first 2Q 2014 due to supplier issues;

Infant formula: 40% of US market share (Top 2)

Adult formula: Global market leader

FY2011 FY2012 FY2013 14Q1-3 14Q3

Total Sales

Growth8.57% 7.74% 4.16% 2.20% 9.30%

Pediatric Growth 10.75% 10.36% 6.81% 0.04% 8.69%

Adult Growth 6.97% 5.04% 1.33% 4.99% 10.01%

DIAGNOSTIC PRODUCTSCore Laboratory Molecular Point of Care

Main Products Immunoassay, Clinical Chemistry, Blood Screening, Hematology

Infectious Disease, HCV, and HIV testing

Abbott i-STAT

Favorable Trends Aging global population, increasing emphasis on disease prevention, emerging market investments in healthcare, need for high-volume, standardized systems, and long, durable contract cycles

Leadership Positions #1 Globally in Immunoassay and Blood Screening

Best-in-class Infectious Disease Molecular Tests

#1 Point of Care Platform in the US

Sales Growth 2010 – 6.0%; 2011 – 8.8%; 2012 – 4.0%; 2013 – 5.9%

Growth Trends Capturing growth in Emerging Markets

Largest and fastest growing segment in emerging markets

Expanding footprint and developing next generation system

Risk Factors Competition, Rapid Product Obsolescence, and Regulatory ChangesSource: Abbott Diagnostic Strategy - http://prod2.dam.abbott.com/en-us/documents/pdfs/investors/our-strategy/

Diagnostics_March_2014.pdf

MEDICAL DEVICESVascular Diabetes Care Vision Care

Main Products Drug-eluting Stents

Bioresorbable Scaffolds

Glucose Monitoring Meters & test strips

Cataract & refractive laser surgery devices

Risk Factors Decreasing price, competition

FDA approval, expensiveness

Fierce competition, global market to decline

Acquisition of OptiMedica

Favorable Trends

Aging population; more diabetes, myopic & cataract patients; richer emerging market

Market Outlook European Market to decline, Glucose-Monitoring market peaked in 2011

Global Market to grow

Sales Balance 55% Vascular 24% Diabetes 21% Vision

Sales Growth FY2011: -2.3%; FY2012: -5.4%; FY2103: -0.6%; 2014 Q1-3: -0.3%

Sources:  http://www.allaboutvision.com/conditions/cataract-surgery.htm; http://www.ibj.com/articles/41392-report-roche-mulls-sale-of-blood-glucose-monitor-business; http://www.fiercebiotech.com/press-releases/european-coronary-stent-market-decline-490-million-2016-despite-growth-numb-0 

INDUSTRY PORTER'S FIVE FORCES ANALYSIS

Threat of new entrant (Low)• It is very expensive to

entry the Industry• Oligopolistic Industry• Prolonged drug and

medical device approval process

Suppliers (medium)• Suppliers are generally

price takers• Component suppliers for

medical devices often has better bargaining power

Buyer bargaining power (Low)• Healthcare demands are

inelastic • Obama care made more

people covered in insurance

Substitute products (Medium)• Generic drugs are

competitive• Have top of the Line

Products• Strong pipeline to

consumers

Rivalry among existing firms (Medium)• Generic companies has

been increasing focus in establishing global operations

S

SWOT ANALYSIS OF ABBOTTStrengths• Geographical diversity• Diversified business operations• Well Established Brands

Weaknesses• Lack of growth in certain

segments• Company is overly dependent

upon mature products whose patents may expire in near future

Opportunities• Emerging market growth• High Birth Rates• Aging Population• New developments in technology

Threats• Regulatory Changes• Competitive landscape• Uncertain R&D outcomes• Product recalls

12

LIFE CYCLE

13Source: http://marygardiner.wordpress.com/2013/05/28/product-cycles/

FINANCIAL RATIO ANALYSIS

FY 2008

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

Q1 2014

Q2 2014

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

-

1.00

2.00

3.00

4.00

5.00

6.00

Ratio Analysis

Return on Common Equity (LHS) Total Debt/Total Assets (LHS)

Inventory Turnover (RHS)

Profitability dropped after Abbvie spin-off

Leverage increased slightly comparing with FY13

Better working capital management comparing with FY13

Ratio AnalysisFY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 Q1 2014 Q2 2014

