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Abbott Labs (NYSE:ABT) is a diversified healthcare conglomerate with a global presence. The company spun off its proprietary pharmaceutical business as Abbvie (NYSE:ABBV) earlier this year and now operates in four main segments: Nutritionals, Diagnostic, Vascular and Generic Pharmaceuticals. In addition to the above mentioned segments, the company also has a portfolio of diabetes and medical optics products.
With $6.5 billion in 2012 sales, the Nutritionals business is now the biggest division within the company and accounts for over 30% of its overall revenue and just over 30% of the company’s value according to our estimates. It is also one of the fastest growing segments and accounts for around one-third of the value in the company according to our estimates. In this article, we discuss this business segment and the major drivers of its revenue.
The Nutritionals Market Is Large And Growing
Nutritionals refers to products that provide health and medical benefits including the prevention and treatment of disease. They can be further classified mainly into dietary supplements, functional foods, and clinical / medical foods. Dietary supplements are concentrated in liquid or capsule form and are available over the counter (OTC). Functional foods are OTC enriched foods close to their natural state while clinical / medical foods are administered under the supervision of a physician.
This market is large and growing rapidly. According to data published by the Nutrition Business Journal, the global nutrition industry is currently valued to be around $320 billion and is set to grow in the coming years in the developing as well as the developed markets due to the following reasons: 
Improving socioeconomic conditions in emerging markets: As the middle class continues to grow in markets such as China and India, a greater number of people can afford discretionary goods and lifestyle products. This is likely to increase the expenditure on supplements and other nutritional products.
Aging population worldwide: Throughout the world and especially in the developed countries, the average age of the population is increasing rapidly. By 2050, the number of people who are older than 50 years is expected to top 2 billion and account for 40% of the total global population, according to Abbott’s management.((Abbott Laboratories’ Management Presents at Deutsche Bank 38th Annual Health Care Conference, SeekingAlpha, May 29 2013)) As people live longer, the incidence of age related diseases is likely to increase and this is likely to boost the demand for adult nutritional products.
We expect the global nutritionals market to continue growing steadily at 3-4% for the next several years and reach a size of $400 billion by the end of this decade.
Abbott Is A Leader In This Market
Abbott is a market leader in the nutritionals segment and holds the number one or number two position in 25 countries around the world. 
Specifically within the U.S., Abbott is the market leader in the pediatric nutritionals market with its flagship brands: Similac for infant nutrition and PediaSure for toddlers and children. These brands also lead their respective segments in several other countries. 
The company also leads the adult nutritionals market worldwide with brands such as Ensure and Glucerna. Ensure comprises liquid supplements that provide nutrition to older people and to patients recovering from illnesses, injuries and surgeries. Glucerna is a therapeutic nutrition brand aimed at providing nutrition to people with diabetes. 
The Company’s Strategy Could Boost It’s Leadership In This Market
As part of its growth strategy in the nutritionals business, Abbott is increasingly focusing on launching new and innovative products, and on geographically expanding in high growth markets.
New and innovative products: Abbott continues to invest generously in developing new products that span the nutritional needs of infants as well as adults. The company’s investments in R&D for nutritional products have already resulted in a 5x increase in the number of new products launched annually since 2008 and a 10x increase in both clinical trials and patent applications. Should any of these new products make inroads in their respective segments, it would result in additional market share gains for the company.
The likelihood of these products succeeding is especially high because the company has been focusing on meeting the local needs and preferences of its customers in new markets by expanding its R&D footprint in emerging markets like India, China and Singapore.
Geographical expansion: Emerging markets are likely to drive significant growth in the nutritional market and Abbott is working hard to capture a larger share of this market. The company opened six manufacturing and R&D facilities in its nutrition and pharmaceuticals businesses in the Asia Pacific region during the past three years, including three in China. The company is also rapidly expanding its footprint in China with plans to more than double its city presence in China by 2015 through expansion activities. In Vietnam, its largest nutrition business outside of the U.S. and China, the company acquired its distributor in 2012. This brings Abbott closer to its customers and could enhance its retail point of sales capabilities in the country.
We believe that the company should be able to leverage its global presence and strong brands to increase its penetration in emerging markets. The company’s nutritional business accounts for a little over 30% of our nearly $38 price estimate.Notes: