Abbott Laboratories is a highly diversified global healthcare company devoted to the discovery, development, manufacture and marketing of pharmaceutical, nutritional and medical products, including devices and diagnostics.

The company is principally engaged in manufacturing, import and marketing of research based pharmaceutical, nutritional, diagnostic, hospital and consumer products and providing the toll manufacturing services.

With over 70,000 employees worldwide and a global presence in more than 130 countries, Abbott is committed to improving people's lives by providing cost effective health care products and services that consistently meet the needs of its customers. Abbott Pakistan is part of the global healthcare corporation of Abbott Laboratories Chicago, USA.

Abbott started operations in Pakistan as a marketing affiliate in 1948. The company has steadily expanded to comprise a workforce of over 1500 employees. Its shares are quoted on all the three stock exchanges of Pakistan. It has the honour of being the first pharmaceutical company in Pakistan to achieve Class-A certification by a world-renowned organization M/s Oliver Wight. The company has also pioneered the concept of disease specific nutrition in Pakistan through introduction of specific products.

Abbott Pakistan has a leadership in the field of pain management, anesthesia, medical nutrition, anti-infectives and diagnostics. Its wide range of products is managed and marketed through four marketing arms. The diagnostic division operates from its office located at Korangi, Karachi. With leading products in several key areas of the diagnostic market, sales and support staff are available all the major cities of the country.

A continuous process of innovation, research and development at Abbott's worldwide facilities enables Abbott Pakistan to offer effective solutions for various healthcare challenges, with products and services that are well focused, within the customer's reach and contribute to improved health care of the people of Pakistan. Currently, the two manufacturing facilities located at Landhi and Korangi in Karachi continue to use innovative technology to produce top quality pharmaceutical products.

RECENT RESULTS 1H'08

For the half year ending May 31, 2008 the pharmaceutical segment, representing 78% of the companies business witnessed a growth rate of 11%, while nutrition and other segments registered a growth of 23%. Prices remained stagnant while the inflationary pressures and currency devaluation led to a decline in gross margins. Gross margins declined to 37% from 42% in the same period last year.

Sales revenue for the half year ending May 31, 2008 increased by 4.7% to Rs 3,254 million, with the domestic sales contributing to the increase while export sales witnessing a decline of 50.5%. Cost of goods sold increased by 7.8%, resulting a marginal decline in the gross profit. However, the administrative expenses and selling and distribution expenses increased by 23% and 11.9% respectively pulling down the PBT by 15.7% to Rs 626 million. PAT has shown a decline of 11.5% to stand at Rs 441 million with an EPS of Rs 4.51.

The market conditions generally remained favourable throughout the FY07 and consequently the company witnessed a double-digit sales growth in its all segments. Pharmaceutical sales increased due to improved field force productivity and an overall strong demand for company's products. Antibiotics and cough cold sales also registered an increase compared to last year. Vitamins and pain management product sales continued its double-digit sales growth as the company maintained its leadership position in these sections of the pharmaceutical market. The company, despite the competition from low-priced generic products, achieved a robust sales growth without a price hike.

Over the last few years, the company's profitability has been on a constant rise till 2007 (except in 2006), indicating that the costs are under control, as the net income has been increasing by a greater proportion than the sales.

However, net sales for FY06 increased by only 13% as compared to last year. The pharmaceutical segment (representing almost 85% of the company's business) is starting to get adversely affected by the lack of price increase for registered products by the government. With almost a double-digit inflation and the rupee depreciation particularly against the major European currencies, the cost pressures are beginning to hurt the company's profitability. Consequently its gross profit and net profit margins both declined in FY06, despite an improvement in both sales mix and plant efficiencies. The profit margin increased by 32% between 2003 and 2004, while the gross profit increased by around 40% in 2007, the largest increase witnessed in the 8 years under observation.

Despite all this, Abbott has been doing better than the average pharmaceutical company over the 8 years under review. In 2001, Abbott performed much better than the industry average, an 84% difference in profit margin in favour of Abbot. After 2001, the industry's rate of change of profit margin was greater than that of Abbott, bring the two to closer to each other. However in 2003, the difference began to increase again and still it operates above the average.

ROA trend (how effectively assets are being utilized in generating the net income, after interest and taxes) shows a constant increase right until 2005, with the sharpest increase between 2003 and 2004. This was due to the 42% increase in the net income. The increase in total assets was a much smaller proportion of 14%.

However, FY06 has witnessed a major decline because of the greater proportionate increase in assets compared to an increase in net income. The net income increase was lower because of higher selling, administrative and distribution expenses driven mainly by increased promotional expenses relating to consumerization of selective nutritional products and higher pension charge. Slight increase in financial costs combined with inflation and Rupee depreciation caused the net income to increase only slightly compared to total assets increase. However, the situation improved in FY07 showing an increase in ROA.

