I found 57 Big Health Care Corps with Pretax Earnings above $100 mil each in either the 2Q 2011 or in the 2Q 2010.
These 57 Big Health Care Corps registered a Total Pretax Earnings increase of 5% in the 2Q 2011, decelerating a bit from the 11% earnings growth in the 1Q 2011. Some of this earnings growth decrease is due to higher restructuring costs, which are so prevalent in the Health Care industry. And these higher restructuring costs have added significantly to US unemployment, and also have resulted in the loss of many higher-paying US jobs.
Below here are these 2Q 2011 Pretax Earnings (PTI), along with a comparison with the prior year’s quarter amounts.
...........................................................................Increase
................................................PTI........PTI.......(Decrease)
.................................................2Q.........2Q..................
...............................................2011......2010....Amount....%
.................................................(millions of dollars)
JNJ(1)...........................NJ......4,413.....4,377........36.......1%
Pfizer(2)........................NY.....4,014.....4,021........(7)......0%
UnitedHealth Group......MN.....1,980.....1,782.......198.....11%
Abbott Labs(3)...............IL.....1,973.....1,740.......233.....13%
Bristol Myers Squibb.....NY.....1,790.....1,592.......198.....12%
Merck(4).......................NJ.....1,672........798.......874....110%
Eli Lilly..........................IN.....1,531.....1,737......(206)...-12%
CVS Caremark................RI.....1,342.....1,366.......(24)......2%
Amgen..........................CA.....1,339.....1,464......(125)....-9%
Wellpoint......................IN.....1,007.....1,130......(123)...-11%
Gilead Sciences..............CA.......983........993.......(10).....-1%
Medtronic(5).................MN.......918.....1,234.....(316)...-26%
Aetna..............................CT.......821.......764.........57......7%
Baxter.............................IL.......803.......670.......133.....20%
Humana(6).....................KY.......672.......566.......106.....19%
Cigna(7).........................CT........653.......603.........50.......8%
Covidien........................MA.......558.......512.........46.......9%
Medco Health Sols..........NJ.......558.......582........(24)....-4%
HCA(8)...........................TN.......542.......605........(63)...-10%
Express Scripts...............MO.......531.......489.........42.......9%
Becton Dickinson.............NJ.......461.......413.........48.....12%
McKesson........................CA.......416.......440........(24)....-5%
Stryker............................MI.......410.......443........(33)....-7%
Biogen IDEC....................MA.......399.......397..........2.......1%
Allergan(9)......................CA.......389.......334.........55.....16%
Forest Labs(10)...............NY.......386.......365.........21.......6%
Cardinal Health(11)..........OH.......341.......274.........67.....24%
Celgene(12)......................NJ.......341.......293.........48.....16%
St Jude Medical...............MN......300.......345........(45)....-13%
Zimmer Holdings(13).......IN.......299.......289.........10.......3%
Amerisource Bergen........PA.......298.......263.........35.....13%
Quest Diagnostics............NJ.......278.......330........(52)...-16%
Davita(14)........................CO.......212.......195.........17.......9%
Lab Corp of America........NC.......207.......260........(53)...-20%
Mylan Labs......................PA.......203.......101........102....101%
CR Bard(15)......................NJ.......199.......183..........16.......9%
Coventry Hlthcre(16).......MD......197.......281.........(84)...-30%
Assurant(17)....................NY.......190.......253........(63)...-25%
Universal Health Svcs.......PA.......182.......117.........65.....56%
Intuitive Surgical..............CA.......172.......144.........28.....19%
Hospira.............................IL........169.........92.........77.....84%
Boston Scientific(18)........MA.......158.........88.........70.....80%
Herbalife Ltd....................CA........152.......114.........38.....33%
Henry Schein....................NY.......148.......133.........15.....11%
Cephalon(19)....................PA.......147.......156.........(9)....-6%
Varian Medical Sys............CA.......141.......130.........11.......8%
Weight Watchers...............NY.......140.........92.........48.....52%
Commun Health Sys..........TN........138.......131..........7.......5%
CareFusion(20)..................CA.......130.........94.........36.....38%
Waters...............................MA.......116.......102.........14.....14%
Life Technologies...............CA.......115.......128........(13)...-10%
Perrigo...............................MI.......113.........66.........47.....71%
Kinetic Concepts................TX........112.........77.........35.....45%
Cerner................................MO.......111.........86.........25.....29%
Endo Pharma(21)................PA.......109.........96........13.....14%
Watson Pharma(22)............NJ.......103.........99..........4.......4%
Warner Chilcott plc.............NJ.........93.......175.......(82)...-47%
Total of all 57............................36,175...34,604...1,571.......5%
(1) JNJ 2011 PTI excludes Asset Impairment Charges and Net Litigation Losses and Other.
