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Morningstar | Abbott Sees Decent 3Q Results Thanks to Nutrition, Diagnostics, and FreeStyle Libre

Abbott reported third-quarter results that held few surprises, and it remains on track to hit our full-year projections on the top and bottom lines. While we’ve made no material changes to our forecast, we plan to raise our fair value estimate modestly to reflect cash flows realized since our last update. Overall, we think narrow-moat Abbott has been executing well on its new product cycles and meaningful innovation, in particular, adoption of Alinity in diagnostics, the strength of its electrophysiology portfolio of ablation and irrigation catheters, and the newly approved FreeStyle Libre sensor, which lasts 14 days. Our longer-term concern about Abbott’s ability to nurture a culture of innovation remains on our minds.

We’re pleased to see that international pediatric nutrition has returned to double-digit organic growth. This is a nice return for the patience investors displayed while waiting for China to work out its new regulatory framework for infant formula over the last 2.5 years. As one of the largest multinational competitors in the Chinese market, Abbott has the resources to comply with new government regulations that have caused some smaller, native formula producers to leave the market.

The continued success of FreeStyle Libre Flash has also been a high point for Abbott.  By setting Libre’s price significantly lower than Dexcom’s G6 and Medtronic’s Guardian CGM systems, Abbott has been able to take share and, we suspect, draw more type 2 patients away from multiple finger sticks each day. Additionally, as we’ve seen with progressive improvements in continuous glucose monitoring technology, Abbott’s 14-day sensor offers more accuracy than its earlier 10-day sensor. We expect Abbott to maintain pressure on Dexcom as the user-friendliness and price of Libre raise the bar.

Coming off the recent Transcatheter Cardiovascular Therapeutics conference, we were surprised by the COAPT trial results that demonstrated the efficacy of MitraClip for patients with severe functional mitral regurgitation (an artifact of underlying heart failure or enlargement of the left ventricle). While the prospect of expanding MitraClip’s indication to beyond degenerative mitral regurgitation to the significantly larger pool of FMR patients is very attractive, we remain somewhat cautious for several reasons. First, the favorable COAPT data is inconsistent with the earlier MITRA-FR data, which failed to demonstrate any benefit at 12 months out (for example, patient outcomes, rehospitalization, mortality). There were differences between the trials in terms of patient selection, practitioner experience, and time frame that make it difficult to compare results. Nonetheless, the conflicting trial data suggest we’ll need to build on these studies before consensus is reached. Second, it’s not clear how durable the COAPT results are. If the underlying heart failure continues to progress, even at a slower rate than would have been seen without MitraClip, will it pull the mitral valve askew again at three or four years following implantation? We don’t know yet.

Despite some of these current successes, we still hold questions about Abbott’s ability to consistently innovate, especially in medical devices where ongoing cultivation of innovation is necessary to maintain pricing power. Additionally, we've seen that competitor Medtronic has been moving aggressively to change the basis of competition such that technological innovation is the only price of entry. We’ve been paying particular attention to Abbott’s cardiac rhythm management segment since it launched its MRI-compatible pacemakers and implantable cardioverter defibrillators last fall in the U.S. Based on historical cycles of new CRM product launches, we would expect to see Abbott outpace market growth and capture anywhere from 100 to 300 points of market share in the first 12 months following launch.

We did see Abbott’s U.S. CRM business pop up to 6% year-over-year growth in the fourth quarter of 2017, immediately following Food and Drug Administration approval of its products in September 2017. However, that energy then dissipated and three more quarters of muted results followed. During those three quarters, Medtronic had managed to sign roughly 30% of the U.S. hospital base onto its risk-based CRM contract that features the antibacterial TYRX envelope. Under this contract, Medtronic will cover the cost of patients whose CRM device has become infected if they were implanted with TYRX and a Medtronic CRM system. We surmise Medtronic’s proposition to take on the financial risk of these costly infections and the milestone of reaching critical mass of hospitals under contract have shielded the firm from the full brunt of Abbott’s new product introductions.