Earnings Preview: Abbott Labs

Abbott Laboratories (ABT) is all set to announce its fourth quarter and full year 2010 results on January 26, 2011 before the opening bell. The Zacks Consensus Estimate for the fourth quarter is $1.29, representing a year-over-year increase of 9.3%. The Zacks Consensus Estimate for 2010 is $4.17, up 12.1%. Abbott Labs has surpassed earnings estimates consistently in the last four quarters with a trailing four-quarter average of 1.01%.

Third Quarter 2010 Recap

Abbott Laboratories’ third quarter earnings of $1.05 per share were a penny above the Zacks Consensus Estimate and toward the higher end of the guidance provided by the company. Earnings increased 14.1% from the year-earlier period. However, including one-time items, EPS declined 40% to $0.57.

Although revenues grew 11.8% to $8.7 billion, they fell short of the Zacks Consensus Estimate of $8.9 billion. Revenues were negatively impacted by foreign exchange fluctuations (1.0%), higher rebates under the US health care reform, the withdrawal of Meridia and the recall of the infant product Similac in September 2010.

Pharmaceutical division sales were $4,937 million, up 21.7% (including a 1.6% negative Fx impact). Strong Humira and lipid franchise sales were offset by the weak performance of Kaletra, which declined 7.2% to $328 million. Pharmaceutical revenues included sales from the Solvay deal that closed in mid-February 2010.

Following the release of third quarter results, management raised the lower end of its previously issued 2010 earnings guidance by 3 cents. Abbott Labs now expects to deliver earnings in the range of $4.16 – $4.18 per share, representing a double-digit growth.

Agreement of Estimate Revisions

Estimate revisions for Abbott Labs have been scarce over the past month. Over the past thirty days, only four analysts covering Abbott Labs have revised their earnings estimates for the final quarter of 2010. While 3 of them have cut their earnings estimates, 1 has moved in the opposite direction. The annual estimates for 2010 too have witnessed a similar trend with 3 lowering estimates and 1 moving in the opposite direction.

There are a number of reasons influencing the negative sentiment regarding Abbott Labs. Concerns like the impact of US health care reform, product recalls, foreign exchange headwinds and EU pricing austerity continue to hurt Abbott Labs. Moreover, several products in Abbott Labs’ portfolio like Omnicef and clarithromycin are facing declining sales due to increased generic competition.

Although sales of Abbott Labs’ lead drug Humira (anti-inflammatory) continues to be impressive; we are concerned about new competition in the market in the form of Johnson and Johnson’s (JNJ) Simponi and UCB Pharma’s (UCBJF) Cimzia. The newly invigorated competition could lead to a slowdown in Humira’s market share gains.

Meanwhile, Abbott’s Kaletra faces intense competition in the HIV market from players like Gilead Sciences (GILD), Bristol-Myers Squibb (BMY), and Johnson and Johnson. Abbott’s lipid franchise also faces stiff competition in the highly crowded fenofibrate market.

Moreover, recently Abbott Labs faced a regulatory setback when the development of Certriad, co-developed with AstraZeneca (AZN), was scrapped following the receipt of a complete response letter. This is a major disappointment for Abbott Labs, which was looking to drive sales of its cardiovascular franchises by launching Certriad. Such setbacks will weigh heavily on the stock.

Magnitude of Estimate Revisions

Estimates for the fourth quarter of 2010 have remained static at $1.29 over the last 30 days due to a lack of significant estimate revisions by the analysts following the stock. Estimates for 2010 too are static at $4.17 over a similar time period.

Our Recommendation

Currently, Abbott Labs carries a Zacks #4 Rank (short-term ‘Sell’ rating) highlighting near-term pressure due to the concerns mentioned above. However, we believe that Abbott Labs is weathering the storm relatively well riding on its strong business segments, contributions from recent acquisitions and impressive late-stage pipeline. The positive catalysts should help fortify long-term earnings growth. Consequently, we remain ‘Neutral’ on the stock in the long run.

ABBOTT LABS (ABT): Free Stock Analysis Report

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