Blackmores Limited Analysis

Table of Contents Title Page Executive Summary 3 1. Company Overview 6 2. Industry Analysis 19 3. Current Issues 33 4. Blackmores Financial Analysis 42 5. Share Valuations 53 6. Valuation Discussion 72 7.

Appendix – Financial Statements 80 References 92 Executive Summary •Blackmores Limited is an industry leader in both natural health and research, basing its principle activity on the development and marketing of health products and natural supplements. •Blackmores Limited (BKL) listed on the Australian Stock Exchange on the 2nd May 1985.

Ownership structure has remained relatively constant, with the largest shareholder with a total substantial holding of 24.

69% of the company is the Executive Director Marcus Blackmore, son of the founder Maurice Blackmore. •The company has over 150 products, catering for all areas in natural health and vitamins. Products are distributed primarily through retail pharmacies, supermarkets and health food shops and operations now stem offshore to New Zealand and throughout Asia. Products are developed by Blackmores Scientific Researchers and are governed under the strict guidelines and control of the Therapeutic Goods Administration (TGA). •Blackmores’ initial process of the research of alternate medicines was initially via the supply of products and funds to external researchers.

However, the late 1990’s saw the company to shift towards a more in-house, formalised process, with the appointment of a research manager based at Southern Cross University. This involvement runs from the supply of products to the full funding of clinical trials. Commitment and attitude towards their socially responsible and environmentally friendly business practices sits high on Blackmores’ priority list, continually incorporating more and more socially and environmentally sustainable practices to all aspects of their business model.

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•The Complementary health care industry in Australia distributes primarily through its pharmacy and supermarket channels and therefore caters to customers in each of these markets. Competition in both markets is derived from two major firms, namely Symbion and Sigma Health. Blackmores is currently operating in an industry which has witnessed recent rapidly accelerating growth, placing itself at the beginning of its mature growth life-cycle. Blackmores is the only mainstream brand that has been able to diversify its position across health food stores, pharmacy, grocery and practitioner channels. •An aging population, exchange rates and the expected increase of patients, have all had a significant impact on the operations of Blackmores, with many of these contributing to a variety of key success factors. The well-knows pan Pharmaceuticals scandal has had an astounding impact on the entire complementary health-care industry, with it now acting as a precedent for all industry and issues going forward.
• DuPont analysis highlights the rapid accelerating growth seen by the industry and Blackmores specifically. This is evident across all aspects of DuPont analysis, with ROE, operating cash flows and dividend growth reaching all time company records, just to name a few.
• Our final company analysis reveals share price to be in fact undervalued by all relevant measures expect for Free cash Flows to Equity.

Further research implies this can be contributed to the excessively large increases in Cap Expenditure witnessed over the past 2 years. •Blackmores is currently positioned to continue to uphold its market leading position in an industry which is ever-expanding. Exciting new opportunities in Asia present avenues for future company growth. •Management has remained fairly constant and it’s capability in the past and going forward should allow the company to further develop with the ongoing changes in health-care and alternate medicines. We believe as such the company’s full potential has not been reached and as such is not being fully valued for the market, consequently presenting a long-term investment opportunity. 1. Company Overview Company Overview Business Description Blackmores Limited is a leading expert in natural health and research. Its principle activity is the development and marketing of health products and natural supplements throughout Australasia. The company has over 150 products and caters for all areas in natural health and vitamins. Products are distributed primarily through retail pharmacies, supermarkets and health food shops.

A key reason for the success of Blackmores is the strong brand platform that has been developed and remains a differentiating factor in the marketplace from its competitors. Blackmores strategic planning is closely linked to its focus on heritage and core values. This enables the company to maintain their market position and to achieve continuous ongoing success for the both the company and its shareholders. Core values have been identified to include: •Passion for natural health •Integrity •Respect •Leadership •Social Responsibility

Products are developed by Blackmores Scientific Researchers under the strict guidelines and control of the Therapeutic Goods Administration (TGA). Company growth is highly important and is driven by high levels of research and development with particular emphasis placed on growing areas and problems such as obesity, cardiovascular and joint problems. The company is highly interested in international diversification and since its initial break into the New Zealand market in 1981; the company has paid particular attention to other emerging markets in the South-East Asian regions.

These areas are of particular importance to Management, in the quest to meet goals and expectation, further develop the Blackmores brand name and capture a larger market share of the industry. ?’Blackmores’ is the idea and vision of its creator Maurice Blackmore a naturopath in the 1930’s, considered ahead of his time. ?Blackmores considers itself a leader and innovator in the continuous clinical research of health products. ?Blackmores considers it to be a socially responsible company and was successful in winning the 2006 Pharmaceutical Packaging Action Award for the reduction in packaging waste across the business. Blackmores sales and manufacturing is stringently regulated and tested by the Therapeutic Goods Administration. Company History Blackmores had its beginnings in the 1930’s through the vision and passion of its founder Maurice Blackmore (1906-1977), an English immigrant with ideas ahead of his time. Maurice Blackmores’ belief in the health-giving properties of herbs and minerals led him to develop a system of healthcare based on naturopathic principles. Maurice Blackmore first opened a naturopathic rest home in Rockhampton, Queensland in 1934.

He than moved amongst other Queensland towns before settling in Brisbane in 1938 when he opened the first health food store in the Fortitude Valley. Blackmore was a pioneer in the naturopathic industry which heralded him the title,’ the father of Australian Naturopathy’. Blackmore helped establish the Australian National Naturopathic Association, a body setup to set the standards and codes of naturopaths in Australia. The company was setup initially in Brisbane in 1962 as Blackmores’ Naturopathic Organisation Pty Ltd as a family naturopathy business and this later expanded to Sydney.

Maurice Blackmore retired in 1973 leaving the company to his son, Marcus Blackmore. On the 2nd of May 1985, Blackmores Laboratories Limited was listed on the Australian Stock Exchange. The company in an expansion phase acquired ‘Russell Health Foods’ and retail chain ‘Healthy Life’. The latter was later disposed of in 1991. In 1988, Blackmores’ established a manufacturing and distribution base in New Zealand. Fiscal 2001 The 2001 year saw a slowdown in the Australian and New Zealand market which saw sales revenue set at $76. 97 million. This could be contributed to the introduction of the GST which automatically led to a 10% price increase, or perhaps a slowdown in overall Australian GDP. Sales across South-East Asia were up nearly 24% as Blackmores attempted to move into the growing kids healthy snack market with the introduction of the product ‘Fruity Bitz’. Total dividends paid to shareholders for the year increased to 18 cents per share. Fiscal 2002 2002 saw sales revenue increase by 6. 5% to $81. 4 million however profitability was down 7. % on last years profit figures. Blackmores also implemented their new business system which was somewhat successful for the purpose of assisting with the problems associated with multiple products, channels, retailers, ingredients, suppliers and regulators. South-East Asia continued to be a strong winner for the company with increased and unprecedented growth despite a downturn in the local Malaysian and Thailand markets. New Zealand continued to be a difficult market and saw the reduction in capital base and sell-off of the Auckland premises.

