A New and Improved Abbott?


The "new" Abbott announced fourth-quarter earnings on Wednesday. This marked the first time that the company reported results after spinning off AbbVie , although 2012 results still include the combined financial numbers. Is Abbott now new and improved -- or just new? Let's find out.

What improved
Two business categories showed the most improvement: point-of-care diagnostics and nutritionals. Net sales for point-of-care diagnostics jumped 15.7% in 2012 compared to 2011. However, the $348 million in revenue garnered makes up only a small fraction of Abbott's total sales.

Nutritionals net sales grew 7.7% for all of 2012 and 10.2% for the fourth quarter compared to the same periods in the prior year. With nearly $6.5 billion in revenue, the business segment is probably the most important element to the new Abbott's continued success.

Growth in diluted earnings per share for the full year looked good, with a 23.6% gain for 2012 versus 2011. The company as a whole showed some improvement in total sales, but not enough to get anyone excited. Sales were up by 2.6% for the full year and 4.4% for the quarter as compared to 2011.

What didn't improve
Quarterly earnings look bad at first glance. Abbott reported diluted earnings per share of $0.66, down by 35% from the fourth quarter of 2011. However, the seemingly negative performance stemmed from one-time events, particularly debt reduction of $1.35 billion and $265 million for separation costs. Excluding these and other special items, Abbott's fourth-quarter earnings were actually up by 5.5%.

The company's vascular business unit continued to be a drag on revenue. Vascular sales fell around 8% for the quarter and full year. The primary culprit was U.S. sales, which dropped by 24.6% in the fourth quarter year-on-year and 20.7% for all of 2012.

Established pharmaceuticals also experienced declines. Sales were down 2.4% for fourth quarter and 4.4% for the year. That represents lower revenue of around $235 million compared to 2011.

A no-Humira world
When asked about specifics on Humira in the company's earnings call, Abbott CFO Thomas Freyman side-stepped the question, responding that he now lives "in a no-Humira world." While that is true, Abbott's results did provide some insight into AbbVie's performance.

Humira sales grew more than 23% in the fourth quarter, with full-year sales growth of 16.8%. Those numbers bode well for AbbVie in the near term, considering that the drug accounts for more than half of its total sales.AbbVie's quarterly conference call is scheduled for Wednesday.

On the other hand, the absence of the strong growth driver that Humira has been over the last few years changes the dynamic for the new Abbott. The company's "no-Humira world" means that more pressure will be on improving performance in its nutritionals and established pharmaceuticals divisions.

Emerging growth drivers
Abbott's management team mentioned the terms "emerging markets" and "emerging economies" more frequently in the earnings conference call than it referred to earnings. That's because emerging markets are critical to the company's growth plans. Abbott projects that half of its sales will come from these markets by 2015. Sales from emerging economies account for a little less than 40% of total sales currently.

Emerging markets are already a bigger factor for Abbott's established pharmaceutical products business, comprising 60% of sales. These areas continue to show strong growth trends.

Emerging economies made up more than 40% of sales for Abbott's largest division: nutritionals. Increasing market share in these countries isn't always a slam dunk. Rival Mead Johnson Nutrition reported some problems in China, the largest emerging market, in the second quarter of 2012. The company cited reductions in distributor inventories. Abbott, though, says that it continues to see acceleration of growth in China.

Another important way for Abbott to grow is through the introduction of new products. The company says that it has more than 150 registration approvals and new product launches planned for this year for its established pharmaceuticals business. Abbott's medical device division will roll out several new products in 2013, including launching the Xience Xpedition drug-eluting stent in the U.S. this month and in Japan later this year.

New and improved?
Many of the good things about the old Abbott carry over to the new Abbott. It will keep its record intact of paying dividends for 356 consecutive quarters. Management hinted strongly that the 40-year string of increasing dividends every year will also keep rolling.

Is the new Abbott also an improved Abbott, though? I think that it might be. Without Humira's strong growth as a cushion for weakness in other parts of the business, Abbott will likely be forced to innovate more and pursue new opportunities more aggressively, perhaps including acquisitions. I suspect that the company's management realizes this. The new Abbott is in a different world now -- the "no-Humira world." My view is that it will probably be a better one over the long run.

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Originally published