ABBOTT LABORATORIES

Analyst: LINH HO
April, 23, 2013

Recommendation:

HOLD
Pros:
Support by technical analysis
Ticker ABT Cash-rich balance and better debt structure
Constant and increasing dividends
Exchange NYSE
Diversified products and markets
Generic
Positioning for substantial growth
Industry Pharmaceutical
Manufacturing
Sector Healthcare Cons:
Capital Appreciation Pricing Pressure
Classification
and Income Uncertainty from healthcare reform
Market Cap. $58.32B Threat from competitors innovation
52 Week Price Range $28.26- $37.55 Concern about nutritional segment
Recent Price $37.20 Overvalued by DDM and FCFE
Current P/E 11.34 TTM Porters Five Forces
Projected 2015 P/E 13.6x
Threat of Competition: High
Projected 2015 EPS $2.5
Threat of New Entrants: High
Dividend Yield 1.67% Threat of Substitutes: Moderate
Debt Rating A1 (Moodys) Power of Suppliers: High
Beta 0.52 Power of Buyers: HIGH
Brief Overview
Abbott Laboratories is an American global
pharmaceuticals and health care products company.
It has 90,000 employees and operates in over 130
countries. The company headquarters are in Abbott
Park, North Chicago, Illinois. The company was
founded by Chicago physician, Dr. Wallace Calvin
Abbott in 1888. In 2010, Abbott had over $35 billion
in revenue. Source: Wikipedia

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 Portfolio Considerations

Purchase Number of Cost Current Current Equity Holding Period EIF YTD EARNED S&P 500 Holding Equity Last Dividend
Ticker Date Shares Per Share Price Market Value Total Return (%) RETURN (%) Period Return Percentage
ABT 4/21/2008 415 $24.18 $35.08 $14,558.20 69.04% 35.23% 21.99% 1.42% 0.14
ABBV 12/10/2012 415 $35.00 $37.58 $15,595.70 8.64% 8.64% 7.57% 1.52% 0.40
AKRX 2/8/2013 2,421 $13.00 $12.82 $31,037.22 -2.95% -2.95% 0.20% 3.02% No Dividend
CELG 6/15/2012 321 $66.00 $98.77 $31,705.17 49.29% 49.29% 14.92% 3.09% No Dividend
SYK 4/25/2012 480 $53.76 $63.85 $30,648.00 20.44% 20.44% 11.38% 2.98% 0.27

Correlation
Company Name Abbott Labs Celgene Corp Stryker Corp Thermo Fisher Akorn Inc Abbvie Inc
Abbott Laboratories 1.00 0.40 0.53 0.53 0.27 -0.28
Celgene Corp 0.40 1.00 0.43 0.51 0.14 -0.09
Stryker Corp 0.53 0.43 1.00 0.69 0.24 0.29
Thermo Fisher Scientific Inc 0.53 0.51 0.69 1.00 0.23 -0.08
Akorn Inc 0.27 0.14 0.24 0.23 1.00 0.22
Abbvie Inc -0.28 -0.09 0.29 -0.08 0.22 1.00

At present, there are 5 stocks in healthcare industry under management of

the EIF, including ABT (Abbott Laboratories), CELG (Celgene Corp), SYK
(Stryker Corp), AKRX(Akorn Inc), ABBV(ABBVIE). The reason Thermo Fisher
Scientific was sold will be discussion latter. The weight of the sector is 12%,
which is also the target weight of EIF for healthcare industry. Most of EIF holdings
are doing very well and beat the S&P 500 index. Noticeably, ABT and CELG
which are holding total returns of 69% and 49.3% respectively, whereas these
numbers for S&P 500 are only 22% and 14.92%. This phenomenon is showing that
we picked up these stocks at the right time.

In terms of diversification, there is a quite low correlation between stocks in

our portfolio, except for the correlation between Stryker and Thermo Fisher. This
is understandable because both Stryker and Thermo Fisher Scientific are medical
technology companies which produce instruments, equipment and devices for
health care industry. Last year, SYK and TMO (Thermo Fisher Scientific lnc) was
considered to bring exemplary returns for the fund but the very high correlation
between TMO makes the fund become risky and less efficient. Besides some
fundamental issues, in order to improve the diversification of the holdings, EIF
decided to sell TMO to make the portfolio more efficient.

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 The spinning off Abbvie seems to be a positive thing for our fund, in terms
of diversification when Abbvie has negative and low correlation with other stocks
in our portfolio. For example, the correlation between Abbot and Abbvie is -0.28.
This is explained by the fact that new Abbott now is a generic pharmaceutical
company whereas Abbvie is branded name pharmaceutical company. In the next
sections in the report, I will show that companies in generic pharmaceutical
industry are rivals and competitors to companies in brand name pharmaceutical
industries to some extent. Furthermore, later in the report, I will explain why
management of Abbott decided to spin-off Abbive. What are the strategic plans
and rationales behind this decision?

I. Industry Analysis
Since Abbott was established, research based pharmaceuticals have been
major revenue source and main line of business. However, there has been a change
in the companys strategy by shifting its focus on from branded pharmaceuticals to
other segments, especially branded generic products. The spin-off of Proprietary
Pharmaceuticals (branded pharmaceuticals) business segment into a new
independent company, named Abbvie, was clear evidence for the companys
strategic change. Under New Abbott, Branded Generics will account for 31.6%
(largest part and this number will increase in the future) of the new business 1 ;
therefore, I decided to categorize New Abbott into Generic Pharmaceutical
Manufacturing industry.
1. Industry at a Glance

Data from IBIS shows the Generic Pharmaceutical Manufacturing industry

has total revenues of $44.7bn and a net profit margin of 14.8% in 2012. With
average growth 5.7% during 2008-2013 periods, the Generic Pharmaceutical
Industry outpaces the branded pharmaceutical industry which just earned -2.3%
profits for the same period of time. This trend is forecasted to continue due to
several factors such as patent cliff (period in which a lot of patents for brand drugs

1 JPM

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will expire), health care reform, shifting from developed countries to emerging
markets. All of this factors as long
as other drivers like technology
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Revenue Growth
14
change, private insurance and senior
population increase will foster the 12
growth of generic pharmaceutical 10
industry. It is estimated that the 8
industry will grow average 6.4% for 6
2013-2018 period. The growth 4
prospect of the industry, in turn, 2
will attract more and more 0

2014
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

2015
2016
2017
2018
2019
businesses, but sustained
consolidation and active M&A
activities will offset that trend. As a
result, IBISWorld project that during 5 years from 2013 to 2018, the number of
companies in the industry only increase average 0.4% per year to 1,141.

