Abbott (NYSE:ABT) is a longtime favorite. This article explains why Morgan Stanley’s inclusion of Abbott in its 05/2022 list of most confident stock picks resonates so well.
Its first quarter 2022 earnings call (the “Call”) provided a recent window on the current attractions of this extraordinary company.
As the market navigates its current slump, Abbott is a stock to accumulate.
The first quarter of 2022 was another strong quarter for Abbott despite significant challenges. The chart below from its 8-K quarterly earnings release shows its skeletal results:
In terms of Abbott’s quarterly organic sector growth percentage, Diagnostics (35.1) and Nutrition (-4.4) both presented outliers for the first quarter of 2022. The Medical Devices and Pharmaceuticals sectors Abbott’s established companies both posted double-digit organic Q/Q sales growth in young teens.
Before the pandemic artificially reduced medical device revenues and supercharged Abbott’s diagnostics segment, medical devices was Abbott’s largest segment by a healthy margin. The pandemic has damaged Abbott’s Diagnostics segment by reducing doctor visits and reducing medical procedures.
Abbott’s Medical Devices segment is comprised of three subgroups:
- cardiac devices (rhythm management, electrophysiology, heart failure, cardiac and vascular structure),
- neuromodulation and
- diabetic treatments.
Each of them requires access to physicians to prescribe and install the devices. The pandemic has reduced both to varying degrees. As a result, Medical Devices, which generated approximately $11.4 billion in 2018, growing (p. 53) to approximately $12.24 billion in 2019, revenue fell to approximately $11.8 billion for 2020.
Diabetes care was a star, bucking the trend in Abbott’s medical device segment during the brutal first year of widespread pandemic lockdowns. Abbott FreeStyle Libre Continuous Glucose Monitoring [CGM] made throughout the pandemic. It brought in $2.6 billion in revenue for 2020, growing 35.8% to $3.7 billion for 2021.
Overall, Abbott Diabetes Care some products generated ~$4.3 billion in 2021 versus ~$3.3 billion in 2020. In contrast, each of Abbott’s 5 cardiac device categories declined by varying percentages in 2020 versus 2019 (pace management ( 11), electrophysiology (8), heart failure (4), structural heart (18) and vascular (11).
Despite the continued challenges of the pandemic in 2021, Abbott’s cardiac device sub-categories have recovered smartly from their slump in 2020. Each grew in double digits, ranging from a high recovery percentage of 29% for the structural heart at a minimum of 14% for the vascular. Abbott’s total cardiac device revenue for 2021 was about $9.3 billion, compared to $7.8 billion for 2020.
Abbott’s efficient product introductions and renewals are one of its biggest attractions.
Abbott’s most significant product refinement and introduction in recent memory has taken place in direct response to the pandemic. As the pandemic began to take shape, Abbott’s New Product Team came to life, creating the following:
- 03/2020, a molecular test to detect COVID-19 on its ID NOW® rapid service point platform in the United States pursuant to an emergency use authorization [EUA].
- 08/2020, Abbott launches its BinaxNOW® COVID-19 Ag Card test, a portable lateral flow rapid test to detect COVID-19 under an EUA in the United States
- 12/2020, Abbott received an EUA in the United States for virtually guided home use of its BinaxNOW COVID-19 Ag Card Rapid Test and launched the product for home use.
- 03/2021, Abbott received an EUA in the United States for its over-the-counter, non-prescription BinaxNOW COVID-19 Ag self-test for people with or without symptoms.
- In Q1 2021, Abbott also received EUAs in the United States that allow non-prescription use of the BinaxNOW COVID-19 Ag Card Home Test and BinaxNOW COVID-19 Ag Card Professional Use Test for those with and without symptoms.
This was just the tip of the iceberg in terms of new COVID-19 related products from Abbott. It has also launched various tests internationally. Additionally, it has generated PCR assays for its m2000 RealTime lab platform and its Alinity® m system. He also launched laboratory tests to determine if people had been infected with the virus.
