VALUATION HIGHLIGHTS

1. Medical Devices constitute 41% of the Trefis price estimate for Abbott Labs's stock.
2. Diagnostics constitute 29% of the Trefis price estimate for Abbott Labs's stock.
3. Nutritionals constitute 19% of the Trefis price estimate for Abbott Labs's stock.

WHAT HAS CHANGED?

ABT Stock Performance

ABT stock has seen little change, moving slightly from levels of $110 in early January 2021 to around $115 now (mid-February, 2024), vs. an increase of about 35% for the S&P 500 over this roughly 3-year period.

Overall, the performance of ABT stock with respect to the index has been lackluster. Returns for the stock were 29% in 2021, -22% in 2022, and 0% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that ABT underperformed the S&P in 2022 and 2023.

Q4 2023 Performance

Abbott's Q4 revenues were up 1.5% y-o-y to $10.2 billion, primarily led by a 12% rise in Nutrition revenue and a 17.5% rise in Medical Devices sales, which more than offset the 23% fall in Diagnostics revenues due to lower demand for COVID-19 testing. The adjusted EPS rose 15.5% to $1.19 in Q4 2023 from $1.03 in Q4 2022.

Coronavirus Crisis Impact On Abbott

Given that the healthcare institutions were focused on Covid-19 and other emergency cases, several types of elective surgeries were postponed in 2020, impacting Abbott's medical device sales.

However, the company's Diagnostics business in the U.S. saw a massive 2x sales growth between 2019 and 2022 due to Covid-19 testing. Now the pandemic is behind us, Abbott is seeing a slowdown in demand for the Diagnostics business.

FDA Approvals

FreeStyle Libre 3, Abbott's latest continuous glucose monitoring device, secured FDA clearance in May 2022.

Abbott secured the U.S. FDA approval for its Portico with FlexNav transcatheter aortic valve replacement (TAVR) system in Sep 2021. This system is used to treat people with severe aortic stenosis who are at high risk for open-heart surgery.

Abbott, in 2019, secured the U.S. FDA approval for its Proclaim XR neuro-stimulation system, which uses low doses of mild electrical pulses to change pain signals traveling from the spinal cord to the brain. Abbott could see strong sales of the new device, given that 50 million people in the U.S. suffer from chronic pain.

Also, the U.S. FDA approved Abbott's ARCHITECT STAT High Sensitivity Troponin-I blood test, which aims to identify heart attacks hours earlier than previous methods.

Medical Devices Business Doing Well

The Medical Devices business for Abbott is doing well, primarily led by increased adoption of its HeartMate device. The segment has seen steady growth in the recent past (barring 2020 due to the pandemic), led by higher electrophysiology, structural heart, and Freestyle Libre sales. Electrophysiology growth is being driven by Confirm RxTM Insertable Cardiac Monitor (ICM), while the structural heart is benefiting from Amplatzer (TM) Occluder and higher sales of MitraClip, which the U.S. FDA has approved for the treatment of heart failure in patients with clinically significant secondary mitral regurgitation.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are some key drivers of Abbott's value that present opportunities for upside or downside to the current Trefis price estimate:

• Abbott's Diagnostics Revenue: Abbott's Diagnostics sales saw a significant 2x rise to $16.6 billion in 2022, compared to $7.7 billion in 2019. This can be attributed to a very high demand for Covid-19 testing. However, now that the worst of the pandemic appears to be behind us, the demand for Covid-19 testing is expected to decline in the near term.
  We forecast Abbott's Diagnostics revenue to decline to $12 billion in 2023 but grow thereafter to over $16 billion by the end of our review period in 2029.
  However, if the company fails to see a recovery in Diagnostics sales post-pandemic and the segment revenue falls to $10 billion by the end of our review period, it would result in a 10% downside to our price estimate.


• Abbott's Gross Margin: Abbott's Gross Profit Margin decreased from 59% in 2017 to around 57% in 2022. We expect the figure to increase to 60% by the end of our forecast period.
  However, if intense competition from new entrants forces the company to reduce its prices and the company's profit margin declines by 300 basis points, there could be over a 15% downside to our price estimate.
  

BUSINESS SUMMARY

Established in 1888, Abbott Labs is a diversified healthcare conglomerate with a global presence. The firm operates in four primary segments: Nutritional Products, Diagnostic, Medical Devices, and Established Pharmaceuticals.

The nutritional segment includes pediatric, adult, healthy living, and sports nutrition products such as infant formulas, snack bars, and meal replacement shakes.

The diagnostics segment includes systems and tests for screening for drug abuse, cancer, therapeutic drug monitoring, fertility, physiological diseases, and infectious diseases such as hepatitis and HIV.

The medical devices segment includes minimally invasive devices for heart diseases, strokes, carotid artery diseases, and other severe vascular conditions.

The established pharmaceuticals segment includes a broad line of generic drugs manufactured worldwide and sold outside the U.S.

SOURCES OF VALUE

Expansion in emerging markets to drive growth

Today, more than 35% of Abbott's sales come from emerging markets. Abbott's management has reiterated its intention to tap these high-potential emerging markets. In recent years, Abbott has made significant moves to expand its presence and product portfolio in many of the world's most populous and fastest-growing countries.

Strong brand recognition and continued investment in product pipeline

Abbott is a market leader in several product categories and continues to leverage its brand to launch new products. The number of new products launched annually has increased five-fold since 2008 on the back of the company's investments in R&D (as well as acquisitions). Both clinical trials and patent applications have increased 10-fold during the same period.

KEY TRENDS

Rapidly growing emerging markets

Per capita income levels in many emerging markets are rising rapidly, which provides an immense opportunity for growth in these markets. Also, new studies and increased access to information have led to increasing health consciousness in these markets. However, some emerging markets have patent law issues, which could ultimately limit the growth potential.

Aging population in the developed world

The average age of the adult population across the developed world is increasing. As the population gets older, demand for adult nutrition products and diagnostics increases. This should positively impact Abbott's revenue.