Furthermore, Abbott's ROA has been greater than the average pharmaceutical company in all the 8 years under review. This has been mainly due to the greater net income the Abbott has been able to generate, due to its greater basic earning power and lower reliance on debt financing, resulting in lesser interest charges.

The ROE follows a similar trend to that of ROA with the exception of 2003, where the ratio fell from 23.19% to 22.63%. This was because of the greater proportionate change in common equity (23%), attributable to 31% increase in revenue reserves, as compared to 20% increase in net income. FY06 has seen a major drop in this ratio, due to less proportionate increase in net income than total equity, on account of aforementioned reasons. However, like ROA, the ROE ratio improved again in FY07 due to higher net income.

ROE has been relatively volatile compared to the industry, on the other hand, the average pharmaceutical company has enjoyed an increasing tendency. The company's rate of increase was quite high in the first 2 years, compared to the industry but declined in the following 2 years. It again rose in 2004 and continues to be above industry average to date.

All the liquidity ratios indicate that the company has expanded over the 8 years. The current ratio has increased from 1.83 in 2000 to 4.76 in 2006. However, it declined in FY07 again due to combined effects of lower CA and higher CL. Abbott's current ratio trend has been in line with the increasing industry trend, with the exception of the year 2005, where the current ratio fell from 4.26 to 4.18, a result of the higher proportionate increase in current liabilities, including creditors, accrued and other liabilities (25% compared to 23%). But this decline is quite meager.

The current assets have been increasing constantly till 2006, however the rate of increase has been very variable, ranging from 68% between 2000 and 2001, from 0.4% between 2001 and 2002 and ultimately declining in FY07.

On the other hand, current liabilities have experienced a very fluctuating trend, ranging from a 45% increase between 2000 and 2001, to a 15% decrease over the next year. The current ratio rose sharply between 2002 and 2004 because the current assets increased by 37%, mainly due to an increase in cash balances and recoverable taxation, while the current liabilities decreased by 20%, because a decline in the short-term finances and proposed dividends.

In fact, current liabilities fell from 2001 to 2003. While in 2000, the ratio of 0.61:1 showed that the company might become insolvent, it further implied that its stock-in-trade was above the industry average. In subsequent periods it improved its liquidity position with respect to this particular ratio. The company's movement is similar to that of the industry, with the exception of 2005. The drop can be attributed to the 33% increase in inventory that year.

Although, the increased current ratio over the six years reflects an increase in Abbott's ability to pay off its short-term obligations, it also indicates an excess of nonproductive assets such as cash and inventory.

Quick ratio followed a similar trend to that of current ratios, being on a constant rise till 2004, while suffering a fall in the consequent periods. The rise for the first four periods can be attributed to the proportionate increase in current assets, excluding inventory, being higher than the proportionate increase liabilities. Inventory turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. For Abbott, this has always been greater than that of the industry's average as its undergoing a capital expansion program over past few years.

ITO has been declining until 2004, after which it started rising. The decline is to be explained by the proportionate increase in net sales being higher than the increase in average inventory kept by the company. For instance during 2002, net sales rose by 15% while average inventory rose by a lower 13%. This is a good sign because a decline in inventory turnover indicates that the company efficiently selling off its inventory and hence is not facing a risk of obsolescence of inventory further showing that demand is high. However the increase in ratio from 2004 onwards is because the net sales are not increasing by a high percentage while inventory increases. This can be attributed to company's plant expansion and up-gradation project that has been commissioned in phases till 2007. Now, in FY07 the ITO ratio has improved considerably and has been at a level even below that of 2003 (around 52 days).

Days sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be high enough for the company to avoid risks of bad debts. The trend line indicates a decline in this ratio for the first two years due to the proportionate increase in net sales being higher than that in trade debts indicating that the company is facing higher risk of debt evasion and it needs to reformulate its credit policy. In 2001, trade debts actually fell by 1%. Then there were some fluctuations after which this ratio experienced a rapid rise in 2005 and 2006 due to 67% and 43% rise in trade debts (credit sales) with only modest increase of 13% and 14% in net sales respectively. The operating cycle of Abbot hence showed an increase in FY05 and 06 due to a rise in ITO and DSO in the respective years. However, DSO declined again in FY07 like ITO thus lowering the overall operating cycle, which is a good sign.

Moreover, it must be noted that Abbott's DSO is far below the industry average, depicting its healthy status. It can use this advantage over the average pharmaceutical company, as it receives cash much earlier than the others. This cash can be used for further investment in more assets, such as inventory, as well as for further expansion. TATO, a reflector of the company's assets' revenue generation capability, decreased in 2001 only to increase in 2002 but after that the ratio shows a negative trend, though by a low proportion. The reason for this decline can be the percentage increases in net sales of 7%, 8%, 13% and 14% being lower than the percentage increases in total assets of 13.67%, 13.88%, 23% and 22% in 2003, 2004, 2005 and 2006 respectively.

