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Financial Analysis of Abbott Laboratories

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Financial Analysis of Abbott Laboratories - February 18th, 2011

Abbott Laboratories (NYSE: ABT) is the largest company in the nutritional products market and the second largest company in the worldwide market for diagnostic products. The company manufactures a number of nutritional and pharmaceutical products, laboratory diagnostics, pharmaceutical therapies and medical devices, including the arthritis medication Humira and the coronary stent Xience. Abbott had total sales of $30.8 billion in 2009. Abbott Labs' recent acquisitions of Kos Pharmaceuticals and Guidant Corporation have contributed to Abbott's competitiveness in the highly profitable vascular stent market.

Abbott and the rest of the pharmaceutical industry are continually under pressure from expiring patents. Patent expiration allows generic drug companies to lower prices for a certain medication by producing their own versions, increasing competition for that product's market.

Corporate Overview

Abbott Laboratiores unlike most big pharmaceutical companies is highly diversified, the company sells everything from pharmaceuticals to medical devices to nutritional products -- allowing it to have a very wide customer base that can withstand volatility. In addition to the large customer base, the company's expansive global business helps make it a stable performer. During 2Q of 2010, more than half of $4.9 billion in pharmaceutical sales came from outside of the US, while international sales for its diagnostic tools were more than double domestic sales.[1]

Business Update
Contents
1 Corporate Overview
1.1 Business Update
1.2 Recent News
1.2.1 Recent Acquisitions
2 Business Segments
2.1 Products
3 Trends and Forces
3.1 Government regulation challenge
3.2 Tightening FDA Regulations
3.2.1 Expiring patents threat
3.2.1.1 Strong pipeline; diverse businesses
3.2.1.2 Generic pharmaceuticals: direct competition
3.2.2 Medicare coverage patterns
3.2.2.1 Effect of US politics
4 Competition
5 References
In Q3 of 2010, Abbott reported sales of $8.675 billion, a growth of 11.8% from the same quarter of 2009. Revenue growth was fueled by worldwide pharmaceutical sales (value includes impact of the Solvay acquisition), which increased 21.7% to $4.937 billion as well as worldwide vascular product sales, which increased 18.6% to $790 million. [2] However, the recall of ‘Similac’, the company’s powdered infant product, hurt the contributions of its nutrition department; US nutritional sales dropped 5.3% to $626 million from the previous year. Abbott's earnings of $1.05 per share (excluding specific items) beat analyst's estimations of an EPS of $1.04. However, revenue growth of $8.68 billion was below the $8.92 billion expected by analysts.[3] Abbott maintained its 2010 outlook, while raising the lower end of its previous guidance range, bringing the range to between $4.16 and $4.18 per share excluding special items.[2]

In Q2 of 2010, Abbott reported sales of $8.8 billion, a growth of 17.8% from the same quarter of 2009. Revenue growth was fueled by double-digit growth across nearly all of Abbott's divisions (Worldwide Diagnostics Sales increased by 8%, while the Pharmaceutical Sales were up nearly 25%). Net earnings for the quarter were $1.29 billion, a 0.3% increase from the previous year. However, if the costs of recent acquisitions (Solvay Pharmaceuticals amongst others), collaborations (Neucrocrine Collaboration), litigation reserves and cost reduction initiatives are excluded from the after tax charges than the net earnings jump to $1.578 billion for Q2 of 2010 compared to $1.38 billion the previous year, an increase of 13.6%.[4] Abbott's earnings of $1.01 per share (excluding specific items mentioned above) met analyst's estimations range from $0.99 to $1.02 per share. However, Abbott maintained its 2010 outlook to between $4.13 and $4.18 per share due to the unfavorable impact of healthcare reform rebates on earnings.[4][5]

In Q1 of 2010, Abbott reported sales of $7.7 billion, a growth of 14.6% from the same quarter of 2009. Revenue growth was fueled by double-digit growth across all of Abbott's divisions. Sales were reduced by $60 million from healthcare rebates tied to healthcare reform. Net income for the quarter was $1.0 billion, a 30% decline from the previous year. However, revenue in Q1 2009 reflected almost $800 million in benefit from the removal of a liability.[6] Abbott's earnings beat analyst estimates by 5%. However, Abbott trimmed its 2010 outlook to between $4.13 and $4.18 per share due to the unfavorable impact of healthcare reform rebates on earnings.[7]


