Global Insight Perspective | |
Significance | Abbott swung to a loss of 32 cents per share in the fourth quarter, compared to profit of 63 cents per share in the same quarter of 2005, as costs related to the US$3.7-billion acquisition of Kos Pharmaceuticals Inc. affected results. |
Implications | Despite the current loss, Abbott is in better shape now than it was a year ago. The company has managed to compensate for the reduction in pharmaceuticals revenue following the termination of distribution rights to three Boehringer Ingelheim (Germany) drugs with indigenous growth of other major drugs in its portfolio, most notably arthritis drug Humira (adalimumab). |
Outlook | The divestment of part of Abbott's diagnostics division to General Electric (GE), due to be completed by the end of the first quarter of 2007, will provide US$6 billion in post-tax revenues—allowing Abbott to offset cash depletion resulting from its 2006 acquisitions of Guidant's (U.S.) vascular business and Kos Pharmaceuticals. Earnings growth is expected to improve, as Abbott has divested a slower-growing unit and acquired technology with potentially faster sales-growth rates. |
Bottom-Line Woes Hide Successful FY for Abbott
Abbott posted a net loss of US$476.2 million, or 31 cents per share, for the three months of FY (full year) 2006, compared with a profit of US$976.4 million, or 63 cents per share in the fourth quarter of 2005. The quarterly loss is due to the company's US$3.7-billion acquisition of U.S. lipid-management drugs developer Kos Pharmaceuticals, which took place in the last quarter. Excluding the impact of the acquisition, Abbott would have achieved profit of US$1.15 billion, or 75 cents per share, in the fourth quarter. Fourth-quarter sales were 14.5% higher, adjusting for the adverse impact of the termination of a BI agreement and including a favourable 1.5% effect of exchange rates. On a reported basis, worldwide fourth-quarter sales inched up 2.8% year-on-year (y/y) to US$6.2 billion.
For FY2006 as a whole, the company reported sales growth of 11.6% on a comparable basis (excluding BI products and including a negative 0.2 exchange-rate impact and the positive impact of the Guidant vascular acquisition). On a reported basis, sales were stagnant at US$22.476 billion, 0.6% higher y/y.
Abbott: Selected Results (US$ bil.) | |||
Full Year 2006 | % Change on a Reported Basis | % Change Excluding BI Products | |
Total Sales | 22.476 | 0.6 | 11.6 |
Cost of Sales | 9.815 | -7.8 | |
SGA Expenses | 6.350 | 15.5 | |
R&D Expenses | 2.255 | 23.8 | |
Acquired in-Process R&D | 2.014 | n/m* | |
R&D Expenses as % of Revenue** | 18.99% | 10.79 pp higher | |
Operating Income | 2.042 | -53.2 | |
Total U.S. Sales | 11.534 | -7.5 | 12.3 |
Total U.S. Pharmaceutical Sales | 6.550 | -19.5 | 10.1 |
Total International Sales (inc. direct exports from U.S.) | 10.942 | 10.9 | |
International Division Sales- Pharmaceuticals | 5.845 | 5.3 | |
Operating Margin | 9.1 | 10.4 pp lower | |
Net Income (U.S. GAPP) | -0.476 | n/m | |
Source: Company Report | |||
Despite the relatively high level of losses, especially in the fourth quarter, Abbott's performance in 2006 has been rather impressive. The fourth-quarter loss is largely attributable to the Kos Pharmaceuticals acquisition, while the acquisition of Guidant's vascular business in the second quarter, as part of Boston Scientific's (U.S.) takeover deal for Guidant, cost the company another US$4.1 billion. Besides, Abbott's cash resources are expected to improve dramatically following the divestment of part of its diagnostics business to General Electric (GE). The US$8.13-billion deal, announced last week, is due for completion in the first quarter of 2007 and is expected to produce post-tax cash revenues for Abbott of around US$6 billion.
