April 9, 2012

HEALTH CARE (PHARMACEUTICALS)

Henry Fund Research

Abbott Laboratories (ABT)

Nick Johnson, CFA
nicholas-e-johnson@uiowa.edu

Investment Recommendation
Current Price Target Price Range

SELL
$61.30 $57-65

INVESTMENT THESIS
(-) Abbotts growth in revenues and profits are highly
dependent on Humira (2011 sales of nearly $8 billion or approximately 21% of Abbotts sales) which will likely face competition from Pfizers JAK-3 inhibitor in 2012 as well as generic competition in 2017. Growth in Humira has been strong and is forecasted to stay in the low double digits which will make Abbott even more dependent on Humira over the next few years.

(+) Part of the S&P 500 Dividend Aristocrats (i.e. a

group of companies that have increased dividends for at least 25 straight years), Abbott has successfully increased their dividend per share for 39 straight years. While their dividend yield is a modest 3.3%, investors can count on annual increases from management. The firm has a strong balance sheet and no major patents expiring until Humira in December 2016. Abbott is expected to continue this even after the split. $46.29-62.57 $96.39 1,570 65.7% 0.40 3.3% 20.37 3.95 1.6 8.40% 20.00% 8.66%

Source: Yahoo! Finance

Key Stock Statistics1

52-Week Price Range Market Capitalization (B) Shares Outstanding (M) Institutional Ownership 3 Year Weekly Beta Dividend Yield Price/Earnings (ttm) Price/Book Price/Sales ROA (ttm) ROE(ttm) Projected 5-Year Growth

(+) The acquisitions of Piramal Healthcare and Solvay

Pharmaceuticals allow Abbott to strategically build their pipeline and to gain further access to emerging markets, in particular India. Emerging markets currently make up nearly 25% of Abbotts revenue and is forecasted to grow by mid-double digits during the forecast period.

(+) Abbott is forecast to split the company into two by

the end of 2012 which will unlock value to shareholders by creating a branded biopharmaceutical and a diversified health care products company. It will also allow the new Abbott Laboratories to focus on something other than Humira.

(-) Splitting the company will likely lead to large onetime costs over the next two years and may hurt their gross margins in the long term due to replication of positions across the two firms. They may also lose their status as a Dividend Aristocrat as there is no precedent for a company dividing into two separate entities of approximately the same size.

EPS ($)
Year EPS 2009 3.71 2010 2.98 2011 3.03 2012E 3.25 2013E 3.40 2014E 3.61
All earnings represent earnings from operations and have been filtered from net nonrecurring gains.

Valuation Models
Discounted Cash Flow Economic Profit Relative P/E Fundamental P/E Model $63.98 $63.98 $52.27 $69.82

(-) Large fiscal budget shortfalls across the US and

Europe will lead to cuts in government spending in health care in the long run. This will cause governments to focus on cost-cutting measures including price-cuts for branded prescription drugs or additional taxes on health care companies. The Supreme Courts upcoming ruling on Health Care Reform introduces additional risk for Abbott.

Important disclosures appear on the last page of this report.

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EXECUTIVE SUMMARY
Abbott Laboratories is a diversified health care company that designs and manufactures products across five reported segments: proprietary pharmaceutical, established pharmaceutical, nutritionals, diagnostics, and vascular. The firm has had strong growth over the past five years, largely due to the success of Humira, a rheumatoid arthritis medicine, which now generates nearly $8 billion in revenue or approximately 21% of Abbotts sales2. While Humiras patent does not expire until December 2016, Abbott will likely face competition as early as this year from Pfizers JAK-3 inhibitor which will dramatically impact share price. Management has announced that the company will be divided into two companies by the end of 2012. One will retain the proprietary pharmaceutical segment (as well as Humira) and be called AbbVie. The other will manage the rest of the firm and will keep the Abbott Laboratories name. While the split is intended to unlock shareholder value, it may end up hurting margins and profitability.

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including Humira7. The company plans to make the separation complete by the end of 2012.

Source: Abbott Laboratories 2011 10-K

Pharmaceuticals represent a majority of Abbotts revenue, with proprietary and established products generating $17 billion and $5.4 billion in 2011, respectively2. Abbotts largest product is Humira, an anti-arthritis medicine, with nearly $8 billion in revenue Abbotts management is dedicated to increasing its and 21% growth for 2011. Growth for Humira is dividends per share as they have successfully done for expected to slow to low double digits in 2012. the past 39 straight years. They are part of the prestigious S&P 500 Dividend Aristocrats and will try to retain this title after splitting into two. Much of Abbotts growth comes from emerging markets and this trend will likely continue as developed markets are predicted to remain stagnant over the next five years while emerging markets are forecasted to grow at a CAGR of 20%10. Abbott made a string of acquisitions in 2010 to strengthen its drug pipeline and have better access to these markets. However, due to Abbotts reliance on Humira for growth and profitability, we place a hold recommendation on Abbott with a price range of $57 to $65.

COMPANY DESCRIPTION
Abbott Laboratories is a global diversified health care products firm that focuses on research, development, design, and manufacture of innovative medical products. Abbott reports five business segments including proprietary pharmaceutical products, established pharmaceutical products, diagnostic products, nutritional products, and vascular products. On October 19, 2011, Abbott announced that it would be dividing the company into two publically traded companies. The first, which will retain the Abbott Laboratories name, will manage all segments of the original firm except for the proprietary pharmaceutical division. The second company, with an announced name of AbbVie, after the Latin word for life, will consist solely of the proprietary pharmaceutical division
Source: Abbott Laboratories 2011 10-K

The United States generated 41% of Abbotts revenue in 2011, continuing a decline from the past decade. As the chart below indicates, Abbott has increasingly relied on international markets, and emerging markets in particular, to grow revenue. This trend is expected to continue as emerging markets are forecasted to grow over 20% over the next five years5. Currently, Abbott hedges foreign exchange rate risk with one year currency forward contracts. This is expected to continue over the forecast period.

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Kaletra (also marketed as Aluvia and Norvir) HIV infection Lupron (also marketed as Lucrin and Lupron Depot) palliative treatment for prostate cancer and treatment for endometriosis and anemia Synagis respiratory syncytial virus AndroGel low testosterone Ultane and Sevorane anesthesia Zemplar hyperparathyroidism Creon pancreatic exocrine insufficiency

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

In order to break down Abbotts revenue, it is best to analyze each segment individually because each segment has its own forecasted growth, risk and life cycle. Proprietary Pharmaceutical Products The proprietary pharmaceutical division is composed of a variety of branded pharmaceutical products currently covered by patents. Management has announced that this segment will be its own publically traded company by the end of 2012, named AbbVie 7. The major concern for this segment is competition for its major product, Humira, first with Pfizers JAK-3 inhibitor then from generic competition when Humira loses its patent in December 2016. Already showing promising results from Phase III trials, Pfizers JAK-3 inhibitor may steal significant market share if it continues to perform well in late-stage trials.

To analyze the proprietary pharmaceutical segment, we further split the segment into pipeline and existing products. Managements guidance calls for flat to low single digit growth until 2015 with growth largely coming from Humira including organic growth and new applications of the compound. Our forecast has existing products growing at a 3% rate until 2016, at which time Humira will lose its patent. We forecast a 50% drop across the entire segment in 2017 as few of the products in their current pipeline have the potential that Humira has. Direct competition could steal market share by the end of 2012 which would dramatically effect revenue and share price.

In addition, Roches rheumatoid arthritis drug, Actemra, will likely report trial data later this year or early 2013 with head-to-head results against Humira8. Early results for Actemra have been promising, but there are a number of limiting factors that prevent true Source: Abbott Laboratories 10-K (2006-2011) and Henry Fund comparison with Humira including a small sample size Estimates and dosage differences. Any evidence showing a head-to-head improvement over Humira could be Established Pharmaceutical Products devastating to Abbotts share price. The established pharmaceutical products segment Abbott Laboratories, and soon AbbVie, will be required includes a broad line of branded generic products. to find new products to replace Humiras lost revenue These products are no longer protected by patents and and possibly soon. In order to account for this face increased competition from generic manufacturers. uncertainty, we performed a scenario analysis to This competition forces margins well below what is analyze the effects losing Humira would have on expected from pharmaceuticals protected by patent (i.e. Abbott. The breakdown of the scenario analysis is Abbott earned a 24% gross margin on established and 42% gross margin on proprietary included in the Valuation section of this report. Below is pharmaceuticals 2 pharmaceuticals) . The principal products include a list of Abbotts principal proprietary pharmaceutical 2 some of the same products in the proprietary segment, products and their indication . but in countries where Abbott no longer enjoys the Humira rheumatoid arthritis and Crohns benefit of the composition of matter patent. Below is a disease list of the main products for this segment as well as TriCor, Trilipix, Simcor, and Niaspan their indication2. dyslipidemia Creon - pancreatic exocrine insufficiency

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Biaxin, Klaci, and Klaricid anti-infective clarithromycin Influvac influenza vaccine Serc Meniere disease and vestibular vertigo Brufen treatment for pain, fever, or inflammation Synthroid hypothyroidism Duspatal and Dicetel irritable bowel syndrome Duphaston numerous gynecological disorders Adomet, Heptral, Transmetil, Samyr, and Donamet treatment of intrahepatic cholestasis Duphalac regulation of the physiological rhythm of the colon Lipanthy and TriCor dyslipidemia Teveten and Physiotens hypertension

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million containers of powdered Similac infant formula in the US because there was a remote possibility that it may contain small insect parts and beetle larvae 4. However, management announced on their 4 th quarter earnings call that the company has since regained all market share lost during the recall and had reestablished itself as the infant formula market leader once again.