Positively, the Australian Medical Association seen traditionally as a staunch opponent to complementary medicine publicly expressed and acknowledged support for the industry. Fiscal 2003 2003 was an unprecedented year in Australian complementary medicine industry with the license suspension and total recall of all Pan Pharmaceutical products. While Blackmores was not directly affected by the recall it did face a significant increase in demand as competitors products were removed from the shelves. Sales increased domestically, as well as in the hostile Asian market whereby sales were incidentally boosted during the SARS epidemic.

Interestingly in the ailing New Zealand market Blackmores formed a strategic alliance with PSM Healthcare, the leading New Zealand pharmaceutical and toiletries company to stock Blackmores range. A total dividend of 35 cents was paid to shareholders, as Blackmores increased marketing and customer relations. The Blackmores Health and Wellbeing Survey was conducted, and in light of the Pan crisis a greater commitment was made to research and development with over $1. 5 million granted toward external research at Southern Cross University. Fiscal 2004 2004 witnessed Blackmores’ achievements in protecting the market share that as captured in the post Pan-Pharmaceuticals fallout. Fully-franked dividends for the year were paid to shareholders at a rate of 46 cents. Debt levels were reduced to $6 million when compared to $8. 2 million in the year previous. Consumer sentiment seemed to be at a high, with specific atonement to ‘the Wellness Revolution’ and widespread interest in maintaining health. Fiscal 2005 2005 was an exciting year for the healthcare industry and in particular for Blackmores with sales climbing to $134 million and Group Net Profit growing by 26% over the year.

A total fully-franked ordinary dividend of 46 cents per share was paid to shareholders as well as a special dividend of 14 cents. Debt levels were once again reduced, and excitingly the Company announced the construction of a new home base in Warriewood, on the Northern Beaches of Sydney. Fiscal 2006 The 2006 fiscal year saw Blackmores win the prestigious Hewitt Best Employer award with over 160 organisations over Australia and New Zealand taking place. The Asian market continued to flourish, with combined sales growth of 27. % in both the Thailand and Malaysian markets. Furthermore, Blackmores announced its intention to track and enter the Taiwanese market. This would represent the company’s first market entry for nearly a decade. Sales grew to $148 million as profit increased 20% over the previous year. Dividends grew to a fully-franked amount of 69 cents. Recent Financial Performance Source: IbisWorld Research and Development Blackmores places a large emphasis on the research and development of products, and in particular the validation of products and their claims.

This has mainly come about through a shift in ideas and attitudes mainly pushed by regulatory bodies, health professionals, consumers and suppliers. Blackmores has always been involved in the research of alternative medicines. This had been a difficult process in the past given the magnitude of products. This was initially through the supply of products and funds to external researchers. However, in the late 1990’s, the company decided to formalise this with the appointment of a research manager based at Southern Cross University.

This involvement runs from the supply of products to the full funding of clinical trials. Blackmores focus is mainly on clinical research rather than scientific research, with an overall goal of supporting the medium to long-term objectives of business development and marketing. Social Responsibility and the Environment Blackmores is highly regarded for their commitment and attitude towards their socially responsible and environmentally friendly business practices. Blackmores adopts socially and environmentally sustainable practices to all aspects of their business model.

Blackmores places extreme importance from its clinical research, to responsible regulation, marketing claims, education and thoughtful attention to its employees. The company believes strongly in environmentally sustainable practices, and has achieved solid outcomes in its broad based approach to reducing packaging waste across all aspects of the business. The company has maintained the ability to reduce packaging waste in landfill, achieved a waste-free flow of packaging between the Balgowah plant and Brookvale warehouses; and has implemented a system of re-use for all cardboard cartons, shippers and pallets.

The company has also created a virtually paperless system at its Brookvale warehouse with state-of the-art technology and software in which stock is electronically recorded on arrival and actioned on departure. Furthermore, the design of the new Warriewood site incorporates a number of features that will minimise Blackmores’ impact on the environment and incorporate the latest concepts in environmental stability. The following diagram outlines the flows of manufacturing, packaging and transportation that are taken to deliver the Blackmores range to the consumer.

Furthermore, the company holds strong intrinsic values in terms of their employees and employee benefits. The company’s executive chairman, Marcus Blackmore believes in “the 3 P’s – people, product and passion. ” The belief is that if you can get those parts of the business right, the rest of the business takes care of itself. Some benefits that staff members enjoy include: •A company subsidised on-site gym •A subsidised staff cafeteria •A profit-share scheme whereby twice a year all permanent employees receive a proportion of after-tax profit which can either be taken as cash, or Blackmores shares •Staff discounts on the Blackmores range Paid maternity and paternity leave •Extensive staff training and career development •Weekly in-house massages •A program that encourages all employees to donate 0. 5% of their salary to the charity of their choice, which the company than matches. Ownership Structure Blackmores Limited (BKL) listed on the Australian Stock Exchange on the 2nd May 1985. The largest shareholder with a total substantial holding of 24. 69% of the company is the Executive Director Marcus Blackmore, son of the founder Maurice Blackmore.