Profitability: 27.7% 28.5% 20.3% 20.1% 2.3% 9.9% 10.5% 10.4% Leverage: 27.0% 31.4% 31.2% 25.6% 30.5% 15.3% 18.6% 17.8% Working Capital: 4.28 4.37 4.54 4.80 2.77 3.10 3.67 3.62

Return on Common Equity (LHS)Total Debt/Total Assets (LHS)Inventory Turnover (RHS)

SALES PROJECTIONFY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31 2016-12-31 2017-12-31 2018-12-31

Revenue

Nutritionals 6,006.0 6,471.0 6,740.0 6,888.5 7,508.5 8,071.6 8,555.9 9,069.2

%Growth 7.74% 4.16% 2.20% 9.00% 7.50% 6.00% 6.00%

Diagnostics 4,126.0 4,292.0 4,545.0 4,732.3 4,968.9 5,217.3 5,478.2 5,752.1

%Growth 4.02% 5.89% 4.12% 5.00% 5.00% 5.00% 5.00%

EPD -- 5,121.0 4,974.0 3,942.1 3,465.2 3,811.7 4,192.9 4,612.2

%Growth -- -- -2.87% -20.75% -12.10% 10.00% 10.00% 10.00%

Medical Devices 5,808.0 5,495.0 5,460.0 5,476.7 5,495.7 5,516.9 5,540.5 5,566.6

%Growth -5.39% -0.64% 0.31% 0.35% 0.39% 0.43% 0.47%

Vascular 3,333.0 3,071.0 3,012.0 2,981.9 2,952.1 2,922.5 2,893.3 2,864.4

%Growth -7.86% -1.92% -1.00% -1.00% -1.00% -1.00% -1.00%

Diabetes Care & Other 1,364.0 1,327.0 1,306.0 1,306.0 1,306.0 1,306.0 1,306.0 1,306.0

%Growth -2.71% -1.58% 0.00% 0.00% 0.00% 0.00% 0.00%

Medical Optics 1,111.0 1,097.0 1,142.0 1,188.8 1,237.6 1,288.4 1,341.2 1,396.3

%Growth -1.26% 4.10% 4.10% 4.10% 4.10% 4.10% 4.10%

Other 476.0 115.0 129.0 158.8 158.8 158.8 158.8 158.8

Total Revenue 21,407.0 21,494.0 21,848.0 21,198.4 21,597.0 22,776.3 23,926.3 25,158.9%Growth 0.41% 1.65% -2.97% 1.88% 5.46% 5.05% 5.15%

DCF-WACC CALCULATIONBeta CalculationDate Range: 1/1/2013 to 11/7/2014Data : Last Price WeeklyCalculation Method: Linear RegressionRegression Results:

Raw Beta 1.16 Adjusted Beta 1.11 Std Error 0.15

Upper LowerConfidence Interval 0.96 1.25

Cost of EquityValue

Beta 1.11 Yahoo Finance BetaRisk Free Rate 2.38% Ten-year US TreasuryMarket Risk Premium 7.22% Bloomberg Country Risk

CAPM Cost of Equity 10.37%Annualized return Since 2013 19.67%

Total Weighted Cost of Equity 12.23%

Source

Cost of DebtLong-term Borrowings Total Amount Interest Rate Weight5.125% Notes, due 2019 947 5.13% 28.7%4.125% Notes, due 2020 597 4.13% 18.1%6.15% Notes, due 2037 547 6.15% 16.6%6.0% Notes, due 2039 515 6.00% 15.6%5.3% Notes, due 2040 694 5.30% 21.0%

Weighted Average Long-term Borrowing 5.29% 46.4%Weighted Average Short-term Borrowing 0.40% 53.6%

Weighted Average Cost of Debt 2.67%

Weighted Average Cost of Capital

Value Percentage

in Mn USD (%)Total Amount of Financial Debt 16,535 20.1%Market Value of Equity 65,788 79.9%Tax Rate 30.1%

WACC 10.15%

DCF-FCF CALCULATIONFCF Calculation Count 0.25 1.25 2.25 3.25 4.25 USD (million) 2014E 2015E 2016E 2017E 2018E