While this segment has shown strong growth in recent years, it was largely due to Abbotts string of acquisitions. With cash purchases of Solvay Pharmaceuticals in February 2010 for $6.1 billion and Piramal Healthcare in September 2010 for $2.2 billion, Abbott made large investments to increase this segment and its drug pipeline2. Without additional acquisitions, management has provided guidance of low single digit growth for 2012 in this segment and we forecast 3% growth going forward unless Abbott were to continue making acquisitions.

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

Management believes this will be one of Abbotts fastest growing segments over the next five years due to growth from emerging markets. They believe the worldwide market will grow from $30 billion to $40 billion by 2015 and have set guidance with a double digit CAGR and revenue of $9-$10 billion by that time. However, in the past five years, nutritionals has only had one year of double digit growth and the lowest margins, currently at 13%. We forecast a 7% growth rate for this segment which is above the five year historic average, but much lower than managements overly optimistic forecast. Diagnostic Products Abbott manufactures and sells a wide variety of diagnostic products in the US and internationally. These products face different industry forces than the rest of the pharmaceutical and nutritional segments. In particular, their competition shifts from pharmaceutical firms to medical device manufacturers. Abbotts principal diagnostic products are: Immunoassay and clinical chemistry systems marketed under the name Architect, AxSYM, and Abbott Prism. Assays for screening drug abuse, cancer, therapeutic drug monitoring, fertility, physiological diseases, and infectious diseases such as HIV or hepatitis m2000 for automating extraction, purification, and preparation of DNA and RNA from patient samples

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

Nutritionals Abbott manufactures and markets a line of pediatric and adult nutritional products. These products are distributed to wholesalers, retailers, health care facilities, and government agencies under a variety of names. Prepared infant formula is sold under the name Similac with a diverse selection of options including organic. Other pediatric nutritional products include PediaSure and Pedialyte. Adult nutritional products are marketed under the name Ensure and Zone Perfect. In September 2010, Abbott voluntarily recalled over five

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Informatics and automation solutions for lab remained relatively flat over the last three years from $2.7 billion to $2.9 billion. We forecast 2% growth over use the forecast period to reflect the historic average growth Full line of hematology systems and blood rate. analysis Dividends i-Stat point of care diagnostic systems Abbott is one of 51 companies in the 2012 S&P 500 Dividend Aristocrats. This list is made up of companies that have increased dividends for no less than 25 straight years. With an increase in 2011, Abbott has increased their dividend for 39 straight years and has a payout ratio of over 60%. The company has announced plans to continue this trend with the combined 2012 dividend of Abbott Laboratories and AbbVie to be greater than the 2011 Abbott Laboratories dividend4. We predict that AbbVie (the proprietary pharmaceutical division) will hold a dividend yield close to the industry average of 4%, while Abbott Laboratories will hold a yield closer to 2%. The company has shown great dedication to keep growing Source: Abbott Laboratories 10-K (2006-2011) and Henry Fund its dividend and with a current yield of 3.3%, we Estimates forecast that both firms will continue this tradition. While management forecasts that this segment will grow more slowly than its other segments, they do believe that it can increase operating margins from 14% in 2010 to 20% in 20124. We agree and project revenue growth of 4% throughout our forecast period due to the expected launch of a number of new assays, but keep margins relatively flat due to and additional medical device tax that is part of the healthcare reform law. Vascular Products Abbott manufactures and markets a broad line of coronary, endovascular, vessel closure, and structural heart devices for treatment of vascular disease 2. The principal products in this segment are stents, balloon dilation products, vessel closure devices, and valve repair systems. While this segment is their smallest reporting segment, it has shown strong growth due to impressive gains in market share of stents. Management believes this trend is expected to continue with mid to high single digit growth for the segment over the next five years. We agree with their prospects in this sector and have projected 7% growth over the forecast period. Other Products

Source: Abbott Laboratories 2011 10-K

RECENT DEVELOPMENTS
2011 Results and Earnings Call On January 25, Abbott announced disappointing 4th quarter results causing shares to fall 1.7% (versus a 0.87% gain for the S&P 500) for the day11. Analysts had estimated sales of $10.6 billion, but Abbott fell short with only $10.4 billion. However, Abbott was able to beat earnings estimates by a penny. In addition, nearly 25% of total sales came from emerging markets, particularly for the nutritional, vascular and diagnostic products segments. In 2012, Abbott provided guidance of non-GAAP earnings of $4.95-5.05, bracketing the average analysts estimate of $5.02 per share11. Abbott also announced that they would continue share repurchases in 2012. Overall, the 2012 goals appear reasonable given the success management has had in cutting costs through layoffs and restructuring.

In addition to Abbotts reporting segments, they also manufacture and sell blood glucose monitors, test strips and management software for individuals with diabetes as well as medical eye care products including LASIK machines, contact lens care products, and dry eye products. Most of these products are sold to wholesalers, government agencies, health care facilities, and pharmacies, but others are sold over-the- Humira recorded revenue of $2.2 billion for the quarter, counter to consumers. Revenue in this segment has missing analysts estimates of $2.3-$2.4 billion. This

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also indicated that growth was slowing to 16% from 25.7% the previous quarter. With slowing growth for Humira, but increasing international growth for their other segments, Abbott should continue to have strong revenue gains in 2012, but gross margins are forecasted to decrease to 58% due to changes in product mix. Abbotts management was extremely positive during their earnings call. They announced their commitment to a strong dividend including a payout of over $3 billion in 2011 as well as a strong stock performance with a shareholder return of 22% in 2011 leading large-cap medical device companies and near the top of largecap pharmaceutical companies. Abbott provided few additional details about the split, but maintained that both companies will be well-positioned large-cap firms with strong balance sheets and cash flows, diversified product lines with global presence, and investmentgrade credit ratings. Management remained concerned over movements in the exchange rates and believed that it would have a negative effect of approximately 2.5% of sales in 2012, but would not affect their bottom line due to exchange rate forwards. We fully expect that Abbott will continue to perform well over the next year, close to managements expectations, but remain concerned about the companys dependence on Humira. Acquistions Abbott acquired Solvay Pharmaceuticals, Piramal Healthcare, and Facet Biotech in 2010 in order to strategically build their pipeline and to gain further access to emerging markets, in particular India. In 2011, Abbott did not acquire any additional firms, but did not rule out opening its pocketbook again in 2012. Abbotts first acquisition of 2010, Solvay Pharmaceuticals, was also its largest2. For a cash price of $6.1 billion, with additional payments of up to 100 million euros for three years, Abbott acquired Solvay which boosted Abbotts 2010 sales by $3.1 billion. The deal provided Abbott with AndroGel, a testosterone replacement therapy, which reported revenue of $874 million in 2011 and Creon, a pancreatic enzyme, which reported revenue of $296 million in 20112. Both of these products are the market leaders for their field and are projected to remain so for the forecast period. Piramal Healthcare, purchased by Abbott for $2.2 billion in cash, provided the firm with increased exposure to branded generics as well as emerging markets. This increases Abbotts ability to diversify its pharmaceutical segment beyond Humira. As countries continue to have fiscal shortfalls, focus has turned to health care as an area for cuts. Switching to generics is a prime target for countries to reduce health care costs and this acquisition positions Abbott well for this shift. As

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mentioned above, nearly 25% of Abbotts revenues now come from emerging markets and this acquisition helped to solidify their position, especially in India. Finally, Abbott purchased Facet Biotech for $430 million in September of 2010. This acquisition increased Abbotts mid and late stage pipeline. In particular, it provided access to Facets biologic for multiple 2 sclerosis, Daclizumab . Biologics, such as Humira, are large molecule compounds and are derived from living matter or organisms. They are harder to replicate, but less capital intensive to get FDA approval. Currently in Phase III trials, Daclizumab may provide a solid entry into the Multiple Sclerosis market for Abbott. Pipeline News With competition facing Humira as soon as this year, Abbott must find a way to replace any lost revenue with their drug pipeline. Much of Abbotts current Phase III portfolio is focused on finding additional applications for Humira, but their Phase II portfolio is large and diverse. Abbotts Drug Pipeline (as of October 2011)
Phase I ABT-308 ABT-413 ABT-436 ABT-354 ABT-500 ABT-110 ABT-272 ABT-521 ABT-199 ABT-348 ABT-767 ABT-806 TRLL.016 Vollociximalb ABT-700 ABT-SLV361 Phase II ABT-450 Linifanib ABT-267 Navitoctax ABT-333 Navitoctax ABT-072 Navitoctax Humira Navitoctax BT-06 Vellparib BT-061 Vellparib ABT-126 Vellparib ABT-126 Vellparib ABT-630 Vellparib ABT-652 Vellparib Atrasentan Elagolix Elagolix Phase III Humira Humira Humira Dacllzumab Duodopa Elotuzumab Linifanib Bardoxolone Methyl Zemplar IV

Antiviral Immunology Neuroscience Pain Oncology Other

Source: Abbott Laboratories (www.abbott.com)

Abbotts Phase II portfolio is focused on oncology and antiviral (Hepatitis C) treatments. The market for Hepatitis C treatments has become increasingly fierce over the past few years as diagnostic approaches have become less costly, but more accurate. For example, there are an estimated four million Americans infected with Hepatitis C, but only one quarter are diagnosed 10. Bristol-Myers Squibb recently purchased Inhibitex at a 163% premium in order to acquire its Hepatitis C portfolio despite already having a drug in Phase III for a

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common strain in Asia. While Phase II studies (PILOT and CO-PILOT) have been positive, Abbott will not have commercialization of any product until 201513. At that point, Bristol, Gilead, and Vertex will already have their products to market although they will not be an oral cocktail. While Abbott estimates the market at over $12 billion by 2015, there will be increased competition going forward12. This increases the risk that Abbott lacks the necessary drug pipeline to compete after the loss of Humira.