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2. Drivers for Industry Growth

a. Patents cliff

In the next five years, many block-bluster brand name drugs like Nexium,
Cymbalta, and Humira, which have sales revenue over 1 billion of dollars will
expire. The expiration of these drugs will create opportunity for generic drugs
which are chemically identical to their branded counterparts, have same or similar
effects on diseases, but are sold for huge discounts. As a natural response,
customers will switch to buying generic drugs, instead of brand name
pharmaceuticals. According to the Congressional Budget Office, generic drugs can
save customers an estimated around from $8b - $10b per year at retail pharmacies.
At hospitals, the money saved is even bigger.
Furthermore, high pressure from stockholders, high failure risk, increased
research and development costs and government regulation projected to shorten
patent protection period make brand name drugs less attractive for pharmaceutical
firms. As a consequence, firms now are more interested in generic drugs because
these drugs require less R&D, failure risk and more profitable.

b. Healthcare reform

Abbott and other companies in the industry are clearly impacted by

Obamacare, whose purpose is to make healthcare generally less expensive and
increase the coverage for millions of people in the States. For example, the Patient
Protection and Affordable Care Act provide people more access to lower-cost
products by prohibiting brand name pharmaceutical manufacturers from changing
their drug labels to brand-name. Furthermore, to make the healthcare costs more
reasonable for people, the Government is considering shortening the patent
protection time for branded products, making them become generic drugs more
quickly; thereby lowering their prices. Last but not least, Medicare and Medicaid
are receiving more funds from the government to cover people under their
program. Covered by Medicare and Medicaid, many people have chance to access
to drugs and medical products which they could not before. These, in turn, will
help increase customer base for companies like Abbott.

c. Aging people increase

Senior people are the main consumers of drugs and medical therapies
because when they are old, they more likely to contract illnesses and age-related
diseases. More than 90.0% of seniors and 58.0% of all adults rely on a prescription

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medicine on a regular basis, according to the Agency for Healthcare Research and
Quality2. Baby boomers have started reaching ages of 65 or older. This trend will
create an average growth rate of 3.1% per year. As this senior group increases, the
demand for industry products will rise as well.

d. Number of people with private health insurance

Private health insurance coverage helps people be able to afford products

and services in the industry by reducing out-of-pocket costs of pharmaceuticals. In
other words, thanks to private health insurance, the demand for pharmaceuticals in
general and generic pharmaceuticals will increase in the years to come. According
to IBIS, there will have a sharp increase in the number of people with private
health insurance from now to 2007. This trend is due to: First. the recovery of the
economy will get people jobs. These people will be covered under their employers
healthcare plan. Second, in 2014, a health insurance exchange will start. The intent
of health insurance exchange is to create a better organized and competitive market
for health insurance by increasing regulation on offering and pricing of insurance
products, providing customers with more information and more choice of plans
which they can find more suitable for them, and subsidizing premium for poor
people. All of these favorable characteristics of new health insurance exchange
will enroll more people into private health insurance.

2 IBIS

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E. Demand from Emerging markets

When living standard improved, people will spend more money on health
expenditure. In emerging countries like Brazil, India, Russia, and China, there is a
merge of middle classes who are caring more for their health and spending more
on drugs and medical products. However, in these emerging market, most of the
time, people pay out-of-pockets for their medicines; therefore, they often choose
generic products, instead of expensive brand name drugs. In other words, generic
pharmaceuticals have more advantage in emerging nations. As seen in the charts
below, spending on pharmaceuticals in emerging markets will nearly equal that in
the U.S by 2015. Although, there are a lot of risks for doing business, potential
demand from these developing countries is huge and worth to make a bet.

3. Products and Services

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 a. Products

In 2013, pharmaceutical preparations are expected to account for about

75.1% of industry revenue, a slight decline compared to 78.0% in 2008. The
decline is entirely due to the growth of generic biologics. Preparations make up the
largest product segment and include drugs that are ready-made for use, such as
those in the form of ampoules, tablets, capsules, vials, ointments, powders,
solutions and suspensions. Prescription drug manufacturers and over-the-counter
(OTC) pharmaceutical companies make them. Products in this segment are
distributed to two primary lines: professionals in the dental, medical or veterinary
fields and the general public. Although veterinary drugs account for a relatively
small percentage of overall industry revenue, many leading companies are
involved in the animal healthcare industry and some maintain specific animal
health divisions.

Cardiovascular and oncology

In 2013, key therapeutic drugs are oncologics, followed by respiratory

agents and lipid regulators, based on revenue. Antidepressants and lipid regulators
are the most prescribed prescriptions. In addition to the established key therapy
areas, there is a promising pipeline of therapeutics, including products to treat
central nervous system disorders and diabetes, both of which will see increasing
revenue, according to the Agency for Healthcare Research and Quality.

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Medicinal and botanical products supply the preparations

Medicinal and botanical products account for roughly 9.6% of industry

revenue. Companies in this segment furnish the active ingredients used by
pharmaceutical firms to manufacture finished products or pharmaceutical
preparations. Components produced by this segment include endocrine products,
basic vitamins and extracts of unprocessed drugs derived from plant or animal
sources, such as agar.

Biological products are made from living systems or organisms

This category covers the production of bacterial and virus vaccines, serums,
plasmas and other blood derivatives (except for in vitro and in vivo diagnostic
substances). Most biologics cannot be made synthetically; rather, they are
produced using living systems or organisms, which makes the manufacturing
process more difficult.

Global initiatives aimed at eradicating deadly diseases as well as preventing

common illnesses, such as ear infections, have boosted growth of biological
products in recent years. Additionally, manufacturers have increased their
development of more user-friendly vaccines, such as vaccines sans needles, which
can be priced at a premium.

Although demand and revenue of biologics are rising, biologics are costly
and relatively difficult to produce as production ingredients are derived from living
material and they require special facilities with high quality assurance. In addition,
the regulations controlling production are often more extensive than for other
pharmaceutical products. Nonetheless, biologics are attractive to pharmaceutical
companies because they command higher prices, and revenue is growing at a faster
rate than for traditional prescription drugs.

In 2010, the Affordable Care Act implemented legislation on patents for

biologics, paving the way for generic biological products (biosimilars). In 2013,
major biological products, such as Procrit and Humalog are scheduled to lose
patent protection. Both products had over $1.0 billion in global revenue over 2012.
As a result, revenue generated from biosimilars is expected to increase in 2013.
Over the year, biological products are expected to generate 9.5% of industry
revenue.

In vitro and in vivo diagnostic substances are on the move

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 In vitro (meaning "in glass," such as in a test tube) and in vivo (meaning "in
the body") diagnostic substances are chemical, biological, or radioactive
substances used in diagnosing or monitoring the state of human or animal health by
identifying and measuring constituents of body fluids or tissues. In vitro
diagnostics, which are used outside of the body, constitute the largest share of this
product category.

The current trend in the segment is to miniaturize in vitro diagnostics

machinery to make it more portable. This point-of-care (POC) testing is expected
to present the greatest growth area in the near future for in vitro diagnostics.
Already, the technology is penetrating hospitals and medical centers and will soon
be available in the home healthcare field. While FDA approval of products, such as
an imaging agent for use with ultrasound technology, is expected to help bolster
the category, current regulations are stringent and an increasing burden.

Therapeutic classes

The most prescribed generic drugs in 2013 are expected to continue to be

related to pain treatment, high cholesterol and high blood pressure. Just over half
of the drugs dispensed for high blood cholesterol in the United States are generics.
Similarly, generic products dominate the large class of cardiovascular
medications.3

b. Market and supply chains

Retail pharmacy chains, mail-order pharmacies, group purchasing

organizations, distributors and wholesalers are direct customers of generic drug
producers. In other words, end-user customers have to get drugs from independent
pharmacies, managed care organizations and hospitals which are redistributed by
distributors, wholesalers and so on.

One of the issues for the industry is that a substantial portion of sales goes to
small number of U.S retail drug chain, wholesalers and group-purchasing
organizations. These buyers have already had a prevailing purchase power. In
addition to that, many these customers have tendency to implement consolidation
and integration to gain even bigger power. This trend will pose a huge risk for the
industry because it is very hard for them to maintain a high profit margin when
customers get large discounts and create an enormous price pressure on products.

3 IBIS

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 Although FDA set up quality standards for products, many retailers who
play critical role in determining the sales of producers, want to go beyond these
standards to ensure everything is good at every level of production and
distribution. Because the competition is so high in the market, manufacturers have
no choice to increase the quality standards as required by retailers. To do that,
more investment will be needed and more costs will incur, dragging down profit
margin.

