Abbott Labs (NYSE:ABT) reported its Q2 results this Wednesday, which were in line with our expectations. Sales grew by 2% y-o-y to about $9.8 billion on back of growth in its pediatric nutritionals business and key drugs including Humira, AndroGel and Creon even as strong U.S. dollar limited the growth in sales.  As expected, improvement in margins due to improved efficiencies across several operating divisions fueled operating earnings to $2.10 billion, 18% higher y-o-y. Investors may cheer the fact that the company has maintained its 2012 earnings per share (EPS) guidance between $5.00 to $5.10 despite adverse currency movements.
We are awaiting company’s 1o-k filing before we revise our price estimate for Abbott Labs to reflect recent developments.
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Growth Driven by Humira and Nutritionals
After facing a setback following voluntary recall of infant formula Similac in 2010, the company seems to be gaining consumer confidence. The company’s pediatric nutritional registered double digits growth in Q2 2012, largely due to Similac and other pediatric nutritional products like PediaSure, Ensure and Glucerna. Sales from total nutritional segment increased about 6% due to relatively under-performance by adult nutritional.
In the pharmaceuticals segment, sales increased as a result of strong performance by key proprietary drugs including Humira, AndroGel and Creon. Humira continues to dominate the rheumatoid arthritis market as the drug’s sales grew 16.5% to $2.3 billion and contributed nearly 20% to overall sales. Loss of revenues from cholesterol drug Trilipix/ TriCor and HIV drug Kaletra, however, offset some of the gains. Sales of established pharmaceuticals, which are mainly generic drugs sold in international market, also increased if one excludes the currency impact.
While the sales in Vascular division declined on a reported basis due to certain royalty and supply arrangement revenues (including Promus) and currency impact, global sales increased excluding these factors.
The company’s focus on developing new products was evidenced by the fact that its overall R&D expense was nearly 10% of total sales in Q2.
Focused on Pipeline, Emerging Markets and Pharma Business Split
While in the short term, Abbott might have to encounter headwinds as Tricor goes off-patent in the July 2012, while other drugs regulator Niaspan and Kaletra have been losing respective market share rapidly. Another worry is the growing competition for its blockbuster drug Humira.
We, however, are bullish on the company’s outlook. Abbott has been very proactive with respect to its growth strategy in pharmaceutical, focusing primarily on pipeline development. Additionally, in order to avoid the sudden impact of generic competition following patent expiries, Abbott has been trying to reduce its dependence on individual products. As a result, it committed to several purchases in the past like Solvay and Piramal to diversify its portfolio of offerings and expand into emerging markets.
On a similar note, the company recently opened a nutritional R&D center in India and struck an R&D deal with a Russian group to give a boost to its nutritional business. The company’s strategy to focus on fast growing emerging markets should pay off in long term.
In Vascular business, the company is developing next-generation Drug Eluting Stent (DES) XIENCE Xpedition, expected to launch in Europe this year and in the U.S. in 2013. Further, the company’s XIENCE PRIME received approval in Japan earlier this year. These factors should drive the growth for the company’s vascular franchise.
Separately, Abbott will complete its spin-off by the end of 2012 and create two publicly traded companies. This will make the old Abbott immune to the changes in product patents and its sudden impacts, and will bring about more stability in its cash flows.Notes: