Abbott Swings to Loss, Narrows Profit Guidance for FY16

Diagnostic major’s worldwide revenue grew 2.9% to $5.3 billion on a reported basis

a11Drug major Abbott Laboratories Inc. (NYSE: ABT) announced its Q3 FY16 financial results on October 19th, 2016.

The Abbott Park, Illinois-based Company is involved in the development of products and technologies that span the breadth of healthcare. With a portfolio of leading, science-based offerings in diagnostics, medical devices, nutritionals, and branded generic pharmaceuticals, Abbott has operations in more than 150 countries and operates under four segments: Established Pharmaceuticals Division (EPD), Medical Devices, Diagnostics, and Nutrition. Read more about Abbott’s financial results below.

Q3 FY16 financial highlights

Abbott’s Q3 FY16 worldwide revenue grew 2.9% to $5.3 billion on a reported basis, including an unfavorable 1.1% effect of foreign exchange, and grew 4% on an operational basis. Excluding the impact of Venezuelan operations, sales would have risen 4.5% on a reported basis and 5.6% on an operational basis. International sales grew 2.2% on a reported basis and 3.7% on an operational basis during the reporting quarter. International operational growth was led by robust performance across Established Pharmaceuticals, Diagnostics, and Medical Devices.

Despite the revenue growth, Abbott swung to an unexpected net loss of $329 million during Q3 FY16 versus a net profit of $580 million in the year-ago period, after the value of its stake in Mylan N.V. (NASDAQ: MYL) slumped as the stock plunged after Mylan became embroiled in public outrage over the rising price of its EpiPens. Abbott holds a 13% stake in Mylan and became the biggest shareholder in 2015 after selling its generic drugs unit in Europe. Mylan’s stock plunged 10% in September 2016 alone, causing a whopping $947 million write-down in Abbott’s Q3 FY16 results.

Reported diluted EPS from continuing operations under GAAP was a $(0.24) loss in Q3 FY16 due to an adjustment of $(0.66) per share associated with Abbott’s equity investment in Mylan to reflect Mylan’s share price as of September 30th, 2016. Excluding the Mylan write-down, Abbott’s earnings stood at $0.59 per share, versus $0.54 per share in the year-ago period, helped by rising demand for its generic drugs and medical devices.

Segmental highlights

Nutrition: During Q3 FY16, Abbott’s worldwide Nutrition sales fell 2% on a reported basis, including an unfavorable 1% effect of foreign exchange, and decreased 1% on an operational basis. During the reporting quarter, Abbott introduced Similac® Pro-Advance™ and Similac Pro-Sensitive™, the first infant formulas in the U.S. with a human milk oligosaccharide that offers a unique immune-nourishing prebiotic. International sales plunged 9.4% on a reported basis and 7.5% on an operational basis, driven by challenging market conditions in China, partially offset by continued strong performance in Latin America and Southeast Asia.

Diagnostics: During Q3 FY16, Abbott’s worldwide Diagnostics sales increased 5% on a reported basis, including an unfavorable 0.4% effect of foreign exchange, and increased 5.4% on an operational basis. During the reporting quarter, Abbott unveiled its new suite of diagnostic instruments, AlinityTM, with higher automation, higher volumes, faster results, smaller size and an improved user interface.

Established Pharmaceuticals: During Q3 FY16, Abbott’s Established Pharmaceuticals sales grew 5.3% on a reported basis, including an unfavorable 3.7% effect of foreign exchange, and grew 9% on an operational basis.

Medical Devices: During Q3 FY16, Abbott’s worldwide Medical Devices sales jumped 6.4% on a reported basis, including a favorable 0.4% effect of foreign exchange, and increased 6% on an operational basis. During the reporting quarter, the FDA approved Abbott’s first-of-its-kind bioresorbable heart stent called Absorb, used for the treatment of people with coronary artery disease.

Other highlights

Troubled acquisitions: Abbott has been grappling with problems at two major companies that it has agreed to acquire during 2016, which has resulted in a decline in its stock prices recently. Abbott signed a definitive agreement on February 1st, 2016, to acquire Alere Inc. (NYSE: ALR), a maker of medical tests and supplies, for about $5.8 billion. However, the deal has hit a roadblock after Alere disclosed probes in its sales practices overseas, with Abbott wanting to end the transaction, while Alere wants it to go through. Moreover, in July 2016, at the request of the FDA, Alere recalled its INRatio device used to monitor levels of the widely used blood thinner warfarin because it was found to generate faulty results. In August 2016, Alere filed a lawsuit accusing Abbott of slow progress on key antitrust submissions to sabotage the deal. Alere’s shareholders are slated to vote on the acquisition on Friday, October 21st, 2016, while Abbott is still working to get regulatory approvals.