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growth in revenues. In particular, Abbotts acquisition of Piramal Healthcare helped to open the Indian market for Abbott. With stagnant to slow growth expected in developed markets, Abbott is well positioned to capitalize on the growth in emerging markets.

INDUSTRY TRENDS
Biologics Biologics or large molecule compounds are medicines derived by living matter or organisms and are expected to grow from 20% of the pharmaceutical market to nearly half by 20169. This increase is largely due to biologics carrying a high price and requiring less capital to obtain FDA approval which provides for a higher return on investment. In addition, these products are far more difficult to replicate compared to smallmolecule chemicals which creates a higher barrier to entry, and therefore, less risk of competition. However, under legislation passed in the Healthcare Reform Act, biosimilar (i.e. generic) versions of biological products can be approved on a shortened track and with less data which eliminated the unlimited exclusivity that previously existed for biologics. Biologics now are limited to 12 years of exclusivity in the US. Humira, Abbotts most profitable compound, is a biologic which may make it more difficult to replicate when it does come off patent in 2016. However, Humiras true competition is likely from other branded pharmaceuticals with better results such as Pfizers JAK-3 inhibitor. Emerging Markets

Global pharmaceutical sales growth is being driven by the high growth in emerging markets, particularly China. Consensus estimates have countries in emerging markets accounting for two-fifths of worldwide GDP and 80% of population by 20155. The projected revenue growth for pharmaceutical drugs in the US is 0%-3% over the next three years, but Chinas market is Patent Cliff expected to grow at a rate of 19-22% spurred by $124 billion in government funding to provide health coverage to nearly 90% of their citizens5,10. This projected growth rate in China is actually down from their 2006-2010 CAGR of 23.9%10. In total, emerging markets are estimated to account for 28% of global pharmaceutical sales in 2015, an increase from 18% in 2010. Conversely, developed markets will likely see their contribution to global sales drop from 53% in 2010 to 44% in 2015. In brief, emerging markets will account for 90% of the growth in pharmaceuticals until 2020 5. Abbott has focused on India and China to stimulate

Emerging markets have also presented significant challenges to drug manufacturers. First, with prescription drug costs largely coming out-of-pocket in emerging markets, it has made the industry more cyclical than in the past and decreased margins. To exacerbate the problem, countries that have been hit significantly hard by the global recession, such as Russia and Mexico, require their citizens to bear the cost of prescription drugs5. In addition, patent enforcement in emerging markets has been a worldwide issue with China and India being the worst offenders. However, both countries started to officially recognize international patents in the last decade. Without patent protection, branded pharmaceutical companies would not have any financial incentive to discover new drugs.

Source: Yahoo! Finance

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After years of preparation, 2011 marked the beginning of the patent cliff for major pharmaceuticals. Patented drug manufacturers are expected to lose $255 billion in total revenue, with decreased revenues of $21 billion in 2011 and $33 billion in 20125. In short, there has been a significant increase in competition from generic drug manufacturers. The chart above outlines the largest expirations and their manufacturers. While Abbott will lose patents on two drugs with sales totaling $2 billion in the next few years, Humira is Abbotts primary concern over the next five years. With several acquisitions in 2010 as well as organic development of a drug pipeline, Abbott has tried to position itself for the loss of patents in its proprietary segment.

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In order to survive the patent cliff, pharmaceuticals have tried multiple strategies including aggressive pricing (branded drug prices increased by 9.7% in 2010), mergers and acquisitions, and licensing and partnership programs5. In addition, significant costreduction efforts have been implemented, including the elimination of over 100,000 jobs across the industry in the past three years. Even R&D budgets, the life blood of pharmaceuticals, have been cut recently, headlined by Pfizers decision to reduce its estimate of 2012 R&D by $2 billion. However, R&D across the industry is expected to continue to grow at above 5% in the near term and remain between 14%-18% of revenues5. Firms that cut R&D budgets will be forced to find strategic partnerships or acquisitions. While Abbott is not a pure play pharmaceutical company (i.e. only 44% of sales are from proprietary pharmaceuticals), they have kept R&D expenses around 10% of sales, well below the industry average of 14%-18%. We forecast for this trend to continue with R&D expenses at 10% of sales.

Source: Abbott Laboratories 2011 10-K

Specialty (Orphan) Drugs Specialty drugs, commonly referred to as orphan drugs, have received renewed interest as government incentives have encouraged their development. These incentives include grants to help defray costs, tax incentives, and 7-year exclusivity (even if the composition of matter patent were to expire prior). In fact, nearly two-thirds of new chemical entities launched have focused on rare diseases affecting less than 200,000 individuals5. Drug manufacturers can achieve monopolistic positions with orphan drugs which allows for premium pricing and a longer product life cycle. For this reason, the number of FDA approvals for orphan drugs has increased from 145 to 202 for the 14-year period of 1997-2010 compared to 1983-1996. This is not a strategy that Abbott has chosen to develop because their focus has been on treating diseases with large markets. In particular, Abbott has focused its pipeline on creating new applications for Humira, oncology drugs, and treatments for Hepatitis C. We

Source: S&P Industry Report

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agree with this strategy because developing orphan depending on the opinion of the Supreme Court in June drugs, even with extended benefits, requires the and whether they appeal a portion of the law. pharmaceutical firm to accept additional risks due to the MARKETS AND COMPETITION limited number of patients available. Abbott competes across several different industries in the health care sector. It is often classified as a pharmaceutical since almost 60% of its revenue comes from those segments. However, Abbott also competes in medical device and nutritional markets that have far different characteristics. For this reason, its main competitors are multinational corporations such as Johnson & Johnson and GlaxoSmithKline who are diversified health care companies and do not rely solely on biopharmaceuticals for income. One Year Stock Return ABT, JNJ, GSK
Source: PhRMA

Health Care Reform President Barack Obama signed the Patient Protection and Affordable Care Act (PPACA) on March 23, 2010. The health care overhaul bill has remained under immense political and judicial scrutiny since its signing. The Supreme Court recently heard arguments, and based on the Justices questions, most pundits believe the individual mandate portion of the law will be overturned8. The official verdict is expected in June. While much of the outcome of reform is still unknown due to many provisions being implemented in 20132020 and uncertainty whether the act will remain law, there has already been large consequences. Profit margins have been squeezed by discounts given by branded prescription drug manufacturers to patients in the Medicare Part D plan doughnut hole 2. In fact, Abbott incurred a one-time $60 million expense in 2010 to reflect changes in the Medicare program. Additionally, there will be a 2.3% excise tax imposed on the sale of certain medical devices in the US which will directly impact Abbott2. However, the new law is projected to increase the number of insured individuals by an estimated 32 million and individuals with prescription drug coverage increase their prescription drug utilization by 75%9. Overall, it is widely expected that health care companies will be hurt in the short term, but will benefit from having more customers with health insurance in the long term. With millions of additional Americans added to health insurance and new health plans that will favor cost savings, strong growth is expected within the generic drug sector5. This may have been a catalyst for Abbotts acquisition of Solvay Pharmaceuticals in order to grow their generic drug portfolio. At this point, pharmaceutical firms are already shouldering the costs of health care reform and a repeal of the law would be a major headwind to future earnings growth. However, events may change rapidly

Source: Yahoo! Finance

Johnson & Johnson (JNJ) The well-known company, Johnson & Johnson, operates in three core segments: medical devices and diagnostics, consumer healthcare, and pharmaceuticals. Within its pharmaceutical segment, 65% of its revenue stems from small molecule chemical compounds and the remaining 35% comes from biologics9. Johnson & Johnson shares the same challenges as the rest of the industry, in particular expiring patents of blockbuster drugs and difficulty in obtaining FDA approval. The company was able to grow its US pharmaceutical and OTC medicine segment in 2011 by 6.3%, including an 8.8% increase in operating income. This was after years of decline in both measures. Johnson & Johnson has positioned itself well for the future with significant R&D investments in biologics as well as large acquisitions in the late 2000s5. In addition, they have a strong pipeline of medicines to replace lost revenue due to patent expiration. GlaxoSmithKline (GSK) GlaxoSmithKline, headquartered in the United Kingdom, operates in two core segments: pharmaceuticals and consumer healthcare. Well established as a branded pharmaceutical company, GlaxoSmithKline is also a major manufacturer of vaccines. In order to increase growth, they have

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focused their resources on biologics and vaccines. Like many of its competitors, GlaxoSmithKline has also instituted cost-reduction plans including cuts to R&D and the reduction in 3,000-4,000 positions by the end of 2012. Sales of their US pharmaceutical segment increased 2% in 2011, but cost-saving measures helped push their operating income up 13%9. With over 30 drugs in late-stage FDA trials, GlaxoSmithKline hopes to replace their current portfolio with new drugs over the next few years, but cuts in R&D put future growth at risk. There may be short term life in GlaxoSmithKline, but we do not believe they are a viable long term target at this time. Pfizer (PFE) Pfizer, the global pharmaceutical company, operates in two core segments: biopharmaceutical and diversified. With over 42% of their revenue in drugs that will lose their patent protection before 2013, Pfizer has searched for strategies to protect their future5. First, in 2009, they acquired Wyeth in order to augment their research in biopharmaceutical drug development. Pfizer has also increased their presence in the generic drug market, in particular, protecting its largest revenue source, Lipitor. Finally, Pfizer has dramatically cut R&D costs to try to improve the bottom line. Sales in Pfizers US pharmaceutical segment saw a 4.2% decrease in sales as well as an 8.0% decrease in operating income in 20119. A weaker pipeline of drugs, decreased R&D spending, and attempts to protect drugs past their patent reveal that Pfizer may have difficulties in 2012 and beyond. In order to grow, Pfizer will be forced to pay premiums to acquire clinical stage firms and is not in a beneficial position to take advantage of market opportunities. Merck (MRK) Merck, the second largest pharmaceutical company, operates in four core segments: pharmaceutical, animal health, consumer care, and alliances. Unlike Pfizer, Merck has increased its R&D spending by 10% in 2009 and plans on continuing to improve its pipeline. After its merger with Schering-Plough in 2009, Merck has attempted to reduce costs by laying off employees, including an announcement to eliminate another 12,000-13,000 employees by the end of 2015 9. Revenue in their US segment fell 5.6% in 2011, but cost-saving measures were able to overcome the shortfall and operating income increased 8.0%. Overall, Merck is likely the best positioned for the patent cliff with only one blockbuster drug, Singulair, set to expire in 2012. With a strong pipeline, reduced labor costs, and a strong R&D investment, Mercks future holds promise. They would be another firm worth investigating further for possible investment. Bristol-Myers Squibb (BMY)

