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Morningstar | Abbott Sees Strength from Key Growth Drivers in 2Q; We've Raised our FVE

Abbott Labs posted stronger than expected second-quarter performance, and we’ve moderately raised our fair value by $6 to $70 per share, after adjusting our projections for key growth drivers upward through 2023. As befitting its size and breadth, Abbott has benefited from waxing new product cycles that have more than offset the waning product cycles. Robust growth fueled by innovation in structural heart, diabetes, electrophysiology, and heart failure outpaced softness in established pharmaceuticals, nutritionals, vascular, and cardiac rhythm management product lines to deliver 7.5% organic quarterly topline growth. We’re leaving Abbott’s narrow economic moat intact.

We’re pleased to see a steady stream of new products and indications rev up growth in the medical device segment, and expect this to continue through the midterm, especially as some products are only beginning to tackle the adoption curve. In particular, MitraClip’s indication expansion for functional mitral regurgitation has led to stronger uptake in the quarter than we’d anticipated. While we’ve long thought penetrating the FMR market was a significant opportunity for transcatheter mitral valve repair and replacement technology, we’ve also held tempered views of adoption as there isn’t a well-established referral path among cardiologists, and the timeframe when surgical intervention is valuable can be unpredictable from patient to patient. The surge in MitraClip growth suggests to us that there is significant underlying demand for the therapy, and we suspect interventional cardiologists are also favorable about the technology (especially now that other procedures, such as angioplasty, are growing more slowly). The next-gen MitraClip, recently approved by the U.S. Food and Drug Administration, or FDA, should further support strong adoption, as this version addresses some of the shortcomings of earlier versions, including better navigation, sizing, and deployment.

We note that the positives surrounding MitraClip’s performance also bode well for Edwards Lifesciences’ PASCAL device, which is launching in Europe this year. Nonetheless, Abbott still enjoys an enviable headstart in the U.S., where Edwards is not likely to receive regulatory approval until 2021.

Separately, we’re also impressed with the strength of flash glucose monitor Libre, which saw growth of 70% year over year. Libre offers the large Type 2 diabetes population a real improvement on the traditional glucose meters that require multiple fingersticks each day. Management indicated Abbott is planning to roll out expanded capacity this year, and we anticipate Libre 2 (currently under review at the FDA) offers features—real-time alerts for glucose readings out of range via Bluetooth, alarm indicating loss of connection with the sensor—that will make the experience more similar to a continuous glucose monitor, such as Dexcom’s G6.

Finally, recent clinical data on Libre demonstrated that Type 2 patients using the device and multiple daily insulin injections were able to significantly lower their blood glucose level. The outcome data, along with the very competitive pricing, should support on-going penetration of the Type 2 market.