The ownership registry of Blackmores is not dominated by one particular private company or individual investor. It should also be noted that managed fund investors do not hold a large percentage of the shares on issue. TOP 20 SHAREHOLDERS 30 April 2008 – Courtesy Blackmores Ltd No. HolderTotal Holdings% I/C 1Mr Marcus C. Blackmore3,994,30224. 68 2Dietary Products (Aust) Pty Ltd576,1323. 56 3JP Morgan Nominees Aust Ltd 436,7792. 7 4National Nominees Limited348,7102. 16 5Milton Corporation Limited305,1151. 89 6ANZ Nominees – Cash Income211,1271. 3 Gowing Bros Limited207,3631. 28 8Ms Jennifer Tait202,2811. 25 9Blackmore Foundation Pty Ltd200,0001. 24 10Sister Esther Whellan182,8681. 13 11Queensland Investment Corporation178,8111. 11 12Citicorp Nominees Pty Ltd155,0000. 96 13Mr Roy Shepherd109,6510. 68 14Trans State Nominees Pty Ltd109,1500. 67 15Rathvale Pty Ltd100,4110. 62 16Mrs Queenie Hannah Elisabeth Praeger94,9800. 59 17Invia Custodian Pty Ltd94,3020. 58 18HSBC Custody Nominees80,5410. 5 19Mrs Patricia Gladys Wright78,8680. 49 20Patricia Gladys Wright & Mark Gregory Wright & James Gregory Wright76,6880. 7 Blackmores Limited Subsidiary Companies Source: IbisWorld Directors/Senior Management Source: IbisWorld Share Price Performance 5 YEAR SHARE PRICE PERFORMANCE – as at 28th April 2008 Source: IbisWorld BKL Historic Performance on $10,000 investment Source: Aspect Huntley Recent Company Announcements 28th April 2008 – Blackmores announce quarterly profits On the 28th April 2008, Blackmores announce a third quarter net profit after tax of $17. 5 million. This represented a 19. 6% increase on the same period last year. Australian sales increased by 6. % with moderate growth across the industry, with Blackmores’ market share remaining strong at 21. 6%. No new products were made available during the quarter but a number of new products a planned for the last quarter. Current Debt levels stand at $21. 8 million increasing due to the construction of the new Warriewood site which is nearing completion. Relocation remains scheduled for the first quarter in 2009. 24th April 2008 – Change of Directors Interest Notice Marcus Blackmore disposed of 100,000 shares as a donation to a private philanthropy program approved by the ATO.

After the change and as of the 24th April 2008, the number of securities held directly and indirectly by Marcus Blackmore include: •3,994,302 ordinary shares held in the name of Marcus Blackmore; •2,1094 ordinary shares held in the name of Marcus Blackmore [Darlene Howie Account]; •576,132 ordinary shares held in the name of Dietary Products Australia P/L; •182,868 ordinary shares held in the name of Ester Mercie Whellan; and •14,364 ordinary shares held in the name of Estate of Late D Howie. . Industry Analysis Market Characteristics Definition The Complementary Health Care Industry is difficult to define, because it can encompass everything from organic food to homeopathic medicines such as food supplements, natural medicines and external products, such as skincare. This sector can also include ‘over-the-counter’ products available without prescription. Nonetheless, complementary health care products are intended to maintain health, rather than treat illnesses.

For the purpose of this analysis we define Complementary medicines as those of herbal, vitamin, mineral and/or other substance, presented in a ‘pharmaceutical’ dose form – these include, tablets, capsules, liquids, powders and/or other forms. Figure 1: Entire spectrum of complementary medicine. Statistics •In Australia in 2000, it was estimated that 52% of the population used at least one complementary healthcare product. Recent studies have shown that it has now risen to more than 70% of the population using complementary healthcare products and a quarter of the population visit complementary health practitioners each year.

Furthermore in regards to the entire world population it is estimated that between 40% and 90% use complementary medicine. •A News poll survey conducted by the CHC (Complementary Healthcare Council of Australia) in September 2001 showed that out of all participants polled: -86% agreed that supplements have a role to play in maintaining good health; -83% agreed that supplements have a role to play in preventing illness; and -66% agreed that supplements have a role to play in helping cure illness. Research cited by the Australian Medical Association shows that more than 80% of GP’s have referred patients for some form of complementary therapy. •Australian domestic sales of natural healthcare products exceeds $A1. 5 billion. •The total expenditure on healthcare in Australia was estimated to be approximately $57 billion in the financial year ending June 2002, which would have equated to approximately $2,850 per head of population. Of this amount, the public cost is around $2,000, while the individual contributes $850.

However the actual cost was $60 billion. •More than $2. 5 billion a year is now spent on alternative and complementary healthcare in Australia in which the figure is growing by the day. Regulation – Complementary Medicines In previous years, complementary medicines were often regulated around the world as a subset of food regulation; however they were very often limited in what they could claim on labels and in advertising, and the quality standards for manufacture varied considerably.

But over the past decade the increase in demand has caused complementary medicines to be regulated in global markets as “medicines” and “health care” products and not “foods”. With this shift have come improved manufacturing standards. Blackmores’ products are referred to in Australia as complementary medicines. They can also be referred to as ‘traditional’ or ‘alternative’ medicines and can include vitamins, minerals, nutritional supplements, herbal, aromatherapy and homeopathic products.

Blackmores’ products are developed by in-house experts, using a combination of scientific evidence and hundreds of years of traditional knowledge. Products are made to exact requirements, with quality ingredients sourced from all over the world and produced under good manufacturing practices. Products are approved by regulatory bodies in each country where they are sold and are approved by Australia’s and the various importing government’s stringent standards of safety.

Complementary medicines are generally used for self-medicating of small minor deficiencies and for the purpose of maintaining general health and well-being. In Australia, complementary medicines are regulated by the Therapeutic Goods Administration (TGA) and all medicines must be registered with the Australian Register of Therapeutic Goods (ARTG). The Therapeutic Goods Act (TGA) 1989, came into effect on 15 February 1991 aims to ensure the quality, safety and efficacy of medicines and ensure the quality, safety and performance of medical devices.

More than 15,000 medicines are listed on the Australian Register of Therapeutic Goods. Registered medicines have been evaluated by the TGA for quality, control and importantly efficacy. When any company makes claim in regard to efficacy they must have the supporting research. Complementary Medicines is a highly regulated industry in Australia which has put the industry at the forefront, helping protect all Australian and overseas consumers, ensuring that Australian consumers have medicines produced at a high level of quality control.

Key competitors The Complementary health care industry in Australia distributes primarily through its pharmacy and supermarket channels and therefore caters to customers in each of these markets. Blackmores major competitors are tiered in these two distinct markets; the pharmacy channel – where Bullivants (part of the Mayne Group) trading as Symbion on the ASX, is the main competitor, and the retail / grocery market where – Nature’s Way, Cenovis and Golden Life all compete for market share.

