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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
1
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
2
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
1 JPM
3
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.
4
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
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
5
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.
2 IBIS
6
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.
7
a. Products
8
Medicinal and botanical products supply the preparations
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.
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.
9
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.
Therapeutic classes
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
10
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
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.
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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
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.
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.
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.
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.
Germany
4%
The Netherlands
5% United States
Japan
42%
6%
All Other
Countries
29%
15
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.
1200
1000
800
600
400
200
0
1975 1987 2001 2006
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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.
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
17
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
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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
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.
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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
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.
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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.
22
It is very hard for Abbott to predict and estimate this risk factor which is totally out
of their control
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.
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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%
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:
27
VII. Pros to Recommendation
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.
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.
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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.
Pricing pressure:
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taking many steps to force medical and health care companies to reduce their price
for people.
Healthcare reform:
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
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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.
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.
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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.
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
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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.
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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%.
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
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view, Abbott still looks like a decent, if not spectacular, stock pick as part of a
broader portfolio.
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"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.
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%.
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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.
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]
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, 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.
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.
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