Changing regulations

As an outcome of healthcare reform and poor economy, regulatory and

competitive environment have been reshaped. The distribution system has become
much more complex. For example, third-party logistics are challenging
conventional wholesale position. An increasing number of orders are direct sales
coming from mail order or online. Moreover, regulators require companies to make
their pricing details more transparent as well as initiate methods to reduce price of
drugs.

Wholesalers

Despite these changes, it may take years to see a considerable effect and
drug wholesalers are still the largest customer category for pharmaceutical and
medicine manufacturers, accounting for an estimated 58.7% of industry revenue in
2013. Why can wholesalers achieve this position in the industry? One of the
answers for this question is: As a key buyer in the market, hospitals often prefer to
delegate inventory management to wholesalers to reduce investments in inventory
and receivables, and manufacturers want to outsource much of the distribution
work to wholesalers to focus on core competencies: research and development
(R&D) and marketing. In this regard, generic drug manufacturers use direct
distribution more often than branded companies, because generics can afford to
devote more resources to distribution and less to research. Under the wholesaler
chain is drug store chain. Drug store chain is the main buyer from wholesalers;
accounting for 27.8% wholesales revenue. Among chain drug stores,
merchandisers and super markets with pharmacies inside like Wal-Mart take a
large part of that.

Third-party logistics providers

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 Third-party logistics, like DHL, UPS, FedEx, are increasing their role in the
distribution system. Providers are expected to account for about 15.0%, up slightly
from 2008, because these firms have benefitted from the outsourcing of drug
distribution activities. Most notably is DHL, which landed a lucrative long-term
contract with Pfizer to become the first logistics provider to be given complete
responsibility for the company's worldwide clinical trial materials distribution,
according to In-Pharma Technologist.4

Direct sales

There are a lot of methods that companies can use to sell their products
directly to end-user customers like online sales, but this trend does not really have
a huge impact on the sales in the next several years. According to IBIS, Direct-to-
consumer sales are expected to account for about only 9.0% of pharmaceutical
sales in 2013, about the same as 2008.

4 IBIS

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 II. Porters Five Forces
1. Threat of Competition: High

The competition in the industry increasingly base on price. The continued

price decline is cutting down profit margin of companies. Many of them cannot
endure fierce competition and have to accept merge or to be acquired with other
firms. This can be seen clearly by looking at the forecast for the number of firms in
the years to come. According to IBIS, growth rate for number of companies is only
average 0.4% per year from now to 2017 despite of the fact that many new
companies are entering the markets.
Furthermore, only a small number of retail drug chains and wholesalers
account for a substantial part of U.S generic sales. These retail drug chains and
wholesales are consolidating and gaining more purchase power. Due to
consolidation between customers, pharmaceutical firms are working very hard to
gain contracts with their customers.
Most importantly, generic drugs companies are also facing aggressive
competition from brand name pharmaceutical producers. To some extent, we can
consider generic drug market as derivatives from brand name drug market because
most of generic drugs come from expiration of their branded drugs. If companies
in the brand name industry know how to prevent or delay approval of generic
equivalents, this action will seriously and negatively affect the generic drug
market. Many tactics and techniques are used by brand name companies such as:
filing suits for patents infringements that may delay approval of new generic
products, reducing the demand for the first generic products by bringing out next-
generation drugs prior to expiration of market exclusivity for the reference
product and applying to extend patented product protection and etc.

2. Threat of New Entrants: High

Many people may think that new entrant barrier into the generic
pharmaceutical market is low because firms do not have patent protection.
However, a lot of other barriers are created to make new firms find hard to enter
the market. First of all, high front costs such as infrastructure investment, R&D,
and marketing expenditures, give well-established and sizable companies more
advantage over smaller and start-up firms. Furthermore, manufacturing of generic
products is highly controlled by regulators like FDA. FDA often set up a series of
quality standards relating to products and production process. Not every company

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with less experience has capability to meet these standards at reasonable costs.
Competing within an environment in which saving costs is the key to success;
many companies cannot see an attractive profit margin to enter the market if they
have to meet all of requirements from FDA. Last but not least, reputation plays a
critical role for operators in the market because customers have tendency to choose
products from well-established firms. This trend makes new entrants with less
reputation disadvantageous to popular producers. All of these factors contribute to
failure of many newcomers into the market when many firms go bankrupt or are
acquired by other bigger companies.

3. Threat of Substitutes: Moderate

The increase in R&D and rapid change in technology create opportunity for
potential new products. For example, many firms now are focusing on producing
new compounds or unique biologic products. The new biologic drugs may have
better use and effect than existing generic drugs to cure certain diseases. In many
parts of the world, there are some alternative medical treatments, but not widely
used. In this respect, some non-pharmaceutical substitutes may challenge the
industry to some extent. For example, psychiatry may replace anti-depressants. In
some markets, especially in Asia, herbs, acupuncture, and other traditional
therapies are likely to substitute for prescription drugs.

4. Power of Suppliers: Moderate to High

First of all, we need to know that inputs for producing a drug vary from
stage to stage. During research and development stage, for example, primary inputs
are laboratory and research equipment. These inputs are quite unique because it
supports only certain purpose. As a result, suppliers have quite high power in this
situation. In other stages, like production and manufacturing or packaging and
labeling materials, the inputs are quite homogeneous; therefore, pharmaceutical
producers have more choice of their suppliers. Consequently, these suppliers have
little or low bargaining control on drug manufacturers.

5. Power of Buyers: Moderate High

The major buyers for pharmaceutical products include retail drug store
chain, hospitals, wholesalers and state and federal government. These buyers often
purchase in huge volume; therefore, gain a lot of discount. Furthermore, many
wholesalers and drug store chains are undergoing integration and consolidation.

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 This activity will make them become bigger organizations and give them
more purchase power. Moreover, there are a lot of variations of a generic drug
which have the same function and effect. This characteristic obviously provides
customers more choice of which one is suitable for their needs and their ability to
pay. However, customers sometimes do not have much option in situations like the
drugs are prescribed by physicians.

III. Company Overview

Dr. Wallace C. Abbott founded the company in 1888 when he was a
practicing physician and pharmacy proprietor at his Peoples Drug Store in
Chicago. In 1898, Dr. Abbott started making tiny pills called dosimetric granules
using alkaloid to improve his patients medication. Very soon after that, the
therapy became very popular among patients and other doctors in the region.
Abbott Laboratories was known as Abbott Alkaloidal Company at that time.
During its first years of operation, the company had very modest revenue which
was approximately $2000. But by 1910, however, the company expanded
exponentially to other regions such as New York, San Francisco, Seattle and
Toronto with more than 700 products. In 1915, Alkaloidal Company officially
changed its name to Abbott Laboratories to target the companys course of
development into research and synthetic compounds. The company did IPO in
1929, and now Abbott has presence in more than 130 countries worldwide with
91,000 employees and revenue of $39b in 2012.(Wikipedia)

Sales by Region United

Kingdom
Canada Spain 3%
3% Italy 2%
France
3% 3%

Germany
4%
The Netherlands
5% United States
Japan
42%
6%

All Other
Countries
29%

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 Basically, Abbott has two main product groups. The first is diversified
medical products which comprise medical devices, established pharmaceuticals,
nutritional products and diagnostics. The other one is research-based
pharmaceuticals which bring major revenue for Abbott and spurred most of the
firms growth. Products from the second group are brand-name; therefore, Abbott
was categorized in brand pharmaceutical industry before 2013.

