Nutritionals Growth Abroad Fuels Abbott’s Results

Abbott Laboratories (NYSE:ABT) announced on April 17th that its total sales for the first quarter of 2013 were almost $5.4 billion, up 1.8% from the same period last year. As mentioned in our pre-earnings analysis, the primary driver for this growth was the company’s nutritional division, which benefited from an over 14% revenue growth in the emerging markets – especially China. The company’s diagnostics division’s revenue also grew by 4.4% y-o-y on the back of sales growth in Core Laboratory and Point of Care Diagnostics products. The only area of concern for the company was its medical devices division, where revenues declined y-o-y by 4.6%.

The earnings result of the company is generally in line with our expectations, and going forward, we expect the nutritional business to continue growing on the back of increasing demand in emerging markets. Another reason why the sale of nutritional products is also going to be strong in the future is that the company continues to leverage its strong brands and launch new products.

Abbott’s stock currently trades at around $37 per share. We will soon release an updated model for the company on our website and revise our price estimate for the same.

See our full analysis for Abbott

Nutritionals Continue To Drive Sales

As mentioned in our pre-earnings article, the nutritionals division accounts for nearly 30% of the value in Abbott’s stock and its revenue has been growing at a healthy pace of 7-8% over the last couple of years. The current quarter’s revenue growth of 8.7% is actually higher than that average and is hence positive new for the company.

Driving this growth are Abbott’s pediatric nutritional products such as Similac and PediaSure. These products account for 58% of Abbott’s total 1Q13 nutritional sales of around $1.7 billion and the worldwide sales of these products increased over 13% y-o-y in this quarter — primarily due to a strong demand pull from emerging markets. The company continues to expand geographically in these markets and is also benefiting from an uptake in newly launched products.

At the same time, the company’s adult nutritionals business witnessed around 3% of y-o-y revenue growth in this quarter and is benefiting from a “continued expansion of the adult nutrition market where Abbott is the global leader.” ^[1]

Diagnostics Division Is Also Growing Well

Abbott’s diagnostics division reported a 4.4% y-o-y increase in its worldwide sales and the major highlights for this division were (1) Point of Care Diagnostics, which grew around 27% in the U.S. due to continued uptake of new assays and continued market penetration, and (2) core laboratory diagnostics products, which grew by 5.9% on an operational basis on the back of a strong performance in key emerging markets, such as China, Russia and Brazil.

Going forward, we expect the sales in this division to continue growing as new products from the company hit the markets. Abbott is currently “developing six new platforms across Core Laboratory, Molecular and Point of Care that are designed to improve service to customers, enhance laboratory productivity, improve efficiency and reduce costs”. ^[1]

However, Medical Devices Are Declining

Abbott’s worldwide medical devices sales decreased by 3% on an operational basis as the largest segment within this division, Vascular products, was “impacted by pricing pressure and a decline in procedures due to market conditions”, according to the company’s press release. ^[1] An expected decline of certain royalty revenues further affected these revenues.

However, there were signs of hope within this segment as the company’s new product introductions like the XIENCE Xpedition (which is a drug-eluting stent) and Absorb (claimed to be the world’s first and only coronary bioresorbable vascular scaffold) are seeing strong demand in emerging markets.

While we expect pricing pressures and market conditions to continue pushing profits for this segment downwards in the near term, there is a likelihood that once market conditions improve a lot of pent up demand for surgical procedures will be released and Abbott’s vascular products sales in the U.S. will improve.

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1. SEC Filings, Abbott Labs, April 17, 2013 [↩] [↩] [↩]