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Bristol has operated solely in the biopharmaceutical industry since 2009. With the impending expiration of their most profitable drug, Plavix, Bristol is searching for opportunities to replace nearly one third of its revenue. Due to strong investments in R&D as well as a stringof-pearls acquisition strategy, Bristol is considered to have one of the best drug pipelines in the industry, headlined by Eliquis (cardiovascular) and Yervoy (oncology). With a dividend yield of 4.2% and a strong drug pipeline, Bristol appears to be a very attractive stock. Comparable Company Comparison
JNJ Market Cap (B): Revenue (B): Operating Margin: EPS (ttm): P/E (ttm): PEG (5 yr expected): P/B (ttm): ROA (ttm): ROE (ttm): Current Ratio (mrq): Dividend Yield (ttm): 179.3 65.0 25% 3.49 18.7 2.07 2.89 9.37% 17.02% 2.38 3.6% GSK 111.6 43.7 37% 1.03 43.7 0.92 19.05 12.66% 58.78% 1.08 5.4% PFE 163.0 67.4 29% 1.28 16.5 3.26 1.79 6.45% 10.23% 2.06 3.8% MRK BMY ABT 117.0 55.5 96.4 48.1 21.2 38.9 21% 33% 40% 2.02 2.18 3.03 19.1 15.1 20.4 2.51 12.1 8.66 5.14 3.41 3.95 6.26% 13.64% 8.40% 11.24% 33.39% 20.00% 2.04 1.97 1.54 4.2% 4.1% 3.3%

Source: Yahoo! Finance

ECONOMIC OUTLOOK
The key macroeconomic factor affecting Abbott is the unemployment rate. Nearly 60% of US workers receive health insurance from their employers, and as the unemployment rate drops, more individuals become covered5. As the economy has improved, the unemployment rate has continued to drop, reaching 8.2% in March of 2012. Henry Fund consensus is that the economy will continue its slow recovery and that unemployment will continue to drop to approximately 8.0% in six months and 7.4% in two years. As the unemployment rate drops and the number of US workers and families with health insurance increases, the usage of prescription drugs will also increase. This will aid Abbott not only in the purchase of their pharmaceutical products, but also in the increase in demand for their nutritional products.

Source: Bureau of Labor Statistics

10

Henry Fund Research

Consumer confidence and spending are also two important drivers for the pharmaceutical markets. Prescription drugs account for the highest percentage of out-of-pocket medical expenses for individuals under 65 on private insurance6. For the highest level of prescription drug utilization, higher consumer confidence and spending are required. Our expectation is that both these indicators continue to improve, but like the unemployment rate, very slowly.

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

CATALYSTS FOR GROWTH

Humira Abbotts biggest catalyst for growth still lies with Humira for the next few years. With several additional uses currently in Phase III trials, management has announced guidance of low double digit growth in Humira in 2012. However, this catalyst is also Abbotts largest risk. Pfizer is expected to enter the market in 2012 with its JAK-3 inhibitor which may steal market share. To analyze this risk, we performed a scenario analysis to better understand the effects Humira had on Abbotts overall stock price. This analysis is contained in the Valuation section. Aging Demographics The aging baby boomer generation in the US represents a large segment of current customers that is expected to increase their consumption of pharmaceuticals as they age. In fact, elderly (i.e. patients over the age of 60) patients already account for 33% of industry sales and with life expectancy rates continuing to rise, the number of elderly in this country is projected to increase to nearly 80 million by 2040 5,15. This phenomenon is not unique to the United States. The percentage of world population over the age of 60 is projected to grow from 11.0% in 2010 to 21.8% in 20505. In short, the market for pharmaceuticals to the elderly has strong long-term growth potential. For Abbott, Humira for rheumatoid arthritis, stents for cardiovascular disease, and oncology drugs to treat cancer will cater to a population that is aging around the world. Emerging Markets As described in detail above, emerging markets represent a great opportunity for Abbott. The sales growth rate in China was forecasted to grow at 25-27% in 2011 alone, due to increased government health care funding and their ever-expanding middle class5. Abbott has focused its attention on India and China with nearly 25% of its revenue now coming from emerging markets. Economic development and the protection of intellectual property will be critical for Abbott to be successful in these countries. Company Split Management has focused a lot of attention on Humira as the drug has become a larger portion of the companys revenue and profit. By splitting the company into two separate entities, management may be able to unlock value by catering to investors looking for certain exposures or characteristics. However, this split may also increase costs and hurt margins due to replication in the two new companies.

Source: Trading Economics

Finally, the real GDP growth rate provides a basic indicator for the overall health of the economy. This drivers influence on Abbott largely stems from its influence on the previously mentioned drivers. A healthy GDP growth rate will positively influence the unemployment rate which will lead to more insured individuals with more spending. Henry Fund consensus estimates predict GDP to stay above 3.0% for the next two years.

Source: Trading Economics

Exchange rates play a large role in the profitability of most multi-national corporations and Abbott is no different. With sizable revenue coming from Europe, India and China, Abbott is focused on how these exchange rates affect sales. Abbott announced that exchange rates would provide a 2.5% headwind for sales for 201211. Abbott hedges their exchange rate risk with one year foreign exchange forwards. With the Greek debt crisis coming to a close (or at least an intermission), we expect the euro to modestly appreciate against the dollar in the short term. While exchange rates could affect reported revenue figures, it is not forecasted to affect net income due to hedging measures.

11

Henry Fund Research

INVESTMENT POSITIVES

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

addition, the new law creates an excise tax on medical devices.

Humira has led Abbott to strong growth across its diversified health care products. While its growth is VALUATION slowing, it is still expected to be in the low double Abbott is currently fully valued based on our discounted digits driving revenue and profit for the next year. cash flow and economic profit model. Sensitivity Abbott has consistently increased dividends over the analysis reveals that the model is most affected by last 39 years to become a part of the S&P 500 WACC assumptions (e.g. beta), continuing value Dividend Aristocrats. This trend is expected to growth rate, gross margin percentages, sales growth continue even after Abbott splits into two separate forecasts and the marginal tax rate. With a three year publicly-traded companies. weekly beta of 0.40 and a low risk free rate of 3.36%, Abbott has a very low weighted average cost of capital Splitting the firm into two may unlock value to of 5.05% which places increased value on distant cash shareholders increasing the share price. In addition, flows. For example, increasing the beta to 0.6 will drop the diversified health care firm (retaining the name the value of firm down to the low $50s. In addition, Abbott Laboratories) will be able to focus on its continuing value growth rates are given extra entire business and eliminate concerns over Humira. importance due to the low WACC. Distant cash flows are discounted at low rates which increases their The growth in emerging markets will be a key for the pharmaceutical industry as a whole, but Abbott present value. stands to earn substantial returns. With double digit Due to Abbotts dependence on Humira, we ran a three growth in health care spending, emerging markets stage scenario analysis to analyze the effects on the will provide a large majority of the growth for health share price. Our base case reflects low single digit care companies. Abbott has positioned itself well growth in Humira in 2012 and 2013, before leveling off with the acquisition of Piramal Healthcare to aid in to mid to low single digits in 2014-2016. In 2017, after the development of the Indian market. losing its patent, sales fall 50%. We expect an 80% likelihood of this occurring. Our bear case reflects a Abbott has no major patent expirations until Humira in December 2016. This should provide them ample scenario in which Pfizers JAK-3 inhibitor becomes a time to continue to develop and improve their drug best-in-class drug and steals large amounts of market pipeline to replace this revenue when it is lost to share starting in 2012. This forecasts a DCF value of $50.49. We provide a 10% likelihood of this occurring. generics. Finally, our best case scenario provides that Humira INVESTMENT NEGATIVES continues to grow at low double digit rates by increasing market share and receiving FDA approval for Humiras dominance in the market will not last forever. Abbott may start to lose market share in new applications until 2017 at which point it loses 50% 2012 with competition from Pfizer or it may make it of its revenue. This provided a DCF value of $72.93. to 2016 before facing generic competition. Either We provide a 10% likelihood of this scenario occurring. way, Abbotts pipeline does not currently hold a Overall, the scenario analysis provides a value of $63.48, similar to Abbotts current market value, replacement for Humira. indicating again that the firm is currently fairly valued. Based on a relative valuation method, Abbott appears overpriced compared to its competitors. We also applied the fundamental P/E and relative The relative Our DCF and EP models indicate that the stock is valuation models to value Abbott. valuation model indicated that Abbott was currently currently trading approximately at its fair value. selling at a significant premium to its competition. The Splitting the company in two may lead to duplication fundamental P/E model indicated there may still be of positions and decreases in margins for both firms. upside potential for the firm with a value of $69.67, but The split will certainly create one-time charges that this is likely due to its extremely low WACC. Based on will reduce cash that could be distributed to these forecasts, we believe that Abbotts fair value is shareholders or used to invest in acquisitions. between $57-65.