(2) Pfizer 2011 PTI excludes Asset Impairment Charges.
(3) Abbott Labs 2011 PTI excludes Acquired In Process R&D Charges and Intangible Asset Impairment Charges. Its 2010 PTI excludes Acquired In Process R&D Charges and Litigation Reserve Charge.
(4) Merck 2010 PTI excludes Gain on AstraZeneca's Asset Option Exercise.
(5) Medtronic 2011 PTI includes large Restructuring Charges.
(6) Humana 2011 and 2010 PTI both exclude Prior Period Medical Claims Reserve Adjustment Charges. Its 2010 PTI also excludes Asset Impairment Charge for Deferred Acquisition Costs.
(7) Cigna 2011 PTI excludes GMIB Fair Value Loss.
(8) HCA 2011 PTI excludes Loss on Debt Retirement. Its 2010 PTI excludes Asset Impairment Charges.
(9) Allergan 2011 PTI excludes Upfront Licensing Fee Charge.
(10) Forest Labs 2011 PTI excludes new Licensing Fee Charge. Its 2010 PTI excludes US Dept of Justice Investigation Charges and Licensing Payment Charge.
(11) Cardinal Health 2010 PTI excludes Litigation Recovery Gain.
(12) Celgene 2011 and 2010 PTI both exclude Upfront Collaboration Payments. its 2011 PTI also excludes Change in Fair Value of Contingent Value Rights.
(13) Zimmer Holdings 2011 and 2010 PTI both exclude Durom Cup Claim Charges.
(14) Davita 2011 PTI excludes Goodwill Impairment Charge.
(15) CR Bard 2011 PTI excludes Legal Settlement and Claim Charges.
(16) Coventry Healthcare 2011 PTI excludes Provider Class Action Credit. Its 2010 PTI excludes Provider Class Action Charge.
(17) Assurant 2011 PTI excludes Higher Casualty Losses at Assurant Specialty Property.
(18) Boston Scientific 2011 PTI excludes Goodwill Impairment Credit Adjustment.
(19) Cephalon 2011 PTI excludes Asset Impairment and Loss on Sale of Assets, and also Change in Fair Value of Investments.
(20) CareFusion 2010 PTI excludes Gain on Sale of Assets.
(21) Endo Pharmaceuticals 2011 PTI excludes Loss and Impairment of Assets. Its 2010 PTI excludes Intangible Asset Impairment Charge.
(22) Watson Pharmaceuticals 2011 PTI excludes Loss and Impairment of Assets.
I think it would be helpful to explain the role financial engineering plays in the Big Health Care Industry.
Whereas the above Pretax Income growth of these Big Health Care Corps in the 2Q 2011 is only 5%, the Earnings Per Share (EPS) growth in the same 2Q 2011 is at least double that. That's quite a favorable spread.
There are two reasons for this very favorable spread.....first, the substantially lower worldwide effective income tax rates prevalent in the Big Health Care Industry, and second, the large stock buyback programs of some of the huge Health Care Corps. The former increases the numerator in the EPS computation, and the latter decreases the denominator in the EPS computation.
And EPS, and EPS growth, is what drives stock prices, and also drives the total compensation of CEOs and of many other high-level executives of these Big Health Care Corps, because stock options play such a substantial role in the total employee compensation of these upper-level executives.
Let me focus specifically on how some of the Big Health Care Corps have increased this critical favorable spread between their Pretax Income growth and their EPS growth.
Big Pharma
In the 2Q 2011, JNJ had Core Adjusted Pretax Income growth of only 1%. However, its after tax Core Adjusted Net Income growth was a much higher 5%. It lowered its effective income tax rate from 22.7% in the 2Q 2010 to only 19.6% in the 2Q 2011. It's mainly about having larger portions of their worldwide income moved to lower taxed foreign jurisdictions.
In the 2Q 2011, Merck had Pretax Income of $1,672 mil. What was its Income Tax Expense? Well, actually it wasn't income tax expense, but rather income tax benefit, and to the tune of $382 mil. This increased its after tax Net Income to $2,054 mil. Its effective income tax rate was reduced from a positive 37.1% in the 2Q 2010 to a negative 22.8% in 2Q 2011.
What caused this monstrously lower effective tax rate? Mainly very favorable income tax settlements on tax audits. And it's not just Merck, and it's not just Big Health Care Corps. When I review Big Corp income tax footnotes, I see large favorable tax settlement after large favorable tax settlement.
But yet Generally Accepted Accounting Principles (GAAP) requires companies to have already included on their books the tax amounts the company has determined it owes.
