10-QPeriod: Q1 FY2007

ABBOTT LABORATORIES Quarterly Report for Q1 Ended Mar 31, 2007

Filed May 7, 2007For Securities:ABT

Summary

Abbott Laboratories' first quarter 2007 report shows a significant increase in net sales, rising to $5.29 billion from $4.58 billion in the prior year's quarter, driven by strong performance in Pharmaceutical Products and the contributions from recent acquisitions in the Vascular Products segment. However, operating earnings saw a decrease due to higher research and development, selling, general, and administrative expenses, partly influenced by acquisitions and increased R&D spending on pipeline programs. The company also announced its agreement to sell its core laboratory diagnostics business for $8.13 billion, which is expected to result in a substantial after-tax gain and has been classified as discontinued operations. This strategic move, coupled with strong underlying segment performance and a robust cash flow from operations, indicates a company actively managing its portfolio for future growth.

Key Highlights

  • 1Net sales increased by 15.5% to $5.29 billion compared to $4.58 billion in Q1 2006.
  • 2Pharmaceutical Products segment sales grew by 16.6% to $3.37 billion.
  • 3The company agreed to sell its core laboratory diagnostics business to GE for $8.13 billion, expected to close by Q3 2007, resulting in an estimated $3.5 billion after-tax gain.
  • 4Research and development expenses increased by 31.9%, driven by acquisitions and investment in pipeline programs.
  • 5Selling, general, and administrative expenses rose by 23.7%, also influenced by acquisitions and increased marketing support.
  • 6Operating earnings decreased to $878 million from $1.04 billion in Q1 2006, primarily due to increased operating expenses.
  • 7Cash flow from operating activities of continuing operations was strong at $945.6 million.

Frequently Asked Questions

The planned sale of the core laboratory diagnostics business to GE for $8.13 billion is expected to result in a significant after-tax gain of approximately $3.5 billion. The financial results and cash flows of this business have been presented as discontinued operations in the financial statements for the quarter ended March 31, 2007. The net proceeds from the sale are intended to be used to pay down debt.

Operating earnings decreased from $1.04 billion in Q1 2006 to $878 million in Q1 2007. This was primarily due to significant increases in operating expenses, including a 31.9% rise in research and development costs and a 23.7% increase in selling, general, and administrative expenses. These increases are attributed to the integration of recent acquisitions (Guidant's vascular business and Kos Pharmaceuticals) and ongoing investments in pipeline development and marketing support for key products like HUMIRA.

Effective January 1, 2007, Abbott adopted SFAS No. 157 (Fair Value Measurements), SFAS No. 159 (The Fair Value Option), and FIN 48 (Accounting for Uncertainty in Income Taxes). While these adoptions did not materially impact the company's overall financial position, SFAS No. 159 led to a specific fair value option for its investment in Boston Scientific stock. This resulted in a $149 million fair market value loss adjustment in 'Other (income) expense, net' for the quarter, partially offset by gains on derivative instruments.

The acquisitions of Guidant's vascular businesses (completed in Q2 2006) and Kos Pharmaceuticals (completed in Q4 2006) are contributing to sales growth, particularly in the Pharmaceutical Products and Vascular Products segments. However, they also increased operating expenses (R&D, SG&A) and interest expense due to increased borrowings. The integration of these businesses is a key factor influencing the current quarter's financial results.