Abbott Laboratories (ABT)

Financial Review

Abbott’s revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements. Patent protection and licenses, technological and performance features, and inclusion of Abbott’s products under a contract or by a pharmacy benefit manager most impact which products are sold; price controls, competition and rebates most impact the net selling prices of products; and foreign currency translation impacts the measurement of net sales. Abbott’s primary products are prescription pharmaceuticals, nutritional products, vascular products and diagnostic testing products. Abbott also owns 50 percent of TAP Pharmaceutical Products Inc. that Abbott accounts for on the equity method.

The worldwide launch of HUMIRA, the acquisition of Guidant’s vascular business, the amendment of the Boehringer Ingelheim agreement, and the loss of patent protection for some pharmaceutical products have impacted Abbott’s sales, costs and financial position over the last three years.

Pharmaceutical research and development is focused on therapeutic areas that include immunology, oncology, neuroscience, metabolism, and viral diseases. In 2003, Abbott began the worldwide launch of HUMIRA, which increased its worldwide sales to $2.0 billion in 2006 compared to $1.4 billion in 2005. Substantial research and development and selling support has been and continues to be dedicated to maximizing the worldwide potential of HUMIRA. In December 2006, Abbott acquired Kos Pharmaceuticals which complements Abbott’s existing franchise in the dyslipidemia market and strengthens the late-stage and mid-term pharmaceutical pipeline with opportunities in cholesterol management, asthma and inhaled insulin. In 2005, Abbott and Boehringer Ingelheim (BI) amended their agreement whereby Abbott distributed and promoted BI products. Effective January 1, 2006, Abbott no longer distributed or recorded sales for distribution activities for the BI products. Abbott’s gross margins for BI products from the prior agreement in effect through December 31, 2005 were substantially lower than its average gross margins. Sales of BI products were $150 million and $2.3 billion in 2006 and 2005, respectively. In addition, increased generic competition resulted in worldwide sales of clarithromycin declining 23 percent in 2006.

In 2005 and 2006, Abbott’s nutritional products businesses were reorganized into a worldwide business to better leverage the opportunities available for strong nutritional brands. Significant efforts have been focused on capturing those opportunities, particularly in developing markets.

In April 2006, Abbott acquired Guidant’s vascular intervention and endovascular solutions businesses and began to integrate it with Abbott’s vascular business. The acquisition significantly improved Abbott’s competitive position in this business that is characterized by rapid innovation. In 2006, Abbott received European Union approval to market the XIENCE V drug eluting stent.

Abbott’s diagnostic segment is comprised of four separate divisions — immunoassay/hematology, diabetes care, molecular, and point of care. In early 2004, Abbott acquired TheraSense for $1.2 billion, and began to integrate it with Abbott’s diabetes care business. In January 2007, Abbott announced that it had agreed to sell its core laboratory diagnostics business, including Abbott Point of Care, to GE for $8.13 billion in cash. Abbott expects the sale to close in the first half of 2007. Abbott’s Molecular Diagnostics and Diabetes Care businesses are not part of this transaction and will remain part of Abbott.

Abbott’s short- and long-term debt totaled $12.4 billion at December 31, 2006, largely incurred to finance recent acquisitions. Operating cash flows in excess of capital expenditures and cash dividends have allowed Abbott to fund acquisitions over the last three years. At December 31, 2006, Abbott’s long-term debt rating was AA by Standard and Poor’s Corporation and A1 by Moody’s Investors Service.

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In 2007, Abbott will focus on several key initiatives. In the pharmaceutical business, Abbott will continue the launch of newly approved indications for HUMIRA, and will also focus on the integration of Kos Pharmaceuticals into the Pharmaceutical Products segment. Pharmaceutical research and development efforts will continue to focus on the therapeutic areas noted above with a significant portion of the development expenditures allocated to new HUMIRA indications. Abbott expects to submit additional pharmaceutical regulatory filings in 2007. In the vascular business, Abbott will continue the launch of the Xience V drug-eluting stent in Europe, and will launch in the U.S. upon approval by the FDA. For diabetes care, Abbott anticipates the approval of FreeStyle Navigator. Effort will also be required for the sale and separation of Abbott’s core laboratory and point of care diagnostics businesses. In the other business segments, Abbott will focus on developing or acquiring differentiated technologies in higher growth segments of those markets.

Financial Review

        Abbott's revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements. Patent protection and licenses, technological and performance features, and inclusion of Abbott's products under a contract or by a pharmacy benefit manager most impact which products are sold; price controls, competition and rebates most impact the net selling prices of products; and foreign currency translation impacts the measurement of net sales. Abbott's primary products are prescription pharmaceuticals, nutritional products and diagnostic testing products. Abbott also owns 50 percent of TAP Pharmaceutical Products Inc. (TAP) that Abbott accounts for on the equity method.

