How did Abbott perform financially in 1998?

Abbott grew net sales 5.0% to $12.48 billion and net earnings 11.4% to $2.33 billion. Diluted EPS reached $1.51 versus $1.34 in 1997, while operating cash flow was $2.73 billion. Growth was volume-driven, partly offset by currency effects and a lower gross margin.

What is the biggest near-term revenue risk for Abbott?

The most significant identified risk is generic competition for Hytrin (terazosin), which generated $542 million of U.S. sales in 1998. Management does not expect generic entry before the end of Q2 1999 and believes generic competition would materially reduce Hytrin sales. Pending patent litigation and settlement agreements govern the timing.

Why did gross margins decline in 1998?

Gross margin fell to 56.8% from 57.5% due to unfavorable product mix, mainly slower pharmaceutical sales, and the negative effect of a relatively stronger U.S. dollar. Rebate programs for infant formula and pharmaceuticals also continue to pressure margins in the Ross and Pharmaceutical segments.

Are there product supply or regulatory issues investors should know about?

Yes. Norvir capsule manufacturing difficulties caused supply shortages, and Abbott is supplying a liquid formulation instead. The FDA suspended release of Abbokinase production lots over manufacturing practice concerns, releasing some lots in January 1999 under new criteria. Management cannot predict the effect on future sales of these products.

Is Abbott's balance sheet and capital allocation strong?

The balance sheet remains solid, with shareholders' investment up 14% to $5.71 billion, working capital of $591 million, and AAA/Aa1 bond ratings. Abbott suspended common share buybacks in December 1998 and expects borrowings to decline in 1999, while capital expenditures of about $991 million continue to be funded internally.

ABT 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 9, 1999. Cited figures are marked; the original filing is the authoritative source.

Abbott Laboratories' 1998 10-K (filed March 9, 1999) reports a year of solid top-line and earnings growth.

Net sales rose 5.0% to $12.48 billion^a, driven by a 7.2% volume increase that more than offset a 2.8% currency headwind. Operating earnings grew 9.4% to $3.12 billion, and net earnings increased 11.4% to $2.33 billion, or $1.51 diluted EPS versus $1.34 in 1997. Gross margin slipped to 56.8% from 57.5% on unfavorable product mix, notably slower pharmaceutical sales, and the stronger U.S. dollar.

Research and development spending fell to $1.22 billion^b (9.8% of sales) from $1.30 billion, partly because 1997 included large technology-acquisition charges. The filing highlights several risks to watch. Hytrin (terazosin), with $542 million of 1998 U.S. sales, faces generic competition no earlier than the end of Q2 1999 under the pending patent litigation and settlements.

Norvir sales of $250 million^c were constrained by capsule manufacturing difficulties. Abbokinase (about $277 million of sales) was subject to an FDA suspension of production-lot releases over cGMP concerns. Abbott also faces numerous antitrust suits over prescription drug pricing and an infant formula antitrust matter, though management judges these unlikely to be materially adverse.

Management suspended share repurchases in December 1998 and expects borrowings to decline in 1999, while operating cash flow of $2.73 billion^d remains strong and the company holds AAA/Aa1 credit ratings. Overall, the company maintained a strong balance sheet, with shareholders' investment up 14% to $5.71 billion, working capital of $591 million, and a return on shareholders' investment of 43.6%.

Growth was volume-led and diversified across segments, with Diagnostics, Hospital and International showing strength, while pharmaceutical growth was softer. Investors should weigh the 1999 generic Hytrin exposure and product-specific regulatory and supply issues against the underlying earnings momentum.

02—Key points

Key Highlights

Net sales grew 5.0% to $12.48 billion, with volume up 7.2% offset by a 2.8% currency drag.
Net earnings rose 11.4% to $2.33 billion; diluted EPS was $1.51, up from $1.34 in 1997.
Gross profit margin declined to 56.8% from 57.5%, reflecting product mix and a stronger U.S. dollar.
Hytrin faces generic terazosin entry no earlier than the end of Q2 1999; 1998 U.S. Hytrin sales were $542 million.
Norvir capsule manufacturing problems constrained supply; 1998 Norvir sales were $250 million.
FDA suspended release of Abbokinase production lots (about $277 million in 1998 sales) over cGMP concerns, with labeling changes made in January 1999.
Share repurchases were suspended in December 1998 with no plans to resume in 1999; AAA/Aa1 credit ratings were maintained and $2.5 billion in unused credit lines is available.

03—Questions

Frequently Asked Questions

How did Abbott perform financially in 1998?
Abbott grew net sales 5.0% to $12.48 billion and net earnings 11.4% to $2.33 billion. Diluted EPS reached $1.51 versus $1.34 in 1997, while operating cash flow was $2.73 billion. Growth was volume-driven, partly offset by currency effects and a lower gross margin.
What is the biggest near-term revenue risk for Abbott?
The most significant identified risk is generic competition for Hytrin (terazosin), which generated $542 million of U.S. sales in 1998. Management does not expect generic entry before the end of Q2 1999 and believes generic competition would materially reduce Hytrin sales. Pending patent litigation and settlement agreements govern the timing.
Why did gross margins decline in 1998?
Gross margin fell to 56.8% from 57.5% due to unfavorable product mix, mainly slower pharmaceutical sales, and the negative effect of a relatively stronger U.S. dollar. Rebate programs for infant formula and pharmaceuticals also continue to pressure margins in the Ross and Pharmaceutical segments.
Are there product supply or regulatory issues investors should know about?
Yes. Norvir capsule manufacturing difficulties caused supply shortages, and Abbott is supplying a liquid formulation instead. The FDA suspended release of Abbokinase production lots over manufacturing practice concerns, releasing some lots in January 1999 under new criteria. Management cannot predict the effect on future sales of these products.
Is Abbott's balance sheet and capital allocation strong?
The balance sheet remains solid, with shareholders' investment up 14% to $5.71 billion, working capital of $591 million, and AAA/Aa1 bond ratings. Abbott suspended common share buybacks in December 1998 and expects borrowings to decline in 1999, while capital expenditures of about $991 million continue to be funded internally.

04—Continue

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