Drip Portfolio Report
Friday, September 26, 1997
by Jeff Fischer (TMF Jeff@aol.com)


ALEXANDRIA, VA (Sept. 26, 1997) -- Founded in 1888, ABBOTT LABORATORIES (NYSE: ABT) divides itself into four categories:

    1. Pharmaceuticals
    2. Nutritionals
    3. Hospital Products
    4. Diagnostics

Each division is responsible for about 25% of total revenue, or over $2.6 billion apiece, on average. (Abbott also has a small chemical and agricultural division.)

Thursday I wrote that pharmaceuticals account for 57% of total sales at Abbott, but it wasn't made clear enough that nutritionals are included in pharmaceuticals. This should have been made very clear, though in the end it doesn't change the analysis. If anything, it's good to see that Abbott maintains high margins while selling nutritional product in an amount nearly equal to its strict pharmaceutical sales. The sales breakdown is given by Abbott as follows:

1996 Sales:

Pharmaceutical and nutritional: $6.3 billion
          Hospital and diagnostic: $4.7
                                    Total: $11.0 billion

The company doesn't give any further breakdown of product sales, but stated on the phone that each of the four divisions represents roughly one-quarter of total sales. We can see that this is just about possible.

The three leading products at Abbott are anti-infectives, adult nutritionals, and infant formula. We learned in Abbott's introduction on Thursday that these three account for 34% of total sales. In comparison, cardiovascular drugs account for 30% of Pfizer's sales, and allergy and respiratory drugs account for 35% of sales at Schering-Plough.

PHARMACEUTICAL: The largest selling product at Abbott is clarithromycin. This is the company's leading antibiotic, used to treat infections in the respiratory tract, skin infections, and also used in the treatment of MAC, which is an infection that occurs in AIDS patients. The clarithromycin antibiotic, sold to treat other infections as well, accounted for over $1 billion of last year's sales, or 9% of total revenue. Abbott saw sales of the drug increase 20% last year from the year prior.

Aside from antibiotics, within pharmaceuticals the company also sells Norvir, a protease inhibitor for the treatment of HIV; Hytrin, an alpha blocker for hypertension; Depakote, an anti-epileptic agent, as well as half a dozen other drugs. None of these independently account for a substantial amount of total revenue.

NUTRITIONALS: The nutritionals division includes Similac and Similac Advance, milk-based infant formulas, as well as Ensure for adults. Ensure was introduced in 1973 and the product created its own market, and continues to lead that market. Both Ensure and Similac lead their retail markets.

We don't know how much of the $6.3 billion of revenue in this combined division is the result of nutritional sales. We'll estimate about $2.5 billion, as the company hinted, and attribute the other $3 billion plus to pharmaceuticals. If it changed our analysis, we wouldn't be so off-handed about it. But it doesn't right now. Abbott has 30% operating margins in this combined division. (From the income statement, $6.3 billion in sales divided by $1.89 billion in operating profit = 30% operating margins.)

HOSPITAL: It's worthwhile to recognize that many of the hospital products are, in fact, drugs, drug delivery systems, and anesthetics. This division also sells what an investor would more naturally expect from a Hospital Products division: Blood pressure monitors, I.V. systems, and infusion systems.

DIAGNOSTIC: In 1996 Abbott entered the glucose-monitoring market with the acquisition of Medisense, a technology leader in self-testing systems for people with diabetes. Abbott is also the leader in the world market for blood screening, supplying more than half of all the tests used to detect infectious diseases. Abbott has about ten other diagnostic fields it sells to. The operating margin in the hospital and diagnostic division is 17%. ($4.7 billion in sales divided by $810 million in operating profit = 17.2%.)

DIVISION GROWTH: Abbott's five-year compound growth rate for its pharmaceutical division (which includes nutritional products) is 12.4%, while the five-year compound growth rate (CGR) for hospital and lab sales is only 6.9%. Total sales grew 9.9% last year and the company is aiming for low double-digits earnings growth from here into the foreseeable future. Earnings grew over 13% last year, as they have for the past five years, while the stock has compounded 16.7%.

Abbott has increased its dividend every year for the past twenty-four years, and return on equity has risen to 40% from 29% ten years ago. Reflecting the company's recent acquisitions for growth, long-term debt is higher than it has been in the past ten years, at $932 million, and working capital is lower than it's been, by far, over that same period, at $137 million.

With positive cash flow of $2 billion last year, Abbott will spend more than $1 billion in research and development this year, about in line with the industry average as measured by R&D expenditures as a percentage of sales (about 11% of sales goes to R&D at Abbott). Pfizer, on the other hand, with $300 million more in trailing sales, is spending nearly $2 billion on R&D this year, or closer to 17% of sales. Remember that Pfizer has a goal of being the largest research-based healthcare company in the world, and is currently number six.

Abbott trades at 4 times sales, 24 times trailing earnings, and 20 times 1998 estimates. One of the company's main focuses for growth is on new and emerging markets -- Asia, China, Eastern Europe -- as well as on alliances, research partnerships and licensing agreements, including acquisitions. The company doesn't have as much in the product pipeline as Pfizer does, which makes sense when you compare the different research and development commitments and the different goals and strategies for growth that the companies have.

We have a complete enough overview of Abbott that we can form some opinions on it and focus next on Johnson & Johnson, en route to comparing the four companies and making a decision.

INTEL (Nasdaq: INTC): We received confirmation that our first share of Intel was bought on 9/8/97, for $94.69. We received a refund check in the amount of $19.01 from the Moneypaper, because we had sent in more money for the purchase than was needed. The cash will be added to the portfolio. We haven't been enrolled in Intel's DRP yet, but obviously that is in the works.

Have a Foolish weekend!

--Jeff Fischer, Fool