Since established, research-based pharmaceuticals have been Abbotts core

line of business for many decades. However, in recent years, the company has been
shifting its focus on to diversified medical product sector. The question is why?
First of all, the research-based pharmaceuticals are extremely risky. The statistics
data follow will help us understand how risky brand name manufacturing industry
is. Only one of every ten thousand discovered compounds will become an
approved drug for sale. Beyond that, it takes companies from 7 to 10 years to get
official approval. And only there out of twenty drugs end up making enough
revenue to cover their costs 5 . As can be seen in the chart below, the cost of
production of a successful drug is increasing from time to time. Therefore, in order
to be successful in the market, companies need to have a consistent stream of
blockbuster (which have billions of dollar of sales revenue) coming out every
certain years.

Drug Development cost (Millions of $)

1400

1200

1000

800

600

400

200

0
1975 1987 2001 2006

Secondly, patent expiration is creating huge pressure on brand name

companies. When patents expire, other companies in the market can produce
generic drugs which are as effective as branded drugs, but cheaper. This makes
5 http:// www.phrma.org/about/biopharmaceuticals

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brand name pharmaceutical firms find hard for their premium prices. In some
cases, after a drug loses its patent protection, its price plunges 80%. Moreover,
generic drug companies do not have to spend much money on R&D and enjoy
reputation established by their brand name counterparts. In recent years, under
Obamacare, government is implementing a series of actions to make prescription
drugs more affordable such as shortening patent protection periods and carrying
out rebate programs. All of these factors make branded drugs less attractive and
less profitable and leaning toward to generic products is a new trend. Abbott is go
ahead to take advantage of this trend.

The culmination of this shift is the spinning off its proprietary

pharmaceutical company, named AbbVie. There are several strategic rationales
and actions behind this spinning off. First of all, according to managers of Abbott,
the investment identity and the operating model of each separate enterprise is very
different from the other. The management thinks that keeping generic and brand
name segments together will not a wise choice when investors as well as market
will not fully realize the fundamentals of the company and believe that the value of
Abbott will be better revaluated with this spin-off. Second, Humira current brand
name blockbuster and other patented drugs which will belong to AbbVie after
spin-off are going to lose their patent protection in the next five years. As
mentioned above, after losing protection, these products will be sold at huge
discount and no longer are main money-making money machines for the company.
In addition to that, R&D expenses are enormous and prohibitive for product
discovery and development. These R&D expenses from research-base segment
will badly affect the profit margin of generic sector which have much lower R&D
costs if we let both of them stay together. Last but not least, old Abbott will
transfer nearly 70% of its debt to Abbvie, leaving the new Abbott with more free
cash flow to implement its strategy to focus on generic drug development. JP
Morgan estimates that sales growth for new Abbott will be from 5% to 5.5%
annually in the next five years whereas this number for brand name segment is
1.5%.

Divisions and products

Proprietary Pharmaceuticals

As the name implied, this segment includes all of the products which are
made internally by Abbott. These segments have some blockbuster drugs such as
Humira - or the treatment of rheumatoid arthritis, Kaletra - for the treatment of
HIV infection; Lupron - or the palliative treatment of advanced prostate cancer and

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Synagis - for the prevention of respiratory syncytial virus. These prodcts account
for 79% revenue of this segment in which Humira makes 47% total revenue.
Wholesalers, Government Agencies, healthcare facilities, and independent retailers
are main buyers of these drugs. Competition with Proprietary Pharmaceuticals
comes from other healthcare and pharmaceutical companies. The introduction of
new products by competitors or changes in medical therapy may severely affect
Proprietary pharmaceuticals by making existing products obsolete. Because of high
risk associated with patent loss, sluggish growth and fierce competition from
generic companies, Abbotts managers decided to spin-off this segment, beginning
in 2013.

Established Pharmaceuticals

This is the division which management sees most growth and is spending a
lot of investment into. These products include a broad line of branded generic
pharmaceuticals manufactured worldwide and marketed and sold outside the
United States, and are generally sold directly to wholesalers, distributors,
government agencies, health care facilities, specialty pharmacies, and independent
retailers from Abbott-owned distribution centers and public warehouses, depending
on the market served. Some principle products for this division are: Creon - for
the treatment of pancreatic exocrine insufficiency associated with several
underlying conditions, Influvac, an influenza vaccine available during flu season;
Brufen, for the treatment of pain, fever and inflammation and so on. This
segment is supported by healthcare reform which wants to help people to access
medical products and service at more reasonable prices.

Vascular products

These products include a broad line of coronary, endovascular, vessel

closure, and structural heart devices for the treatment of vascular disease
manufactured, marketed and sold worldwide. The main buyers for these products
are hospitals. Sales are implemented through Abbott-owned distribution centers or
public warehouses. Some main products for this segments are: Absorb, a drug-
eluting coronary bioresorbable vascular scaffold, Xience Xpedition, Xience
Prime, Xience nano, and Xience V, drug-eluting coronary stent systems
developed on the Multi-Link Vision platform; and MitraClip, a percutaneous
valve repair system. Technological innovation, price, convenience of use, and long
term contracts may make the market very competitive. Just take long term contract
as an example. There are a small amount of hospitals which often buy products

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under million or even billion dollar contracts. Every company understands that
gaining the contract with these hospitals will ensure the revenue stream in the long
run. That explains why companies compete so aggressively to earn these contracts.

Diagnostics

These products include a broad line of diagnostic systems and tests

manufactured, marketed, and sold worldwide to blood banks, hospitals,
commercial laboratories, clinics, physicians' offices, government agencies,
alternate-care testing sites, and plasma protein therapeutic companies. In recent
years, Abbott has made more bet into this segment through a series of acquisitions
of companies already in their respective markets. Some key products in this
segment are: the Vysis product line of genomic-based tests, the m2000, an
instrument that automates the extraction, purification, and preparation of DNA and
RNA from patient sample, Immunoassay and clinical chemistry systems, including
ARCHITECT and ABBOTT PRISM. Many products are facing risk of being
obsolete when other companies introduce new products into the market.

Nutritionals

This division has been split into adult and pediatric nutritionals. This
segment has been gaining its position in the emerging market. Currently, Abbott is
the largest nutrition firm in the world. On the one hand, some chief pediatric
nutritional products are: SimilacAdvance, Similac Advance with
EarlyShield, Similac. One the other hand, we have adult nutritional products
like Ensure, Ensure Plus, Ensure Muscle Health, Ensure. Primary
marketing efforts for nutritional products are directed toward securing the
recommendation of Abbott's brand of products by physicians or other health care
professionals. Competition for these nutritional products comes from other
diversified consumers and healthcare manufacturers basing on competitive factors
like consumer advertising, formulation, scientific innovation and intellectual
property.

19
Sales by segments of old Abbott
4% 3%
Proprietary Pharmaceutical
8% Established Pharmaceutical
Nutritionals
11% 45%
Diagnostics

16% Vascular
Diabetes Care & Other
13%
Medical Optics

20
Noticeable M&A

When Competition in the industry is increasingly aggressive and the market

becomes saturated, big companies like Abbott often activate M&A activities to
take of advantage of economies of scales as well as create new segment and
achieve stable source of revenue.

In 1964, Abbott purchased Ross Laboratories and turned it into wholly

owned subsidiary of Abbott. Abbott renamed Ross Laboratories into Nutrition in
2007. This transaction is one of the most successful M&A deals of the company
because as you know Abbott now is the largest firm in the world for nutritional
products.

