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Morningstar | Abbott Laboratories Ends Year With Solid Performance; No Change to Our FVE

Despite foreign exchange headwinds, Abbott generally finished up its fourth quarter and the full year very close to our expectations on the top and bottom lines, and we’re leaving our fair value estimate unchanged. Although growth in nutrition seems to be moderating after the recovery seen in the Chinese infant formula market, adoption of new products including Alinity diagnostic instruments, further penetration of Freestyle Libre continuous glucose monitors, and new products and indications in the cardiac area drove fourth-quarter organic revenue up by a very solid 6.4%. We see little to change our thinking on Abbott’s narrow economic moat at this point.

We remain optimistic about Abbott’s diabetes business thanks to the European launch of next-gen Libre 2, which features alarms signaling low or high blood glucose levels in real time, as well as Medicare’s decision to cover the original Libre in the U.S. The user-friendliness of Libre and its price set the product apart from competitors. We’re also favorable about the new destination therapy indication for HeartMate 3, the left ventricular assist device for patients in advanced heart failure. While LVADs were originally indicated for short-term use during the wait for a heart transplant, longer-term destination therapy is attractive opportunity because of the roughly 250,000 patients who need a transplant, only several thousand will get one. The remaining patients could benefit from LVAD therapy.

On the other hand, Abbott saw softness in its domestic fourth-quarter cardiac rhythm management business, which declined 2.6% year over year. We recognize Abbott’s especially strong fourth-quarter performance in the prior-year period as it launched its MRI-compatible CRM devices. However, we think the firm is at disadvantage because competitors offer less-invasive rhythm devices. We’re curious to see what Abbott has in the pipeline to compete more directly against Boston Scientific and Medtronic on that front.

While Abbott management chalked up the weakness in its U.S. CRM unit as related to larger market growth, we’re not entirely convinced. Both Boston and Medtronic have seen strong adoption of their S-ICD and leadless pacemakers, respectively. Further, as we’ve discussed before, we suspect Medtronic’s efforts to sign up more hospitals to its risk-based contracts with the TYRX antibacterial envelope for traditional CRM devices could be affecting the traditional competitive dynamic in this market. We should have a better sense of the CRM market once Boston and Medtronic report next month. In the meantime, for more detail on Medtronic’s novel approach to changing payment models and why we think this strategy will help enhance Medtronic’s competitive advantages, please see, "Medtronic’s Embrace of Value-Based Payments Is Reinforcing Its Wide Moat."