Abbot Laboratories: Problems or Opportunities

Abbot Laboratories: Problems or Opportunities for Improvement (OFIs)

On paper the financial outlook of Abbott Laboratories seems moderately strong, particularly given the shaky nature of the rest of the economy. In terms of its liquid or cash assets, Abbott Laboratories' cash and cash equivalents increased from 2008 to 2009. As with many companies, these cash assets declined significantly from 2009 to 2010, with the downturn in the financial markets. Abbott Laboratories' current assets (assets expected to be realized in cash, sold, or consumed within one year) increased from 2008 to 2009. Current assets only slightly declined from 2009 to 2010. Abbott Laboratories' short-term investments, in the form of time deposits and certificates of deposit increased from 2008 to 2009 and from 2009 to 2010. Its trade receivables, inventory, noncurrent assets (assets expected to be realized in cash, sold, or consumed within more than one year), net property and equipment, and total assets all increased steadily from 2008-2010 (Abbott Laboratories: Assets, 2011, Stock Analysis).

However, what does seem worrisome is that year over year, Abbott Laboratories' bottom line overall has shrunk from $5.7B to $4.6B despite an increase in revenues from $30.8B to $35.2B. This indicates an inability to keep input costs down and possible financial mismanagement in other key areas, given that expenses are growing faster than profits, and even during a relatively 'healthy' financial year, the company has not shown consistent growth. Additionally, the company's increase in the percentage of sales devoted to SGA (Selling General Administrative) costs increased from 26.95% to 28.73%. Administration and marketing cost increases were deemed a key component in the falling bottom line in the face of rising revenues (Abbott, 2011, Businessweek). And the company's debt-to-equity ratio as well as its debt-to-capital ratios has deteriorated significantly in the past two years (Abbott Laboratories: Long-term debt, 2011, Stock Analysis). Again, this may be merely the result of a slow rebounding from the economic crisis of 2008, but it remains cause for concern.

In 2011, Abbott has slightly improved its results. Its 2011 revenue increased 12.3% compared with the previous year, but earnings declined 14.1% to $0.55 per share. Analysts remain wary of investing in Abbott, due to widespread uncertainty about the direction of U.S. health reform and generic competition. Its most successful drug at present is Humira, an anti-tumor necrosis factor (TNF) drug (Abbot Laboratories, 2011, Zacks Equity Research). However, exclusive dependence on a single drug does not bode well for the company's future. The eternal problem for profitability with drug companies is that all new drugs patents expire after a certain period, and are allowed to be produced more cheaply in generic form. A pharmaceutical company needs to show consistent innovation to stay afloat. Combined with the difficulties in curtailing overhead costs, Abbott should reconsider its approach to spending, trimming administrative costs and emphasizing R&D.