In terms of actual of product range and image within the pharmacy market Symbion can be considered Blackmores’ major competitor. However, there does not seem to be any no clear dominate service providers reaching Blackmores target industry, with much of this being contributed to the Pan Pharmaceuticals scandal, which essentially removed from the market a large amount of competition. In light of this, Blackmores recorded its market share, based on combined retail sales in both of the two channels, remained strong at 21. 6 per cent. Market Distribution and Access to Complementary Health Care

Complementary health care are available to consumers through a number of different channels, with the total complementary health care market achieving a value in the target of $800 million to $1 billion AUS. Pharmacy remains a primary outlet for many complementary healthcare products, which is reflects approximately 40% of the entire market. This suggests the changing face of pharmacy practice as Pharmacists are becoming more knowledgeable about recommending appropriate complementary health care and otherwise employing in-store naturopaths to meet consumer’s needs.

Health food stores are also an important distribution channel for many complementary health care products provided by Blackmores, which represents approximately 20% of the market. However in recent years there has been a shift in the availability of major brands through grocery channels which now has also increased to approximately 20% of the market, not only within the vitamin and mineral supplement shelves, but within the medicinal aisles competing alongside pharmaceutical products such as cold, flu and allergy relief.

Direct to Consumer (DTC) sales also remain a consistent channel which are approximately 7% of the market for complementary health care, particularly those products with high “brand loyalty” to companies that provide a wide range of complementary medicine products. This distinct relationship is evident across a wide variety of Blackmores’ products. Another source of distribution is availability from a complementary health care professional such as; Herbalist or Naturopath which in itself represents approximately 10% of the market.

It has become increasingly popular for appropriate medicines to be supplied as a part of a holistic consultation regarding the immediate and longer term health needs of a patient rather than just addressing immediate symptomatic problems. Barriers to entry The level or degree of barriers to entry into the Complementary Health Care industry will indicate how limited the industry is to new entrants. Ultimately Blackmores will be seeking to raise the level of barriers to entry into the industry, to minimise other potential competitors from entering the market and taking a portion of its market share.

As stated before in previous sections of the paper the Complementary Health care industry is difficult to define as it covers so many different sectors. But if we focus on the products that Blackmores distributes, namely herbal, vitamin, mineral and other substances we can see that the industry is not dominated by any group of major competitors. We are aware that Blackmores is a recognised and strong performing company and based on its retail sales its share of the market only accounts for 21. 6%, which seems quiet small considering its industry leading position.

The industry’s low level of concentration limits the power that the leading companies have over the rest of the market; hence they are unable to set the price like an oligopoly market and effectively remove the other competitors. In addition companies are not able to experience the full benefits of economies of scale due to their relatively small size. Thus no company has any significant cost advantage over any of the other competitors. There is a considerable level of regulation within the industry which has increased more so in the recent years from Australian government.

Entry into the complementary health care industry requires strict processes which can potentially be a lengthy process. As mentioned, in Australia complementary health care products are regulated under the Commonwealth Therapeutic Goods Act 1989 and regulations are administered by the Therapeutic Goods Administration. These goods must be manufactured under the strict pharmaceutical standards of good manufacturing practice by Australian manufacturers and on many occasions regulators have been forced to take action.

In one instance in April 2003 the TGA suspended the licence of Pan Pharmaceuticals, Australia’s largest manufacturer of herbal products, mineral and nutritional supplements at the time, and ordered the immediate withdrawal of hundreds of products it had manufactured. This in turn would deter many potential entrants into the industry. Overall, the current barriers to entry are high, this industry is on track to continue to grow in the future where we will possibly see a further increase to the restrictions into the industry and further developments in regards to regulation. SWOT Analysis StrengthsWeaknesses

Most of the products used in Australia are manufactured in Australia to some of the highest standards in the world, based on GMP validation and strict therapeutic regulations. Low risk dietary supplements are effectively regulated under the same law as pharmaceutical drugs, except the supplements attract 10% GST where most drugs are GST-exempt. According to the CHC, complementary healthcare products can be of benefit in the management of some age-related diseases such as arthritis, certain types of cancer, heart disease and brain function disorders such as dementia, and help relieve symptoms of age-related changes such as the menopause.

There is a 30% private health insurance rebate that is applied to some consultations, there is no subsidy for complementary health therapy. The increase use of complementary health care medicine can effectively reduce health care costs, as it evident that vitamin and mineral supplements and herbal supplements can reduce certain diseases, therefore there would be a reduction in hospital costs, maintenance costs etc. Pan recall has caused customers to think twice about purchasing complementary health care products.

The non-prescription nature of these medicines means that the consumer is empowered to pursue a strategy of self-care. Greater training in undergraduate courses for medicine, pharmacy and nursing. There are minimal side effects with complementary health care products. Blackmores is the only mainstream brand that has diversified its position across health food stores, pharmacy, grocery and practitioner channels. Life Cycle The industry life-cycle illustrates the growth path of an industry and indicates the level of sales over the cycle’s time period. This is illustrated in the diagram below.

Life Cycle of an Industry Based on the analysis of the Complementary Health Care market, the industry is at the ‘Rapid Accelerating’ stage of its life cycle. The primary reason is that people are living longer. Over the past century, life expectancy at birth has increased from 57 to 80 years. As an ageing population becomes more health conscious the greater demand for complementary health products will be a logical progression. More than $2. 5 billion a year is now spent on alternative and complementary healthcare in Australia and the figure is growing by the day.

As people increasingly turned to complementary health cures, analysts forecast the emergence of a multi trillion dollar, global industry. Support Complementary Healthcare Council of Australia (CHC) The CHC of Australia is the peak body representing the overall natural and complementary healthcare industry in Australia. The CHC aims to enhance the health and wellbeing of Australia’s population through providing education and information on the use of complementary healthcare products. The CHC seeks to show that part of the answer in reducing public healthcare costs requires a different approach to healthcare policy.

The CHC contends that by adopting healthcare practices that prevent illness, existing resources will be made available to provide improved levels of acute and crisis care. Implicit in this approach is the need for public education on the ability of individuals to take control of their health and prevent illness and disease, and the proven health benefits of lifestyle and natural approaches to maintaining good health. Basis of Competition The industry primarily competes on quality rather than price, although price does bare some importance.

The stringent regulation of contemporary health care ensures the quality, safety and efficiency of medicines The industry however would have suffered substantially from decrease in revenue growth due to the Pan Pharmaceutical recall situation, where Pan Pharmaceuticals were accused of substituting ingredients, manipulating test results and for having substandard manufacturing processes. This caused the TGA to suspend the licence of Pan Pharmaceuticals and ordered the immediate withdrawal of hundreds of products it had manufactured. This reduced sales dramatically which in essence decreased the industries revenue.