For Q4 of 2009, Abbott reported sales of $8.79 billion, a growth of 10.6% from the same quarter of 2008. Net income for the quarter reached $1.54 billion, which was unchanged from 2008.[8] Abbott's Q4 results mostly beat analyst estimates, but weaker than expected sales of Humira in the United States drove share prices down on the earnings announcement.[9]

In Q3 2009 (ending 9-30-09), Abbott reported sales of $7.76 billion, an increase of 3.5% over the same quarter of the previous year. Total international sales rose 8.5%, while U.S. sales shrank 1.7%. Abbott's sales growth was driven largely by its nutritional and vascular divisions, which grew 9.8% and 4.7%, respectively, while pharmaceutical sales decreased 1.6% and diagnostics sales remained flat. Abbott's fastest growing major products where the blockbuster arthritis medication, Humira, which grew 26.2% and its pediatrics nutritional products, which grew 21.9%.[10] Abbott reported a net income of $1.48 billion for the quarter, an increase of 37% from the previous year. For fiscal 2009, Abbott raised its outlook from $3.65-$3.70 to $3.70-$3.72 earnings per share.[11]

In 2009 Q2, earnings decreased to $1.29B from $1.32B the year before. Sales increased by 2.5% to $7.5B compared to the previous year, despite an 8% decrease in revenues due to unfavorable exchange rates. Total international sales fell 21%, while US sales increased 21%. Humira remains the main growth and profitability driver for the company, with Q2 sales of $1.3B, due to its continued expansion into the rheumatology, dermatology, and gastroenterology markets. [12]

Recent News
On September 21,2010, Abbott, announced that it will eliminate 3000 jobs and take almost $1.3 billion in charges over the next two years as cost of integration of Solvay. Most of the jobs that will be eliminated are based in Europe, and almost all of them are part of Solvay's operations. Abbott closed the acquisition in February and said it would improve its sales by about $3 billion per year. It will also add about $500 million to its research and development costs.[13]

Recent Acquisitions
On May 21, 2010, Abbott announced that it would acquire the branded generics business from Indian drug manufacturer Piramel Healthcare for $3.7 billion. Piramel manufactures drugs and diagnostics in India, where it competes with top players Dr. Reddy's Labs, Cipla, and Ranbaxy Labs. Piramel posted 2009 profit of $109 million.[14] Abbott expects to have the leading market share in India for branded generics, and forecasts sales in excess of $2.5 billion in India by 2020.[15]

On December 2008, Abbott announced plans to acquire Ibis Biosciences from Isis Pharmaceuticals (ISIS) for $215 million. The company expects the acquisition to help advance its position in detecting infectious agents, specifically in hospitals. [16] As of June 2009, the company continues to be open to growth through mergers and acquisitions, specifically seeking to expand its non-pharma business. It does not appear, however, to be looking for the same scale deals as those of Pfizer (PFE)/Wyeth (WYE) and Merck (MRK)/Schering-Plough (SGP). [17]

On September 24, 2009, Abbott made a bid to acquire the drugs unit of Solvay Pharmaceuticals, rivaling an earlier bid made by privately owned Nycomed. Solvay is a Belgian chemical and pharmaceutical company whose drugs include cardio-metabolic, neuroscience, gastroenerolgy, and hormone therapies. Analysts estimate that the deal will eventually cost more than 5 billion euros.[18] Abbott has announced plans to pay $6.6 billion in cash in a deal that would also include up to $441.3 million in milestone payments.[19]

Business Segments

Products
Abbott Labs' products fall into three categories or production divisions: medical, pharmaceutical, and nutritional. Over the past five years, the revenue distribution from each of these these divisions has held fairly steady, with Pharmaceuticals consistent as the highest earner. Medical products are on an upwards growth curve, however, and may equal or surpass pharmaceuticals in importance--especially if demand for vascular stents remains high.

Pharmaceutical Products ($16.5 billion, 54% of 2009 revenue)[20]
Abbott's main revenue-generating pharmaceutical is Humira, which makes up one-third of the pharmaceutical division's revenue. Humira, Abbott's #1 selling medication, is used to treat rheumatoid arthritis. Depakote, which was previously a blockbuster epilepsy and bipolar drug treatment for Abbott, lost close to 70% of its 2008 revenue to generic competition. Abbott also develops Niaspan, which is the only drug on the market capable of decreasing cardiovascular risk by increasing HDL, or "good" cholesterol. Generic competition in Abbott's pharmaceutical division has led to an 8.6% decrease in U.S. sales, which offset international growth for total sales growth of only 5.2% in 2009.[21]

Nutritional Products ($5.3 billion, 17% of 2009 revenue)[22]
The nutritional products division has been a steady source of revenue for Abbott and a source of growth in 2009 (revenue rose 7.3% for the year). The company further announced in July, 2009 plans to expand the division's operations in India by purchasing local nutrition companies Wockhardt and Carol Info Services for $130M. [23] Abbott's most well-known brands include Ensure, a meal replacement shake, and ZonePerfect snack bars.

