No Surprises In Abbott’s Earnings, But Investors Need To Be Convinced Of Value Of Acquisitions
Abbott Labs (NYSE:ABT) recently reported its Q1 2017 earnings and, as expected, the primary trends from previous quarters persisted. The company’s nutritional business continued to struggle in China in the wake of new safety regulations, a situation which is unlikely to change in the near term, and we expect sustained pressure on nutritional sales. However, the medical devices business and the established pharma segment grew in mid single digits, which is in stark contrast to the 1% decline in the nutritional business. Abbott’s international sales from the diabetes care segment grew nearly 29% due to the continued success of FreeStyle Libre, a senson-based glucose monitoring system that eliminates the need for finger sticks. So overall, the quarter wasn’t surprising. But what comes next for Abbott? We believe the key near-term catalysts are the acquisitions of St. Jude Medical and Alere, as Abbott may still need to convince investors that these acquisitions will be accretive going forward.
Our price estimate of $46.50 for Abbott Laboratories is slightly above the market. We are reviewing our price estimate in light of the recent earnings.
Abbott’s St. Jude Medical acquisition has increased Abbott’s exposure to the commoditized section of the cardiovascular medical device market. Johnson & Johnson’s recent divestitures suggest that it has moved away from this business, likely due to pricing pressure and a lack of growth. So it remains to be seen how Abbott will manage the acquired business and justify the money spent. Additionally, the acquisition also increases Abbott’s risk of health care policy changes, as St. Jude is facing pressure from hospitals looking to cut costs.
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Meanwhile, Abbott believes in the potential of point-of-care testing devices and believes its Alere acquisition can give it an edge. However, the acquisition process has been marred by disagreements and legal battles. Alere’s revenue practices have come under scrutiny, and there are concerns that there may be unexpected costs associated with the acquisition that may eventually impact the projected synergies. Nevertheless, Abbott continues to push relentlessly in the point-of-care market, with plans to launch multiple Alinity systems this year in Europe and in the U.S. next year.
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