There is however no real external competition to this industry and it contains very low levels of globalisation. Most of the products used in Australia are manufactured in Australia to some of the highest standards in the world, based on GMP validation and strict therapeutic regulations. In addition the Australian companies do not have any significant exposure to any overseas markets. Although Blackmores is adopting a globalistic approach and as such does have significant and expanding operations in New Zealand and increasingly parts of Asia, which are mentioned throughout this report.

Market Sensitivity The key factors that impact the performance of the Complementary Health Care industry include: Ageing of population The proportion of the population aged 65 or more is set to double over the next 40 years due to the fact that life expectancy for the average person is longer. Older age groups are typically more health conscious and are prepared to seek alternative ways to increase their general well being. Disposable Income This factor does not have a major impact on the performance on the industry but does contribute to the industries revenues.

Changes to household disposable income directly affect the budget and expenditure paid on complementary health care products and may case some people to opt for cheaper alternatives. Typical economic factors that impact disposable income are petrol prices, interest rates, tax rates and the labour market growth, all of which are ripe in current economic conditions both nationally and abroad. Technological changes There is always constant research and developments when considering the prevention of illnesses.

This is despite complementary health care products not being presented to the population as a cure for illnesses. Increasing patient expectations The public is demanding more autonomy and involvement in their own health care. They want to prevent or slow down ageing and aim to optimise health by achieving higher levels of functioning. Additionally, the exponential increase in scientific studies being published on these products has no doubt added to public interest and confidence in its use. Key success factors

The key success factors to the Complementary Health Care industry are: •Unwillingness to restrict healthcare to prescribed medication when ill and being prepared to test a range of natural products for our own condition all for a sense of wellbeing; •There are minimal side effects with complementary health care products; •Recent studies have indicated that complementary medicine is finding a growing preference amongst patients with chronic or serious diseases who are looking for natural options to assist in the ongoing management of these conditions; •The population as a whole are longer-lived, more urbanised, more readily informed, more affluent, demanding and mobile; and •Whilst interest in complementary medicine has increased among practitioners and patients, this has been paralleled by increasing support by the government.

This is evident by recent moves to grant degree status to schools of natural medicine, exemption of some complementary medicines from GST, as well as government support for private health insurance, many of which cover complementary health care. 3. Current Issues Recent Acquisitions The PAN Pharmaceutical recall in Australia A ‘virtual tsunami’ was taken against the Complementary Health industry after Pan Pharmaceuticals was closed down by the TGA in early April 2003. Pan was the fourth largest supplier of natural ingredients in the world, and privately owned. It was serious competition to the drug industry, which was taking steps to get into the supplement market. The company was accused of substituting ingredients, manipulating test results and for having substandard manufacturing processes.

The TGA was first alerted to the possible manufacturing problems when dozens of adverse reaction reports to a pharmaceutical motion sickness tablet known as Travacalm were lodged, a product that had been produced under licence by Pan Pharmaceuticals. After some investigation it was found that manufacture of this product was substandard and doses of active ingredient varied enormously from that stated on the label. Pan Pharmaceuticals was not given a chance to fix this product before the TGA closed the company down, and all of its 1400 other natural health products were ordered removed from the shelves by the regulator. Health food shops and chemist’s shelves were stripped nearly bare of product overnight. Pan was placed into the hands of a corporate liquidator which was well known as a consultant to the multinational pharmaceutical industry.

Pan was disposed of (in record time) only six months later for a miniscule fraction of its true value, destined never to be a serious competitor to the drug companies again. Although the original product in question was a pharmaceutical drug, media attention remained focus on natural medicine products, with some commentators seizing the opportunity to call into question the value of complementary medicine in general. The regulator claimed that the public’s confidence in the Australian supplement industry had been undermined. This was done deliberately by the TGA after creating mass consumer panic by calling a ‘class one’ recall on vitamins, minerals and other health supplements.

Class one meant the TGA claimed that Pan’s vitamins, minerals and other supplements had caused death or serious injury when in fact nobody had died of any of Pan’s supplements or anyone else’s supplements. As a result the Federal Government set up an expert committee to examine the role of complementary medicines in the health care system, including the supply of safe, high quality complementary medicines, quality use and timely access to these medicines, and the maintenance and responsible and viable complementary medicine industry. After Pan, the TGA began a regulating frenzy. The TGA closed dozens of companies, fined others and imposed crippling compliance fees on the rest of the mainly Australian based supplement industry.

This created a nationwide shortage of natural health products and eliminated much of the multi national pharmaceutical industry’s local competition. Pan Recall Impact Lingers 30 Jun 2003 Two months after the Pan Pharmaceutical recall, the complementary health care industry is still reeling from the shock of Australia’s biggest medical recall. One WA retailer has been forced to close and industry groups have stated that hundreds of jobs have been affected across the country. Complementary Healthcare Council executive director Val Johanson said several retail outlets and small companies in the Eastern States had gone to the wall. Bigger companies had to contract and there had been hundreds of jobs lost.

She said “overall turnover was estimated to be down about 15 per cent to 20 per cent, which was not as bad as had been initially expected… Between 30 per cent and 40 per cent of products were still off the shelves. ” “We had reports of people coming in and buying up bottles of products that had been recalled but which they had used for many years and still had faith in,” she said. “The picture that is coming through is that there is still very strong support out there for natural health care products. But we are not out of the woods yet. ” The council had no knowledge of any serious adverse effects from Pan Products despite the company having made up 11. 4 billion doses last year. Ms Johanson further added that there had been 71 cases reported to the Therapeutic Goods Administration but the TGA did not believe most could be linked to Pan. She epeated concerns voiced at the time of the recall that the entire complementary health care industry was being targeted by the TGA because of the sins of one manufacturer. Marcus Blackmore, chairman of natural health care company Blackmores, which did not have any products manufactured by Pan, said the industry was devastated but people still strongly believed in the products. “Where is the evidence that these products were ever harmful? ” he asked. “It’s like the weapons of mass destruction. The Government just went ahead with what they wanted to do anyway. ” He said Blackmores’ own research showed 14 per cent of people in Australia went ahead and used recalled products despite Government warnings.

