Abbott 2006 Annual Report : Chairman's Letter

Miles D. White
Chairman of the Board and Chief Executive Officer

Richard A. Gonzalez
President and Chief Operating Officer

Miles White (left) and Rick Gonzalez (right) attended the 2006 Transcatheter Cardiovascular Therapeutics medical meeting in Washington, D.C. At the meeting, Abbott Vascular showcased a broad portfolio of leading products, including Xience V, Abbott's drug-eluting stent, which launched in Europe and Asia in October 2006.

For the past eight years, we've worked consistently not only to ensure Abbott's future, but also to elevate and accelerate it. Our goal has been to make Abbott a more competitive company that is capable of higher growth over the long term. As a result of our strategic actions, Abbott is stronger today than it has been in more than a decade.

Advancing Abbott: a strategic reshaping of our diversified business
1999	> Perclose acquisition Entering vascular care
2001	> Knoll Pharmaceuticals acquisition Adding biologics expertise and Humira
2004	> TheraSense acquisition Solidifying diabetes care leadership
2004	> Hospira spinoff Creating a new hospital products leader
2006	> Abbott Nutrition International Targeting our efforts on emerging markets
2006	> Guidant vascular acquisition Propelling Abbott to the forefront of vascular care
2006	> Kos Pharmaceuticals acquisition Expanding our on-market presence and pipeline in lipid management
2007	> Core lab diagnostics divestiture Sharpening our focus on innovation-driven businesses
Abbott today: a portfolio of well-balanced, higher-growth, technology-driven businesses

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We've worked steadily to make Abbott a company with a straight-forward business model that can deliver sustained, high-quality growth. To that end, we've built a richer mix of businesses that compete in attractive markets where medical innovation wins and where market leadership ensures a commensurate level of financial return. Through this change process, we've amassed greater depth within each of the major businesses that form our diverse framework: medical products, nutritional products and pharmaceuticals.

The changes we've made over this period have significantly strengthened Abbott's core investment identity as a balanced, broad-based health care company built for sustainable double-digit earnings-per-share performance.

Medical Products

Our medical products business has undergone an almost complete transformation over the past eight years. In 1999, the elements of this business included our hospital products business and our core laboratory diagnostics business.

We spun off the hospital products business as Hospira in 2004. In the first quarter of 2007, we agreed to divest the core laboratory diagnostics business to General Electric Co. (GE) for $8.13 billion.

The sale of the core laboratory diagnostics business was compelled by the steady changes in that market over the past decade. Abbott Diagnostics grew when innovation in this business was about developing the best new tests.

In the future, innovation in this segment will be driven by automation, system integration and a host of skills that GE can offer. As part of GE, Abbott's core laboratory diagnostics and point-of-care businesses will be powerfully positioned to sustain and extend their market success. This agreement did not include our other diagnostics businesses, Diabetes Care and Molecular Diagnostics.

As with the spinoff of Hospira, this strategic move allows Abbott to concentrate our attention and resources on what we do best: high-growth businesses that are focused on continued innovation for the patient.

These are precisely the kinds of businesses that Abbott has added to its medical products portfolio over the past eight years, culminating with last year's acquisition of the vascular and endovascular businesses of the former Guidant Corp. This acquisition not only propelled Abbott to the forefront of the vascular care business, but it also fulfilled a strategy we'd pursued since we acquired Perclose Inc. in 1999.

Our intention then was to achieve exactly the kind of position we hold today. Our initial investments provided us a foothold in one of the largest and most attractive segments of health care. With the addition of Guidant, we achieved the position we envisioned at the outset.

Today's Abbott: historical sales growth

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Sales excluding the announced divestiture of the diagnostics businesses and Boehringer Ingelheim products. For sales including these items, see the Summary of Selected Financial Data

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Today, we're the third largest player in the vascular care market. We intend and expect to be a market leader in the years ahead. We're also the leading supplier of carotid stents and metallic stents, and in October 2006 saw the launch in Europe and Asia of a new drug-eluting stent, Xience V, which studies show may be a significant advancement. We have the industry's largest vascular sales force, one of the largest and most productive vascular research and development (R&D) organizations and a rich new-product pipeline, including a breakthrough technology that we think represents the future of this market: bioabsorbable stents, which are designed to be naturally absorbed by the body.

The building of our vascular business perfectly exemplifies our strategy: We identified a large market with great potential for profitable growth, we entered it by acquiring a small company that had developed superior new technology, and we deliberately and methodically built a leader on that base. This is a model that works.