Fiscal budget shortfalls across the global will likely lead to significant cuts in government spending on health care. In the US, health care reform already required Abbott to accept over $60 million in discounts to the Medicare Part D patients in the coverage gap, or doughnut hole, with more drastic cuts needed to balance the budget long term. In

Buy/Sell Discipline There are several critical factors and events that would require an updated analysis of Abbott. First, any updated information regarding Humira or Pfizers JAK-3 inhibitor must be carefully analyzed as described above in the scenario analysis. In addition, the failure of a pipeline drug to receive FDA approval, particularly their

12

Henry Fund Research

promising Hepatitis C compounds, could hurt future earnings. If there was a change in dividend policy, particularly a failure to increase dividends per share, a reevaluation would be necessary. Finally, any changes in government health care spending or the health care reform law must be closely analyzed to estimate its effect on Abbott.

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

REFERENCES
1 2 3

Yahoo! Finance, http://finance.yahoo.com Abbott Laboratories 2006-2011 10-K. US Food and Drug Administration, http://www.fda.gov/

4 th

4 Quarter Earnings Call, Abbott Laboratories. Transcript access from http://www.thestreet.com/

5

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

6

Pharmaceutical Research and Manufacturers America (PhRMA), http://www.pharma.org/

7

of

Wall Street Journal, Abbotts AbbVie Draws Mixed Reaction, March 21, 2012. Accessed through Factiva.
8

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

9

IBISWorld Industry Report 32541a, Brand Name Pharmaceutical Manufacturing in the US, December 2011
10 11

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

Dow Jones Business News, Abbott Labs 4Q Net Rises 12%; Sales Miss Views, January 25, 2012. Accessed through Factiva.
12 13 14 15 16

Abbott Laboratories, http://www.abbott.com/ Deutsche Bank, Abbott Laboratories, March 19, 2012. Bureau of Labor Statistics, http://www.bls.gov/ US Census Bureau, http://www.census.gov/ Trading Economics, http://tradingeconomics.com/

IMPORTANT DISCLAIMER
This report was created by a student(s) enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowas Tippie School of Management. The intent of these reports is to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

13

Abbott Laboratories Revenue Decomposition (in millions) Fiscal Years Ending Dec. 31 Durable Growth

2006
11,210

2007
12,229 4,388 2% 3,158 11% 2,073 12% 2,610 18% 12,022 12,022 18% 1,663 54% 25,914 15%

Net Sales 2008

13,560 4,924 12% 3,575 13% 2,080 0% 2,981 14% 13,727 13,727 14% 2,241 35% 29,528 14%

2009
14,528 5,284 7% 3,578 0% 2,725 31% 2,941 -1% 13,545 13,545 -1% 2,692 20% 30,765 4%

2010
16,642 5,532 5% 3,794 6% 2,797 3% 4,519 54% 15,331 15,331 13% 3,194 19% 35,167 14%

2011
18,496 6,006 9% 4,126 9% 2,951 6% 5,413 20% 17,022 17,022 11% 3,333 4% 38,851 10%

2012E
19,303

2013E
20,152

2014E
21,045

2015E
21,986

2016E
22,977

2017E
24,021

Nutritionals 4,313 (Growth) Diagnostics 2,843 (Growth) Diabetes Care and Medical Optics 1,843 (Growth) Established Pharma 2,211 (Growth) Proprietary Pharma 10,184 Base 10,184 Pipeline Innovative Driven Devices (Growth) Net Sales (Growth)
1,082 22,476

6,426
7%

6,876
7%

7,358
7%

7,873
7%

8,424
7%

9,013
7%

4,291
4%

4,463
4%

4,641
4%

4,827
4%

5,020
4%

5,221
4%

3,010
2%

3,070
2%

3,132
2%

3,194
2%

3,258
2%

3,323
2%

5,575
3% 17,533

5,743
3% 18,103

5,915
3% 18,953

6,092
3% 19,863

6,275
3% 21,141

6,463
3% 12,682

17,533
3% -

18,059
3% 44

18,601
3% 352 700%

19,159
3% 704 100%

19,733
3% 1,408 100%

9,867
-50% 2,816 100%

3,566
7% 40,402

3,816
7% 42,071

4,083
7% 44,081

4,369
7% 46,218

4,675
7% 48,793

5,002
7% 41,705

4%

4%

5%

5%

6%

-15%

Abbott Laboratories Income Statement (in millions except per-share data) Fiscal Years Ending Dec. 31
Net sales Cost of products sold Research & development expenses Acquired in-process research & development expenses Selling, general & administrative expenses Total operating cost & expenses Operating earnings Interest expense Interest income Income from the TAP Pharmaceutical Products Inc. joint venture Net foreign exchange gain (loss) Other income (expense), net Earnings from continuing operations before taxes Taxes on earnings from continuing operations Earnings from continuing operations Gain on sale of discontinued operations, net of taxes Net earnings Year end shares outstanding Net earnings (loss) per common share - basic Cash dividends declared per share

2009
30,765 13,209 2,744 170 8,406 24,529 6,236 520 138 (36) 1,375 7,194 1,448 5,746 5,746 1,551 3.71 1.60

2010
35,167 14,665 3,724 313 10,376 29,079 6,088 553 105 11 62 5,713 1,087 4,626 4,626 1,547 2.98 1.76

2011
38,851 15,541 4,129 673 12,757 33,099 5,752 530 85 50 (159) 5,199 470 4,728 4,728 1,570 3.03 1.92

2012E
40,402 16,969 4,040 808 11,717 33,534 6,868 697 56 6,227 1,177 5,050 5,050

2013E
42,071 17,670 4,207 841 12,201 34,919 7,152 739 58 6,470 1,223 5,247 5,247

2014E
44,081 18,514 4,408 882 12,784 36,587 7,494 726 60 6,827 1,290 5,537 5,537

2015E
46,218 19,411 4,622 924 13,403 38,361 7,857 759 62 7,159 1,353 5,806 5,806

2016E
48,793 20,493 4,879 976 14,150 40,498 8,295 789 64 7,570 1,431 6,139 6,139

2017E
41,705 17,516 4,171 834 12,094 34,615 7,090 823 66 6,333 1,197 5,136 5,136

1,555 3.25 2.27

1,542 3.40 2.38

1,531 3.62 2.53

1,520 3.82 2.67

1,512 4.06 2.84

1,512 3.40 2.89

Abbott Laboratories Balance Sheet (in millions) Fiscal Years Ending Dec. 31
Cash & cash equivalents Investments Trade receivables, net Finished products Work in process Materials Total inventories Deferred income taxes Other prepaid expenses & receivables Total current assets Investments Land Buildings Equipment Construction in progress Less: accumulated depreciation & amortization Net property & equipment Intangible assets, net of amortization Goodwill Other assets Total assets Short-term borrowings Trade accounts payable Salaries, wages & commissions Other accrued liabilities Dividends payable Income taxes payable Obligation due to TAP Pharmaceutical Products Current portion of long-term debt Total current liabilities Yen notes Notes Euro notes Debentures Other long-term debt Long-term debt Post-employment obligations & other long-term liabilities Total liabilities Common shares Common shares held in treasury, at cost Earnings employed in the business Accumulated other comprehensive income (loss)

2009
8,809 1,123 6,542 2,289 448 527 3,265 2,364 1,211 23,314 1,133 546 4,010 11,325 605 8,867 7,619 6,292 13,200 858 52,417 4,978 1,281 1,117 4,363 621 442 36 211 13,049 11,000 266 11,266 5,202 29,518 8,258 3,310 17,054 897 22,899 52,417

2010
3,648 3,676 7,184 2,059 384 746 3,189 3,076 1,545 22,318 302 649 4,334 11,814 577 9,403 7,971 12,152 15,930 790 59,462 4,350 1,536 1,329 6,015 681 1,308 2,045 17,262 12,000 524 12,524 7,200 36,986 8,745 3,917 18,927 (1,279) 22,476 59,462

2011
6,813 1,285 7,684 2,221 432 631 3,284 2,701 2,003 23,769 378 634 4,467 12,216 699 10,143 7,874 9,990 15,705 2,561 60,277 2,348 1,721 1,260 7,855 754 515 1,027 15,480 321 11,000 719 12,040 8,231 35,751 9,817 3,687 20,907 (2,511) 24,526 60,277

2012E
6,578 1,328 8,080 2,424 404 808 3,636 2,971 2,020 24,613 391 734 4,967 13,216 899 10,930 8,887 8,991 15,705 2,561 61,147 3,341 1,778 1,414 6,868 808 1,177 719 16,106 321 11,000 976 12,297 7,819 36,221 10,736 5,687 22,389 (2,511) 24,926 61,147

2013E
5,916 1,372 8,414 2,524 421 841 3,786 3,268 2,104 24,860 404 834 5,467 14,216 1,099 11,819 9,798 8,092 15,705 2,561 61,420 3,514 1,851 1,472 7,152 841 1,223 16,054 321 11,000 1,230 12,551 7,428 36,033 11,654 7,687 23,931 (2,511) 25,387 61,420

2014E
6,360 1,418 8,816 2,645 441 882 3,967 3,594 2,204 26,360 418 934 5,967 15,216 1,299 12,798 10,618 7,282 15,705 2,561 62,945 3,716 1,940 1,543 7,494 882 1,290 321 17,186 11,000 1,766 12,766 7,057 37,008 12,572 9,687 25,563 (2,511) 25,937 62,945