In order to maintain position as a leader in global, broad-based health care

and an innovator in new medicines, technologies and health management, since
2001, Abbott made a series of strategic acquisitions and surprisingly all of these
purchases are quite successful so far. We can name some of them such as Knoll a
the pharmaceutical division of BASF, TheraSense a diabetes care company, the
vascular device division of Guidant and Advanced Medical Optics, giving Abbott a
Vision Eye care division in 2009. As you can see in the financial statements of
Abbott, all of these segments earn them their own space in these statements,
proving their significant position with the company.

For example, in 2001, Abbott took over BASF AGs Knoll Pharmaceuticals
unit in 2001 for $6.9 billion dollars. The purpose of this deal is to expand Abbotts
drug research business and provide it access to several experimental medicines.
The acquisition of Knoll proves to be a phenomenal success for Abbott when Knoll
created and owned the drug Humira, a blockbuster, which treats rheumatoid
arthritis. Humira is estimated to bring to Abbott more than $10 billion in sales until
its patent is expired.

In February 2010, Abbott purchased Solvays pharmaceutical business

(Solvay Pharmaceuticals) for nearly $6.1b, in cash, plus additional payments of up
to EUR 100m per year if sales milestones are met in 2011, 2012, and 2013. The
acquisition of Solve is to provide Abbott with a large and complementary portfolio
of pharmaceutical products and expand operation of the firm into global emerging
markets where lucrative opportunities emerge.

In March 2010, Abbott took over STARLIMS Technologies for

approximately $100 in cash, providing Abbott with leading products and expertise

21
to build its position in laboratory informatics. The acquisition enhanced Abbotts
early-and-mid stage pharmaceutical pipeline, including a biologic for multiple
sclerosis and compounds that complement Abbotts oncology program.

On September 8, 2010, Abbott purchased Piramal Healthcare Limiteds

Healthcare Solutions business, a leader in the Indian branded generics market, for
$2.2b, in cash and additional payments of $400m annually in 2011, 2012, 2013,
2014. Abbott recorded a $1.6b liability for the present value of the additional
payments at the acquisition date. This amount of money surely will affect cash
position of the firm to some extent. But looking at cash position of the firm on its
balance, I do not see a problem for Abbott to service these payments.

Main risk factors

As a company working in the field relating to people health, Abbott has to

comply with a lot of government regulations. It may be very costly to meet all of
the requirements set by regulators like FDA. The process of getting a product
approval is very tedious and time-consuming. Normally, it takes the company from
7-12 years to complete the process. Any delay in this approval process may affect
expectation of the company revenue in the future and on Abbotts stock price.
Even after achieving approval from FDA, there is no assurance that Abbott will
remain compliance with applicable FDA and other regulatory requirements. A lot
of issues relating to producing, labeling, and packaging may create defected
products or quality problems. Any of these events may not only disrupt the
business (such as, recall, shut down of production, seizure, and refunds,), but also
bring company to law suits. Product liability claims and lawsuits and safety alerts
or product recalls, regardless of their validity or ultimate outcome, may have a
material adverse effect on Abbott's business and reputation and on Abbott's ability
to attract and retain customers. Consequences may also include additional costs, a
decrease in market share for the products, lower income or exposure to other
claims. All of these costly expenses will materially affect Abbotts financial
position.

In addition to that, investors should expect risks relating to Changes in the

health care regulatory environment. Obamacare program with the Patient
Protection and Affordable Care Act and the Health Care and Education
Reconciliation Act of 2010 is trying to make access to health care products and
services easier for people by creating new fees for the pharmaceutical and medical
device industries. Furthermore, other programs are also implemented like increase
in rebate rate, or requiring additional reporting and disclosure to protect customers.

22
It is very hard for Abbott to predict and estimate this risk factor which is totally out
of their control

Abbott's research and development efforts may not succeed in developing

commercially successful products and technologies, which may cause Abbott's
revenue and profitability to decline. To remain competitive, Abbott must continue
to launch new products and technologies. To accomplish this, Abbott commits
substantial efforts, funds, and other resources to research and development. A high
rate of failure is inherent in the research and development of new products and
technologies. Abbott must make ongoing substantial expenditures without any
assurance that its efforts will be commercially successful. Failure can occur at any
point in the process, including after significant funds have been invested. By
spinning off Abbvie, Abbott gets rid of significant amount of this type of this.

The international nature of Abbott's business subjects it to additional

business risks that may cause its revenue and profitability to decline and unstable.
Following the separation of AbbVie, sales outside of the United States are
expected to make up approximately 70 percent of Abbott's net sales. The risks
associated with Abbott's operations outside the United States include: First, the
company has to comply with governmental legislation which regulates
manufacturing and marketing of its products. Because the law systems and
requirements in each country are very different, it may be costly to meet all of the
requirements as well as to gain approval for Abbotts products. Furthermore, one
of the target markets Abbott wants to expand is the emerging markets, like China
and India; however, in these countries, copyright violation and patent infringement
are rampant and hard to control. If Abbott does not control its intellectual property
well, the company may lose its competitive advantage to domestic rivals who can
copy its products and sell with much cheaper price. Last but not least, currency risk
could negatively affect the operation of Abbott. Moreover, performance results of
foreign facilities will be translated into U.S dollar for consolidated financial
statements. Unfavorable move of foreign currency against the U.S dollar will cause
the financial statements to look unattractive to outside stakeholders. As you can see
in the table below how significantly a change in Foreign exchange may impact on
a change in sales of Abbott. In 2012, a disadvantage movement of foreign
exchange took away 2.9% revenue growth of Abbott. In the future, if Abbott finds
out effective hedge method, the firm may make their sales performance look more
stable and predictable.
Total Components of Change
% Change Price Volume Forex
Total Net Sales
2012 2.6 1.7 3.8 (2.9)
2011 10.53 1.20 6.50 2.80 23
2010 14.3 (0.10) 13.20 1.20
2009 4.2 (0.10) 8.30 (4.00)
 IV. Recent SYK Performance

Looking at the chart, we can easily realize that, during October to the first
half of November, Abbott stock was trading at very high price and very high
volume. This is the time there were rumor on Abbvie spin-off. After Abbott
officially announced the spin-off, many investors think that the effect of rumor had
been full reflected on the price, then decided to sell their shares to protect their
return, making Abbott price plunge. From December to now, the stock consistently
recover and increase due to positive perspective investors have on the spin-off.
Some rationale investors think this spin-off is better for Abbott as follow: New
Abbott gives away the risk it may get from patent protection loss for many of its
products to Abbvie. Second, 70% of its debt was transferred to Abbvie, leaving
Abbott with better free cash flow to focus on its strategies for generic drugs.
Lastly, revenue is expected to higher from 5%-5.5% annually.

