VALUATION HIGHLIGHTS

1. Medical Devices constitute 41% of the Trefis price estimate for Abbott Labs's stock.
2. Diagnostics constitute 28% of the Trefis price estimate for Abbott Labs's stock.
3. Nutritionals constitute 20% of the Trefis price estimate for Abbott Labs's stock.

WHAT HAS CHANGED?

Coronavirus Crisis Impact On Abbott

Given that the healthcare institutions are focused on Covid-19 and other emergency patients, several types of elective surgeries have been postponed. This has significantly impacted the business of medical devices companies, including Abbott. However, the company's point-of-care devices in the U.S. have seen massive sales growth of late, due to its use in Covid-19 testing. With economies gradually opening up, Abbott will likely see significant growth in demand for the Medical Devices segment as the deferred surgeries are attended to.

Q3 2020 Performance

Abbott's Q3 revenues were up 9.6% to $8.6 billion, as a decline in Established Pharmaceuticals segment was more than offset by growth in Diagnostics, Nutritional and Medical Devices businesses. Diagnostics in particular was up 38% y-o-y. The adjusted EPS grew 17% from $0.84 in Q3 2019 to $0.98 in Q3 2020.

Recent FDA Approvals

Abbott recently 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 spinal cord to brain. Abbott could see strong sales of the new device, given there are 50 million people in the U.S. suffering from chronic pain.

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

Cephea Acquisition

Cephea is known for its technology, in which an artificial valve is delivered through a vein in the leg, without going for open-heart surgery, for the replacement of diseased mitral valves. Abbott first invested in Cephea in 2015, and it recently announced it would acquire Cephea for an undisclosed sum.

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, led by higher electrophysiology, structural heart, and Freestyle Libre sales. Electrophysiology growth is being driven by Confirm RxTM Insertable Cardiac Monitor (ICM), while structural heart is benefiting from Amplatzer (TM) Occluder and higher sales of MitraClip, which was recently approved by the U.S. FDA 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 Nutritionals Revenue: The Global Nutritionals market is growing rapidly due to increasing demand from emerging markets and Abbott is working to capture a larger share of this growth by increasing its footprint in countries like China, India, Brazil and Russia. We currently forecast the company's nutritionals revenue to grow from $7.4 billion in 2019 to nearly $9.8 billion by the end of our forecast period. However, if the company's new products take off more than expected in these markets and its revenue increases to $14 billion, there could be over 10% upside to our price estimate.
• Abbott's Gross Margin: Abbott's Gross Profit Margin increased from 53.2% in 2011 to a little over 59% in 2019. We expect the figure increase marginally 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 10% 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 main segments: Nutritionals, Diagnostic, Vascular, and Generic Pharmaceuticals. It also has a portfolio of diabetes products and medical optics. We treat this as the fifth segment within the firm.

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 used for screening for drugs of abuse, cancer, therapeutic drug monitoring, fertility, physiological diseases, and infectious diseases such as hepatitis and HIV.

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

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

SOURCES OF VALUE

Expansion in emerging markets to drive growth

Today, more than 50% 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 most populous and fastest-growing countries in the world.

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.

Margin improvements

Since 2011, the company was able to expand operating margins by more than 600 basis points. Abbott is further streamlining its operations to bring more efficiency and cost reductions in its business.

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 rising 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.