Abbott’s Net Income Falls on Acquisition-related Costs

FY16 net income plunged 68.4% to $1.4 billion from $4.42 billion in FY15

Drug major Abbott Laboratories Inc. (NYSE: ABT) announced its Q4 FY16 financial results on January 25th, 2017.

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.

Q4 FY16 financial highlights

Abbott’s Q4 FY16 worldwide sales of $5.33 billion grew 2.8% on a reported basis and 3.8% on an operational basis versus $5.18 billion in the year-ago same quarter. The top-line was, however, impacted 1% by unfavorable foreign exchange movement. During the reporting quarter, Abbott’s operating profit grew 16.3% to $948 million from $815 million in the year-ago comparable period.

Abbott’s Q4 FY16 net income grew 3.9% to $798 million, or $0.51 per share, from $767 million, or $0.46 per share, in Q4 FY15. Excluding specified items, adjusted diluted EPS from continuing operations was $0.65 in Q4 FY16, in-line with the previous guidance range.

Abbott’s full-year FY16 worldwide sales of $20.9 billion grew 2.2% on a reported basis and 4.8% on an operational basis versus $20.4 billion in the year ago corresponding quarter. Abbott’s FY16 net income plunged 68.4% to $1.4 billion, or $0.71 per share, from $4.42 billion, or $1.72 per share, in the previous year, due to acquisition-related charges.

Segmental highlights

Nutrition: During Q4 FY16, Abbott’s Worldwide Nutrition sales decreased 3.7% on a reported basis, including an unfavorable 1.1% effect of foreign exchange, and decreased 2.6% on an operational basis. Worldwide Pediatric Nutrition sales fell 5.4% on a reported basis, including an unfavorable 1.1% effect of foreign exchange, and decreased 4.3% on an operational basis. International sales plunged 13.1% on a reported basis and 11.2% 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 Q4 FY16, Abbott’s worldwide Diagnostics sales grew 2.9% on a reported basis, including an unfavorable 1% effect of foreign exchange, and increased 3.9% on an operational basis.

Core Laboratory Diagnostics sales rose 3.6% on a reported basis, including an unfavorable 1.2% effect of foreign exchange, and increased 4.8% on an operational basis. During the quarter, Abbott obtained CE Mark for several Alinity core laboratory systems and i-STAT Alinity handheld portable blood testing system.

Established Pharmaceuticals: During Q4 FY16, Abbott’s Established Pharmaceuticals sales grew 10.6% on a reported basis, including an unfavorable 2% effect of foreign exchange, and jumped 12.6% on an operational basis. Key Emerging Markets include Brazil, Russia, India, and China (BRIC), along with several additional emerging markets that represent the most attractive long-term growth opportunities for Abbott’s branded generics product portfolio. Sales in these key geographies grew 10.6% on a reported basis and 13% on an operational basis in Q4 FY16. Operational sales growth was led by double-digit growth in BRIC, which comprises approximately 45% of Abbott’s Established Pharmaceuticals sales, as well as strong growth in several countries throughout Latin America, including Colombia, Mexico, Peru, and Argentina.

Medical Devices: During Q4 FY16, Abbott’s worldwide Medical Devices sales grew 4.4% on a reported basis, including an unfavorable 0.3% effect of foreign exchange, and rose 4.7% on an operational basis. Worldwide sales of Vascular products grew 2.9% on a reported basis, including an unfavorable 0.3% effect of foreign exchange, and increased 3.2% on an operational basis. Sales growth in Vascular products was led by double-digit growth of MitraClip® and Supera®, Abbott’s unique stent for the treatment of blockages in the leg.

Worldwide Diabetes Care sales grew 4.5% on a reported basis due to higher sales of FreeStyle® Libre, Abbott’s revolutionary continuous glucose monitoring system that eliminates the need for finger-sticks. Worldwide Medical Optics sales grew 7.7% on a reported basis propelled by the recent US launch of the TECNIS® Symfony intraocular lenses, the first and only lenses in the US that provide a full range of continuous high-quality vision following cataract surgery.

Other highlights

Completion of St Jude acquisition: On April 28th, 2016, Abbott entered into a definitive agreement to acquire medical devices manufacturer St. Jude Medical Inc. for roughly $25 billion. On January 04th, 2017, Abbott completed the acquisition of St. Jude, establishing the company as a leader in the broad medical device arena and providing expanded opportunities for future growth. With the acquisition, Abbott can now effectively compete in the $30 billion cardiovascular device market and holds No. 1 or 2 positions across several large and high-growth cardiovascular device areas.

Together, the combined cardiovascular and neuromodulation portfolio has annual sales of approximately $8.7 billion. The acquisition of St. Jude is expected to be accretive to Abbott’s adjusted EPS in the first full year and increasing thereafter, with approximately $0.21 of accretion in 2017 and an estimated $0.29 in 2018. The combination is anticipated to result in annual pre-tax synergies of $500 million by 2020, including both sales and operational benefits.

Termination of Alere acquisition: Abbott signed a definitive agreement on February 01st, 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. 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. On December 07th, 2016, Abbott filed a complaint to terminate its proposed acquisition of Alere based on the substantial loss in Alere’s value following the merger agreement.

FDA approvals: In Q3 FY16, Abbott received FDA approval for its FreeStyle Libre Pro system, a continuous glucose monitoring system. 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 also submitted for US regulatory approval a consumer version of FreeStyle Libre to be used by people with diabetes to self-monitor glucose levels.

During Q4 FY16, Abbott obtained CE Mark for four new major diagnostics systems, including “AlinityTM s” for blood and plasma screening, “Alinity i” for immunoassay diagnostics, “Alinity c” for clinical chemistry diagnostics and “i-STAT® Alinity” for point of care blood testing.

Dividend: On December 09th, 2016, the board of directors of Abbott increased the Company’s quarterly dividend to $0.265 per share from $0.260 per share. Abbott’s cash dividend is payable February 15th, 2017, to shareholders of record at the close of business on January 13th, 2017.

Guidance for FY17

For FY17, Abbott forecasts diluted EPS from continuing operations under GAAP of $0.92 to $1.02, including amortization and integration expenses related to the acquisition of St. Jude Medical. Abbott forecasts net specified items of approximately $1.48 per share in FY17. Specified items include acquisition-related expenses, intangible amortization expense, charges associated with cost reduction initiatives and other expenses, partially offset by a gain on the sale of the Abbott Medical Optics business (AMO). Excluding specified items, projected adjusted diluted EPS from continuing operations would be $2.40 to $2.50 for FY17.

For Q1 FY17, Abbott forecasts diluted EPS from continuing operations under GAAP of $0.19 to $0.21. Abbott forecasts specified items for Q1 FY17 of $0.23 related to the same items discussed above for the full year FY17. Excluding specified items, projected adjusted diluted EPS from continuing operations would be $0.42 to $0.44 for Q1 FY17.

Stock Performance

Abbott’s stock stood at $40.96, gaining 1.61%, at the close on Thursday, January 26th, 2017, having vacillated between an intraday high of $41.12 and a low of $40.45 during the session. The stock’s trading volume was at 9,409,934 for the day. The Company’s market cap was at $70.60 billion as of Thursday’s close.

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