Diagnostics ($3.6 billion, 12% of 2009 revenue) [24]
Abbott's diagnostics division makes tests used in blood banks, hospitals, laboratories, and plasma protein therapeutic companies. The tests include immunoassay and chemistry systems used to screen for markers for infectious diseases, fertility, drug targets, and cancer, as well as genetic tests and hematology systems.

Vascular ($2.7 billion, 9% of 2009 revenue)[25]
The vascular division is largely dominated by stents, which open up clogged arteries in patients. Abbott's new drug-eluting stent Xience V has shown strong growth, doubling in sales in a year and becoming the best-selling stent of its kind in the U.S. market.[26] Clinical trials have shown Xience V to be safer and more reliable for treating clogged heart arteries than its competition. In particular, one clinical trial demonstrated Xience V to be clinically superior to its competitor Boston Scientific's Taxus stent. Abbott's acquisitions of Kos Pharmaceuticals and Guidant Corp will add depth to Abbott's medical product pipeline.

Trends and Forces

Government regulation challenge
Abbott Labs and its competitors are all heavily affected by government regulation. This includes both long-term challenges like required FDA approval and patent expiration, and acute sudden changes like Medicare reform. These regulations are primarily affected by political factors.

Tightening FDA Regulations
When FDA commissioner Margaret Hamburg began her tenure in 2009, she announced that the FDA would toughen it's enforcement efforts to protect public health.[27] As the FDA has drawn criticisms for its failures in preventing deaths caused by drugs such as Vioxx, Hamburg has come in with several fixes that include stricter monitoring of drug adverse events, more funding for the agency, stronger ability to force product recalls, and more scientific expertise within the agency.[28] On May 19, 2010, the FDA announced 21 proposals aimed at increasing transparency to the public regarding regulatory information.[29]

Such information will increase the amount of information accessible to the public with regard to companies' pipeline drugs and manufacturing facilities that might otherwise not have been disclosed. While the tightened regulations and increased transparency will eventually improve the overall quality of pharmaceutical products, there will be growing pains as companies adjust to the stricter standards and stronger enforcement. Abbott's ability to adjust to these new standards will impact its valuation and financial success.

Expiring patents threat
Expiring patents are inevitable and a threat to all companies in the pharmaceutical market. More than half of Abbott's revenues are generated by the pharmaceutical division. With expiring patents and an extremely competitive generic drug market, Abbott's pharmaceutical revenues could experience a drop in sales.

Strong pipeline; diverse businesses
Expiring patents will have the greatest effect on Abbott's pharmaceutical division, so if Abbott can successfully maintain a diverse business spread beyond pharmaceuticals to nutritional, and medical as well, it can insulate itself from the drop in profit caused by patent expirations or drug approval troubles. Currently, Abbott's nutritionals division generates 20% of its revenue, but still might not be enough to offset a heavy loss of pharmaceutical revenue due to expired patents and generic competitors. The performance of Abbott's Xience V drug-eluting stent will be important for boosting profits in Abbott's medical division.

Generic pharmaceuticals: direct competition
Although Abbott has a diverse product line spread throughout the pharmaceutical, nutritional and medical products industries, Abbott's main focus has shifted onto the pharmaceutical industry in recent years. The threat of FDA approval of generic drugs has put a lot of pressure on the pharmaceutical industry. Of Abbott's 70 drug patents, the most threatened (expired or due to expire in the near future) are:

Biaxin (expired 2005): this antibiotic has already experienced a 33% sales decrease since losing its patent.
Depakote (expires January 2008): this prescription drug treats migraines, bipolar disorder, and epilepsy, and is Abbott's second best selling pharmaceutical product. Abbott's sales will be especially hurt by a sharp decrease in Depakote sales due to generic competitors.
Further, major pharmaceuticals are constantly vulnerable to patent infringement from generic competitors. The litigation involved in preventing such patent violations can be drawn out and costly, though successful defenses of patents can sometimes offset these losses. In July 2009, for example, Abbott sued Medtronic (MDT) to defend its coronary stent technology and successfully settled for $400M. [30]

Medicare coverage patterns
Health coverage is an important determining factor when patients and doctors choose among various treatment options, and Medicare coverage is particularly significant in that it directly affects the drug choices of about 20% of the US population.