EBIT 2545.6 2593.6 2732.3 2870.6 3018.4 - Tax -134.5 -137.2 -144.7 -152.0 -159.9 + Depreciation & amortization 1672.5 1728.8 1823.2 1915.2 2013.9 - CAPEX -1105.3 -1126.1 -1187.6 -1247.6 -1311.8 - Increase in NWC 0.5 -106.3 -314.5 -306.6 -328.7

FCF 2978.8 2952.8 2908.7 3079.6 3232.0

WACC 10.15%Risk Premium 1.00%Discount Factor 11.15%

Present Value of FCF 2901.1 2587.3 2293.0 2184.2 2062.3

Terminal Value CalculationTerminal Growth Rate 3.5%Terminal Value 43725.9Present Value of Terminal Value 27901.14

DCF-SHARE PRICE CALCULATION

Value per Share Calculation Enterprise Value 39929.0 +Proceeds from selling the business 4002.6 -Net Debt 3086.0Equity Value 40845.6Total Number of Shares Outstanding 1,558.0Implied Share Price 26.22

Sensitivity Analysis

Terminal Growth Rate26.22 3.00% 3.25% 3.50% 3.75% 4.00%

10.15% 28.27 29.04 29.86 30.75 31.7210.65% 26.55 27.21 27.91 28.67 29.4811.15% 25.04 25.61 26.22 26.87 27.5611.65% 23.70 24.20 24.73 25.29 25.8912.15% 22.51 22.95 23.41 23.91 24.43Di

scou

nt R

ate

PROJECTION RATIONALESales Projection

We cannot foresee the company to have any big change, so our sales growth projection is predominantly based on the past figures. Nutritionals: despite that the company only achieved an average growth rate of

Although the company improve their Operating margin from 7.6% in 2011 to 12% in 2013, their first 3Q achieved operating margin maintained at 12%, so I cannot foresee a larger operating margin going forward.

Beta Calculation

We run regression for weekly close price since 2013-Jan-01 for several reasons: 1) By using weekly price we transpire the volatility of day-trading. 2) The ABBV spin-off took place at Jan 1st, 2013, so using the data since 2013 can better reflect the current nature of business.

DCF-Share Price Calculation

The company will sell off its US Pharmaceutical business to Mylan Inc. for 21% of its stake. The sell-off will cause the FCF to decrease, while owning only 21% of stake will not have any influence on ABT’s income statement, so we directly added the Mylan’s value into the DCF resulted share price.

COMPARABLE COMPANIES

Selection criteria Comprehensive health care companies: after the spin-off of ABBvie, ABT is no

longer a pharmaceutical company, so we try to avoid 100% pharmaceuticals.

Global Presence: since ABT is gradually moving its focus to emerging market, we try to choose companies with global presence as comps.

Major Comparables

Company Names EV/Revenues EV/EBITDA P/EPS(ttm) P/Forward EPS

JOHNSON & JOHNSON 3.81 12.36 18.02 18.17

ROCHE HOLDING AG-GENUSSCHEIN 5.43 12.71 20.88 19.78

BOSTON SCIENTIFIC CORP 2.91 26.66 30.82 16.03

MEDTRONIC INC 3.68 11.25 17.50 16.86

NOVARTIS AG-REG 4.41 16.19 21.07 17.61

COMPARABLE ANALYSIS

Key Takeaways:

ABT share price: $42.24 as of Oct. 27th,2014

Trade at fair value based on EV/Revenue, overvalued based the other ratios even taking into account the value of Mylan Inc. ($2.57 per share)

ABT has lower margin comparing with its peers

EV/Revenues EV/EBITDA P/E(ttm) Forward P/E

Median 3.81 12.71 20.88 17.61

Mean 4.05 15.83 21.66 17.69

ABT Net Debt (ttm) 13,029.38

Total Share Outstanding 1,558.00

Implied Share Price (Based on Median Multiples) 43.54 25.46 31.94 26.25 (Based on Average Multiples) 46.74 33.77 33.13 26.37

RECOMMENDATIONCurrent stock price $42.24 as of Oct 27 , 2014

DCF $26.22

Comparables $32.09

We recommend to sell 100 shares at the market price