Abbott Stumbles on Mixed Outlook

Sales surge 17.5% from a year ago.
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Updated from 8:28 a.m. EDT

Abbott Labs'

(ABT) - Get Report

second-quarter earnings came in slightly above Wall Street's estimates, but concerns about the company's guidance sank its shares Wednesday, analysts say.

While the company beat the consensus forecast by a penny with solid revenue gains in its pharmaceuticals and medical products divisions, guidance for the rest of 2005 was mixed. Shares fell $2.08, or 4.2%, to $47.63 recently.

Abbott earned $877.1 million, or 56 cents a share, in the quarter, compared with $634.3 million, or 40 cents a share, a year ago. Excluding one-time charges, the Abbott Park, Ill., company earned $909.1 million, or 58 cents a share, in the 2005 quarter.

Abbott previously pegged earnings before special items at 56 cents to 58 cents a share. It cited stronger-than-expected sales growth and manufacturing consolidation and selective job cuts to curb the company's costs.

For the third quarter, Abbott expects to earn 56 cents to 58 cents a share, below the Thomson First Call consensus estimate of 60 cents a share. Guidance for the full year remained the same, however, at $2.47 to $2.53 a share. Wall Street is forecasting $2.50 a share.

Despite the positive earnings news, Leerink Swann & Co. analyst Bruce Cranna says gross margins have eroded since last year, making investors unsure whether the company can make its numbers for this year. Cranna expected gross margins of 54%, but the company reported 53%. Leerink doesn't have an investment banking relationship with Abbott.

"The stock may weaken this morning initially in reaction to the moving parts in the quarter ... and the below-consensus 3Q guidance," wrote Bear Stearns' Rick Wise in a research note, "Still with 15% Q4 EPS growth prospects, diagnostic turning, pharma overall quite strong, diabetes robust, and over 10 potential '05 positive catalysts ahead, we would accumulate shares especially on any price weakness." Bear Stearns does and seeks to do business with companies covered in its research reports.

Total worldwide sales were up 17.5% to $5.5 billion, about $200 million ahead of estimates. The company said sales in its pharmaceuticals products group rose 18% from a year ago, while sales in medical products jumped 13.6%.

In its pharmaceuticals business for the second quarter, sales of the antibiotic Biaxin fell 30% from a year ago, hurt by competition from generic-drug companies like

Teva

(TEVA) - Get Report

. Abbott's composition-of-matter patent on Biaxin expired in May, but other patents cover both immediate-release and extended-release forms of the drug. The patent on its extended-release Biaxin expires in 2017.

Last month, Abbott was granted a preliminary injunction preventing Teva from launching an extended-release form of Biaxin, which is known generically as clarithromycin.

Most of its other products did well in the quarter, including the antibiotic Omnicef, which saw sales rise 63% from the year-ago quarter. Last fall, the FDA approved a concentrated dose of the children's antibiotic medication.

Arthritis drug Mobic brought in $322 million in sales, up 204% from a year ago, benefiting from the withdrawal of Vioxx and Bextra. In the U.S., the latter two drugs are classified as a Cox-2 inhibitors, which the Food and Drug Administration warned may increase the risk of heart attack and stroke. Mobic is co-marketed with

Boehringer Ingelheim

of Germany and is classified as a Cox-2 inhibitor in Europe, but not in the U.S.

Worldwide sales of rheumatoid arthritis drug Humira were $321 million, up 58%. In its conference call Wednesday, the company said it's on track to reach its global sales forecast of $1.3 billion this year. Abbott expects Humira to be approved for additional indications in the fourth quarter.

Also expected in the fourth quarter is a once-a-day version of the HIV drug Kaletra. In the second half, Abbott expects approval of a stent used to prop open the carotid artery to prevent stroke, a hepatitis C diagnostic test and the use of epilepsy drug Depakote in bipolar disorder.

Data from trials combining the cholesterol drug Tricor with statin drugs Lipitor from

Pfizer

(PFE) - Get Report

and Crestor from

AstraZeneca

(AZN) - Get Report

should also be available in the second half.

In Abbott's medical products group, worldwide diagnostics sales were up 12.9% in the quarter, with sales of diabetes products up 25.2%.

"We're particularly pleased with the strength of our global diagnostics business, where Abbott Diabetes Care continues to perform well and where we're winning new long-term diagnostics contracts with major customer groups in the United States and internationally," the company said in a release.

Additionally, Abbott updated some financial forecasts, saying it expects to record one-time charges of roughly 23 cents a share for the full year. The items reflect cost reductions, the effect of 2004 acquisitions and costs related to the repatriation of overseas earnings under a new federal law.