Humira Saves the Day - Again
While net profit losses are attributable to Abbott's heightened M&A (mergers and acquisitions) activity in the past year, there is no denying that revenue growth has stalled, particularly in the company's pharmaceuticals division. Pharmaceutical sales for 2006 declined by 9.5% y/y worldwide (to US$12.395 billion), while U.S. pharmaceutical sales tumbled by 19.5% y/y (to US$6.55 billion), due to the loss of distribution rights for three BI drugs, including rheumatoid arthritis (RA) drug Mobic (meloxicam).
The spectacular sales growth of Abbott's own RA drug, Humira, has partially offset the loss of Mobic revenues. Annual Humira sales increased by 45.9% y/y to US$2.044 billion worldwide, while U.S. sales of the drug increased by 38.4% y/y to US$1.176 billion. Humira was approved for the additional indication of ankylosing spondylitis in both the United States and Europe in 2006, extending the drug's potential market. Humira sales are projected to exceed US$2.7 billion this year, according to Abbott's 2006 annual results statement.
Abbott: Net Sales of Leading Products/Divisions, Full Year 2006 (US$ mil.) | ||||
Products | U.S. Sales | % Growth, Year-on-Year* | Global Sales | % Growth, Year-on-Year* |
Pharmaceutical Products | ||||
Humira | 1,176 | 38.6 | 2,044 | 45.9 |
Depakote | 1,230 | 18.5 | 1,308 | 18.9 |
Kaletra | 512 | 22.0 | 1,135 | 13.0 |
TriCor | 1,048 | 13.1 | 1,048 | 13.1 |
Biaxin | 151 | -50.5 | 816 | -23.4 |
Ultane/Sevorane | 260 | -22.5 | 799 | -8.6 |
Omnicef | 637 | 28.6 | 637 | 28.6 |
Synthroid | 470 | -5.7 | 534 | -3.6 |
Leuprolide | - | - | 230 | 4.6 |
Lansoprazole | - | - | 173 | 12.3 |
Medical Products | ||||
Paediatric Nutritionals | 1,128 | 2.7 | 2,026 | 12.8 |
Adult Nutritionals | 1,097 | 1.9 | 1,882 | 5.0 |
Diabetes Care | 547 | 4.8 | 1,136 | 6.5 |
TAP Pharmaceutical Products (not consolidated in Abbott sales) | ||||
Prevacid | 2,600 | 4.0 | 2,600 | 4.0 |
Lupron | 662 | -5.2 | 662 | -5.2 |
Source: Company Report | ||||
Among pharmaceuticals, antibiotic Biaxin (clarithromycin) suffered the most significant sales decline in 2006: 23.4%y/y globally and 50.5% y/y in the United States as generic versions of the extended-release formulation were allowed briefly in the U.S. market.
Outlook and Implications
The bottom-line results tend to obscure Abbott's success in overcoming several challenges over the past year. Notably, the company managed to offset some of the expected revenue decline due to the loss of BI-product distribution rights with strong growth of its own products. Humira sales are expected to remain strong, considering the approvals in a third indication achieved last year. Meanwhile, Abbott's recent success in fighting off generic challenges to the extended release formulation of Biaxin promises to stall generic competition in the U.S. and protect revenues.
Abbott: Guidance for 2007 | |
Earnings per Share exc. specific items | US$2.77-2.83 |
Sales Growth | 13-15% |
Source: Company Report. | |
The Guidant vascular business, now integrated with Abbott's own stents development unit into Abbott Vascular posted a spectacular 359.2% sales growth in the fourth quarter to US$224 million and is set for strong future growth despite some patent challenges against the Xience stent. Meanwhile, sales of Diabetes care products—one of the two diagnostics units that Abbott chose to retain in the GE deal (the other one is Molecular diagnostics)—increased by 6.5% globally and by 4.8% in the United States in FY2006. While growth rates are slower than for pharmaceuticals, diabetes care is a faster-growing unit than the larger, but slower-growing, diagnostics units sold to GE. Abbott did indeed need a cash injection to fuel further growth, but it seems to have divested the right units and to have spent its money on acquisitions (Guidant and Kos) that will speed up sales growth in the future.