These efforts have been rewarded with income beyond avarice’s dreams. For 2020, they totaled around $3.9 billion. For 2021, as the pandemic fluctuated with vaccinations and then variants, they fluctuated a lot. However, overall they reached around $7.7 billion.
According to Abbott’s Q1, 2022 10-Q, p. On January 19, quarterly sales related to the COVID-19 test hit a record total of $3.3 billion. Such future sales are unknowable; but with the pandemic appearing to be waning in the United States, it seems likely that they will be significantly reduced.
Judging by its forecast of $4.5 billion in total sales for 2022, Abbott has minimal expectations for ongoing COVID-19 sales. On the positive side for shareholders, as its COVID testing loot dwindles, Abbott’s diversified business will kick off with replacement revenue.
Each of Abbott’s business segments will benefit as disruptions related to COVID-19 diminish. Pharmaceuticals, diagnostics and established medical devices have all suffered to varying degrees in different geographies as the pandemic degrades healthcare operations. Nutrition, which has done well during the pandemic, will benefit as shown below.
When it comes to product introductions, beyond COVID-19 testing, Abbott painted with a broad brush. Its established pharmaceuticals business posted strong results in the first quarter of 2022. It produced 13.5% growth in the quarter following double-digit growth in three of the previous four quarters. These came from new product approvals and launches in high-growth areas.
During the call, the Ford CEO highlighted the following product launches:
… It’s always a challenge to launch these new technologies in this COVID environment, but it was the right decision to make, and we see good momentum, whether it’s Amulet, Navitor in Europe, CardioMEMS, the deployment of ‘EnSite X which started in the fourth quarter of last year, our TriClip product. So I think all of that is the combination of, I would say, both the recovery as COVID cases go down, but also the new product launches and the pipeline that we’ve put in place, which is driving this performance where I would say, we’re ahead of where we were in 2019, with a good rate of growth in our cardio portfolio.
Abbott’s pediatric nutrition recall posed a significant challenge that should soon be in the rearview mirror.
In mid-02/2021, Abbott investors were rocked by its unusual/undesirable voluntary program recall of certain batches of infant formula. The recall applied to powdered formulas including Similac, Alimentum and EleCare manufactured at its Sturgis, Michigan manufacturing facility.
This was in response to consumer complaints about Cronobacter sakazakii or Salmonella Newport which were thought to come from the plant. Abbott’s testing detected no such contamination, but they did issue a limited recall of some formulas from the factory.
The FDA, in collaboration with the Centers for Disease Control and Prevention (CDC) and state and local partners, announcement that they were investigating the situation in response to consumer complaints.
Overall, during the pandemic, Abbott’s nutrition business has been mixed. Its adult nutrition led by its Ensure and Glucerna brands has thrived internationally during the pandemic with double-digit global growth.
In infant nutrition, Abbott owns the market-leading Pediasure and Pedialyte brands. However, his recall created reputational issues that Abbott battled. During the call, Abbott reported the following regarding the recall:
- As a routine quality control, it maintains internal samples of shipped products; tests of retained samples related to this recall action by Abbott and the FDA have all been negative for the presence of the bacteria that cause the reported illnesses.
- … the FDA and CDC found that there was no genetic match between the bacteria strains identified in the non-product contact areas of the Abbott facility and the available samples obtained from the complaints customers, suggesting a different source of contamination.
- …no salmonella was found in Abbott’s plant or product and therefore the FDA ruled out any link to its facility.
It is working with the FDA to reopen its facilities as soon as possible to help alleviate industry-wide infant formula supply shortages.
The market is going through tough times, with companies facing supply chain disruptions and rising interest rates. This is exactly the environment in which Abbott established itself.
Its operational excellence, shareholder-friendly capital allocation and solid balance sheet make it an excellent core portfolio. He’s a candidate worthy of his place as a “highest conviction” pick, as Morgan Stanley noted:
…With double-digit underlying organic growth in 2021 with over $6 billion in Dx COVID-19 revenue, we expect this momentum to continue in 2021 with ~$5 billion in Dx revenue and with a device growth driven by key products like Libre and Mitraclip as well as pipeline launches (eg CardioMEMS, Amulet).