2015E
6,765 1,466 9,244 2,773 462 924 4,160 3,954 2,311 27,899 432 1,034 6,467 16,216 1,499 13,860 11,356 6,554 15,705 2,561 64,507 3,934 2,034 1,618 7,857 924 1,353 500 18,219 10,500 2,515 13,015 6,704 37,938 13,491 11,687 27,277 (2,511) 26,570 64,507

2016E
7,362 1,515 9,759 2,928 488 976 4,391 4,349 2,440 29,816 446 1,134 6,967 17,216 1,699 14,996 12,021 5,899 15,705 2,561 66,448 4,188 2,147 1,708 8,295 976 1,431 750 19,494 9,750 3,531 13,281 6,369 39,143 14,409 13,687 29,094 (2,511) 27,305 66,448

2017E
7,231 1,566 8,341 2,502 417 834 3,753 4,784 2,085 27,761 461 1,234 7,467 18,216 1,899 16,198 12,619 5,309 15,705 2,561 64,416 3,793 1,835 1,460 7,090 834 1,197 500 16,708 7,000 6,590 13,590 6,050 36,348 14,409 13,687 29,857 (2,511) 28,067 64,416

Total equity Total liabilities and equity

Abbott Laboratories Cash Flow Statement (in millions) Fiscal Years Ending Dec. 31
Net Income Depreciation and Amortization Change in deferred income Change in Trade receivables Inventories Prepaid expenses Trade accounts payable Salaries, wages & commissions Other accrued liabilities Dividends payable Income taxes payable Net cash from operating activities Increase in short term investments Increase in long term investments Capital Expenditures Change in other assets Net cash from investing activities Proceeds from short term borrowing Change in current portion of long term debt Issuance/Repayment of long term debt Payment of post-employment obligations Proceeds from issuance of common stock Payment of dividends Repurchases of common stock Net cash from financing activities Net change in cash Cash at beginning of the year Cash at the end of the year

2012E 5,050 1,786 -270

-397 -352 -17 57 154 -987 54 662 5,740 -43 -13 -1,800 0 -1,856 994 -308 257 -412 918 -3,569 -2,000 -4,120 -235 6,813 6,578

2013E 5,247 1,788 -297

-334 -150 -83 73 58 284 33 46 6,666 -45 -13 -1,800 0 -1,858 173 -719 254 -391 918 -3,705 -2,000 -5,469 -661 6,578 5,916

2014E 5,537 1,789 -327

-402 -181 -101 88 70 342 40 67 6,924 -46 -14 -1,800 0 -1,860 202 321 215 -371 918 -3,905 -2,000 -4,620 444 5,916 6,360

2015E 5,806 1,790 -359

-427 -192 -107 94 75 363 43 63 7,148 -48 -14 -1,800 0 -1,862 217 179 249 -353 918 -4,092 -2,000 -4,881 405 6,360 6,765

2016E 6,139 1,791 -395

-515 -232 -129 113 90 438 52 78 7,430 -49 -15 -1,800 0 -1,864 254 250 266 -335 918 -4,322 -2,000 -4,969 597 6,765 7,362

2017E 5,136 1,792 -435

1,418 638 354 -312 -248 -1,205 -142 -234 6,762 -51 -15 -1,800 0 -1,866 -395 -250 309 -318 0 -4,373 0 -5,027 -131 7,362 7,231

Abbott Laboratories Common Size Income Statement Fiscal Years Ending Dec. 31
Net sales Cost of products sold Research & development expenses Acquired in-process research & development expenses Selling, general & administrative expenses Total operating cost & expenses Operating earnings Interest expense Interest income Income from the TAP Pharmaceutical Products Inc. joint venture Net foreign exchange gain (loss) Other income (expense), net Earnings from continuing operations before taxes Taxes on earnings from continuing operations Earnings from continuing operations Gain on sale of discontinued operations, net of taxes Net earnings

2009
100.00% 42.94% 8.92% 0.55% 27.32% 79.73% 20.27% 1.69% 0.45% 0.00% -0.12% 4.47% 23.38% 4.71% 18.68% 0.00% 18.68%

2010
100.00% 41.70% 10.59% 0.89% 29.51% 82.69% 17.31% 1.57% 0.30% 0.00% 0.03% 0.18% 16.25% 3.09% 13.15% 0.00% 13.15%

2011
100.00% 40.00% 10.63% 1.73% 32.84% 85.19% 14.81% 1.36% 0.22% 0.00% 0.13% -0.41% 13.38% 1.21% 12.17% 0.00% 12.17%

2012E
100.00% 42.00% 10.00% 2.00% 29.00% 83.00% 17.00% 1.73% 0.14% 0.00% 0.00% 0.00% 15.41% 2.91% 12.50% 0.00% 12.50%

2013E
100.00% 42.00% 10.00% 2.00% 29.00% 83.00% 17.00% 1.76% 0.14% 0.00% 0.00% 0.00% 15.38% 2.91% 12.47% 0.00% 12.47%

2014E
100.00% 42.00% 10.00% 2.00% 29.00% 83.00% 17.00% 1.65% 0.14% 0.00% 0.00% 0.00% 15.49% 2.93% 12.56% 0.00% 12.56%

2015E
100.00% 42.00% 10.00% 2.00% 29.00% 83.00% 17.00% 1.64% 0.13% 0.00% 0.00% 0.00% 15.49% 2.93% 12.56% 0.00% 12.56%

2016E
100.00% 42.00% 10.00% 2.00% 29.00% 83.00% 17.00% 1.62% 0.13% 0.00% 0.00% 0.00% 15.51% 2.93% 12.58% 0.00% 12.58%

2017E
100.00% 42.00% 10.00% 2.00% 29.00% 83.00% 17.00% 1.97% 0.16% 0.00% 0.00% 0.00% 15.18% 2.87% 12.31% 0.00% 12.31%

Abbott Laboratories Common Size Balance Sheet Fiscal Years Ending Dec. 31
Cash & cash equivalents Investments Trade receivables, net Finished products Work in process Materials Total inventories Deferred income taxes Other prepaid expenses & receivables Total current assets Investments Land Buildings Equipment Construction in progress Less: accumulated depreciation & amortization Net property & equipment Intangible assets, net of amortization Goodwill Deferred income taxes & other assets Total assets

2009
28.63% 3.65% 21.26% 7.44% 1.46% 1.71% 10.61% 7.68% 3.94% 75.78% 3.68% 1.78% 13.04% 36.81% 1.97% 28.82% 24.77% 20.45% 42.91% 2.79% 170.38%

2010
10.37% 10.45% 20.43% 5.85% 1.09% 2.12% 9.07% 8.75% 4.39% 63.46% 0.86% 1.85% 12.32% 33.59% 1.64% 26.74% 22.67% 34.55% 45.30% 2.25% 169.09%

2011
17.54% 3.31% 19.78% 5.72% 1.11% 1.63% 8.45% 6.95% 5.15% 61.18% 0.97% 1.63% 11.50% 31.44% 1.80% 26.11% 20.27% 25.71% 40.42% 6.59% 155.15% 6.04% 4.43% 3.24% 20.22% 1.94% 1.33% 0.00% 2.64% 39.84% 0.83% 28.31% 0.00% 0.00% 1.85% 30.99% 21.19% 92.02% 25.27% 9.49% 53.81% -6.46% 63.13% 155.15%

2012E
16.28% 3.29% 20.00% 6.00% 1.00% 2.00% 9.00% 7.35% 5.00% 60.92% 0.97% 1.82% 12.29% 32.71% 2.22% 27.05% 22.00% 22.25% 38.87% 6.34% 151.35% 8.27% 4.40% 3.50% 17.00% 2.00% 2.91% 0.00% 1.78% 39.86% 0.79% 27.23% 0.00% 0.00% 2.42% 30.44% 19.35% 89.65% 26.57% 14.08% 55.41% -6.21% 61.69% 151.35%

2013E
14.06% 3.26% 20.00% 6.00% 1.00% 2.00% 9.00% 7.77% 5.00% 59.09% 0.96% 1.98% 13.00% 33.79% 2.61% 28.09% 23.29% 19.23% 37.33% 6.09% 145.99% 8.35% 4.40% 3.50% 17.00% 2.00% 2.91% 0.00% 0.00% 38.16% 0.76% 26.15% 0.00% 0.00% 2.92% 29.83% 17.66% 85.65% 27.70% 18.27% 56.88% -5.97% 60.34% 145.99%

2014E
14.43% 3.22% 20.00% 6.00% 1.00% 2.00% 9.00% 8.15% 5.00% 59.80% 0.95% 2.12% 13.54% 34.52% 2.95% 29.03% 24.09% 16.52% 35.63% 5.81% 142.79% 8.43% 4.40% 3.50% 17.00% 2.00% 2.93% 0.00% 0.73% 38.99% 0.00% 24.95% 0.00% 0.00% 4.01% 28.96% 16.01% 83.95% 28.52% 21.98% 57.99% -5.70% 58.84% 142.79%

2015E
14.64% 3.17% 20.00% 6.00% 1.00% 2.00% 9.00% 8.55% 5.00% 60.36% 0.93% 2.24% 13.99% 35.09% 3.24% 29.99% 24.57% 14.18% 33.98% 5.54% 139.57% 8.51% 4.40% 3.50% 17.00% 2.00% 2.93% 0.00% 1.08% 39.42% 0.00% 22.72% 0.00% 0.00% 5.44% 28.16% 14.51% 82.08% 29.19% 25.29% 59.02% -5.43% 57.49% 139.57%

