Scenarios That Can Add To Abbott’s Value

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ABT: Abbott Laboratories logo
ABT
Abbott Laboratories

We expect a significant upside to our price estimate for healthcare major Abbott (NYSE: ABT), if it succeeds in getting the FDA approval for commercialization of its fully dissolving heart stent, Absorb, in the U.S. by the end of 2016. Additionally, there could be additional upside if the company is able to expand its foothold in emerging markets.  Two specific drivers include the increasing adoption of its I-Stat of-care diagnostics system and continuing growth  of the Nutritional segment. Below, we detail these scenarios and discuss their impact on Abbott’s value estimate.

Our price estimate of $45 for Abbott Laboratories is closer to the current market price.

See our complete analysis for Abbott Laboratories here

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If Abbott Gets The FDA Approval For Absorb:  10% upside

A couple of months back, Abbott reported positive results for its fully dissolving heart stent, Absorb, which it will now leverage to get FDA approval in the U.S. [1] Unlike a metallic stent that remains permanently in the Coronary artery after opening a blockage, Abbott’s Absorb stent dissolves completely, leaving the vessel in the natural state after it is fully restored. A fully restored vessel has the potential to flex and dilate in response to the person’s lifestyle. Absorb, being the first of its kind in the U.S., is expected to attract significant adoption in the U.S. market after the FDA approval. Also, Abbott is in the process of getting approval in other bigger coronary stent markets, such as China, Japan etc., which leaves significant room for the company to expand its sales in the bioresorbable stent market, which is projected to account for 17% of stent sales by 2021, up from less than 2% in 2014. [2].

If Abbott is successful in getting FDA approval in the U.S and other key markets by 2016, the company can reverse the declining trend in its market share in the vascular segment, which constitutes 15% of its value as per our estimates. We currently forecast the company’s market share in vascular segment to decline from 22% in 2015 to 18% over the next six-seven years. However, successful commercialization of Absorb can push the market share to around 24% instead.

Given that bioresorbable stents have twice the price of a conventional drug eluting stent, owing to the product’s benefits, Abbott stands a strong chance of improving its gross margins as well. ((Leaders emerge in the race for the first U.S. bioresorbable stent, FierceMedicalDevices, July 31, 2014)) By commanding a pricing premium for Absorb, Abbott can increase its gross margins by 1.5-2.0 percentage points over our current projections in the long run. The combined effect of the aforementioned factors translates into a 10% upside to our price estimate for Abbott.

Targeting Emerging Markets To Improve Nutritional And Diagnostic Market Share: 10% upside

Emerging markets have delivered strong sales growth for Abbott’s nutritional and diagnostic segment in the past. Developing markets such as China, India, Russia and Brazil continue to grow at a faster rate than most developed economies, and have a rapidly growing middle class population. The median income per household is expected to grow by 90%  in real terms in India and China by 2030. As the middle class continues to expand, people are likely to increase their discretionary spending on nutritional products (such as food supplements) and point-of-care diagnostics. We can expect Abbott to be one of the biggest beneficiaries of this trend in the near future due to its focus on new products and the fact that the Nutritionals and Diagnostics businesses contribute more than 50% to its value.

We currently forecast Abbott’s market share in diagnostics to stabilize at 8% by the end of our forecast period. (We have calculated market share based on the company’s reported revenues and estimated market size.) However, if the company expands its presence in key emerging markets in the Point-Of-Care business by aggressively commercializing its I-Stat system in the region, it can expand its market share in diagnostics by up to 2 percentage points in the long run.

In the Nutritional segment, we currently forecast Abbott’s market share to decline from 2% in 2014 to 1.75% over the next six-seven years due to increasing competition. However, if the company expands its reach in the emerging markets by targeting the growing need of nutrition in the middle class and does not fall behind its competitors, it can increase its market share by at least 75 basis points (long run) in the Nutritional segment. With an improvement in market share in both nutritional and diagnostic segment, there can be about 5% upside to the company’s value.

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Notes:
  1. Abbott Announces Positive Clinical Results of Absorb™, prnewswire, Oct 12 2015 []
  2. U.S. to vie with India for top bioabsorbable stent market after FDA approval, FierceMedicalDevices, June 24, 2015 []