Abbott Raises Full Year Earnings Guidance On Strong Q2 Results

Healthcare giant Abbott Laboratories (NYSE:ABT) reported a strong set of second quarter 2014 results on Wednesday, July 16. The company’s operational sales increased 3% over the prior year quarter to $5.55 billion, beating analysts’ estimates of $5.52 billion compiled by Thomson Reuters. Net income increased by 14.6% to $829 million or $0.54 per share, which was higher than the company’s own guidance of $0.50-$0.52 for the quarter. These earnings exclude charges for certain items such as amortization, cost-cutting measures and repatriation of ex-U.S. earnings, amounting to $369 million or $0.24 per share. Based on its performance in the quarter, Abbott raised its full year 2014 EPS (earnings per share) guidance from $2.16-$2.26 to $2.19-$2.29. ^[1]

The Diagnostics division was again the star performer for Abbott, as its operational sales increased 5.5% year-over-year (y-o-y) to about $1.2 billion driven by robust growth in Core Laboratory sales in the U.S. and Point of Care sales in international markets. Nutritionals, the company’s largest segment, seems to be finally recovering from the supplier recall that was initiated in international markets in August of last year. It reported an increase of more than 3% in operational sales, excluding a 1.5% negative impact of foreign exchange. Established Pharmaceuticals, which represents the company’s generic drug business, also witnessed a turnaround with a 3% y-o-y increase in sales, driven by robust growth in emerging markets. Vascular and Medical Optics reported operational sales growth of 1.4% and 12.2%, respectively, while Diabetes Care sales declined by over 10%. On the cost side, Abbott’s adjusted gross margin improved 30 basis points over the prior year quarter to 55.3%, driven by better Diagnostics gross margins and lower product costs in the Vascular business owing to the resolution of an intellectual property matter.

The company expects operational sales to grow in mid-single digits in the third quarter, with gross margins remaining steady around 55%. Its EPS forecast for the next quarter stands at $0.59 to $0.61, excluding a negative impact of certain specified items amounting to about $0.27 per share. We have a price estimate of $40 for Abbott Labs, which is roughly in line with the current market price. We are in the process of updating our model in light of the recent earnings release.

See our full analysis for Abbott Labs

Steady Growth In Diagnostics

Diagnostics has been Abbott’s most consistent growth driver, delivering high single-digit operational sales growth for the past three years. Worldwide sales in this segment grew by 5.5% in Q2 on a constant currency basis, driven by Core Laboratory (6.8%) and Point of Care (3.8%). In the Core Laboratory diagnostic business, sales in the U.S. market grew by over 11% y-o-y driven by greater acceptance of Abbott’s integrated and flexible solutions for large scale laboratory testing. International sales grew by 5.8% on the back of strong demand in emerging markets. Contrary to its robust performance in the past year, Molecular Diagnostics sales decreased by about 3% in the quarter, but the company expects the business to bounce back to positive growth in the second half of the year on the back of some expected new orders.

We expect Abbott’s Diagnostics sales to continue increasing over the next few years as it launches innovative Diagnostic products. In the Core laboratory diagnostics, Abbott plans to broaden its ARCHITECT assay menu and expand its presence in both developed as well as emerging markets. ^[1]

Nutritionals Gaining Traction

Nutritionals is Abbott’s largest business division, contributing slightly over 30% of the company’s value, according to our estimates. It has been under pressure since August of last year when regulators in China, Vietnam and Saudi Arabia asked the company to recall some of its baby formula products on concerns that they contained bacteria that cause food poisoning. ^{[2] [3] [4]} Although no health issues were detected during later investigations, the recalls caused significant disruption to the company’s sales in these countries. Abbott estimates that the August supplier recall impacted its global nutritional operational sales by about $40 million in Q2 2014.

The company undertook several new initiatives to turn around the business in the past couple of quarters, and they seem to be bearing fruit. Global Pediatric nutrition sales grew about 1% on a constant currency basis this quarter to $963 million, with about 60% of sales generated in international markets. In addition to the Similac Simple Pack launched late last year, Abbott introduced a new infant formula, Elova, in China in the last quarter.

In the adult nutrition business, sales increased 5.7% y-o-y globally, including 10% in international markets in the second quarter. Sales were driven by strong performance of the company’s flagship product Ensure and robust uptake in emerging markets. The company expects sales to further improve going forward as it launches new products in existing markets and expands its presence in emerging economies such as India, China, Russia and Brazil. It recently launched a new product, Enovo, in Japan, which is its largest adult nutrition market outside the U.S.

Generic Pharma Business Set For Growth

Established Pharmaceuticals sales have seen a low-to-mid single-digit decline in the last few years, owing to pricing pressure in developed markets such as Europe and Japan. The company announced several deals in the last quarter to streamline this business and focus on high growth areas. In Q2 2014, sales grew 2.3% on a constant currency basis, driven by almost 10% growth in emerging markets, partially offset by 4.7% decline in developed regions.

Abbott sold off the developed market assets of its generic drug business to specialty pharma major Mylan (NASDAQ:MYL) last week. The deal, expected to close in the first quarter of 2015, is in line with the company’s strategy of focusing on emerging markets to revive growth in the business. By divesting its generic pharma business in established markets (which generated sales of about $2 billion in 2013), the company has re-positioned itself from a player in the low-margin, low-growth generic drug market in developed regions to one focused on the high-growth opportunity in emerging markets such as India, China and Latin America.

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1. Abbott’s CEO Discusses Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, July 16 2014 [↩] [↩]
2. China Asks Abbott to Recall Some Formula Products, WSJ, August 5, 2013 [↩]
3. Vietnam recalls Abbott milk over contamination suspicion, Tuoi Tre News, August 5, 2013 [↩]
4. Abbott recalls 9 batches of baby formula in Saudi Arabia, CNTV, August 7, 2013 [↩]