Markets

Abbott Labs Q1: Has the Company Taken Its Eye Off the Sales Force Ball?

By Jim Edwards

Updated on: April 15, 2009 / 1:42 PM EDT / MoneyWatch

Abbott Labs' stock took a beating today even though it posted a 53 percent gain in net income, to $1.4 billion. Investors didn't like that $1 billion of that profit came from a one-off item reflecting the end of a joint venture with TAP. Revenues were flat at $6.7 billion.

Behind the numbers, however, is more worrying news for Abbott. The company may have taken its eye off the ball in terms of managing its raw materials costs and the productivity of its sales and marketing arms.

First, note that the amount of revenue earned on every single dollar Abbott spends on sales promotion declined to $3.24, the lowest it has been since 2006. Abbott is now down to Merck's level of sales effectiveness. That is not a compliment.

It's particularly disappointing because two quarters ago Abbott was a model of discipline in its hiring. It laid off 1,000 people in its diagnostics section even though that business was growing and was expected to continue to grow. BNET noted that margin discipline was breaking down at Abbott in Q4. The company seems to realize it has made a misstep, noting this in its earnings release:

We expect to deliver significant SG&A leverage in 2009, as we are forecasting a reduction in full-year ongoing SG&A as a percentage of sales of more than 100 basis points compared to 2008.

That may not be enough. It's at 29 percent of sales now. So a 100-basis point cut to 28 percent would leave SG&A just $20 million lower than it is currently ... not enough to be noticed.

Now take a look at Abbott's gross profit margin (that's revenues minus "cost of products sold," or raw materials costs). Previously, gross profit had been above $4 billion since Q2 2008, but now it's back down to $3.7 billion. A year earlier, on virtually the same sales, gross profit was $3.8 billion. So Abbott's raw materials costs grew by $100 million over the year. The cost of each pill is becoming more expensive. (A similar problem is occuring at Schering-Plough.)

The chart at the bottom of this item tracks the change, quarter to quarter, of the return in revenue and gross profit for every dollar Abbott spends on sales and promotion. You can see that the lines are pointing down, representing the decline in the company's productivity.

Lastly, note that despite the success of the Xience stent, Abbott is starting to see a problem BNET predicted back in August 2008: Depakote sales collapsed by 64 percent and Kaletra was down by 17 percent, in the face of generic competition. That leaves the company increasingly dependent on the mighty Humira and its stents, but even Humira appears to be slowing.