Relationship: ABBOTT LABORATORIES Counterparty: Abbott Laboratories (Pak) Ltd Client Status: Global Clients Last Decision Date:

May 06 AGIC:4507 Line of Business: Manufacture of basic pharmaceutical products

AAC Number: 50675d Presentation No: 2007-0198 UCR: 2 KMV EDF: n.a Ratings: ST LT Date Outlook S&P Moodys Fitch IBCA Innovest

of

Rating

Nature of Request Annual review of the counterparty, outlining recent business/financial performance for the FYE Nov 06, requesting renewal of existing facilities at UCR 2. The Company History: Public limited concern. Established in 1948, Abbott Laboratories is majority owned by parent/associated concerns to the extent of ~79% with the remaining divided between FIs, companies and various individuals. Pls note that during the current year shareholding of Abbott Lab Ltd and Abbott Equity Holdings Ltd has been transferred to Abbott Asia Investments Ltd UK. However, the ultimate holding company is Abbott Int USA. Business/Business Risks: Primarily involved in manufacture/sale of pharmaceutical/diagnostic products (imported) with the majority product categories comprising of antibiotics, analgesics, vitamins and nutritional products. The pharmaceutical division is engaged in manufacture, import and marketing of research based products registered with the Ministry of Health while the diagnostic division represents import, manufacture and marketing of diagnostic, consumer healthcare, nutritional and hospital products. Also note that Abbott Lab is currently involved in toll manufacturing arrangements for other pharmaceutical companies namely Organon, Wyeth etc. Total import volume of USD 35-40 mln with 80:20 split between contracts/LC. Key raw materials/finished goods are procured from parent/affiliates (80%) and third party suppliers (20%) against contracts and LCs (sight) basis respectively. On the sales side, majority sales (~95%) are made through an internal distribution network on cash basis with institutional sales are made out on 30-90 day credit terms. Key risk associated with the business is the price controls imposed by the GoP. The absence of any price increase puts pressure on margins following devaluation of PKR against major currencies (USD/EUR etc) as the multinational pharma companies operating in the country are dependent on imports (raw materials/finished goods) from parent/affiliates. The risk is mitigated to some extent via companys competitive advantages realised via access to parent R&D/technology and strong/established product pipeline along with companys strong ability to introduce new/high margins products. Management: Considered strong. The 7 member Board of Directors comprises of 4 parent nominees ensuring control over the local managements strategic decision making. Additionally, monitoring of operating/financial performance is done via monthly reporting to the Head Office. The senior management comprises of well qualified professionals with strong business knowledge and industry experience. AA maintains well-stratified contact with senior/middle level management. Our primary contact is Mr. Razzak Fathani- Treasurer & Co Secretary. Industry / Industry Risks: The pharmaceutical sector of Pakistan comprises of over 650 entities with operating licenses from Ministry of Health. Fragmented nature of the industry as ~15 companies (both local/MNC) control 45% market share. The aggregate market size is estimated to be ~ PKR 75-80 bln with an estimated annual CAGR of 12%. Given a number of global mergers and acquisitions the number of multi and transnational companies is on a decline and the same is reflected in Pakistan. As a result, the foreign multinationals face stiff competition from the local players on account of a) introduction of close substitutes of branded products at relatively lower prices, b) popularity of the toll manufacturing concept creating opportunities for the national companies who have proved to be fully competent to undertake such manufacturing. The primary hurdle faced by the local pharmaceutical sector is that the industry remains regulated in nature by the GoP via Ministry of Health (MoH). All product (essential/life saving and over the counter drugs) prices and drug registrations are determined by MoH. Additionally, advertising/marketing is governed by the GoP. Competition: Key multinational pharma players include Glaxo Smith Kline (12.1% SOM 1), Abbott Laboratories (5.6%), Aventis Pharma (4.9%) and Novartis Pharma (4.7%). Abbott Laboratories (5.6% SOM) fares well on the following a) established product portfolio (market leadership in various product categories), b) access to parent R&D, technology and c) ability to introduce new high-margin product pipeline. Exposure Horizon: Not proposed.
1

Share of Market

Relationship Economics (supported by LPT) Economic Capital Expected Loss Economic Profit Credit RAROC Relationship RAROC Current 11,584 643 12,765 72.22% 117.66% Proposed 5,823 452 11,620 156.41% 206.10%