2016E
15.09% 3.11% 20.00% 6.00% 1.00% 2.00% 9.00% 8.91% 5.00% 61.11% 0.91% 2.32% 14.28% 35.28% 3.48% 30.73% 24.64% 12.09% 32.19% 5.25% 136.18% 8.58% 4.40% 3.50% 17.00% 2.00% 2.93% 0.00% 1.54% 39.95% 0.00% 19.98% 0.00% 0.00% 7.24% 27.22% 13.05% 80.22% 29.53% 28.05% 59.63% -5.15% 55.96% 136.18%

2017E
17.34% 3.76% 20.00% 6.00% 1.00% 2.00% 9.00% 11.47% 5.00% 66.56% 1.11% 2.96% 17.91% 43.68% 4.55% 38.84% 30.26% 12.73% 37.66% 6.14% 154.46% 9.09% 4.40% 3.50% 17.00% 2.00% 2.87% 0.00% 1.20% 40.06% 0.00% 16.78% 0.00% 0.00% 15.80% 32.59% 14.51% 87.16% 34.55% 32.82% 71.59% -6.02% 67.30% 154.46%

Short-term borrowings 16.18% 12.37% Trade accounts payable 4.16% 4.37% Salaries, wages & commissions 3.63% 3.78% Other accrued liabilities 14.18% 17.10% Dividends payable 2.02% 1.94% Income taxes payable 1.44% 3.72% Obligation in connection with conclusion of the TAP Pharmaceutical Products Inc. joint 0.00% 0.12% venture Current portion of long-term debt 0.69% 5.82% Total current liabilities Yen notes Notes Euro notes Debentures Other long-term debt Long-term debt Post-employment obligations & other long-term liabilities Total liabilities Common shares Common shares held in treasury, at cost Earnings employed in the business Accumulated other comprehensive income (loss) 42.42% 0.00% 35.76% 0.00% 0.00% 0.86% 36.62% 16.91% 95.95% 26.84% 10.76% 55.43% 2.92% 74.43% 170.38% 49.09% 0.00% 34.12% 0.00% 0.00% 1.49% 35.61% 20.47% 105.17% 24.87% 11.14% 53.82% -3.64% 63.91% 169.09%

Total equity Total liabilities and equity

Abbott Laboratories Value Driver Estimation (in millions unless otherwise noted) Fiscal Years Ending Dec. 31
Net sales Cost of products sold Research & development expenses Acquired in-process R&D expenses Selling, general & administrative expenses Removal of Operating Lease Interest Expense EBITA Income tax provision (-) Tax on non-operating income (+) Tax on non-operating losses (+) Operating Lease Interest Expense Adjusted Taxes Change in deferred taxes NOPLAT Normal cash (10% of revenue or actual) Trade receivables Inventory Prepaid expenses Total Operating Current Assets Accounts payable Salaries, wages & commissions Other accrued liabilities Dividends payable Income taxes payable Total Non-Interest Bearing Current Liabilities Net operating working capital Net PP&E Capitalized operating leases Other operating assets Other operating liabilities Total Invested Capital NOPLAT Beginning Invested Capital Change in invested capital Return on Invested Capital (ROIC) Free Cash Flow Economic Profit

2009
30,765 13,209 2,744 170 8,406 19 6,254 1,448 279 98 19 1,285 99 5,068 3,076 6,542 3,265 1,211 14,094 1,281 1,117 4,363 621 442 7,824 6,270 7,619 412 7,150 21,452 5,068 19,175 2,277 26.43% 2,790 4,099

2010
35,167 14,665 3,724 313 10,376 24 6,112 1,087 34 105 24 1,182 (712) 4,218 3,517 7,184 3,189 1,545 15,434 1,536 1,329 6,015 681 1,308 10,868 4,567 7,971 541 12,942 26,020 4,218 21,452 4,568 19.66% (350) 3,135

2011
38,851 15,541 4,129 673 12,757 20 5,772 470 (4) 100 20 594 376 5,553 3,885 7,684 3,284 2,003 16,856 1,721 1,260 7,855 754 515 12,105 4,751 7,874 435 12,551 25,610 5,553 26,020 (410) 21.34% 5,963 4,239

2012E
40,402 16,969 4,040 808 11,717 20 6,888 1,177 11 132 20 1,318 (270) 5,300 4,040 8,080 3,636 2,020 17,777 1,778 1,414 6,868 808 1,177 12,045 5,732 8,887 478 11,552 26,648 5,300 25,610 1,038 20.70% 4,262 4,007

2013E
42,071 17,670 4,207 841 12,201 20 7,172 1,223 11 140 20 1,371 (297) 5,503 4,207 8,414 3,786 2,104 18,511 1,851 1,472 7,152 841 1,223 12,540 5,971 9,798 526 10,653 26,948 5,503 26,648 299 20.65% 5,204 4,158

2014E
44,081 18,514 4,408 882 12,784 20 7,513 1,290 11 137 20 1,436 (327) 5,751 4,408 8,816 3,967 2,204 19,396 1,940 1,543 7,494 882 1,290 13,148 6,248 10,618 579 9,843 27,288 5,751 26,948 340 21.34% 5,411 4,390

2015E
46,218 19,411 4,622 924 13,403 20 7,877 1,353 12 144 20 1,505 (359) 6,013 4,622 9,244 4,160 2,311 20,336 2,034 1,618 7,857 924 1,353 13,786 6,550 11,356 636 9,115 27,658 6,013 27,288 370 22.03% 5,642 4,635

2016E
48,793 20,493 4,879 976 14,150 20 8,314 1,431 12 149 20 1,587 (395) 6,332 4,879 9,759 4,391 2,440 21,469 2,147 1,708 8,295 976 1,431 14,556 6,913 12,021 700 8,460 28,093 6,332 27,658 435 22.89% 5,896 4,935

2017E
41,705 17,516 4,171 834 12,094 20 7,109 1,197 12 156 20 1,360 (435) 5,315 4,171 8,341 3,753 2,085 18,350 1,835 1,460 7,090 834 1,197 12,416 5,935 12,619 770 7,870 27,193 5,315 28,093 (900) 18.92% 6,215 3,896

Abbott Laboratories Weighted Average Cost of Capital (WACC) Estimation WACC Risk Free Rate 3.36% Equity Risk Premium 4.80% Beta 0.4 Cost of Equity 5.28% Pre-Tax Cost of Debt Tax Rate After-Tax Cost of Debt Market Capitalization Book Value of Debt Capitalized Operating Leases Enterprise Value % Equity in Capital Structure % Debt in Capital Structure WACC 4.50% 18.90% 3.65% 96,264 15,415 435 112,114 85.9% 14.1% 5.05%

Abbott Laboratories Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models Key Inputs: CV Growth of NOPLAT CV ROIC WACC NOPLAT 2017 EP 2017 Fiscal Years Ending Dec. 31 DCF Model Free Cash Flow PV of FCF at 12/31/2011 PV of Operating Assets (+)Excess Cash and Marketable Securities (-)Debt and Equivalents (-)PV of Operating Leases (-)Pension Liability (-)PV of ESOP 12/31/2011 Intrinsic Equity Value Intrinsic Value Today DCF Share Value Today EP Model Economic Profit PV of EP at 12/31/2011 PV of Operating Assets (+)Excess Cash and Marketable Securities (-)Debt and Equivalents (-)PV of Operating Leases (-)Pension Liability (-)PV of ESOP 12/31/2011 Intrinsic Equity Value Intrinsic Value Today EP Share Value Today

1.00% 18.92% 5.05% 5,315 3,896 2012E 2013E 2014E 2015E 2016E CV

4,262 4,057 119,855 4,590 15,415 435 8,231 1,154 99,211 100,440 $ 63.96

5,204 4,716

5,411 4,667

5,642 4,633

5,896 4,609

124,312 97,172

4,007 3,814 119,855 4,590 15,415 435 8,231 1,154 99,211 100,440 $ 63.96

4,158 3,768

4,390 3,787

4,635 3,806

4,935 3,858

96,219 75,212

Abbott Laboratories Fundamental P/E Valuation Model Fundamental P/E Model CV growth of EPS CV ROE CV Payout Ratio CV Retention Ratio Cost of Equity

1.0% 18.3% 85.2% 14.8% 5.28% 2012E 2013E 3.40 2014E 3.62 2015E 3.82 2016E 4.06 CV 3.40 22.09 3.40 75.04 58.02

Earnings Per Share P/E Multiple EPS(CV) Future Stock Price Dividends Per Share Discounted Cash Flows Intrinsic Value at 12/31/2011 Intrinsic Value Today

3.25

2.27 2.16 $ 68.87 $ 69.77

2.38 2.15

2.53 2.17

2.67 2.18

2.84 2.20

Abbott Laboratories Relative Valuation Model Ticker JNJ MRK NVS GSK BMY TEVA Company Johnson & Johnson Merck & Co Inc Novartis AG GlaxoSmithKline Bristol-Myers Squibb Teva Pharmaceuticals Price 65.34 38.88 55.84 45.02 33.68 45.06 Sales 2011A 65.0 48.1 51.6 45.8 21.2 18.3 Sales 2012E Sales 2013E 66.4 69.8 47.3 46.0 58.2 58.7 45.1 46.9 18.0 17.0 21.9 22.7 Average ABT Abbott Laboratories $ 61.30 38.85 40.40 42.07 P/S 2011 1.0 0.8 1.1 1.0 1.6 2.5 1.3 1.6 P/S 2012 1.0 0.8 1.0 1.0 1.9 2.1 1.3 1.5 P/S 2013 0.9 0.8 1.0 1.0 2.0 2.0 1.3 1.5