        The worldwide launch of HUMIRA, the spin-off of Hospira, integration and restructuring activities and the loss of patent protection for some products have impacted Abbott's sales, costs and financial position over the last three years.

        Subsequent to Abbott's 2001 acquisition of the Knoll pharmaceutical business, which significantly increased the scale of Abbott's pharmaceutical business, Abbott focused on reorganizing and growing its global pharmaceutical business. Abbott has established a global research and development organization and a global manufacturing and distribution organization to serve its domestic and international commercial pharmaceutical operations. Pharmaceutical research and development is focused on five therapeutic areas — immunology, oncology, neuroscience, diabetes/metabolism, and viral diseases. U.S. commercial pharmaceutical operations are focused mainly on primary care and specialty pharmaceuticals. In 2003, Abbott began the worldwide launch of HUMIRA, which increased its worldwide sales to $1.4 billion in 2005 compared to $852 million in 2004. In 2005, Abbott and Boehringer Ingelheim (BI) amended their agreement whereby Abbott distributed and promoted BI products. Effective January 1, 2006, Abbott will no longer distribute BI products but will receive residual commissions. Abbott's gross margins for BI products from the prior agreement in effect through December 31, 2005 were substantially lower than its average gross margin. 2005 sales of BI products were $2.3 billion. Increased generic competition resulted in U.S. sales of Synthroid declining 22 percent in 2005 while holding a 36 percent market share.

        In 2004, Abbott separated its diagnostic segment into four separate divisions — immunoassay/hematology, diabetes care, molecular, and point of care — to better focus on commercial and scientific opportunities. In early 2004, Abbott acquired TheraSense for $1.2 billion, and began to integrate it with Abbott's diabetes care business. In late 2003, Abbott was informed by the FDA that it may distribute the immunoassay products in the U.S. that were impacted by regulatory restrictions imposed in 1999. Net sales and profits for this business declined over the restricted period, but stabilized in 2004 and 2005. In 2005, Abbott diagnostics launched more than 50 new products. In the Ross segment in 2003, Abbott settled its portion of an industry-wide investigation of the enteral nutritional business for $614 million.

        In 2004, Abbott completed the spin-off of Hospira, Abbott's former hospital products business. Annual sales of Hospira were approximately $2.4 billion. As part of the spin-off, Hospira assumed $700 million of debt. The historical operating and cash flow results of Hospira are presented as discontinued operations. Hospira is contractually obligated to purchase the international hospital assets and operations that were not included in the spin-off. The legal transfer of certain remaining operations and assets (net of liabilities) outside the United States is expected to occur in the first half of 2006.

        In early 2006, Abbott reached agreement to acquire Guidant's vascular intervention and endovascular solutions businesses, subject to Boston Scientific's acquisition of Guidant. Guidant's annual revenues from these businesses are approximately $1 billion. The purchase price would be $4.1 billion, plus contingent milestone payments of $500 million.

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        TAP's contribution to Abbott's earnings declined in 2004 and 2003. A part of the decline was due to increased competition for Prevacid, TAP's largest selling product, and due to market contraction for prescription proton pump inhibitors. In 2004, TAP recorded additional litigation reserves of $125 million for an anticipated legal settlement.

        Abbott's short- and long-term debt totaled $6.6 billion at December 31, 2005, largely incurred to finance acquisitions. Operating cash flows in excess of capital expenditures and cash dividends have allowed Abbott to reduce debt and fund acquisitions over the last three years. At December 31, 2005, Abbott's long-term debt rating was AA by Standard and Poor's and A1 by Moody's Investors Service.

        In 2006, Abbott will focus on several key initiatives. In the global pharmaceutical business, Abbott will launch newly approved indications for HUMIRA. Abbott will also focus on appropriate market support for Synthroid, which became subject to generic U.S. competition in mid-2004, and for sevoflurane, which became subject to generic competition in December 2005. In 2005, TAP received an approvable letter from the FDA for febuxostat. Contingent upon FDA approval, TAP plans to launch febuxostat in 2006. Pharmaceutical research and development efforts will continue to be focused in the five therapeutic areas noted above with a significant portion of the development expenditures allocated to new HUMIRA indications. Abbott expects to submit additional pharmaceutical regulatory filings in 2006. In the immunoassay business, attention will be focused on improving revenue growth by capitalizing on recent product launches, including the U.S. launch of the blood screening system, PRISM, launching additional products, and commercial execution of the existing broad product portfolio. In the hematology business, attention will be focused on the continued launch of CELL-DYN Sapphire and other analyzers. For diabetes care, Abbott will continue the launch of FreeStyle Connect and Abbott anticipates the approval of FreeStyle Navigator in 2006. Upon closure of the acquisition of Guidant's vascular business, planning for its integration would be a key activity in the vascular business. Focus in this business will also be on the 2005 launch of Xact Carotid Stent and Emboshield Embolic Protection System and the projected approval of ZoMaxx, Abbott's drug-eluting stent, in Europe. With a greater focus on consumer marketing, Ross will maximize the strength of its core brands and further develop its healthy-living market presence. In the other business segments, Abbott will focus on developing or acquiring differentiated technologies in higher growth segments of those markets.