Recent Medicare reform resulted in expanded coverage for two treatments for rheumatoid arthritis: Abbott's Humira and Amgen's Enbrel (previously Medicare only covered Johnson & Johnson’s Remicade). Now that Humira can be reimbursed under Medicare, its market share (and that of rival Enbrel) are expected to increase. However, as Medicare coverage extends over time to cover other rheumatoid arthritis medications, competition may force Abbott to lower prices.

Effect of US politics
Under the Medicare Modernization Act (MMA), drug prices are negotiated between private drug manufacturers and private drug plans which prohibit government interference from participating in negotiations and setting up a price structure. The White House and Democrat-heavy Senate are exploring new ways to lower drug prices, which could decrease revenue throughout the pharmaceutical industry. If Abbott is forced to lower their drug prices, they will be hard hit--more than half of their total sales come from pharmaceuticals.

The results of the President Obama's 2009 healthcare reform will affect Abbott's pharmaceuticals industry by playing a major role in Medicare reform.

Competition

For a company in the high-speed and constantly changing health care industry, capturing market share must be the primary focus. Market share can be spiked up either by introducing new drugs or by obtaining new indications for existing drugs, increasing demand for the medications.

Humira faces competition for the treatment of Crohn's Disease and psoriasis from Johnson & Johnson (JNJ) and Amgen (AMGN).

Abbott's Xience V is also being pushed to seize market share, this time in the lucrative drug-eluting stent market--currently populated by only two main players, Boston Scientific's Taxus and Johnson and Johnson's Cypher. Combined, these two companies hold more than 90% of drug-eluting stent market. Johnson and Johnson's recent acquisition of Conor Medsystems may benefit Abbott if the Xience V is approved in time to pick up some of the lost market share from Conor. Abbott competes with St. Jude Medical (STJ) in the vascular closure device market.

Abbott's toughest competition may still be generic drug manufacturers, however. A slew of expiring patents makes Abbott's sales very vulnerable to competition from generic drugs, whose low prices make it difficult for Abbott to compete.

Abbott will have to continue investing more in R&D in order to stay ahead of the tough competition, both from generics and from companies like Johnson and Johnson. In 2006, Abbott's R&D spending was significantly less than its competition.


Competition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze Abbott's competitors by each drug market (See section on Major Drugs and Industry Trends).

The table below displays competitive operating metrics for competitors within the pharmaceutical industry. Note that the total revenue for Merck and Pfizer was influenced by revenue inherited from their acquisitions of Schering-Plough and Wyeth, respectively. In addition, net income for Merck was bolstered by $3.2 billion from the sale of its animal division [31], while Bristol-Meyers Squibb's net income saw a one-time $7.2 billion increase from the sale of its nutrition division.[32]


Pharmaceutical and Biotech Industry — Competitive Operating Metrics (2009)




Johnson & Johnson (JNJ)

Pfizer (PFE)

Novartis (NVS)

Abbott Laboratories (ABT)

Merck (MRK)

Bristol-Meyers Squibb (BMY)

Eli Lilly (LLY)

Amgen (AMGN)

Gilead (GILD)

AstraZeneca (AZN)

Roche (RHHBY)

Revenue (in billions of USD)

Total Revenue

$61.9

$50.0

$44.3

$30.8

$27.4

$18.8

$21.8

$14.6

$7.0

$32.8

$49.1

Gross Profit

$43.5

$41.1

$32.1

$17.6

$18.4

$13.7

$17.6

$12.6

$5.4

$27.2

$34.4

Revenue Growth from 2008

-2.9%

3.5%

4.0%

4.2%

15.0%

6.2%

7.2%

-2.4%

31.4%

3.8%

7.5%

Income

Net Income

$12.3

$8.6

$8.4

$5.8

$12.9

$10.6

$4.3

$4.6

$2.6

$7.5

$7.8

Net Profit Margin

19.8%

17.3%

19.0%

18.7%

47.0%

56.4%

19.8

31.5%

37.6%

22.9%

15.9%

Operating Income

$15.8

$10.8

$10.0

$6.2

$15.3

$5.6

$5.4

$5.5

$3.5

-$11.5

$11.9

Diluted EPS Growth from 2008

-3.7%

2.5%

3.7%

21.8%

55.6%

20.7%

NA

19.6%

36.9%

23.6%

-11.8%

Other

R&D Spending

$7.0

$7.8

$7.5

$2.7

$5.9

$5.1

$4.3

$2.9

$0.9

$4.4

$9.9
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