24
 V. Financial Analysis
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 Pfizer J&J Industry Avg

Returns
Return on Common Equity 12% 20% 28% 25% 20% 19% 23% 17.8% 17.8% 26.0%
Return on Assets 5% 9% jdlasKF;DAS
12% 11% 8% 8% 9% 7.8% 9.2% 10.7%

Margins
Gross Margin 57% 56% 58% 58% 58% 60% 62% 81.4% 67.8% 71.2%
EBITDA Margin 26% 25% 28% 30% 26% 24% 27,98% 46.2% 30.8% 33.3%
Operating Margin 19% 18% 21% 22% 18% 17% 21% 33.3% 25.3% 25.5%
Pretax Margin 10% 17% 20% 23% 16% 13% 16% 20.5% 20.5% 20.9%
Net Income Margin 8% 14% 17% 19% 13% 12% 15% 24.7% 16.1% 16.8%

Liquidity Ratios:
Quick Ratio 0.47 0.85 0.91 1.26 0.73 1.02 1.72 1.58 1.34 1.17
Current Ratio 0.94 1.54 1.47 1.79 1.29 1.54 2.36 2.15 1.9 1.72

Debt Utilization:
Debt to Equity 1.57 1.23 1.43 1.29 1.66 1.46 1.51 1.29 0.87 1.88
Financial Leverage 2.57 2.23 2.43 2.29 2.66 2.46 2.49 2.29 1.93 2.52

Asset Utilization:
Asset Turnover 0.62 0.65 0.70 0.59 0.58 0.64 0.63 0.3 0.6 0.6
Inventory Turnover 3.43 3.87 4.42 3.94 4.60 4.73 4.27 1.61 3.14 2.66

Valuation Ratios:
P/E 17.90 19.20 18.30 13.00 12.20 11.00 12.92 11.5x 13.6x 16.1x
Price/Book 5.30 4.87 4.72 3.65 3.25 3.57 3.86 2.3 3.0 5.1
Price/Sales 3.32 3.34 2.79 2.71 2.11 2.25 2.59 3.16 2.85 2.79
Price/Cash Flow 15.21 18.75 12.82 12.43 9.08 10.40 11.08 10.94 12.43 11.76

DuPont Analysis:
Net Profit Margin 8% 14% 17% 19% 13% 12% 15% 25% 16% 17%
Asset Turnover 0.62 0.65 0.70 0.59 0.58 0.64 0.63 0.32 0.57 0.61
Financial Leverage 2.57 2.23 2.43 2.29 2.66 2.46 2.49 2.29 1.93 2.52
Return on Equity 12% 20% 28% 25% 20% 19% 23% 18% 18% 26%

Additional
Effective Tax Rate 25% 19% 19% 20% 19% 9% 5% 21.2% 23.7% 23.0%
Dvd Payout Ratio 103% 54% 44% 42% 57% 62% 44% 68.9 61% 66%
Sustainable Growth Rate -0.4% 9.3% 15.5% 14.6% 8.6% 7.3% 13.0% 5.55 7% 13%

Altman Z-score: 4.1

Profitability: Abbott is doing really well in maintaining and improving their gross
profit margin from time to time. The improvement in gross profit margin is
explained by better margins in the established pharmaceutical, diagnostics,
diabetes, and nutritional businesses. Although Abbotts gross profit margin is far
behind its competitors, the net profit margin of the company is nearly par with J&J
and industry average. The reason for this trend is Abbotts tax advantage position
when its effective tax for 2012 was only 5%. This number for J&J and industry
average is 23.7% and 23% respectively. Furthermore, R&D expenses which

25
represent a substantial portion of pharmaceutical firms like Abbot, actually account
for smaller percentage of Abbots earnings than its competitors like J&J and Pfizer.
From data table above, we can say that Abbott is one the right track to improve its
profitability and are catching up with its competitors. However, rebate programs
under Medicare and Medicaid may create challenge for the company to enhance its
profit margin in the years to come. According to Abbotts managers, one-
percentage point increase in the percentage of rebates to related gross sales would
decrease net sales by approximately $269m in 2012. Rebates and charge backs
charged against gross sales in 2012 were $6.2b, equivalent with 22.9% of gross
sales subject to rebate.

Operating: These ratios show Abbotts excellence in controlling its assets. First of
all, receivable turnover, inventory turnover and asset turnover are better than its
competitors and industry. Furthermore, as a result of acquisitions, inventory will
increase. If the company does not manage their new inventory well, these assets
may turn obsolete and have to be written-off. The inventory turnover ratio has
remained nearly unchanged from 2010 2012. This clearly tells us that the
company does not face any difficulty to sell new products compared to its existing
products. This conclusion is once again shored up when we look at asset turnover
ratio. The maintenance of ratio from 2007-2012 proves that sales increase well
enough to offset the increase of assets, which is a positive trend.

Liquidity: In the last report, analyst Bobby raised concern on the liquidity of the
company because ratios of Abbott like current rations and quick ratios were deeply
below those of its competitors and industry average. However, looking at the
numbers for 2012, we can see that the situation has changed dramatically. This is
understandable because Abbott was using a lot of their cash for acquisition
activities, restructuring expenses and making early principal payments for their
debts, leading liquidity ratios plunge. In 2012, when the companies spent less for
mentioned activities, their cash position has improve a lot, so their liquidity ratios
which are higher than those of Abbotts competitors and industry average.

Debt Utilization: Although debt-to-equity and leverage ratios are higher than
those of J&J and Pfizer to some extent, this does not cause much worry for
company future. First of all, the company has enough cash reserve to service its
debt interest. Second, I do not see any significant principle debt to be mature in the
near future, which may have consideration on financial position of the firms.
Lastly, after spinning off Abbvie, Abbott will transfer 70% of its debt to Abbvie;
therefore, we can see Abbotts debt structure will improve a lot in 2013.

26
DuPont:

Return on Equity figure measures Abbotts profitability by revealing how

much profit the company has generated with the money shareholders have put into.
Dupont analysis will help us explain and understand in which way the company
can improve ROE. According to data table above, ROE for Abbott in 2012 is 23%,
which beats its competitors J&J and Pfizer. Dupont analysis tells us there are 3
ways the company may make an impact on its bottom-line number. First, the
company may increase its net profit margin. However, this does not explain why
ROE of Abbotts is better than those of its competitors because Abbotts net profit
margin is far behind J&J and Pfizer. In order to do this, the company has to either
increase its price or reduce cost. It is hard for Abbott to increase price of their
products when competition is high and rebate program may seriously affect their
profit margin. Therefore, cost cutting may be a better solution for the company.
Second, the company may want to increase its asset turnover. This is what the
company is doing with a series of acquisitions. Through acquisitions, Abbott may
want to access infrastructure and technology to help the company streamline its
production and optimize its asset utilization which is the second component of
Dupont function. Lastly, Abbott may want to borrow more debt to finance its
operation and increase its leverage ratio. This action may pose a risky situation in
which growth rate of the company is not higher than cost of debt, putting the
company in trouble. However, after spinning off Abbvie, we will observe a
decrease in leverage ratio when 70% debt of old Abbott will be transferred to
Abbvie. Decline in leverage ratio will negative affect on ROE of Abbott next year,
assuming other things will not change.

VI. Recommendation: HOLD

Two Three
Current Last
Opinion Months Months
Month Month
Ago Ago
Strong Buy 4 3 3 2
Buy 4 4 4 4
Hold 13 13 15 14
Underperform 0 0 0 0
Sell 1 1 1 1

27
 VII. Pros to Recommendation

Cash-rich balance sheet and Better debt structure

As analyzed above, a strong cash status can help the company meet all its
liability and unexpected challenges, stabilize its operation, and embrace investment
opportunities such as target acquisitions. With a huge pile of cash, the company
can also have flexibility in dividend payout or repurchase schedule. This flexibility
may mitigate the volatility of the stock price in the market. Furthermore, buy
transferring 70% of its debt to Abbvie, capital structure of the company will
become better in the eyes of investors. With less debt obligation, the company does
not need to service interest and principle; therefore, the firm has more disposal
money for their strategic plan.

Diversified products and markets and Positioning for substantial growth:

Under new Abbott, there are 6 major diversified medical products, including
Vascular, Medical Optics, Nutritionals, Established pharma, Diabetes care, and
Diagnostics with the presence in more than 130 countries. Six segments with
different characteristics and markets will ensure a diversified revenue source for
the company and hedge risks if one of the segments has a problem. Furthermore,
emerging market with the sharp increase of middle class who are caring more
about their health will promise a handsome return for health care companies. One
of noticeable information about the middle class in emerging markets like China
and India is that these middle-class people pay very close attention to reputation or
brand of health-care companies because in these countries, customer protection is
not highly regulated; therefore, people always afraid of buying low-quality
products. Abbott with huge investment in building out its emerging-market
infrastructure and establishing reputation (such as buying Piramal the biggest
health care company in India) there will give the firm a huge advantage over their
competitors in the market.