A spokeswoman for the TGA did not comment on the number of cases of adverse effects but it was made known that this would be carefully assessed. At this stage there was no link to any of the Pan products. She said it was disturbing that companies were in the position of having to close, but the health and safety of Australians was most paramount. Red tape and GST continue to hamper Australians’ wellbeing April 19, 2006 Marcus Blackmore made an impassioned plea to the Federal Australian Government to make access to complementary medicines cheaper and easier for Australian consumers. The Executive Chairman of the leading vitamins producer Blackmores Ltd. old the Australian Financial Review (AFR) that an independent review of the ‘red tape’ associated with complementary medicines was badly needed. Mr Blackmore, has been talking to government ministers about high industry manufacturing costs, and is lobbying for the removal of GST from complementary medicines, in line with the current GST waiver for prescription medicines. Mr Blackmore spoke to Tony Abbott, stating he believed said it is the treasurer’s problem. He believes federal and state government support is needed to remove the GST on complementary medicines. Consumers may also face higher prices for vitamins and minerals across all brands because the federal drug regulator, the Therapeutics Goods Administration (TGA) is trying to raise listing fees.

Rent increases and falling revenues for the TGA have been cited as reasons for the increased fees that manufacturers will need to pay the regulator. Upcoming Issues •Remove the GST from the complementary health care products for which there is evidence to show they are as effective as PBS listed pharmaceuticals; •Remove the GST from complementary health therapies conducted by approved therapists for which there is evidence of effectiveness; •Provide reliable public information of the safety and efficiency of complementary health care, including information software for GP’s and pharmacies; •Continue to penalise poor manufacturing practice but reduce the need for costly testing, in line with the relative risk of the product; Integration of complementary health training into university based courses for conventional health care providers, particularly GP’s, nurses and physiotherapist; and •Funding for more research into complementary health product and therapies. High Barriers to entry This industry specific issue has great impact on future earnings of Blackmores. The Complementary health care has relatively high barriers of entry. It is now highly regulated which can potentially discourage prospective entrants entering the market therefore Blackmores will have higher market share which in turn typically means higher earnings. If the barriers to entry were Blackmores could risk other companies taking portions of future earnings.

By continuing to build on their service to customers, Blackmores can maintain industry leader and eliminate any issues of low barriers to entry. Interest rates Blackmores has recorded a relatively low debt to equity ratio of under 40% at the end of the 2007 calendar year. This ratio has been maintained over the past 10 financial years. It can then therefore be assumed that a considerable amount of their acquisitions are funded via equity rather than debt. This essentially removes a substantially the impact of interest rates on their borrowings. Although increasing the interest component of the liability, in the context of current financials this affect will be marginal at that.

Maintaining such a low debt (gearing) ratio has the ultimate affect of allowing financing costs to remain down and as such potentially increasing their cash flow and future earnings. Exchange rates Fluctuating exchange rates have an impact on Blackmores. Their recent increase exposure and as a result sales activity in Asian markets means they are subject to the favourable and unfavourable movements in the Australian and Asian currencies. Either way the currencies move will have a significant impact on their future earnings of Blackmores, and will cause the value of their international acquisitions to either increase or decrease, respectively. Ageing Population The longer people live the greater the impact on Blackmores’ future earnings. Over the past century, life expectancy at birth has increased from 57 to 80 years.

Older age groups are typically more health conscious and are prepared to seek alternative ways to increase there general well being. If people know that there are products out there to help achieve this then they will be more willing to purchase and use these products. 4. Blackmores Financial Analysis Recent Financial Performance Blackmores’ financial performance and share price activity is heavily dependant and strongly affected by market trends for both domestic and international macroeconomic conditions. In particular, is consumer confidence in which the company relies on heavily to enhance its revenues, and subsequently profit. Blackmores’ sales have increased sharply over 5 years with an 81. 83% increase rom 2003 to 2007, this has led to an increase in Profit before Interest and Tax (EBIT) of 147. 34%. 2007 witnessed an increase in revenue of 15. 99% and subsequent increase in EBIT of 21. 15%. 2003 to 2007 has been a period of sustained growth for the company due to an increase brand awareness, increase in market share (as international markets such as the Asian markets flourished) and furthermore a shift in attitude towards the benefits of complementary medicines. Source: Blackmores Annual Report 2007 2003 was an unparalleled year in the area of complementary medicines due to the Pan Pharmaceutical Crisis whereby a number of Blackmores’ competitor’s products were removed from stores.

Blackmores’ products were not directly affected by the recall and as a result, the company faced a significant increase in demand. The industry crisis caused sales to increase 14. 08% from 2002 to 2003. Earning per share has continually increased as has the amount of dividends paid to shareholders. Blackmores share price has steadily increased each year, finishing at $20. 56 as at the 30th June 2007. Figures: Aspect Huntley Similarly to Blackmores’ sales trend, total assets have grown considerably from 2004 to 2007. This is largely due to the development and construction of a new site in the Northern Beaches of Sydney, set for completion in mid-2008. Long-term debt has also increased from $10 million in 2006 to $15. 4 million in 2007.

Net borrowings are at its highest since 2004, but unlike 2004 where Net Gearing was at 21. 81%, Net Debt Levels are now 12. 11%. Furthermore, the increase in gearing should not warrant a large increase in Blackmores’ riskiness as the funds are being used for investment purposes with the aim of streamling business activities and the clear intention of increasing profitability. Figures: Aspect Huntley Operating cash flows has increased to its highest ever levels in 2007 to $16. 79 million. This is a result of increased revenues and cash receipts from its customers. The large investment spending from acquisitions and the purchase of operating assets in 2007 was partly offset by the greater increase in customer receipts.

Investment Cash Flows grew to an outflow of $7. 58 million in 2007. This is directly related to the purchase and investment in property and production infrastructure. Interestingly, Blackmores’ purchased $13. 61 million of production, parts and equipment in 2006 however this was offset with the sale of $9. 8 million of non-current assets. 2006 and 2007 witnessed a combined total borrowing of $31. 88 million which was offset by a combined total repayment of $22. 50 million. Furthermore, dividends grew to over $10 million for the first time. Du Pont Analysis The Du Pont Analysis system aims to provide a measure of a firms return on its total assets.

The return on total assets can be made up of the net profit margin that is depicted on the left hand side of the chart, and the total asset turnover of a firm, which is depicted on the right hand side of the chart. The formula for calculating a firm’s total return on assets is: (Net profit/Total asset)= (Net profit/Net sales) x (Net sales/Total assets) According to this formula Blackmores’ historic return on assets is: Source: Aspect Huntley In 2007, Blackmores has made a 20. 41% return on its total asset base. Return on Equity (ROE) The Return on Equity (ROE) measures Blackmores’ return from the capital raised by its shareholders equity. This ratio can be broken into the contributing factors of a firm’s ROE.

