TO: Real Client Managed Portfolio Fall 2016 Class

RCMP MEMORANDUM

FROM:Sang Hyuk Yoon, Jiaxin Yang

SUBJECT: AbbVie, Inc. Investment Summary

DATE: November 3, 2016

Recommendation: Hold

Portfolio Position:

Initially 400 shares of ABBV was received at an average cost of $28.98 via the spinoff from Abbott Labsin 2013. We sold 200 shares at $61.18 on April 13, 2015 and sold another 100 shares at $60.79 on November 19, 2015. We currently possess 100 shares in our portfolio, with a closed price of $56.79 per share on November 2, 2016.

Company Overview:

AbbVie originated as a spin-off of Abbott Laboratories in January 2013 and was officially listed on New York Stock Exchange right after the separation. The company is headquartered in North Chicago, Illinois and it is a specialty-focused, research-based pharmaceutical company that discovers, develops and markets both biopharmaceuticals and small molecule drugs. AbbVie owns 21 primary research and manufacturing facilities worldwide and sold its products in over 170 countries. AbbVie’s main product is HUMIRA, and two new products IMBRUVICA and VIEKIRA were launched in recent years. The major customers of AbbVie include managed care provider, hospitals and governments.

Macroeconomic Outlook and Industry Overview:

AbbVie operates in the healthcare sector and falls in the drug manufacturer industry. The growth of AbbVie is heavily relying on the worldwide aging population, the population growth, and the increasing in healthcare expenditures. Healthcare expenditure per capita actually doubled during the past ten years, and is expected to grow in the following five years in all income levels, especially the high income category. The drug manufacturing industry faces low threat of entrants, but high rivalry among existing competitors. However, the buyer bargaining power is low because of the patent protection.

Valuation:

We have used comparable analysis and DCF model to determine ABBV’s both implied price and intrinsic price. As for the comparable analysis, we selected four pharmaceutical companies operating in similar segments, which are Eli Lilly and Company, Gilead Science Inc., Bristol-Myers Squibb Company, and Amgen Inc. We used theirmultiples figure of TEV/sales, TEV/EBIT, TEV/EBITDA, and P/E. We derived the implied price of ABBV using the weighted median of these multiples and obtained $63.6 per share. In the DCF model, we projected the revenue by each product, considering the patent expiration of HUMIRA, and the sharp growth of two new products, a discount rate of 9.8%, and a long-term growth rate of 3%. Projecting with all these factors, we can get an intrinsic value of $59.61 per share.

Recommendation:

We recommend HOLD on AbbVie stock. Based on our valuation, we believe that ABBV is fairly valued by the market currently. There is high level of uncertainty of revenue in the coming years because of patent expiration and the FDA regulations, and we are quite conservative in the valuation. It is probable that AbbVie will outperform our expectation, because it is expected to continue its mergers and acquisitions activities and launching new products. Besides, based on the growing demand in healthcare and the aging populations, the overall industry is expected to grow in the new future as well.