Abbott Laboratories: Looking to Emerging Markets for Growth

Nov. 9.10 | About: Abbott Laboratories (ABT)

In an article dated October 18, 2010, I compared and performed relative valuation of 6 major drug companies. In this article, I will focus on Abbott Laboratories (NYSE:ABT) and present my discounted cash flow analysis results for the company.

ABT is primarily divided into 4 operating segments namely Pharmaceuticals, Nutritional Products, Diagnostics, and Medical Services. Although commonly seen as a pharmaceutical company, this segment contributed only about 55% of the total company revenues during the first nine months of this year. Nutritional Products accounted for approximately 16% of total sales. International sales were responsible for 57% of total revenues.

Abbott has a diverse product offering which it markets in 130 countries. Its blockbuster drug HUMIRA (used in the treatment of rheumatoid arthritis and psoriatic arthritis) accounted for 33% of the company’s global pharmaceutical sales. Other major products include TRILIPIX, TriCor and Kaletra which together contributed $2 billion in global sales. The US patent for HUMIRA will expire in December 2016. Several other patents expire during this decade.

To make up for the impending patent expirations, ABT has been investing significant amounts of money to develop new products. For example, in fiscal year 2009, ABT invested approximately $2.7 billion into R&D. The company expects to introduce 75 new products and indications (including non pharma) during the next 5 years. Still, several analysts believe that ABT’s pipeline lags its peers like Merck (NYSE:MRK).

Abbott is known for its aggressive acquisitions having closed three major deals this year. These acquisitions provide an attractive opportunity for growth. The company bought Solvay Pharmaceuticals early this year as part of its strategy to gain a foothold in emerging markets. Emerging markets, the company reports, are growing at three times the rate of developed markets. In September, the company announced the acquisition of Piramal’s Healthcare Solutions Business in India. This acquisition catapulted ABT into a leadership position in the generic pharmaceutical business in India. India is the 2nd fastest growing emerging market and the $8 billion pharmaceutical market is predicted to double by 2015. ABT expects to generate about $2.5 billion in sales from India by 2020.

Nutritional Products segment is another growth driver for ABT. The company reports that it is the fastest growing nutritional company in international markets and expects to maintain its double digit growth. It continues to gain market share in infant nutritionals and is a leader in adult and therapeutic nutritional products. As is the case with the pharmaceuticals segment, emerging markets should provide significant opportunities for growth in the nutritional segment.

Discounted Cash Flow Valuation

DCF valuation was performed by employing a two-stage model with a high growth period of 10 years. The major inputs and the valuation results are presented below.


Bottom-Up Beta for High Growth


Bottom-Up Beta for Stable Growth


Equity Risk Premium


Cost of Equity for High Growth


Cost of Equity for Stable Growth


Average Growth Rate (Years 1-5)


Average Growth Rate (Years 6-10)


Stable Growth Rate



Present Value of FCFE in High Growth Period (Billions)


Present Value of Terminal Value of Equity (Billions)


Cash, Marketable Assets and Non-Operating Assets (Billions)


Total Equity Value (Billions)


Market Value of Equity/Share


Click to enlarge

As shown above, my DCF analysis yields a fair value of $66 a share. My relative valuation analysis indicated a fair value of $60 a share. Combining the two values, my price target for ABT is $63 a share. As of November 8, 2010, ABT was trading at $50.45 a share implying a discount of approximately 20%. Additionally, the stock currently yields a healthy 3.5% compared to the 2.55% yield of the 10-year Treasury note. At these levels, ABT makes a compelling investment opportunity with a total return potential of about 25 to 30% in 12-months.

(Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision.)

Disclosure: None, I will open a position in ABT three days after this article is posted subject to ABT trading below $52 a share.