Abbott Reports Solid Q4 Results On Growth Across Divisions

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Abbott Laboratories

Healthcare major Abbott Laboratories (NYSE:ABT) reported a strong set of fourth quarter 2014 results on Thursday, January 29. The company’s operational sales from continuing operations increased 10.2% over the prior year quarter to $5.4 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 $522 million of sales in the quarter. Net earnings, including discontinued operations, increased by 18.6% to about $1.1 billion or $0.71 per share, which was higher than the Thomson Reuters-compiled analysts estimate of $0.68 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 $438 million or $0.30 per share. For full year 2014, Abbott reported adjusted earnings per share (EPS) of $2.28, about 13.5% above the prior year figure. This includes $1.98 from continuing operations and $0.30 from discontinued operations. ((Abbott’s CEO Discusses Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, Jan 29 2015)) [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 2013. Following last quarter’s double-digit sales growth, it reported an increase of 8.9% in operational sales, excluding a 2.9% negative impact of foreign exchange. Established Pharmaceuticals, excluding the developed market business to be sold to Mylan, reported an increase of about 35.4% in operational sales, driven by a solid performance in emerging markets and significant sales contribution of the recently acquired CFR Pharmaceuticals. The Diagnostics division maintained its consistent performance, as operational sales increased 8.6% year-over-year (y-o-y) to over $1.2 billion driven by robust growth in Core Laboratory and Point of Care sales in the U.S. as well as in international markets. On the cost side, Abbott’s adjusted gross margin improved over the prior year quarter to 56.9%, driven by better product margins as well as distribution margins.

The company expects operational sales to grow in high single digits in 2015, with adjusted gross margins remaining steady around 57%. Its EPS forecast for the next year stands at $2.10 to $2.20, excluding contribution from discontinued operations. We have a price estimate of $42 for Abbott Labs, which is slightly below the current market price.

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Nutritionals Continues Strong Recovery

Nutritionals is Abbott’s largest division, contributing slightly over 30% of the company’s value, according to our estimates. It had been under pressure since August 2013 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 are now starting to bear 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 the fourth quarter, this increased to 13.8% with international pediatric sales growing over 24%. Growth was driven by strong uptake of the company’s new products in China- Eleva and Similac Qinti.

In the adult nutrition business, operational sales increased about 3% y-o-y globally, including 12.8% in international markets in the fourth 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 from new products in existing markets and expands its presence in emerging economies such as India, China, Russia and Brazil.

Generic Pharma Business Shows Exceptional 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 Q1 2014 to streamline this business and focus on high growth areas. In July last year, Abbott sold off the developed market assets of its generic drug business to Mylan. The deal, expected to close in the first quarter this year, 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 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 over 35% y-o-y to $922 million in the fourth quarter last year. Key emerging markets including India, China, Russia and Brazil contributed about 65% of total sales, down from 80% in the previous quarter. 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 8.6% in Q4 on a constant currency basis, driven by Core Laboratory (8.6%) and Point of Care (14.2%). In the Core Laboratory diagnostic business, sales in the U.S. grew 9% and international sales grew by about 8.5% y-o-y driven by strong demand in emerging markets. After returning to positive growth in the third quarter on the back of new orders, Molecular Diagnostics sales grew by 4.4% in Q4 2014.

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 and emerging markets. It received the FDA’s approval for an automated galectin-3 test for use on its ARCHITECT platform in Q4 2014.

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Notes:
  1. Press Release, Abbott, Jan 29 2015 []
  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 []