Expect Diagnostics And Medical Devices Business To Drive Abbott’s Near Term Earnings Growth

Abbott Labs (NYSE:ABT) has seen strong revenue growth in the recent quarters, primarily led by its Diagnostics business, reflecting the impact of the Alere acquisition, which was completed in Q4 2017. Apart from Diagnostics, the company is also seeing steady growth in other segments, including Established Pharmaceuticals and Medical Devices. While Established Pharmaceuticals is benefiting from the growth in the key emerging markets, Medical Devices is seeing strong growth in electrophysiology and structural heart. We expect these trends to continue in the near term and drive the company’s earnings growth. We have created an interactive dashboard ~ What Is The Near Term Outlook For Abbott ~ on the company’s expected performance in 2018 and 2019. You can adjust the revenue and margin drivers to see the impact on the company’s overall earnings, and price estimate.

Expect Strong Growth In Diagnostics Business

We forecast Abbott’s Diagnostics business to see a sharp rise in revenues to north of $8 billion by the end of 2019, primarily reflecting the impact of the Alere acquisition. The Rapid Diagnostics business will likely generate sales of $2 billion in 2018. Apart from Rapid Diagnostics, the company is also seeing high single digit growth in Core Laboratory, primarily due to higher demand in the international markets. These trends will likely continue in the near term, and drive the segment revenues higher. Recent advances in diagnostics have made available products with accurate and rapid results. In Vitro Diagnostic tests help in improving patient outcomes and cost savings due to earlier and more precise diagnoses. The product improvement is driving demand growth, especially in the emerging markets, which are also seeing higher spending on healthcare. Abbott has a strong presence in growing markets like China, India, and Brazil. Looking at the company’s gross margins, we forecast a slight uptick, primarily led by continued cost reductions, and merger synergies.

Established Pharmaceuticals And Medical Devices Will Likely See Mid-Single Digit Growth

Looking at Abbott’s Established Pharmaceuticals, we expect the revenue to grow in mid-single digits in 2018, primarily led by its expansion in emerging markets. The segment saw high single digit revenue growth in the nine month period ending 2018, primarily reflecting the growth in key emerging markets. The company has been focused on branded generic pharmaceutical products, and it is working towards increasing its product offerings by launching new and improved formulations. The global generic drug market has been growing at a CAGR of 8% over the past few years and stood at $244 billion in 2017, and it is expected to grow at a CAGR of over 10% in the coming years. Emerging markets, in particular, will likely see strong growth. For instance, India’s pharmaceutical industry has seen double digit growth in the recent years, and it is expected to grow from $36 billion in 2017 to $55 billion in 2020, making it one of the five top five emerging pharmaceutical markets. Given that Abbott has a strong presence in such emerging markets, it will likely continue to see steady growth in its pharmaceuticals business in the near term, and beyond.  

We forecast the Medical Devices segment revenues to grow in mid-to-high single digits, primarily be led electrophysiology, which is seeing strong demand of late, and saw revenue growth in early twenties percent in the nine month period ending September 2018. The segment sales will also be aided by new Confirm RxTM Insertable Cardiac Monitor (ICM). Apart from electrophysiology, structural heart continues to benefit from higher MitraClip sales. We expect this trend to continue in the near term, and drive the segment growth. Note that the results of Abbott’s COAPT trial demonstrated that MitraClip improves survival and clinical outcomes for patients with functional mitral regurgitation, which is the most prevalent form of this condition. The company aims to submit the data to the U.S. FDA toward the end of 2018, and will likely get an approval for an expanded indication. This should further boost the MitraClip sales in the coming quarters. 

Overall, we expect the Diagnostics business to lead near term growth for Abbott. We currently forecast adjusted earnings of $2.80 per share in 2018, and a TTM price to earnings multiple of 24x, to arrive at our price estimate of $67 for Abbott Labs, which is slightly below the current market price.

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