Abbott Laboratories (NYSE:ABT) reported first-quarter earnings last Thursday that exceeded expectations on a 13.9% jump in sales from the same quarter last year. Abbott's increasingly important pharmaceuticals area drove the strong performance, including better-than-anticipated international sales of Humira, its rheumatoid arthritis drug.
Such news might have been expected to boost Abbott stock, but in fact, the firm's shares closed down 2.2% for the day. Granted, Abbott's earnings increased just 2% on a generally accepted accounting principles (GAAP) basis to $0.52 per share. Still, the firm's $5.2 billion in sales for the period was impressive, and stripping out onetime items, per-share earnings were up 11.8% at $0.57.
Patent expirations may be one issue giving investors pause. The patent for Abbott's top seller, Biaxin -- an antibiotic that had first-quarter sales of $320 million -- is due to expire next year. In addition, the Food and Drug Administration (FDA) recently gave Impax Laboratories (NASDAQ:IPXL) tentative approval to sell a generic version of Abbott's anti-cholesterol Tricor tablets, which provided Abbott with $166 million in the first quarter.
All of this might be troubling if not for Humira. Abbott projects Humira will achieve revenue of more than $700 million this year and more than $1.2 billion in 2005. In fact, Abbott's CEO has referred to Humira as a "pipeline in a drug" because its sales are expected be so huge, given that it can treat a variety of diseases beyond rheumatoid arthritis.
And perhaps therein lies the problem. As Zeke Ashton has noted, big pharma companies such as Merck (NYSE:MRK), Schering-Plough (NYSE:SGP) and Bristol-Myers Squibb (NYSE:BMY) have developed a dependency on blockbuster drugs. The pitfalls of this model are well known -- once patents expire, sales erode rapidly, leaving gaping holes in revenue streams.
At the moment, Abbott's pharmaceutical revenue is fairly diversified. Biaxin, for instance, constituted just 12.7% of first-quarter pharmaceutical sales. If plans for Humira pan out, though, the arthritis medication will probably come to dominate the firm's drug segment. Because Abbott does not boast the massive resources of leading drug companies, becoming reliant on a single blockbuster carries some significant risks.
This is not to say that the growth in Humira sales is a bad thing. But with several other Abbott drugs due to come off patent in 2008, Humira, which is protected until 2016, will only become more important. In the meantime, Abbott will be under intense pressure to churn out several more winners from its pipeline to flesh out its portfolio. Investors no doubt will be watching closely.
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Fool contributor Brian Gorman is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here.