Source: Bloomberg
Source: Bloomberg

On April 28th, 2016, Abbott entered into a definitive agreement to acquire medical devices manufacturer St. Jude Medical Inc. (NYSE: STJ) for roughly $25 billion.    St. Jude has been the target of short-seller Carson Block’s Muddy Waters LLC, which made allegations that St. Jude’s pacemakers and defibrillators may be uniquely vulnerable to cyber security attacks. While St. Jude has denied the allegations, it has taken steps to warn patients about risks unrelated risks pertaining to accelerated depletion of its defibrillator batteries, which has led to two deaths in Europe. To make matters worse, Muddy Waters posted a video designed to show that St. Jude’s Merlin equipment can be reverse-engineered; allowing the programmer commands to be manipulated so that a patient may get an unnecessary cardiac shock or the device may be turned off. While the bad press has affected St. Jude’s stock prices, Abbott has also borne the brunt of these allegations pending its merger with St. Jude.

FDA approvals: In Q3 FY16, Abbott received FDA approval for its FreeStyle® Libre Pro system, a revolutionary continuous glucose monitoring system for healthcare professionals to use with their patients with diabetes. Abbott also received FDA approval for AbsorbTM, the only fully dissolving heart stent and TECNIS® Symfony intraocular lenses, used for the treatment of cataracts, the first and only extended depth of focus lenses for people with cataracts. Abbott submitted for U.S. regulatory approval a consumer version of FreeStyle Libre to be used by people with diabetes to self-monitor glucose levels.

Sale of eye care business to Johnson & Johnson: Abbott agreed to sell its eye-surgery equipment business to Johnson & Johnson Inc. (NYSE: JNJ), a3the world’s biggest maker of healthcare products, for $4.32 billion in an all-cash deal, on September 16th, 2016. The deal would enable J&J to emerge as the second largest company in cataract surgeries, an $8 billion global market that is growing at a rate of about 5% annually. Abbott had bought the eye business, then known as Advanced Medical Optics, for $2.8 billion, including debt, in 2009. Abbott is selling the business, renamed as Abbott Medical Optics (AMO), amidst its efforts to strategically reshape its products portfolio.

a4The strategic deal includes AMO’s consumer eye health products, cataract surgery business and advanced laser vision (LASIK) technology and corneal care products. Abbott’s medical-optics business makes equipment used in cataract and LASIK vision-correction surgeries, as well as contact lenses. In 2015, AMO’s sales fell 6.9% to $1.1 billion, largely because of a strengthening dollar. The deal, expected to close by April 2017, will not have any impact on Abbott’s earnings guidance for FY17, and is subject to customary closing conditions, including regulatory and shareholder approvals.

Sale of medical devices to Terumo: Abbott, which is in the process of completing the St. Jude acquisition by the end of 2016, said on October 18th, 2016, that the companies would sell some of their medical devices to Japan-based Terumo Corp for about $1.12 billion. The deal is subject to the successful completion of Abbott’s acquisition of St. Jude and other approvals. The all-cash transaction will include St. Jude Medical’s Angio-Seal and Femoseal vascular closure products and Abbott’s Vado Steerable Sheath. Abbott said it would retain its vascular closure products.

Guidance for Q4 FY16 and full year FY16

Abbott has narrowed its EPS forecast for FY16 to $2.19 per share to $2.21 per share, in-line with the $2.20 per share anticipated by analysts. Abbott adjusted its full-year 2016 EPS guidance for continuing operations under GAAP to $0.59 per share to $0.61 per share, and narrowed and raised at the mid-point its full-year 2016 adjusted EPS for continuing operations to $2.19 per share to $2.21 per share, exceeding its initial guidance for the year.

Stock Performance

a5Abbott’s stock stood at $40.50, slipping 0.59%, at the close on Friday, October 21st, 2016, having vacillated between an intraday high of $40.61 and a low of $40.16 during the session. The stock’s trading volume was at 7,273,818 for the day. The Company’s market cap was at $59.89 billion as of Friday’s close.

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