Du Pont ROE analysis distinguishes between the results of a firm’s decisions regarding operating and financial leverage, which is accomplished by measuring the underlying determinants of the return of assets used by separating the effects of the amount of debt used by the firm from the cash flow implications of that chosen amount of debt. The Du Pont ROE framework is as below: We have chosen to compare Blackmores (BKL) with two of its closest competitors in the industry of complementary medicines. When deciding upon Blackmores most relevant competitors we took into consideration opposition products that consumers would directly compare against, when purchasing from supermarkets and retail outlets. A summary of the companies are outlined below: Symbion Health Limited

Symbion Health Limited formally Mayne Group Limited, is a health-care focused company comprising of 5 divisions, medical centres, imaging, pharmacy services and Symbion consumer services. Symbion complementary and consumer brands include Natures Own, Cenovis, Golden Glow, Bio Organics, Natures Nutrition, Bullivants and Vitelle. Symbion Health Limited provides wholesale distribution of pharmaceutical and healthcare product lines to around 3,000 retail pharmacies, as well as public and private hospitals. Its brands include Terry White Chemists and Chemmart. Furthermore, it is a provider of nutraceuticals (vitamin and mineral supplements) with over 1. 3 billion tablets and capsules produced annually.

Sigma Pharmaceuticals Limited Sigma Pharmaceuticals Limited (SIP) is a developer of generic pharmaceutical products and a distributor of pharmaceuticals for pharmaceutical companies across Australia. Sigma Pharmaceuticals Limited is the new name of the company listed on the Australian Stock Exchange (ASX) following the merger between Sigma Company Limited and Arrow Pharmaceuticals Limited on 19 December 2005. The operation of a pharmaceutical business encompasses the manufacturing, development and distribution of own branded and contract over the counter, prescription and generic pharmaceutical products for the Australian and overseas markets.

Sigma’s product range includes Herron, Amcal, Chemist Own and all Guardian generic products. Sigma Company Limited was founded by two Melbourne pharmacists in 1912 and aims to be the leading Australian pharmaceutical manufacturer and marketer, and the most efficient pharmaceutical wholesale distributor and retail banner group in Australia. Summary of Extended DuPont Analysis Year end 31st December, 2005 Total RevenueBlackmoresSymbion HealthSigma Pharmaceuticals EBIT/Sales13. 10%4. 51%5. 66% Sales/Total Assets227. 00%93. 88%112. 59% EBIT / Total Assets29. 86%4. 23%6. 37% Profit Before Tax / Total Assets28. 54%3. 69%5. 11% Total Assets / Total Equity193. 00%162. 58%154. 49% Profit Before Tax / Total Equity55. 32%6. 00%7. 74%

Return on Equity38. 39%3. 32%5. 21% Inventory Turnover917. 97%918. 80%744. 56% Current Ratio1. 54%1. 12%1. 09% Gross Gearing Ratio21. 24%26. 79%20. 25% Asset Turnover Ratio227. 92%93. 89%103. 93% Summary of Extended DuPont Analysis Year end 31st December, 2006 Total RevenueBlackmoresSymbion HealthSigma Pharmaceuticals EBIT/Sales14. 09%4. 64%6. 12% Sales/Total Assets217. 71%159. 01%132. 69% EBIT / Total Assets30. 68%7. 37%8. 13% Profit Before Tax / Total Assets29. 80%3. 69%6. 50% Total Assets / Total Equity185. 59%264. 03%153. 86% Profit Before Tax / Total Equity55. 32%16. 45%10. 01% Return on Equity39. 28%-0. 06%7. 32% Inventory Turnover1031. 3%11122. 00%762. 25% Current Ratio2. 38%1. 09%1. 89% Gross Gearing Ratio27. 18%7339. 00%22. 73% Asset Turnover Ratio217. 83%15898. 00%103. 93% Summary of Extended DuPont Analysis Year end 31st December, 2007 Total RevenueBlackmoresSymbion HealthSigma Pharmaceuticals EBIT/Sales14. 25%4. 83%5. 27% Sales/Total Assets207. 45%171. 87%145. 44% EBIT / Total Assets29. 56%8. 30%7. 67% Profit Before Tax / Total Assets29. 43%6. 58%9. 11% Total Assets / Total Equity191. 26%254. 19%172. 48% Profit Before Tax / Total Equity56. 29%16. 72%-4. 09% Return on Equity38. 34%13. 32%6. 43% Inventory Turnover1134. 34%1368. 43861. 23% Current Ratio2. 52%1. 111. 82%

Gross Gearing Ratio35. 41%68. 6639. 04% Asset Turnover Ratio207. 50%93. 89145. 45% EBIT / Sales This ratio calculates the operating profit margin of the business and reflects the rate of profit (before interest and tax) on sales. It also gives an insight into the relative cost structure of the firm. Blackmores’ EBIT / Sales ratio has grown slightly over the three year period in question returning 14. 25% in 2007. The other peers seem to be negatively performing with relatively low percentage figures. Sales / Total Assets This ratio represents total asset turnover, which indicates the effectiveness of the company’s use of its total asset base.

Blackmores shows to be making quite effective use of its total asset base. Although this has decreased over the 3 year period, it is likely to increase upon completion of the new site. Both Symbion and Sigma have made large percentage gains, mainly due to also being in a development stage. EBIT / Total Assets This ratio represents operating profit relative to the firm’s total assets. It indicates the effectiveness of the company to generate profits from its asset base before allowing for the effects of financial leverage and taxation. Blackmores seems to be well established in their asset turnover as, again they financial figures seem to keep them much above the rest of their international peers with 29. 6% in 2007. Symbion overtook Sigma in 2007 with a 0. 93% gain. Profit before Tax / Total Assets This ratio represents return on assets prior to the distortion of taxes. Calculating return of assets prior to taxes is particularly relevant in this instance as we are comparing firms with international operations. Blackmores’ are producing higher returns in comparison to their asset base with 29. 43%. Their closest competition is Sigma with 9. 11%. Total Assets / Common Equity This ratio represents the financial leverage multiplier (FLM) which demonstrates how much a company has leveraged its shareholders equity (by raising debt) to build its asset base.

A higher FLM implies higher financial risk and a greater risk to return for equity holders due to an increased portion in cash flows to debt holders. Profit before Tax / Common Equity This ratio represents the return to equity holders prior to the payment of tax. Blackmores is returning a considerable amount of their profit to equity holders in comparison to their peers with 56. 29%. Return on Equity Return on Equity (ROE) is an important measure of the performance of a business as it indicates the rate of return that management has earned on capital provided by shareholders. This ratio can be broken into the contributing factors of firms ROE.