Financial Review

        Abbott's revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements. Patent protection and licenses, technological and performance features, and inclusion of Abbott's products under a contract or by a pharmacy benefit manager most impact which products are sold; price controls, competition and rebates most impact the net selling prices of products; and foreign currency translation impacts the measurement of net sales. Abbott's primary products are prescription pharmaceuticals, nutritional products and diagnostic testing products. Abbott also owns 50 percent of TAP Pharmaceutical Products Inc. (TAP) that Abbott accounts for on the equity method.

        Integration activities, regulatory and legal issues, the worldwide launch of HUMIRA and the Hospira spin-off have impacted Abbott's sales, costs and financial position over the last three years.

        Subsequent to Abbott's 2001 acquisition of the Knoll pharmaceutical business, which significantly increased the scale of Abbott's pharmaceutical business, Abbott focused on reorganizing and growing its global pharmaceutical business. Abbott has established a global research and development organization and a global manufacturing and distribution organization to serve its domestic and international commercial pharmaceutical operations. Pharmaceutical research and development is focused on five therapeutic areas — immunology, oncology, neuroscience, diabetes/metabolism, and viral diseases. U.S. commercial pharmaceutical operations are focused on primary care, specialty and hospital pharmaceuticals. In 2003, Abbott began the worldwide launch of HUMIRA, which achieved worldwide sales of $852 million in 2004.

        In 2004, Abbott separated its diagnostic segment into four separate divisions — immunoassay/hematology, glucose testing, molecular, and point of care — to better focus on commercial and scientific opportunities. In early 2004, Abbott acquired TheraSense for $1.2 billion, and began to integrate it with Abbott's glucose testing business. In late 2003, Abbott was informed by the FDA that it may distribute the immunoassay products in the U.S. that were impacted by regulatory restrictions imposed in 1999. Net sales and profits for this business declined over the restricted period, but stabilized in 2004. In 2004, Abbott diagnostics launched more than 80 new products. In the Ross segment in 2003, Abbott settled its portion of an industry-wide investigation of the enteral nutritional business for $614 million.

        In 2004, Abbott completed the spin-off of Hospira, Abbott's former hospital products business. Prior to the spin-off, the hospital pharmaceutical and vascular device businesses, which Abbott retained, were transferred to the pharmaceutical business and Abbott Vascular Products segment, respectively. Annual sales of Hospira were approximately $2.4 billion. As part of the spin-off, Hospira assumed $700 million of debt. The historical operating and cash flow results of Hospira are now presented as discontinued operations. Hospira is contractually obligated to purchase the international hospital assets and operations that were not included in the spin-off.

        TAP's contribution to Abbott's earnings has declined over the last two years. A part of the decline is due to increased competition for Prevacid, TAP's largest selling product, and due to market contraction for prescription proton pump inhibitors. In 2004, TAP recorded additional litigation reserves of $125 million for an anticipated legal settlement.

        Abbott's short- and long-term debt totaled $6.8 billion at December 31, 2004, largely incurred to finance acquisitions. Operating cash flows in excess of capital expenditures and cash dividends have allowed Abbott to reduce debt and fund acquisitions over the last three years. At December 31, 2004, Abbott's long-term debt rating was AA by Standard and Poor's and A1 by Moody's Investors Service.

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        In 2005, Abbott will focus on several key initiatives. In the pharmaceutical business, Abbott expects worldwide sales of HUMIRA, its rheumatoid arthritis drug launched in 2003 and 2004, to exceed $1.3 billion in 2005. Abbott will also focus on appropriate market support for Synthroid, which became subject to generic U.S. competition in mid-2004. U.S. Synthroid sales in 2004 and 2003 were $637 million and $565 million, respectively, and are projected to exceed $400 million in 2005. In 2005, Abbott expects a response from the FDA to Abbott's regulatory submissions made in 2004 for Xinlay, for prostate cancer, Kaletra once-daily dosing, Zemplar capsules, and additional HUMIRA indications, and TAP expects a response for its filing for Febuxostat. Abbott expects to submit a similar number of additional pharmaceutical regulatory filings in 2005. Pharmaceutical research and development efforts will continue to be focused in the five therapeutic areas noted above with a significant portion of the development expenditures allocated to new HUMIRA indications. In the immunoassay business, attention will be focused on improving revenue growth by capitalizing on recent product launches, launching additional products, and commercial execution of the existing broad product portfolio. In addition, Abbott expects to place with customers additional ARCHITECT immunochemistry diagnostic instruments in 2005. With a greater focus on consumer marketing, Ross will maximize the strength of its core brands and expand its healthy-living market presence. In the other business segments, Abbott will focus on developing or acquiring differentiated technologies in higher growth segments of those markets.