Corporate Annual - Financial Analysis

Corporate Annual - Financial Analysis Abbott (ABT) & Boston Scientific (BSX) Finance 324 Financial Analysis for Managers I DJ Nestrick December 20, 2007

Workshop 3

BSX – Boston Scientific Corporation

Background

The sale of Guidant to Boston Scientific has been touted as “the biggest Merger and Acquisition blunder since AOL/Time Warner. Analysts claim that Boston Scientific paid too high a price to purchase Guidant, a deal which was originally to take place with J&J – Johnson and Johnson. Additionally, Boston Scientific has issued recalls or warnings on almost 50,000 Guidant cardiac devices. Further, it would take as long as two years to fix its safety problems.

On Jan. 17, Boston offered Guidant an offer of $80 per share, totaling of $27 billion, $14 billion in cash and $13 billion in stock. By end of year, 2006, Boston Scientific executives found themselves spending several days a month at Guidant's St. Paul headquarters. They oversee continuing product issues. The company’s tope executives claim that operations are producing zero profit. Abbott (SBT) became the other big winner.

Net Sales

In 2006, Boston Scientific’s U.S. net sales increased by $988 Million over 2005 (26%). This increase in sales related to $1.1 billion of U.S. net sales from Boston’s newly acquired CRM and Cardiac Surgery divisions. Other divisions of BSX which contributed sales growth include Endosurgery ($83 million) and Neuromodulation ($75 million). Boston Scientific also experienced a decline in net sales of the TAXUS coronary stent device, totaling $1.6 billion for 2006, compared to $1.8 billion in 2005. This decline in TAXUS sales was due to an overall decrease in the U.S. drug-eluting stent market overall. The U.S. drug-eluting stent market experienced lower penetration rates in 2006 compared to 2005, after studies suggest safety concerns with drug-eluting stents, in general. By the end of 2005, the percentage of drug-eluting stents used were in the high 80 percent range, compared to stent market rates lower than 70 percent by Q4 2006. Gross Profit In 2006, Boston Scientific’s gross profit, as a percentage of net sales, decreased by 6.1 percentage points, compared to 2005. BSX’s gross profit ending 2006 decreased as a percentage of net sales by 3.8 percent compared to 2005. There were costs associated with the acquisition of Guidant, including inventory acquired from manufacturing costs to fair value. BSX’s gross profit for 2006 decreased as a percentage of net sales by approximately 2 percent, compared to 2005 due to period expenses, including costs special projects and inventory charges. Shifts in product sales, including CRM products and lower U.S. sales of TAXUS stents have decreased Boston’s gross profit as a percentage of net sales by 0.8 %. These decreases were offset by a 0.8% increase due to the favorable change in currency exchange rates on gross profit. By comparison, in 2005, Boston Scientific’s gross profit increased by 0.9% as compared to 2004. In addition, shifts in our product sales mix toward higher margin products, primarily TAXUS stents, increased the company’s gross profit, as a percentage of net sales by 0.6%. Boston Scientific’s gross profit for 2005 was reduced by 0.9%. This was related to period expenses, including manufacturing costs associated with launch of TAXUS stent, as well as increased investment in quality projects. Cash Flow In 2006, operating cash flow was approximately $1.8 billion. Operating results included the Company's cardiac rhythm management (CRM) and cardiac surgery businesses. These were also acquired as part of Guidant in April, 2006. In 2007, problems with Boston Scientific’s drug-coated stent have become so problematic that the company is looking at selling some assets. The stent have been blamed for clotting (thrombotic events), as well as other heart problems in a patients. When Boston Scientific bought Guidant in 2006, taking over $27 billion in debt, the company assumed that cash flow would offset debt load.

Abbott – ABT Background

Abbott’s stock price rose 22% in 2006. It is believed that by 2009, Abbott's operating earnings from groundbreaking devices, such as Xience stent and other Guidant technologies reach $650 million. In 2008, Abbott, upon FDA approval of the new stent, Abbott will prove to be a potent competitor. In December 2006, Abbott acquired Kos Pharmaceuticals for $3.8 billion. This expands Abbott’s presence in the lipid management market, further expanding its product pipeline.

In April 2006, to further expand Abbott’s position in the high-growth vascular market, Abbott acquired Guidant’s vascular intervention and endovascular solutions unit for $4.1 billion. This was in connection with Boston Scientific’s acquisition of Guidant. In addition, Abbott will also pay to Boston Scientific $250 million upon government approvals to market the Xience V drug-eluting stent in the U.S. and in Japan; this will be the result of additional goodwill. Net Sales In 2006, Abbott reported sales of $22.476 billion, 6% higher than 2005, year over year. This represents a growth of nearly 12%. Despite posted losses in 2006, predominantly Q4, Abbott's performance in 2006 seemed impressive. Q4 losses are largely attributable to the KOS Pharmaceuticals acquisition. In addition, the Q2 acquisition of Guidant's vascular business costs the company another $4.1 billion.