Blackmores have a significantly higher return on equity than any of their other international peers, recording a current ROE of 38. 34%, in comparison to Symbion, with the next highest ROE of 13. 31%. It is a financially healthy sign that Blackmores’ growth in comparison with its peers is successfully being achieved. Inventory Turnover Ratio Inventory turnover aims to determine how productively the company has been utilising their inventory. This is particular important for firms such as Blackmores who rely heavily on the movement of inventory in order to produce income. Current Ratio Calculated by dividing current liabilities by current assets. This ratio is a useful measure of the short term debt-paying ability of the company.

The higher the ratio, the more liquid the company is. Whilst a ratio of 2 or more was traditionally considered desirable many companies have reduced this in recent years, as operating cycles have shortened. It is more relevant to understand the ratio in the context of the sector average and the trend over the last few years. Blackmores’ current ratio has increased over the period while both Sigma’s and Symbion’s have reduced from 2005 to 2007. 5. Blackmores Share Valuation Assumptions Evaluation Timing All of our evaluations are as at the 8th May 2008, where our forecasts for 2008 and beyond incorporate the relevant data and market news of the past four years. Beta (? )

Beta is a standardised measure of systematic risk that relates the individual asset covariance to the variance of the market portfolio. Blackmores’ Beta is measured against the Australian market and was listed as 0. 671. The All Ordinaries, the primary Australian market index, was listed as 1. 092. Risk Free Rate (Rf) We have assumed the Australian Government 10 year bond rate as the relevant measure of risk free return. The current 10 year bond rate is 6. 19%2 on the 8th May 2008. Market Risk Premium (Rm – Rf) The valuation of Blackmores using the CAPM approach requires the calculation of a market risk premium. This can be defined as the difference between the expected return on the market and the risk free rate.

The market risk premium represents the compensation risk adverse investors require to be enticed into investing in the riskier market portfolio. Using the S&P 200 index as our benchmark market portfolio, we have assessed the expected market return to be 11. 12% on the 8th May 2008. Based on this assumption, the market risk premium is 4. 93%. Expected market return can be defined as follows: Ke= Rf+ ? (Rm-Rf) Where: Rf = Risk Free Rate of Return ? = Beta (Rm-Rf) = Equity Risk Premium Based on Blackmores’ beta and the market risk premium, their cost of equity is equal to: Ke=6. 19%+0. 67(4. 93%) = 9. 4931% 1. Aspect Huntley – FinAnalysis 08/05/2008 2. Comsec – All Ords Index 08/05/2008 Dividend Discount Model (DDM)

The dividend valuation model is a commonly used discounted cash flow model that assumes that the current value of a companies stock is equal to the present value of all future dividends. V=? (Dt/1+k) Where: V = Value of common stock Dt = Dividend during period t K = Required rate of return However this model does not take into account a company’s future growth prospects. As such, the DDM can be extended to assume that future dividends grow at a constant rate for an infinite period. In effect, this approach treats dividends as a growing annuity. V=? (Do (1+g)/ ke-g) Where Do = Dividend payment in the current period G = Expected growth rate of dividends Ke = required rate of return

While this approach is not suitable to companies with varying rates of growth, it becomes a suitable valuation technique in the analysis of companies such as Blackmores, who have historically been able to maintain a relatively stable dividend growth rate. This stems from the first major assumption that the DDM, which intuitively concludes that dividends are steady, or grow indefinitely at a constant rate. However, even for the most historically proven steady, reliable, blue chip-type stocks, it can be a seemingly difficult task to forecast exactly what the dividend payment will be next year, let alone the preceding decade. In itself, the DDM attempts to demonstrate the underlying principle that a company is worth the sum of its discounted future cash flows.

The question of reliability and accuracy of this means of cash flow measurement becomes an entire other question. The real challenge thus lies in ensuring the model remains in keeping as applicable as possible to reality, incorporating the most reliable and up-to-date information in assumption models. Blackmores’ Dividend Policy & History Since listing on the stock exchange on 2 May 1985, Blackmores have paid dividends in each year. The payout ratio has remained comparatively stable throughout the past ten years, maintained at just below 90%. Dividend Forecasts Blackmores’ future dividend growth will heavily reflect the growth of its revenues.

Despite the supernormal growth that has been observed over the past number of years, industry growth rates from prior years are not sustainable. Despite becoming an industry leader following the Pan Pharmaceuticals scandal in 2003, we believe that the market will mature with competition re-joining in the long-term (post 2013), thus reducing the market power held by Blackmores. In light of this, Blackmores is uniquely positioned to benefit from an ageing population and increasing health conscious consumers. Management has established a strong long-running reputation consistently providing shareholders with steady returns and growth. They will, therefore, continue to enjoy a healthy growth rate, however at a much lower, steady rate.

It is forecast that over the next five years, an ageing population, increased popularity of alternate medicines and an increase in the Asian market growth, along with the strong and steady Australian currency, should allow the industry to maintain its credibility and maintain growth. Looking beyond 2012, these steady returns can again be maintained through a matured industry and large barriers to entry, making it difficult for competitors to penetrate the market. Substantial overseas gains may be eaten away due to the currency impact affecting these off-shore revenues. As a result, we believe Blackmores will grow going forward in a constant manner, with dividend growth rates eventually increasing in line with a constant-growth model. Utilising a constant – growth model, we have split the stages of growth into three time periods. They are:

To reflect and assist in most accurately assessing the sensitivity of changes to our valuation assumptions, we utilised the multi-stage model in our analysis. Multi Stage models take the DDM a step closer to reality by assuming that the company may experience differing growth phases in the future. Stock analysts build complex forecast models utilising many phases of differing growth to better reflect real prospects. By incorporating a Multi-Stage growth model into our sensitivity analysis, it essentially allows any changes to future company growth outside the constant growth model to become evident and the overall affect this will have on the forecasting of share prices.

Considering our forecast dividend growth rates, we have applied them to the Dividend Discount Model (DDM) below: Based on our model Blackmores is valued at $21. 81, which is at a premium to the current market price of $19. 45 (05 May 2008). Therefore, according to the DDM Blackmores is considerably undervalued by the market, trading at just over 12% below our estimation. Sensitivity Analysis The DDM is sensitive to both the