Nutritional Products

Our nutritional products business brings an altogether different dimension to our portfolio. This business offers little risk relative to its potential. In the United States, the nutrition market is largely mature but offers room for innovative new products that have relatively low research and regulatory hurdles.

Outside the United States, on the other hand, large, profitable and fast-growing markets from China to Latin America are opening up to the nutrition business. What we see in these emerging economies is that as personal incomes improve, people want to ensure superior nutrition for their children. That's providing great growth for core Abbott products such as Similac Advance, sales of which grew nearly 70 percent last year in China and more than 20 percent throughout Latin America. In 2006, we launched Abbott Nutrition International as a stand-alone division to capture outstanding opportunities like these. We also globalized our nutritional products supply chain and our R&D efforts to ensure our ability to keep competing successfully in these emerging growth markets.

Pharmaceuticals

In 2006, this business continued to be driven by the growth of our leading brands: Kaletra, the world's number-one HIV protease inhibitor; Depakote, our neuroscience treatment for mania in bipolar disorder, certain types of epilepsy and the prevention of migraine headaches; TriCor, our medication for management of triglycerides and cholesterol; and Humira, our flagship biologic medication that became Abbott's first $2 billion brand.

Humira came to Abbott through our acquisition of Knoll Pharmaceuticals in 2001. Last year, we took another large step to maintain our internal balance and to ensure our near-term future in this important business: our acquisition of Kos Pharmaceuticals Inc. Kos significantly expands our franchise in lipid management. At nearly $20 billion, it's the largest pharmaceutical market and an area of growing interest for us. Kos also complemented our agreement with AstraZeneca PLC to coformulate its Crestor with an Abbott compound to address total lipid control in a single pill. Again, our strategy is to bring superior new technologies to markets that reward innovation and offer opportunity for growth. The excellent late-stage pipeline we acquired with Kos will help maintain our new pharmaceutical product flow in the near term; for the long term, we're working to strengthen our R&D capability to provide a sustainable pharmaceutical pipeline going forward.

Operating cash flow

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Research & development

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Delivering Results

The proof of our growth strategy is in the results we've delivered in recent years. In 2006, we continued to pay down debt, buy back shares and increase our investment in R&D and commercial infrastructure to support future growth. In October, the board of directors authorized a new program to repurchase up to $2.5 billion of our common stock. Dividends increased for the 34th consecutive year, allowing us to deliver a total return to shareholders of 27 percent. And our operating cash flow grew to a record $5.3 billion. We remain committed to improving our gross margin to deliver even better results in the future.

A company's success, of course, is a function and reflection of the people who make it work. The 65,000 Abbott people around the world performed with their customary skill and dedication to our company and its purpose. And we continued to build our management team to meet the shifting needs of the market and our organization.

I'd also like to recognize the 12,000 people of the Abbott Diagnostics and Abbott Point of Care divisions, who will be leaving us to join GE. Diagnostics is a great and proud part of Abbott's history. These colleagues saw their business through changing conditions to deliver market-leading growth in 2006. We thank them for their many contributions and wish them all the best.

On the Move

As 2006 clearly demonstrated, Abbott is a company on the move. Our accomplishments last year and the success of our long-term strategy made 2006 one of the most satisfying years for me personally since I became Abbott's CEO, eight years ago.

As a result of the growth strategy we've executed, today's Abbott has the size and scope, the competitive desire and the ability to win in the health care marketplace — and to do so despite the challenges in our business environment. We're positioned to address the needs of the next generation of patients and to help manage the future of health care with breakthrough medical technologies.

Today's Abbott is a uniquely well-balanced company, with leadership positions in each of three great and essential businesses: medical products, nutritional products and pharmaceuticals. We've built a rich and varied portfolio to increase our range of opportunities and limit risk to our overall performance. We've strengthened that base with a heightened emphasis on technological innovation, developed both within and outside of Abbott.

Our work is never done, of course, and we remain highly ambitious to pursue our growth strategy to still greater success ahead. But in 2006, we made major strides toward advancing Abbott's business and its investment identity to the strong and promising position we've desired and worked for over the years. Today, all of our businesses match the high-performance profile we've built toward and provide a strong and productive template for future building and future growth. No other health care company today is more ready than Abbott to deliver results for patients, for shareholders and for all the people it serves.