Markets & Finance

S&P Cuts Outlook for Abbott Labs to Negative


On June 12, Standard & Poor's lowered its outlook on pharmaceutical manufacturer Abbott Laboratories Inc. to negative from stable, as a result of its higher-than-average debt and expected leverage relative to the rating.

At the same time, Standard & Poor's affirmed its 'AA' corporate credit and senior unsecured debt ratings, as well as its 'A-1+' short-term corporate credit and commercial paper ratings on North Chicago, Ill.-based Abbott.

The outlook revision reflects Abbott's continued difficulties in returning its Lake County, Ill. diagnostic manufacturing facility to FDA compliance, the resulting related significant charges, and expectations that Abbott will likely continue to pursue an acquisition policy that will result in slower-than-expected de-leveraging of the company, says analyst Arthur Wong.

The superior investment-grade ratings for Abbott are based on the company's solid positions in a number of diverse health-care segments that generate strong cash flows from operations, offset somewhat by a higher level of leverage relative to its peers.

Abbott has been very active in the past few years, in both acquisitions and licensing agreements, as the company seeks to accelerate growth in its various divisions. Most recently, the company acquired the BiodivYsio cardiovascular stent business of Biocompatibles International PLC for roughly $235 million. This acquisition expands its presence for polymer-coated stents.

Earlier, the company closed on its acquisition of clinical laboratory products company, Vysis Inc., in a debt-financed transaction valued at approximately $355 million. This transaction adds several genomics-based technologies to Abbott's diagnostic operations. Both acquisitions followed Abbott's 2001 $7 billion acquisition of Knoll Pharmaceutical.

Acquisitions have slowly stocked the company's product development pipeline with some interesting prospects, such as the rheumatoid arthritis treatment D2E7. But Abbott's financial performance has been hurt by a series of operational disappointments, including the concerns regarding the regulatory status relating to the company's thyroid hormone replacement therapy, Synthroid, and a $274 million charge in 2001 relating to its TAP litigation settlement.

Most recently, Abbott revised its earnings downward due to expected $140 million in additional charges relating to the company's failure to return its Lake County, Ill. diagnostic manufacturing facility to FDA compliance, as well as an expected $100 million sales shortfall for its diet drug, Meridia/Reductil.

Nevertheless, Abbott's cash-flow protection measures and financial profile remain solid and are consistent with its rating. Funds from operations to net debt have climbed to over 85% from 48% in early 2001, and net debt to EBITDA has drifted down to 1.2 times. Return on net capital remains consistently just under 30%.

OUTLOOK. Abbott's credit measures have steadily improved and financial performance is expected to remain solid, given the company's diversity and low exposure to pharmaceutical patent expirations.

However, expectations that Abbott will likely remain acquisitive and the cumulative cash-flow impact of charges relating to the various unforeseen operational setbacks will mean that Abbott is not likely to return to a net cash position until after Standard & Poor's original late 2003/early 2004 expectations.

A large debt-financed transaction or significant deterioration in financial performance will likely result in a ratings downgrade. From Standard & Poor's RatingsDirect


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