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Despite the roughly equal size of Abbott’s four major sectors, growth rates among them vary.


Abbott: 2013 a new beginning

by Zongwei Li
Feb 27, 2013


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Zongwei Li/MEDILL

Abbott continues to strengthen its international presence with a focus in fast-growing emerging markets.

Imagine a pharmaceutical company breaking away from its blockbuster product, a $9-billion-a-year seller that is still generating double-digit quarterly growth after a decade-long lead in its field. After more than a year of planning, that is exactly what Abbott Laboratories did as it stepped into 2013.

“Abbott has taken the most transformative action in its 125-year history,” said Miles D. White, chief executive officer of Abbott in a company news release announcing the separation.

On Jan. 1 the North Chicago-based pharmaceutical company completed the spin-off of its lucrative but less-predictable research-oriented drug business. The company that remains, left with a portfolio centered on nutrition, diagnostics, branded-generics and medical devices, now needs to prove to Wall Street that “less is more.”

Abbott must navigate challenges that include the need to balance a collection of segments that are growing at different rates, and it faces continued fierce competition in developed markets. The good news is investors seem to buy Abbott’s strategy, which involves walking away from the “patent cliff” and marching into emerging markets.

A new Abbott without Humira

The spin-off created a new company, AbbVie Inc. Gone with that is Abbott’s best-selling rheumatoid arthritis drug, Humira, a big-selling product that has long been the company’s financial star. Humira generated $9.27 billion of sales in 2012, a double-digit growth compared with 2011 and nearly a quarter of Abbott’s total revenue last year.

The drug’s rich profits won’t last forever. “Humira is a great product, but it will slow over time,” said Glenn Novarro, analyst with RBC Capital Markets.

His comments reflect the shadow cast over the entire pharmaceutical sector by what is known as the patent cliff, in which many blockbuster branded drugs will begin to face generic competition. Humira will lose patent protection in December 2016.

“If investors become concerned about the outlook for Humira, they may not want to give credits to the other pieces of the business that could be performing very well,” Novarro said.

By getting rid of that threat, Abbott’s executives said during this year’s J.P.Morgan Healthcare Conference, they have structured the company to have “the right portfolio businesses and geographic diversity to take advantage of favorable trends” in the industry.

Analysts have already identified some strong drivers in the new portfolio.

“Its revenue growth is largely going to come from Nutritionals and Diagnostics,” said Joanne Wuensch, analyst with BMO Capital Markets. “Coronary, endovascular and diabetes segments should also generate respectable low- to mid-single-digit sales growth,” Wuensch said in an email interview.

Since the company announced the spinoff in October 2011, shares have been climbing more than 30 percent with 52-week high of $35.29. In late-Wednesday trading, Abbott shares were up 33 cents at $34.39. At that price, the company has a price-to-earnings ratio of 9.25; that’s well below the 17.26 P/E ratio of the S&P 500.

However, short pains often accompany changes.

After removing the contributions of AbbVie, Abbott’s new picture is clearer -– but not pretty, Morningstar Inc. senior stock analyst Debbie Wang said in a recent research note. “We suspect Humira’s success may have covered a multitude of sins in the other divisions,” Wang said in the research note.

Strong nutrition. What about the rest?

So here’s the anatomy of the new Abbott.

Despite the roughly equal size of Abbott’s four major sectors – each accounting 20 to 28 percent of the company’s total sales – growth among them varies significantly.

The nutritional sector leads the groups, pulling in $6.47 billion of sales last year. That was a nearly 9 percent jump from 2011 on constant exchange basis and 16 percent of the old Abbott’s total revenue last year, second only to proprietary pharmaceuticals. Company executives believe it will continue to be the fastest grower.

Brian Yoor, Abbott’s vice president of investor relations and public affairs, broke down growth outlook in 2013 during a conference call on year-end earnings. He said the company expects nearly double digit growth in nutrition; mid- to high-single digit growth in diagnostics; low- to mid-single digit growth in generic drugs; and flat sales in medical devices.

Experts echo the optimism towards Abbott’s nutrition business, which is following what they view as obvious growth trajectory, given current trends in the health care industry.

“With the aging of the U.S. population in particular, that’s where all the money is going to be,” said Surrey Walton, associate professor of pharmacy administration at University of Illinois in Chicago, who cited the increasing demand on health care related to chronic diseases, especially diabetes.

Contrary to the strong nutritional engine, other chunks of Abbott’s new portfolio seem less attractive, especially generic drugs, which Abbott calls “established pharmaceuticals drugs,” or EPD.

In 2012 that business generated $5.12 billion of sales for Abbott, basically from international markets, slipping 4.4 percent from a year earlier. Excluding impacts from exchange rates, the company would have enjoyed a slight 2.2 percent growth in EPD sales.

“Established Pharmaceutical sales remain choppy,” said Michael Weinstein, analyst with J.P.Morgan. He now rates neutral on the company’s shares and said all but its nutritional segment missed his forecast for the fourth quarter.

Abbott knows it, and is seeking way out.

EPD sales were shaky performances in developed markets, due in large part to austerity measures in Europe. In contrast, EPD experienced double-digit growth in emerging markets centering BRIC countries.

“Our long-term strategy is to increase the breadth of our product offering by launching new-approved formulation and registering products across multiple geographies, reinforce our position in the developed markets through portfolio expansion, and accelerate and capture new sources of growth by targeting fast growing emerging market where we have strong position,” said Thomas Freyman, Abbott’s chief financial officer, during the J.P.Morgan health care conference.

Abbott expects EPD sales in emerging markets to climb to 65 percent of the segment’s total revenue this year from 60 percent in 2012, hoping the larger percentage of the portfolio will bring improving overall growth rate for EPD.

Expanding global presence

And it’s not just the generic segment that’s looking overseas. It’s hard to find a single sector, in which Abbott executives didn’t link fast-growing emerging markets with strong performance in the past and promising growth in the future.

In the fourth-quarter conference call, Abbott emphasized its general strategy to fish more in emerging markets led by Brazil, Russia and China, where it’s free of austerity measures and U.S. affordable health care reform, and where competition is less daunting.

“Health care spending in emerging markets, such as China, is accelerating, primarily driven by a rising middle class with increased disposable income,” said Jeff Windau, analyst with Edward Jones. “Abbott’s brand recognition is an advantage as customers move to higher-quality products.”

The company estimates half of its total revenue coming from fast-growing emerging markets by 2015, up from 40 percent last year.

For its fast-growing nutrition business, Abbott is investing in new products and infrastructure, including manufacturing facilities in China and India.

“We focus on seven markets including China, which is the largest pediatric nutritional market of more than $7 billion dollars today and is growing rapidly,” Freyman said.

Chinaese consumers’ confidences in domestic nutritional products was largely wiped out by a tainted milk powder scandal that killed at least six children and sickened thousands of others in 2008. The incident boosted sales in foreign-branded nutritional products, with Abbott being one of the top choices.

With all the changes at Abbott, 2013 is a new beginning for the century-old company. There’s still plenty of work to be done.

“Now that proprietary pharma products have been spun off,” said Debbie Wang in her Morningstar research note, “we hope management’s new focus on the remaining businesses will result in greater efficiency and profitability.”