Relationship Economics: Healthy RAROC is on account of incremental LC volume anticipated during the year. NCI comprises of income from fx fee and term/savings deposits. AA Position within Lending Group: Abbott Lab. is a profitable relationship with strong cross-sell annuity income as AA is recipient of large volume of low-solvency ancillary business. Given that we have just facilitated some regulatory approvals for the company in a record time, our position as core bank is further strengthened. Accordingly the company has agreed to "Grow" with AA and increase our share of import wallet which is presently 14%. Our main competitors are SCB (with 34% of import volume) followed by HSBC and Deutche Bank. We will also present various cash management solutions such that revenue stream increases without deployment of capital. LGD class: Facility Existing D2 E3 D4 D6 L3 L3 Calculated I3 L3 L3 Final/Proposed E3 L3 L3 Comments Given cash surplus nature of the customer, facility is primarily in use for LC facility. In line with LGD calculator and LPT guidelines for trade facilities. In line with LGD calculator and guidelines for unsecured facilities. In line with LGD calculator and LPT guidelines for unsecured facilities.

Summary Financial Analysis (see Notes to Financials) Financial Highlights: In PKR mln; Fiscal year-end November Balance Sheet Total Assets Net Worth Total Debt Contingent Liabilities Current Ratio Net Worth/T.A. FY 05 4,129 3,412 1,480 4.18x 0.83x FY 06 5,036 4,242 952 4.75x 0.84x Profit & Loss Turnover/Sales EBITDA EBITDA Margin (%) Net Profit/Loss Total Debt/EBITDA EBIT / Net Interest FY 05 5,227 1,507 29% 961 FY 06 5,914 1,524 26% 999 -

Following analysis is based on full-year financials for the period ended Nov 06: Profitability: Reduction in EBITDA margins by 300 bps is primarily on account of absence of any price increase allowed by the government resulting in continued inflation and higher input costs. The company posted net profit of PKR 999 mln (FY 05: PKR 962 mln) with net margin of 17%. Liquidity: Robust liquidity as current ratio increased to 4.75x (FY 05: 4.18x). Details of ST banking lines attached in the Appendix. Capital Structure: Well-capitalised balance sheet on account nil gearing at year-end. Also note that equity ratio improved to 84%. Cash Flow/Debt Service: Improvement in NOFF to PKR 930 mln (FY 05: PKR 778 mln) is mainly on account of lower inventory requirements for the FYE 06. This was sufficient to meet discretionary/non-discretionary expenses. Attached are the 1st Qtr 06 results: 1st Qtr Results Sales Gross Profit (Gross Margins) 1st Qtr 07 1,525 552 (36%) 1st Qtr 06 1,289 575 (45%)

Profit Before Tax

310 334 Qtr 07 FY 06 Current Ratio 3.61x 4.76x Gearing Prospects: For the 1st Qtr Feb 07, company reported sales revenue of PKR 1,525 mln (14% higher than the corresponding period in FY 05) due to volume increases. The companys existing pharma and nutritional product portfolio continued to show strong demand. Gross margins were impacted primarily on account of higher product import costs to meet demand as the company shut down its tablet plant post completion of its expansion/upgradation project. Profit-before tax declined to PKR 310 mln (1st Qtr FY 06: PKR 334 mln) primarily on account of reduced gross margins. However, companys performance/profitability remains dependent on new product introductions as well as smooth market access. Given that Abbott has historically performed well in both areas complimented by access to parents R&D and technical support, we expect sales growth of 10-12% with net profit margin to improve as well. Risk Analysis RISKS Price regulation risk- Pressure on margins given cap on prices by GoP resulting in cost increases not being passed on in a timely manner. Competition risk Strong competition from both the multinationals and fast growing local pharmaceutical companies, resulting in reduction in market share. Devaluation risk PKR against major currencies thereby increasing the cost of imported raw materials. MITIGANTS Common risk across the industry and is partially mitigated by a) periodical price increase allowed by the government, b) continuos introduction of new products and c) prudent cost control followed by the local management. Largely mitigated by the following: 1) market leadership position in antibiotics, vitamins and nutritional products 2) nation-wide distribution network, 3) high-tech/R&D and superior quality products with lesser competition from the low quality generics. Mitigated by the fact that the company books forward cover in order to hedge against possible devaluation.

