ABT

Abbott Laboratories 10-Q Summary: Period Ended June 30, 2007

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2007, and the six months ended on that date. Abbott Laboratories is a global healthcare company operating in four reportable segments: Pharmaceutical Products, Nutritional Products, Diagnostic Products, and Vascular Products. The company is a large accelerated filer with 1,545,452,757 common shares outstanding as of June 30, 2007.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 15.3% year-over-year, driven by the Guidant vascular acquisition (April 2006) and Kos Pharmaceuticals acquisition (December 2006), unit growth, and a favorable impact from a weaker U.S. dollar (+2.7% impact).
• Profitability: Net earnings rose 14.1% to $1.686 billion. Operating earnings increased significantly to $2.134 billion, aided by the absence of a $493 million in-process R&D charge recorded in the prior year for the Guidant acquisition.
• Margins: Gross profit margin declined to 56.2% from 57.3% due to the completion of the Synagis co-promotion, generic competition for Omnicef and Biaxin, and increased amortization of intangible assets.
• Expenses: R&D expenses increased 15.5% and SG&A expenses increased 20.1%, reflecting integration costs and marketing support for new products like HUMIRA and Xience V.
• Liquidity: Cash and cash equivalents increased by $1.02 billion to $1.54 billion, reversing a negative working capital position from the prior year-end.

Guidance, Outlook, and Risks

• Termination of GE Sale: On July 11, 2007, Abbott and GE mutually agreed to terminate the contract to sell Abbott's core laboratory diagnostics business. Assets previously classified as "held for sale" ($3.48 billion) will be reclassified, and suspended depreciation/amortization of approximately $99 million will be recorded in Q3 2007.
• Restructuring: A non-recurring charge of approximately $94 million (net of tax) is expected in Q3 2007 related to the termination of the GE contract. Additional restructuring charges of $58.8 million were recorded in the first six months of 2007.
• Acquisition Integration: Significant cash inflows from Guidant and Kos acquisitions are expected to commence within one to two years of product launches (2008–2013).
• Legal and Regulatory: Abbott faces ongoing litigation regarding pricing practices (MDL 1456), patent disputes (Depakote, Omnicef, Xience V), and investigations into Kos Pharmaceuticals marketing practices. Management believes outcomes will not have a material adverse effect except for specific pricing cases which could be material to quarterly results.
• Capital Allocation: The company purchased 15.4 million shares of common stock for $827 million in the first six months of 2007. Unused lines of credit total $7.0 billion.

Investor Verification Checklist

• GE Transaction Impact: Verify the timing and magnitude of the $94 million Q3 charge and the reclassification of $3.48 billion in assets from "held for sale."
• Generic Competition: Monitor sales trends for Omnicef and Biaxin as generic competition continues to erode margins.
• Acquisition Milestones: Track progress on the $520 million projected costs to complete Guidant R&D projects and the $71 million for Kos projects.
• Legal Exposure: Review updates on the Department of Justice intervention in the pricing litigation (MDL 1456) and the Kos Pharmaceuticals investigation.
• Foreign Exchange: Assess the sensitivity of future earnings to currency fluctuations, given the significant international revenue base.