This decline is due to the fact that the company has been investing in its fixed assets, mainly in plant, machinery and infrastructure up gradation. Capital expenditure of Rs 365 million was made to improve compliance with the latest GMP and EHS requirements. The sales/equity ratio also follows the exactly same pattern as that of TATO. This is showing a declining trend from 2002 onwards because of increasing equity base of the company both due to increasing reserves and paid-up capital over the years. However, the situation reversed and both TATO and sales/equity ratios improved in FY07 on account of a much higher increase in sales.

As far as debt management is concerned, Abbot followed a very similar trend to that of the industry. The trend line of D/A ratio shows that the ratio has gone through a major decline over the years (except in FY07) owing to proportionate increase in liabilities being less than the proportionate increase in the assets. This shows that the company's reliance on debt financing is falling over the years and being replaced by equity financing. For instance, the 44% increase in liabilities in 2002 is less than the 57% increase in total assets. Besides, it has always been below 50% throughout the period, showing that equity financing has always been the primary source of financing.

Debt to equity ratio, which simply compares the two modes of financing, has also been falling over the years as shown by the trend. This is due to the proportionate changes in shareholders' equity being higher than the proportionate changes in total liabilities and further confirms that there's a change in financing policies, shifting from debt financing to equity financing. This ratio has increased in FY07 on account of lower equity base compared to a higher deferred taxation.

The long term debt to equity ratio has been volatile over the 8-year period, however, showing that long term debts still remains very insignificant portion of equity (maximum being 0.02 in 2000 only). In 2006, the doubling of long term debts, was offset by a considerable increase in equity base (increase in paid-up capital and reserves), hence the long term debt to equity ratio remained around 1.04% which is very meager. However, a sharp increase in the ratio in FY07 can be witnesses due to higher deferred taxation.

Looking at Abbot's TIE ratio we see it rose from 2000 to 2003 and then fell in 2004 and again rose sharply in 2004 which was due to the fact that interest charges fell by 81%. This increase continued till 2005 due to a higher EBIT and lower finance costs compared to previous years. This shows that the company's ability to pay interest improved till 2005. However TIE again declined slightly in 2006 due to a 21% increase in interest expense compared to a very small 5% increase in EBIT. But it recovered immensely in FY07 on account of higher other income compared to interest expense.

The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its the earnings per share (EPS). Abbot's EPS has been on a constant rise from 2000 right until 2006. This drastic increase can be attributed to a higher increase in net sales, while the number of shares remained either constant or increased slightly. In FY06, the EPS declined to a greater number of shares issued. Consequently, the P/E ratio also followed a rising trend due to a higher increase (or smaller decline in case of FY06) in market price than the proportionate increase (or decline in FY06) in EPS.

Till 2005 the shares of Abbot have outperformed the 100 index but later the trend has been volatile as evident from the price chart. Initially investors were willing to pay relatively little for a dollar of Abbot's book value however 2001 onwards, the company has turned into a financially strong setup. A major factor of the increase in this book value per share is the continuous increase in its equity base. The ratio declines in FY06 and FY07 due to greater number of issued shares than increase in overall equity base (which declined on the account of lower revenue capital).

The dividend per share was the highest in 2001 but showed a negative trend then onwards. This shows that currently the company is expanding and is reinvesting its profits in the business rather than giving return to its shareholders in the form of dividends. It is hoped that with continued focus on improving cost effectiveness via expansion; the company would enhance its overall efficiency and productivity in the near future, hence promising a good return to its investors.

FUTURE OUTLOOK

The FY08 is likely to be demanding, in particular for the pharmaceutical industry of Pakistan. The industry has immense growth potential, however it can only be tapped if the provided regulatory environment balances the interests of the research-based industry, with the need for affordable healthcare. Almost 85% of Abbot's business depends on the sale of pharmaceutical products, price of which have been static since December, 2001 and there has been no offset made by the government to account for an adverse impact of rising inflation (particularly in the energy and the fuel costs), raw and packaging material costs, construction costs and rupee devaluation, particularly against the major European currencies.

The business improvement initiatives mainly on upgrading and expanding manufacturing facilities, undertaken in past few years by Abbot, have contributed towards its the enhanced operational efficiencies and cost savings. However, this beneficial impact is eroding and will continue to do so unless the Government implements an appropriate and consistent mechanism for determining prices of new products. Furthermore, an increase in price of registered products is also demanded so as to offset inflation and devaluation. This is essential to encourage quality manufacturers to invest in the industry, which can then sustain itself for future.

Abbot furthermore, urges the government to take stringent action against the menace of counterfeit and spurious drugs that have infiltrated the local market. In the past few years, Pakistan has made some progress in updating its Intellectual Property Rights (IPR) laws to the levels required by global conventions. Practically, much more needs to be done to discourage both piracy and counterfeiting. Its effective implementation will not only protect the consumers, but also the industry and result in quality and research oriented culture. It is hoped that the government would effectively implement the recent directive of the Supreme Court to stop the unlicensed sale of drugs.