28
Constant and high dividend

Dividends have been increasing at a rate of 10% annually for the past 5
years, and no mention of dividend cutbacks have been made. As discussed in
detail, the combination of New Abbott and AbbVie will result in a 4.6% (to keep
AbbVie valuations high) dividend yield which is higher than what it is now.

Source: The company website

VIII. Cons to Recommendation

Pricing pressure:

As operating in generic market where competition is so high, pricing

pressure is inevitable. This pricing pressure is not only coming from buyers with
huge purchase power, but also stemming from government programs like
Obamacare. Furthermore, crisis in Europe also put Abbott into pricing problem
when people here who do not have a job and do not get insurance, cannot afford
expensive drugs. Moveover, like U.S government, European governments are

29
taking many steps to force medical and health care companies to reduce their price
for people.

Healthcare reform:

As one of the risk factors mentioned above, there is a lot of legislation

regulating the industry. Law makers are amending and creating a ton of new
regulations such as Medicare and Medicaid program with intent to make the
market better and bring harmonized benefits for all market participants. However,
the effects of these changes are controversial and uncertain.

Threat from competitors innovation

Like any company operating in medical industry, Abbott faces a great

challenge from threat of revolutionary innovation from competitors. Whenever
competitors discover a new drug or new method to cure a certain disease, it will
make Abbotts existing product become obsolete.

Concern about Nutritional segment

Abbott is the largest Nutritional Company in the world and Nutritional

segment also accounts for significant part of new Abbott revenue. However,
according to Morning Star investment research center, Abbotts nutritional
segment is unlikely to see much growth from developed market.

IX. Assumption
Approach to the model: Abbott creates an interesting situation when the company
officially spin-offed its proprietary research-based segment as an independent
company named Abbvie on 1/2/2013. After spin-off, the company still filed its 10-
K for financial year 2012 as a consolidated company (which means including
Abbvie). After separating from Old Abbott, Abbvie also filed its 10-K for its
financial year 2012. The issue here is that we need to valuate New Abbott which
does not Abbvie and has not filed its financial statements for its self. We cannot
take numbers from financial statements of 10-K of Old Abbott minus numbers
from financial statements of 10-K of Abbvie to get numbers for New Abbott
because value of assets of Abbvie, for example, will have different value under
independent position as compared with that under as a dependent segment under

30
Old Abbott after being revaluated. Furthermore, tax position, capital structure and
so on also change when Abbvie has become an independent organization.

My approach for the issue is: I assume the Old Abbott had still existed and project
IS/BS/CF to 2015. Then with DDM and FCFE, I get the stock price for Old
Abbott. After having the modeled stock price for Old Abbott, I compare this price
with the price which is the sum of current market Abbott price and Abbvie price.
This method is reasonable because our fund currently stil holds both of these
stocks. Furthermore, if the model shows that the stock price is overvalued, we
should expect that the degree should be expected to be less than what the model
shows. Why? The spin-off will help the company specialize and utilize their assets
better. By this way, the assets under two independent companies are understood to
be higher value as compared with being under the whole Old Abbott. As a result,
the hypothetical stock price by adding New Abbott and Abbvie will be higher than
Old Abbott to some extent.

I understand that this approach is not totally quite accurate but it will help us
capture the idea of whether the stock of price is over or undervalue to some extent.

Revenue: I estimated revenue based on managements discussion and guidance for

2013 on Strykers website (4.6-5.5%).

Gross Profit Margin: From 2010-2012, the Gross Profit Margin was very stable
with a range of 60%-62%. Because there were no guidance on the issue, I took the
average profit margins of the most current years (2010-2012), and then applied the
average number for the years from 2013-2015.

Effective Tax rate:Management thinks that the tax bracket of the firm ranges from
12-15% from 2013-2015.

Basic and diluted weighted average shares growth: I noticed a constant increase
in diluted average weighted average shares. Without any information from 10-K
about this trend, I believe that this trend will continue and I add 5 million shares
each year to the average weighted average shares of the previous year beginning
from 2013.

Research and Development Cost: According to conference call which took place
on 4/17/2013, management believes that R&D accounts for 6%-7% revenue.

31
Capital Expenditure: I calculated Capital Expenditure as percent of Net Fixed
Asset for each year. Then I took average Capex as percent of Net Fixed Assset for
most 3 current years, then apply these numbers, starting from 2013.

P/E ratio:I took average numbers from forecasted numbers of financial

intelligence unit.

Risk Free Rate: I used currently quoted 30 year T-bond of approximately 2.89%
on 4/21/2013

Market Risk Premium: 5.7% premium of stock market over the 30 year T-bond
rate since 1926 was employed for my model

Beta: I ran regression for Stryker stock return and premium to get beta of 0.52. I
believe that this number is reasonable reflection of market risk of Abbott stock.

Recent Prices: I picked the stock prices of $42.39 and $37.2 per share for Abbvie
and New Abbott respectively on 4/21/2013.

X. Sources

YAHOO! FINANCE
CNBC
STRYKER WEBSITE
IBISWorld
BLOOMBERG
HOOVERS
MORNINGSTAR
FIRST CALL WEB
THOMSON ONE
LEXIS NEXIS ACADEMIC
VALUE LINE RESEARCH CENTER

32
 XI. Recent News
How Will Q1 Results Impact Abbott Laboratories' Stock?

Since spinning off AbbVie (NYSE: ABBV ) at the beginning of the year, Abbott
Laboratories' (NYSE: ABT ) stock has done pretty well, rising over 13%. The
company announced first-quarter financial results on Wednesday. How will these
results impact Abbott's nice stock run?

Results

The numbers looked pretty good. Adjusted earnings for the first quarter came in at
$0.42 per diluted share. That amount was near the high end of Abbott Laboratories'
previous guidance and narrowly beat the average analyst estimates of $0.41 per
share.

Abbott reported total sales for the first quarter of $5.38 billion, up 1.8% compared
to the same quarter last year. Analysts, though, were expecting higher revenue of
$5.41 billion.

The company confirmed its prior full-year 2013 adjusted earnings guidance of
$1.98 to $2.04 per share. GAAP earnings projections for the full year are $1.39 to
$1.45 per share. Abbott also estimated that second-quarter adjusted earnings would
be in the $0.43 to $0.45 per share range, with GAAP earnings for second quarter of
$0.27 to $0.29 per share.

Reasons

These results marked the first quarter for Abbott Labs without Humira. AbbVie
now has the blockbuster arthritis drug -- along with its growth power. The days of
impressive double-digit growth for Abbott are in the past.

With the brand pharmaceuticals business spun off to AbbVie, Abbott's remaining
divisions are Nutrition, Diagnostics, Established Pharmaceuticals, and Medical
Devices. Two of those divisions are doing relatively well, but two lag behind.

33
Nutrition stands out as the shining star for Abbott Laboratories and perhaps the
primary reason for continued interest in the stock. First quarter sales for the
division were $1.7 billion, up 8.7% versus the same quarter of 2012. Emerging
markets, in particular, saw strong operational growth of 20%.

Diagnostics sales increased 4.4% year-over-year to nearly $1.1 billion. Core

laboratory diagnostics, the largest revenue-generator for the business segment,
grew sales by 3.6%. Point-of-care diagnostics is the fastest-growing area, with $99
million in sales for the quarter representing a 17.3% jump over the prior year.