UCR Proposal: Propose to maintain existing UCR 2; in line with GRACE rating. Pls note that subjectives remain unchanged as per the last approved presentation. Also note that during the FY 06 the company continued its healthy financial performance as witnessed via sales growth, strong current ratio and nil gearing. Recommendation Based on the above, we recommend for approval. Sign Off by: Credit Portfolio Management Annexes GRACE Executive Summary Notes to Financial Statements Corporate Rating Sheet (GRACE) Organigram/Group Structure Loan Pricing Tool and advice (provided by PMG) if required Client Management Advice KMV EDF Graph (optional) S&P or Moodys Research (optional) AAB Equity Research (optional) Innovest Report (if required) ESRMU Advice (if required) Other Product Advices (specify) Appendices Appendix 1: Shareholding Structure Appendix 2: Pharmaceutical market share for 2006 Attached Y Y Y N Y N Y N N N N N

Appendix 3: Banking Facilities of Abbott Laboratories Pakistan

Relationship: ABBOTT LABORATORIES U.S.A Counterparty: Abbott Laboratories (Pakistan) Ltd ACC Number: 50675d Presentation No: 2007-0198 Financial Analysis Audited financials for the FYE Nov 06 analysed below. Auditors A. F Ferguson (good repute) has provided an unqualified opinion on subject financials. Overall the financials can be classified as strong on account of increasing profitability, robust current ratio and a well capitalised balance sheet following nil gearing. Compliance with Prudential Regulations as of FYE Nov 06 is as follows: Ratio Actual Required Current Ratio 4.75x 1.00x Funded Liabilities/Equity 4.00x Non Funded Liabilities/Equity 0.17x 10.00x Profit & Loss-(Strong) - Sales growth of ~13% on y-o-y basis to PKR 5,914 mln (FY 05: PKR 5,227 mln) is primarily volume driven in the wake of strong field force productivity coupled with overall strong demand of antibiotics, cough/cold, vitamins and nutritional product- Ensure. - Gross margins remained in line with last year. Pls note that in the absence of any price increase by the government since 2001, margins of pharma companies are being adversely affected on account of inflationary pressures coupled with depreciation of PKR against key European currencies resulting in higher input costs. - Salaries/wages increased to 17% of sales (FY 05: 15% of sales) in line with inflation coupled with higher pension charge during the FY under review. Other expenses remained in line with last year. - The company remained cash surplus during the FY 06 and met its working capital requirements via internal cash generation- resultant ST borrowing and interest expense remained nil at year-end. Other financial income amounting to PKR 66 mln (FY 05: PKR 8 mln) represents interest income on deposits and investments. - The company reported net profit of PKR 999 mln (FY 05: PKR 962 mln) with PKR 374 mln reported as dividendto be paid out subsequent to year-end. Balance Sheet- (Strong) - Gross fixed assets increased to PKR 2,761 mln (FY 05: PKR 2,381 mln) primarily on account of the completion of the 1st phase of the plant upgradation and expansion project coupled with installation of electricity generation equipment. The electricity generation equipment has been installed to meet the companys enhanced electricity requirements in line with plant capacity expansion. - Inventory levels increased marginally to PKR 1,256 (FY 05: PKR 1,218 mln). The company maintained adequate inventory during the FY under review to meet product demand therefore, lower imports at year-end. - Group company receivables increased marginally to PKR 23 mln (FY 05: PKR 19 mln). This represents payments from associated undertakings on account of export sales coupled with reimbursement of expenses for providing services. - Accounts receivable increased to PKR 198 mln (FY 05: PKR 138 mln) on account of strong field force productivity to ensure growth in sales. - Other receivables increased to PKR 296 mln (FY 05: PKR 131 mln) - this pertains to taxation recoverable from the statutory authorities. Other current assets- an aggregation of various heads declined to PKR 182 mln (FY 05: PKR 241 mln) comprising of loans/advances, stores & spares and accrued profit. - Cash and bank deposits increased to PKR 1,609 mln (FY 05: PKR 1,161 mln) - and represents 45% of the current assets of the company. - Deferred taxation amounted to PKR 44.1 mln (FY 05: PKR 21 mln) in line with higher capex during the FY under review. - Group company payables declined to PKR 153 mln (FY 05: PKR 212 mln) in line with lower inventory imported at year-end. Accounts payable remained in line with last year. - Other current liabilities increased to PKR 402 mln (FY 05: PKR 304 mln) mainly on account of higher accrued liabilities. Accruals comprising of workers profit participation funds, welfare funds and sales tax amounted to PKR 157 mln (FY 05: PKR 145 mln).

Cash Flow- (Strong) Increase in NOFF to PKR 930 mln (FY 05: PKR 778 mln) is primarily on account of lower inventory requirements during the FYE 06. This was sufficient to meet discretionary and non-discretionary payments. Capex was entirely financed through internal sources. Contingencies & Commitments: Contingent liabilities included tax related claims for PKR 160.8 mln, outstanding bank guarantees for PKR 50.8 mln and outstanding letters of credit for PKR 351 mln; commitments for capex stood at PKR 23.8 mln while that of fx contracts amounted to PKR 205.04 mln.