Abbott Labs (NYSE:ABT) recently reported its Q2 results, which were mostly in line with our expectations. To see our full analysis of Abbott’s Q2 earnings, please refer to our note Abbott Meets Expectations as Humira, Nutritionals Drive Growth. In the wake of earnings and recent developments, we have slightly increased our price estimate for Abbott Labs to $67 from $66, which is about in line with current market price. Below we discuss the major changes made in our model.
Humira Continues to Perform
In the pharmaceuticals segment, we have increased our near term sales for the company’s largest selling drug Humira, which continued to dominate the rheumatoid arthritis market. The revision is due to the recent FDA’s negative observations and and further delay in approval for Pfizer’s oral pill Tofacitinib. The FDA raised safety concerns about Tofacitinib in May 2012 relating to infections associated with the drug’s use in RA patients. Now, it is expected only to be used in patients who do not respond to any other RA drugs, which are either injected or infused and include Abbott’s Humira, JNJ and Merck’s Remicade, and Amgen and Pfizer’s Enbrel.
We have lowered our sales forecast for the HIV drug Kaletra due to greater than expected recent weakness in the drug’s sales. In addition, we have reduced our sales forecast for AndroGel, Synagis and other drugs, which are mainly generics sold in international markets. This was mainly due to the unfavorable currency outlook (a strong U.S. dollar). Due to these factors, the pharmaceutical division’s overall contribution to the company’s value has been reduced to 54% from the earlier 59%, according to Trefis estimates.
We believe that, in the short term, Abbott might be better off than most of its major competitors as no major patent expiry is due in the near term except for Tricor, which went off-patent in July 2012. 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.
Nutritionals Division Bounces Back
After facing a setback following the voluntary recall of infant formula Similac in 2010, the company seems to be gaining consumer confidence and market share. The company’s pediatric nutritional business registered double digit growth in Q2 2012, largely due to Similac and other pediatric nutritional products like PediaSure, Ensure and Glucerna. We have, therefore, increased our sales forecast for Nutritionals.
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 the long term. These factors have led to the Nutritionals division jumping to the second position in terms of its contribution to the company’s value, about 17% according to Trefis estimates.
No Major Changes in Vascular and Diagnostic Business
While we have slightly lowered our sales forecast for the Vascular and Diagnostics division, this is mainly due to the currency outlook rather than weak product sales. The company has gotten CE approval for its next-generation Drug Eluting Stent (DES) XIENCE Xpedition and expects to launch the product in Europe this month and in the U.S. in 2013. Further, the company’s XIENCE PRIME received approval in Japan earlier this year. These factors should drive growth for the company’s vascular franchise.
Focused on Business Split, No Major Upside Without a Strong Pipeline
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 changes in product patents and should bring about more stability in its cash flows.
We, however, believe that the company’s current valuation already reflects all these factors after appreciating nearly 30% in the last year. The company doesn’t have a very strong phase III pipeline with any potential blockbuster drugs, which limits its growth potential and as such we don’t see major upside to the company’s current market price.
We have changed our model structure for the pharmaceutical segment to make revenue a direct driver for each drug as opposed to segment market share. Users can now directly modify a revenue forecast to see its impact on the company’s price estimate. We have also stripped out R&D expenses from EBITDA to show it as a separate driver.