Established pharmaceuticals sales dropped by 1.9% compared to first quarter 2012

to $1.2 billion. The bright spot for this segment is in emerging markets like China,
India, and Russia. Emerging market sales increased by 4.4%.

Medical devices remain the weakest segment for Abbott Laboratories. Sales
dropped by 4.6% year-over-year to $1.3 billion. Vascular, in particular,
underperformed with 7.7% lower sales than in the same period of 2012. This drop
stems partially from expiration of Abbott's contract in mid-2012 to supply the
Promus stent to Boston Scientific.

Ramifications

What do these results really mean for Abbott Laboratories' stock? Judging by the
initial market reaction, the results could help. Shares jumped over 2% higher than
the prior close in early trading.

Probably the most encouraging news was Abbott's continued strength in emerging
markets. The Nutritionals business segment appears to have the potential to power
reasonable levels of growth, largely from these markets.

My chief disappointment with the company is its relatively puny dividend. Abbott
declared its 357th quarterly dividend of $0.14 per share. However, the dividend
yield only stands at 1.5%. Meanwhile, AbbVie's yield is 3.7% -- much more in line
with Abbott's historical levels. Abbott won't be a high-growth stock, so a better
dividend would make shareholders happier.

Overall, the results for Abbott Laboratories were solid. The stock should continue
to do well, especially if current weakness in developed markets improves. In my

34
view, Abbott still looks like a decent, if not spectacular, stock pick as part of a
broader portfolio.

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Foreign Business Risk

Russia rejects Abbott Laboratories' plan to buy Petrovax

MOSCOW (Reuters) - Russia's government commission on foreign investment has

rejected U.S. Abbott Laboratories' plan to buy Russian pharmaceutical producer
Petrovax, the head of the Russian antitrust regulator said on Friday.

"The commission has reviewed the question about the sale to U.S. company Abbott
of Petrovax Pharm. As a result of very lengthy discussion the U.S. company was
denied to make this deal," Igor Artemyev, head of the Federal Anti-Monopoly
Service (FAS), told reporters.

Abbott Laboratories filed for permission to buy the Russian vaccine developer and
producer last year.

Abbott Laboratories spokeswoman Irina Gushchina said the company had not
received any official information regarding the state of its application.

Nutritionals Growth Abroad Fuels Abbott's Results

Abbott Laboratories (ABT) announced on April 17 that its total sales for the first
quarter of 2013 were almost $5.4 billion, up 1.8% from the same period last year.
As mentioned in our pre-earnings analysis, the primary driver for this growth was
the companys nutritional division, which benefited from an over 14% revenue
growth in the emerging markets - especially China. The companys diagnostics
divisions revenue also grew by 4.4% y-o-y on the back of sales growth in Core
Laboratory and Point of Care Diagnostics products. The only area of concern for
the company was its medical devices division, where revenues declined y-o-y by
4.6%.

35
The earnings result of the company is generally in line with our expectations, and
going forward we expect the nutritional business to continue growing on the back
of increasing demand in emerging markets. Another reason why the sale of
nutritional products is also going to be strong in the future is that the company
continues to leverage its strong brands and launch new products.

Abbotts stock currently trades at around $37 per share. We will soon release an
updated model for the company on our website and revise our price estimate for
the same.

Nutritionals Continue To Drive Sales

As mentioned in our pre-earnings article, the nutritionals division accounts for

nearly 30% of the value in Abbotts stock and its revenue has been growing at a
healthy pace of 7-8% over the last couple of years. The current quarters revenue
growth of 8.7% is actually higher than that average and is hence positive for the
company.

Driving this growth are Abbotts pediatric nutritional products such as Similac and
PediaSure. These products account for 58% of Abbotts total 1Q13 nutritional
sales of around $1.7 billion and the worldwide sales of these products increased
over 13% y-o-y in this quarter - primarily due to a strong demand pull from
emerging markets. The company continues to expand geographically in these
markets and is also benefiting from an uptake in newly launched products.

At the same time, the companys adult nutritionals business witnessed around 3%
of y-o-y revenue growth in this quarter and is benefiting from a continued
expansion of the adult nutrition market where Abbott is the global leader. [1]

Diagnostics Division Also Growing Well

Abbotts diagnostics division reported a 4.4% y-o-y increase in its worldwide sales
and the major highlights for this division were (1) Point of Care Diagnostics,
which grew around 27% in the U.S. due to continued uptake of new assays and
continued market penetration, and (2) core laboratory diagnostics products, which
grew by 5.9% on an operational basis on the back of a strong performance in key
emerging markets, such as China, Russia and Brazil.

Going forward, we expect the sales in this division to continue growing as new
products from the company hit the markets. Abbott is currently developing six

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new platforms across Core Laboratory, Molecular and Point of Care that are
designed to improve service to customers, enhance laboratory productivity,
improve efficiency and reduce costs.

However, Medical Devices Are Declining

Abbotts worldwide medical devices sales decreased by 3% on an operational basis

as the largest segment within this division, Vascular products, was impacted by
pricing pressure and a decline in procedures due to market conditions," according
to the companys press release. An expected decline of certain royalty revenues
further affected these revenues.

However, there were signs of hope within this segment as the companys new
product introductions like the XIENCE Xpedition (which is a drug-eluting stent)
and Absorb (claimed to be the worlds first and only coronary bioresorbable
vascular scaffold) are seeing strong demand in emerging markets.

While we expect pricing pressures and market conditions to continue pushing

profits for this segment downwards in the near term, there is a likelihood that once
market conditions improve a lot of pent up demand for surgical procedures will be
released and Abbotts vascular products sales in the U.S. will improve.

Product recall risks

Abbott Labs Recalls Glucose Meter

Abbott Laboratories (ABT) recently announced that the company is initiating a

voluntary recall of its FreeStyle InsuLinx Blood Glucose Meters in the US.

Abbott Labs decided to recall the its FreeStyle InsuLinx Blood Glucose Meters as
it found that the device displayed and stored wrong test results in patients with
extremely high blood glucose levels.

Abbott Labs estimates that there are approximately 50,000 active FreeStyle
InsuLinx Meter users in the US and asked them to take appropriate measures.

Following the identification of the deficiency, the company has started the process
of informing the concerned persons about the same.

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Abbott Labs has also notified the US Food and Drug Administration (:FDA) and
all relevant healthcare authorities in the other countries about the defect.

We note that Abbott Labs obtained U.S. regulatory approval for its FreeStyle
InsuLinx Meter in the first quarter of 2013. Earlier in 2011, the company obtained
CE mark and Health Canada approval for ts FreeStyle InsuLinx Blood Glucose
Meters. The CE mark is a mandatory confirmation for products placed in the
European markets.

We remind investors that in Jan 2013, Abbott Labs separated its research-based
pharmaceuticals business by creating a new company AbbVie (ABBV). The
decision to spin off the business was taken in Oct 2011 when Abbott decided to
separate its business into two publicly traded companies one in diversified
medical products and the other in research-based pharmaceuticals.

Following the move, Abbott Labs became a diversified medical products company
including branded generic pharmaceutical, devices, diagnostic and nutritional
businesses.

Abbott intends to increase its presence in emerging markets, which provide a

substantial opportunity for growth, given the rise in middle-class income and aging
population. The diversification should enable Abbott to penetrate these markets
and capture market share.

In particular, the nutrition and diagnostics business should maintain momentum

and boost the bottom line due to an improvement in operating margins.

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