So why the huge favorable tax settlement? It could be several reasons. First, companies aren't following GAAP, and instead are booking estimated tax liabilities on open tax audits at conservatively more than they think they owe. And second, the IRS isn't doing a very good job in settling these tax audits of Big Corps.....they are leaving way too much money on the table.....and this is US taxpayers money, not money of the IRS.
This is another case where the Big Corps have a major economic advantage over small businesses.
From first-hand experience, the IRS will doggedly pursue, in an incredibly bungling, clearly dishonest, and Gestapo-like manner, a small business owner in a tax audit, and will not offer one iota in the way of settlement offers of clearly gray areas in the IRS code. And the small business owner can't afford to pay high-priced tax talent needed to help him in his IRS tax audit.
However, the Big Corps can afford to have the very best tax minds, both inside and outside their organization, defending them, and thus the IRS is no match for the extremely brilliant, experienced tax talent of Big Corps, and clearly the IRS loses out to them on tax audits, with the resultant substantial favorable tax audit settlements being subsequently booked to earnings by the Big Corps, especially by multinational ones.
And the other side here of how the US government helps Big Corps vs Small Businesses, is that the substantial, very lengthy and bungling IRS harassing of small businesses in widespread Gestapo-type audits is taking up loads of critical time of small business owners, with the resultant reduction of US real GDP growth, and more importantly, of US job creation.
When I spread all the time I had to spend, defending myself against the IRS in their clearly unnecessary, lengthy, bungling, menacing tax audit, over the universe of what has to be happening to thousands and thousands of small businesses being audited by untrained IRS agents all over the US, I am certain that this intensive IRS tax audit practice has caused an increase in the US unemployment rate of at least 1%.
The Republicans are right when they assert that there is some over-regulation hampering the US economy and US job creation. One key example is that there are way too many IRS auditors, and their IRS support personnel, handling small business and self-employed tax audits.
You cut the number of IRS tax auditors of small and self-employed businesses in the field, along with the legions of IRS support personnel, and you get a two-fer on US Debt reduction.
First, you get a wise cut in annual US government costs from the reduced head counts.
And second, and much more importantly, you free up the time of small businesses, which can be used to both grow their businesses organically and to create US jobs.
Another wise approach would be for the US Government to move a substantial amount of its funding for their so many, and so lengthy, harassing IRS tax audits of small and self-employed businesses to its funding for the tax audits of Big Multinational Corps.....that is the fertile area for substantially raising US tax revenues.
Going back to Big Pharma, Pfizer's Reported Pretax Income decreased by 6% in the 2Q 2011. Its after tax Net Income increased by 5%. Why the 11% favorable spread? Again it's the lower worldwide effective income tax rate, which was reduced from 37.5% in the 2Q 2010 to 29.7% in the 2Q 2011.
In the 2Q 2011, Abbott Labs' Reported Pretax Income increased by 7%. It's after tax Net Income increased by 50%. Why? It reduced its worldwide effective income tax rate from an already extremely low positive 17.1% in the 2Q 2010 to an off-the-charts negative 16.0% in the 2Q 2011.
How was this possible? Well, it was just like Merck. Abbott Lab had an extremely favorable tax audit settlement with the IRS.
In the 2Q 2011, Amgen's Reported Pretax Income declined by 9%. Its after tax Net Income declined by only 3%. Why? Amgen reduced its worldwide effective tax rate from an extremely low 17.9% in the 2Q 2010 to an even lower 12.6% in the 2Q 2011.
And Eli Lilly lowered its effective income tax rate on what it calls its Adjusted Pretax Income from 22.5% in the 2Q 2010 to 20.9% in the 2Q 2011.
Big Health Insurance
In the 2Q 2011, WellPoint's Pretax Income declined by 11%. Amazingly, its after tax Net Income declined by only 3%. Why? A lower effective income tax rate.....36.0% in the 2Q 2010 vs. only 30.4% in the 2Q 2011. This lower tax rate was due to favorable IRS tax audit settlements. Where have we heard that one?
And UnitedHealth Group lowered its effective income tax rate from 37.0% in the 2Q 2010 to 36.0% in the 2Q 2011.
Big Medical Products
Medtronic lowered its worldwide effective income tax rate from an already very low 22.6% in the 2Q 2010 to an even lower 15.5% in the 2Q 2011.
Now let me address another financial engineering vehicle used by some Big Health Care Corps.....Stock Buybacks, which reduces the number of common shares outstanding. Stock Buybacks are particularly economically attractive to Big Corps in the current very low interest rate environment, which has been clearly driven by US Government actions.