Gross Profit In 2006, Abbott reported Gross profit of 412.7 billion, compared to $11.7 billion in 2005. Gross profit was 56% of Abbott’s net sales in 2006, compared to 52% in 2005 and 55% percent in 2004. The margin was 58% for Q1, compared to 53% percent for Q1-2005. The increase in gross profit margin is due, in part to the decrease in sales of Boehringer Ingelheim. These products have historically had lower margins than other products in the Pharmaceutical Products division. R&D expenses were $2.3 billion in 2006 and $1.8 billion in 2005. Part of the increase was due to the acquisition of Guidant’s vascular intervention and business unit, as well as increased spending to support pipeline programs. General administrative expenses and Selling expenses increased 16% in 2006, compared to a 12% increase in 2005. Cash Flow Net cash from operating activities of continuing operations amounted to $5.3 billion, $5.0 billion and $4.3 billion in 2006, 2005 and 2004, respectively. The increase in cash from operating activities in 2006 compared to 2005 is due to higher net earnings adjusted for after-tax non-cash charges for acquired in-process research and development and share-based compensation and higher contributions to retirement benefit plans in 2005 compared to 2006; partially offset by higher income tax payments in 2006, including tax payments related to the 2005 remittances of foreign earnings under the American Jobs Creation Act. In 2006, 2005 and 2004, $200 million, $641 million and $482 million, respectively, was contributed to the main domestic defined benefit plan. Abbott expects pension funding for its main domestic pension plan of $200 million annually. The increased contribution in 2005 was due, in part, to the investment of cash remitted under the American Jobs Creation Act of 2004. Abbott expects annual cash flow from operating activities to continue to exceed Abbott’s capital expenditures and cash dividends. Asset Utilization

Asset utilization is used by companies to assist them in continuing with success and Boston Scientific and Abbott Laboratories both use assets and invest back into their companies. Boston Scientific is using assets to assist in the research and development areas including heart failure management and new stent advancement. These next generation stent systems include drug eluded stents, bioabsorbable polymers that promote healing when using stents and improved performance. The goal is to continue to investing back into the company so technology can benefit and continue to advance on the leading edge of technology. Abbott Laboratories also invests back into their companies with research and development in many areas of the medical field. In 2002 they were focused on its rheumatoid arthritis (RA) treatment with special focus on juvenile RA and Crohn’s disease medications. From 1999 until current the focus has been on vascular care focusing on stents similar to Boston Scientific. Abbott is also focusing on the division of Nutritional International which grew at a double digit pace in 2006, and growth is anticipated to continue. Investment of the companies assets are deposited back into the company and focused on research and development to continue moving the company ahead.

Risk Management

For Boston Scientific, there has been a significant change in their numbers considering the changes which have been occurring within their organization. As previously mentioned, their spending has gone up significantly but after analyzing their data, Boston Scientific had not put into consideration how much they were spending because they experienced a net loss as opposed to an income. Boston Scientific’s Return on Assets and Equity has changed much from 2005 to 2006. Their ROA in 2005 was .168 and in 2006 because of the net loss they experienced a negative -.115. They experienced the same in the Return on Equity. In 2005, the ROE was .147 and experienced a loss in 2006 with -.234. Abbott did not undergo much change from 2005 to 2006. Their numbers stayed for the most part the same, even with the changes going on in their organization. Granted, they did not do better than the year before, more than likely because of the changes within the organization, but as they grow stronger in their niche, their numbers will show the changes. Abbott’s Return on Assets in 2005 was .096 and in 2006 it was .072. Again, the difference from year to year is not as noticeable as Boston Scientifics’. The difference on the Return on Equity is also small, for 2005 it was .194 and in 2006 it was .186.

Sources

http://209.85.165.104/search?q=cache:B4iq65lect0J:biz.yahoo.com/e/061109/bsx10-q.html+BSX+2005+versus+2006&hl=en&ct=clnk&cd=15&gl=us

http://www.abbott.com/static/content/microsite/annual_report/2006/17_review2.html

http://money.cnn.com/magazines/fortune/fortune_archive/2006/10/16/8390284/index.htm

http://www.globalinsight.com/SDA/SDADetail8147.htm http://wwww.abbott.com http://www.bostonscientific.com

http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=105&STORY=/www/story/10-09-2002/0001815095