$ $ $ $ $ $

Implied Value: P/E 2011 P/E 2012 P/E 2013 Average

$ $ $ $

51.32 51.77 53.73 52.27

Abbott Laboratories Key Management Ratios

Fiscal Years Ending Dec. 31 Liquidity Ratios Current Ratio Cash Ratio Interest Coverage Ratio Activity or Asset-Management Ratios Assets to Sales Inventory Turnover Accounts Receivable Turnover Financial Leverage Ratios Debt to Equity Debt Ratio Debt to Non-Cash Assets Profitability Ratios Operating Margin Net Profit Margin Free Cash Margin Return on Assets Return on Equity Payout Policy Ratios Dividend Payout Total Payout including Repurchases

2009

2010

2011

2012E

2013E

2014E

2015E

2016E

2017E

1.79 0.76 12.00

1.29 0.42 11.01

1.54 0.52 10.85

1.53 0.49 9.85

1.55 0.45 9.67

1.53 0.45 10.32

1.53 0.45 10.35

1.53 0.46 10.52

1.66 0.53 8.61

Current Assets/Current Liabilities (Cash + Equivalents)/Current Liabilities EBIT/Interest Expense

1.70 4.37 5.12

1.69 4.54 5.12

1.55 4.80 5.23

1.51 4.90 5.13

1.46 4.76 5.10

1.43 4.78 5.12

1.40 4.78 5.12

1.36 4.79 5.14

1.54 4.30 4.61

Total Assets/Sales Cost of Goods Sold/Avg. Inventory Net Receivable Sales/Average Receivables

0.72 0.56 0.69

0.84 0.62 0.71

0.63 0.59 0.69

0.66 0.59 0.68

0.63 0.59 0.67

0.65 0.59 0.67

0.66 0.59 0.67

0.67 0.59 0.68

0.64 0.56 0.65

BV Debt/BV Equity Total Liabilities/Total Assets Total Liabilities/(Total Assets - (Cash + Equivalents))

20.3% 18.7% 9.1% 13.5% 32.9%

17.3% 13.2% -1.0% 8.8% 20.2%

14.8% 12.2% 15.3% 8.0% 21.0%

17.0% 12.5% 10.5% 8.4% 20.6%

17.0% 12.5% 12.4% 8.6% 21.1%

17.0% 12.6% 12.3% 9.0% 21.8%

17.0% 12.6% 12.2% 9.2% 22.4%

17.0% 12.6% 12.1% 9.5% 23.1%

17.0% 12.3% 14.9% 7.7% 18.8%

Operating Profit/Sales Net Income/Sales Free Cash Flow/Sales Net Income/Beg. Assets Net Income/Beg. BV Equity

43% 56%

59% 76%

63% 64%

70% 110%

70% 109%

70% 107%

70% 105%

70% 103%

85% 85%

Dividend per Share/Earnings per Share (Dividends paid + share repurchases)/Net income

Abbott Laboratories Sensitivity Analysis $ 63.96 0.2 0.3 0.4 Beta 0.5 0.6 0.7 0.8 0.9 1.0 0.00% $67.47 $60.33 $54.36 $49.28 $44.91 $41.11 $37.78 $34.83 $32.20 0.25% $70.69 $62.87 $56.38 $50.92 $46.26 $42.23 $38.71 $35.61 $32.86 0.50% $74.33 $65.70 $58.63 $52.73 $47.73 $43.44 $39.71 $36.45 $33.57 CV Growth Rate of NOPLAT 0.75% 1.00% 1.25% $78.50 $83.32 $88.95 $68.90 $72.55 $76.73 $61.14 $63.96 $67.15 $54.73 $56.95 $59.44 $49.34 $51.13 $53.10 $44.76 $46.20 $47.79 $40.80 $41.99 $43.28 $37.36 $38.34 $39.40 $34.33 $35.15 $36.03 1.50% $95.61 $81.57 $70.79 $62.24 $55.30 $49.55 $44.70 $40.56 $36.99 1.75% $103.61 $87.26 $74.98 $65.42 $57.77 $51.50 $46.26 $41.83 $38.03 2.00% $113.41 $94.02 $79.86 $69.06 $60.55 $53.67 $47.99 $43.22 $39.16

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

$ $ $ $ $ $ $ $ $

4.0% 72.00 75.69 79.91 84.78 90.46 97.17 105.22 115.07 127.38

$ $ $ $ $ $ $ $ $

4.5% 62.57 65.30 68.38 71.87 75.86 80.46 85.82 92.16 99.77

$ $ $ $ $ $ $ $ $

5.0% 55.02 57.10 59.41 61.99 64.90 68.19 71.95 76.29 81.36

WACC 5.5% $ 48.84 $ 50.46 $ 52.23 $ 54.19 $ 56.37 $ 58.80 $ 61.54 $ 64.64 $ 68.18

$ $ $ $ $ $ $ $ $

6.0% 43.69 44.96 46.35 47.86 49.53 51.38 53.43 55.72 58.29

$ $ $ $ $ $ $ $ $

6.5% 39.33 40.34 41.44 42.63 43.94 45.36 46.93 48.67 50.59

$ $ $ $ $ $ $ $ $

7.0% 35.59 36.40 37.28 38.24 39.27 40.39 41.61 42.95 44.42

$ $ $ $ $ $ $ $ $

7.5% 32.34 33.00 33.72 34.48 35.31 36.20 37.17 38.22 39.36

$ $ $ $ $ $ $ $ $

8.0% 29.49 30.04 30.62 31.25 31.91 32.63 33.40 34.24 35.14

$ 63.96 0.00% 0.25% 0.50% Prop Pharma Growth '12-'16 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75%

$ $ $ $ $ $ $ $ $ $ $ $

38% 65.40 65.62 65.85 66.08 66.31 66.54 66.77 67.01 67.24 67.48 67.72 67.97

$ $ $ $ $ $ $ $ $ $ $ $

39% 64.38 64.60 64.82 65.04 65.27 65.50 65.73 65.96 66.19 66.43 66.67 66.91

$ $ $ $ $ $ $ $ $ $ $ $

40% 63.35 63.57 63.79 64.01 64.23 64.45 64.68 64.91 65.14 65.37 65.61 65.85

COGS% 41% $ 62.32 $ 62.54 $ 62.75 $ 62.97 $ 63.19 $ 63.41 $ 63.64 $ 63.86 $ 64.09 $ 64.32 $ 64.55 $ 64.79

$ $ $ $ $ $ $ $ $ $ $ $

42% 61.30 61.51 61.72 61.94 62.15 62.37 62.59 62.82 63.04 63.27 63.50 63.73

$ $ $ $ $ $ $ $ $ $ $ $

43% 60.27 60.48 60.69 60.90 61.12 61.33 61.55 61.77 61.99 62.21 62.44 62.67

$ $ $ $ $ $ $ $ $ $ $ $

44% 59.25 59.45 59.66 59.87 60.08 60.29 60.50 60.72 60.94 61.16 61.38 61.61

$ $ $ $ $ $ $ $ $ $ $ $

45% 58.22 58.42 58.63 58.83 59.04 59.25 59.46 59.67 59.89 60.10 60.32 60.54

$ $ $ $ $ $ $ $ $ $ $ $

46% 57.32 57.51 57.70 57.89 58.09 58.28 58.48 58.68 58.88 59.08 59.29 59.50

$ 63.96 4% 5% 6% Nutritional Growth 7% 8% 9% 10% 11%

$ $ $ $ $ $ $ $

26% 76.75 77.72 78.72 79.78 80.88 82.04 83.24 84.50

$ $ $ $ $ $ $ $

27% 71.64 72.55 73.51 74.51 75.55 76.65 77.79 78.98

$ $ $ $ $ $ $ $

28% 66.52 67.38 68.29 69.23 70.22 71.25 72.34 73.47

SG&A% 29% $ 61.41 $ 62.22 $ 63.07 $ 63.96 $ 64.89 $ 65.86 $ 66.88 $ 67.95

$ $ $ $ $ $ $ $

30% 56.29 57.05 57.85 58.69 59.56 60.47 61.43 62.43

$ $ $ $ $ $ $ $

31% 51.18 51.89 52.63 53.41 54.23 55.08 55.98 56.91

$ $ $ $ $ $ $ $

32% 46.06 46.72 47.42 48.14 48.90 49.69 50.52 51.39

$ $ $ $ $ $ $ $

33% 40.99 41.59 42.22 42.87 43.57 44.30 45.07 45.87

$ $ $ $ $ $ $ $

34% 36.27 36.82 37.40 38.00 38.63 39.29 39.98 40.70

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

$ $ $ $ $ $ $ $ $

17% 93.13 78.14 66.89 58.13 51.12 45.38 40.59 36.53 33.04

$ $ $ $ $ $ $ $ $

18% 91.72 76.94 65.84 57.20 50.29 44.62 39.89 35.89 32.45

$ $ $ $ $ $ $ $ $

19% 90.32 75.74 64.79 56.27 49.45 43.86 39.20 35.25 31.86

Tax Rate 20% $ 88.91 $ 74.53 $ 63.74 $ 55.34 $ 48.61 $ 43.10 $ 38.50 $ 34.61 $ 31.26

$ $ $ $ $ $ $ $ $

21% 87.51 73.33 62.69 54.41 47.78 42.34 37.81 33.97 30.67

$ $ $ $ $ $ $ $ $

22% 86.10 72.13 61.64 53.48 46.94 41.58 37.12 33.33 30.08

$ $ $ $ $ $ $ $ $

23% 84.70 70.93 60.59 52.55 46.10 40.83 36.42 32.69 29.49

$ $ $ $ $ $ $ $ $

24% 83.29 69.73 59.55 51.62 45.27 40.07 35.73 32.05 28.89

$ $ $ $ $ $ $ $ $

25% 81.89 68.53 58.50 50.69 44.43 39.31 35.03 31.41 28.30