As I earlier mentioned, in the 2Q 2011, Pfizer's Reported Pretax Income declined by 6%, but its after tax Net Income increased by 5%, due to the use of a lower effective tax rate. But to pile on, Pfizer's Reported EPS increased by 10% in the 2Q 2011, due to stock buybacks. Let's see, Pfizer has magically gone from a Pretax Income decline of negative 6% to a EPS increase of a positive 10%.....that is a massive 16% favorable spread......that is what I call some snazzy financial engineering.
Amgen had a Reported Pretax Income decline of 9% in the 2Q 2011. This 9% decline was totally wiped out on an EPS basis, where EPS was the same 25 cents in both years. Amgen had 3% fewer common shares outstanding, due to stock buybacks.
Medtronic also had 3% fewer common shares outstanding in the 2011 quarter vs. the 2010 quarter.
Turning to Big Health Insurance, UnitedHealth Group's Pretax Income increased by 11% in the 2Q 2011 over the 2Q 2010. It's Net Income increased by 13%, due to a lower tax rate. But to substantially pile on, UnitedHealth Group's EPS increased by 17% in the 2Q 2011. Why? Because it had 4% fewer common shares outstanding in the 2Q 2011.
But clearly taking the cake here is WellPoint. It's Pretax Income declined by 11% in the 2Q 2011. Its Net Income declined by a lower 3% in the 2Q 2011, due to a lower tax rate, mentioned earlier. But to really pile on, WellPoint's EPS didn't decline, but actually increased by 11% in the 2Q 2011. Why? Because of its massive stock buyback program, it had 12% few common shares outstanding in the 2Q 2011.
Yeah, that's correct, Wellpoint had an incredibly favorable spread of 22% in the 2Q 2011.....a negative 11% Pretax Income decline to a positive 11% EPS increase.....now, that is taking financial engineering to a completely different level.
In the case of the Big Health Insurance Corps, where did the money come from to pay for these massive stock buybacks? From the people and businesses paying the insurance premiums.
These Big Health Insurance Corps receive the insurance premiums on the front end, and pay the claims as late as they can. This early cash inflow from these premiums is invested in their own stock, through stock buybacks.
Thus, insurance policyholders are facilitating this Big Health Insurance financial engineering by their money, being paid on the front end in insurance premiums, being used by the Big Health Insurance Corps to buy back their own common stock in order to bump up their EPS, and thus the company's stock price, and the related value of the stock options held by their top executives. Whew! It makes me mad just keying this in to the computer.
And then these Big Health Insurance Corps demand that they need substantially higher insurance premiums since they are making so little profit.
That's absurd.
Here's the Core Pretax Income percentage increases of the Big Health Insurance Corps for the first 7 years of the laissez-faire Bush/Cheney Presidency, from 2000 to 2007:
WellPoint..........+1493%
Humana............+1031%
Aetna...................932%
Coventry..............875%
UnitedHealth.........532%
Assurant...............421%
Gosh, just how greedy can you be?
And now a Big Health Insurance Corp like Wellpoint demands that its insurance premiums get significantly raised because its profits decreased by 11% in the 2Q 2011.
But that is clearly being clever by half. That 11% decline is just in their Pretax Income. Their EPS increased by 11% in the same period. The EPS growth is the relevant one to WellPoint's CEO and its top executives. A huge portion of their total compensation is stock price based, due to the massive number of stock options they are awarded each year. And the stock options they hold, plus company stock they also hold, is what they are most concerned about economically.
And the last bit of financial engineering performed mainly by Big Pharma is their financial disclosure, and clear emphasis, of the substantial amount related to the additional items that are needed to convert their GAAP Reported Net Income to their Non-GAAP Adjusted Net Income.
Included in these questionable items, that bump up these Non-GAAP Adjusted Earnings, is Amortization Expense of Intangible Assets acquired...gosh, this is what Big Drug firms are all about.....their intellectual property.
Also included is Amortization of the stepped-up Inventory purchased in an acquisition, as if the acquisition didn't occur.
In addition, all kinds of restructuring charges are also included, even though they frequently recur every year.
Further, loss on early debt retirements is included, which it should be, but the subsequent year amortization of this loss is not included.
And many companies also include stock compensation expense from stock option grants to executives and other company employees.
And there are many more.
The point is that I don't think it is wise to pay for a stock if the amount you pay for it is based on a company's Non-GAAP Adjusted Earnings, because many of the items that a Big Corp uses to convert its GAAP earnings to its Non-GAAP Adjusted Earnings are of very questionable quality.
And brokers and other financial pundits who push stocks with low P/E's, where the low P/E is based on artificially high Non-GAAP Adjusted Earnings, are not doing stock investors any favor, nor the US economy as a whole any good. That's how you get stock bubbles.
