Abbott Reports Solid Q3 Results On Nutritionals Recovery, Emerging Markets

+12.89%
Upside
112
Market
127
Trefis
ABT: Abbott Laboratories logo
ABT
Abbott Laboratories

Healthcare major Abbott Laboratories (NYSE:ABT) reported a strong set of third quarter 2014 results on Wednesday, October 22. The company’s sales from continuing operations increased 6.7% over the prior year quarter to $5.1 billion. Abbott’s branded generic drug business in developed markets is in the process of being acquired by Mylan (NASDAQ:MYL) and therefore has been reported as discontinued operations in the financial report. Discontinued operations registered $519 million of sales in the quarter. Net earnings, including discontinued operations, increased by over 8% to $945 million or $0.62 per share, which was higher than the company’s own guidance of $0.59-$0.61 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 $380 million or $0.25 per share. Based on its performance in the quarter, Abbott raised the mid-point of its full year 2014 EPS (earnings per share) guidance from $2.19-$2.29 to $2.25-$2.27. [1]

Nutritionals, the company’s largest segment, seems to have finally recovered from the supplier recall that was initiated in international markets in August of last year. It reported an increase of more than 10% in operational sales, excluding a 0.8% negative impact of foreign exchange. Established Pharmaceuticals, excluding the developed market business to be sold to Mylan, reported an increase of about 13% in operational sales, driven by robust performance in key emerging markets such as India, China and Brazil. The Diagnostics division maintained its consistent performance, as operational sales increased 6.2% year-over-year (y-o-y) to about $1.2 billion driven by robust growth in Core Laboratory and Point of Care sales in international markets. Medical Optics reported operational sales growth of 9%, while Vascular and Diabetes Care sales declined by over 2% and 5%, respectively. On the cost side, Abbott’s adjusted gross margin improved 70 basis points over the prior year quarter to 55.4%, driven by better product margins as well as distribution margins.

The company expects operational sales to grow in double digits in the fourth quarter, with gross margins remaining steady around 55.5%. Its EPS forecast for the next quarter stands at $0.68 to $0.70, excluding a negative impact of certain specified items amounting to about $0.36 per share. We have a price estimate of $42 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.

Relevant Articles
  1. What’s Next For Abbott Stock After A 6% Rise This Year?
  2. Is Abbott Stock Undervalued At $95?
  3. Which Is A Better Pick – Abbott Stock Or Amgen?
  4. Is Abbott Stock A Better Healthcare Pick Over Thermo Fisher Scientific?
  5. Lower Testing Demand To Weigh On Abbott’s Q2?
  6. Will Abbott Stock Rebound To Its 2022 Highs?

See our full analysis for Abbott Labs

Robust Recovery in Nutritionals

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.

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 8.6% on a constant currency basis in the third 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, Eleva, in China.

In the adult nutrition business, sales increased 11.8% y-o-y globally, including 21% in international markets in the third quarter. Sales were driven by strong performance from the company’s flagship product Ensure and robust uptake in international 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.

Generic Pharma Business Shows Solid 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 first quarter to streamline this business and focus on high growth areas. In July this year, Abbott sold off the developed market assets of its generic drug business to Mylan. 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.

Operational sales in the division, excluding the developed market business, grew almost 13% y-o-y to $771 million in the third quarter. Key emerging markets including India, China, Russia and Brazil contributed about 80% of total sales. Going forward, the company expects sales to grow in high-single digits with sales from the recently acquired CFR Pharmaceuticals expected to grow in double digits.

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 6.2% in Q3 on a constant currency basis, driven by Core Laboratory (6.8%) and Point of Care (6.7%). In the Core Laboratory diagnostic business, international sales grew by about 8.3% y-o-y driven by strong demand in emerging markets. After declining by 3% in Q2 2014, Molecular Diagnostics sales returned to positive growth in the third quarter 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.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Abbott’s CEO Discusses Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Oct 22 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 []