Zacks Small Cap Institutional Research



| Abbott Laboratories |(ABT-NYSE) |$62.07 |

Note: More details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.

Note: This report contains substantially new information. Subsequent reports will have changes highlighted.

Reason for Report: 1Q18 Earnings Update

Previous Ed.: Feb 5, 2018; 4Q17 Earning Update

Brokers’ Recommendations: Positive: 85% (17 firms); Neutral: 15% (3); Negative: 0% (0) Prev. Ed.: 17; 4; 0

Brokers’ Target Price: $67.12 (↑$1.8 from the previous report, 17 firms) Brokers’ Avg. Expected Return: 8.1%

*Note: Though dated May 31, 2018, share price and broker material are as of May 30, 2018.

*Note: A Flash update on ‘1Q18 Earnings’ was done on Apr 20, 2018.

Portfolio Manager Executive Summary

Abbott Laboratories is one of the largest diversified healthcare products companies in the industry with a portfolio of leading science-based offerings in diagnostics, medical devices, nutritionals and branded generic pharmaceuticals. Abbott is engaged in the development, manufacture and selling of health care products. Key products include diabetes care and monitoring products, international nutritionals, bare metal stents and other vascular devices.

On Jan 1, 2013, Abbott separated its pharmaceutical business into a new company called AbbVie. The decision to spin off the business was taken back in Oct 2011 when Abbott decided to separate its business into two publicly traded companies – one specializing in diversified medical products and the other in research-based pharmaceuticals.

Of the 20 firms covering the stock, 17 firms (85%) provided positive ratings while three firms (15%) assigned neutral ratings. None of the firms assigned a negative rating on the stock.

Buy or equivalent outlook (17/20 firms): Per the bullish firms, Abbott’s 1Q18 earnings per share (EPS) and net sales beat estimates as well as market expectations. According to these firms, the revenue beat came on the back of better-than-expected performance in Nutritional, Diagnostic and Medical devices business. However, they are upset about slowing growth rate in the company’s Established Pharmaceuticals, primarily due to softness in Russia. Nonetheless, the firms expect the segment’s performance to improve backed by strength in some key emerging markets like India, China and Brazil. Further, the bullish firms are encouraged by the strong adoption of Confirm insertable cardiac heart monitor and Ensite Precision mapping system which led the upside in the Electrophysiology business. These firms are also upbeat about the consistent strong uptake of FreeStyle Libre Flash glucose monitoring system in overseas markets. They are also satisfied with the encouraging response for the FreeStyle Libre in the United States where the product was launched recently. In Diagnostics, the firms expect Abbott to beat intense competition in Europe on the back of Alinity. These firms are also positive about the Alere acquisition.

Neutral or equivalent outlook (3/20): The neutral firms are upbeat about growth acceleration in 1Q18. They believe that Abbott’s fundamentals continued to be solid during 1Q18 along with increasing revenue growth from recently-launched products. However, these firms are disappointed with the FY18 guidance remaining unchanged in spite of the company expecting above-market growth in the revenues from FreeStyle Libre product along with the strengthening of Nutritional segment. These firms also believe that the company is on track to achieve its expected cumulative synergies from St. Jude and Alere acquisitions. Per the neutral firms, gross margin dilutive Alere acquisition, pricing pressure, a change in accounting standard and reinvestment to support future growth may build pressure on the margins in FY18.

May 31, 2018

Overview

Headquartered in Abbott Park, IL, Abbott is a global healthcare company dedicated to the development of a wide range of healthcare products and technologies.

On Jan 1, 2013, Abbott separated its proprietary pharmaceutical business into a new company AbbVie. The research-based pharmaceutical company, AbbVie, includes proprietary pharmaceuticals and biologics including products like Humira, Lupron, Synagis, Kaletra, Creon and Synthroid.

Meanwhile, Abbott retained the company name and the branded generic pharmaceutical, devices, diagnostic and nutritional businesses. The new Abbott has roughly four equal-sized businesses – Established Pharmaceuticals Division (EPD or branded generics business), Medical Devices, Diagnostics and Nutritionals.

In Feb 2010, Abbott acquired the pharmaceutical business of Belgium-based Solvay Group for $6.6 billion in cash. The company also acquired an Indian company, Piramal’s Healthcare Solutions business, in Sep 2010 thus giving it a leading position in the fast-growing Indian pharmaceuticals market.

On Jan 4, 2017, Abbott acquired St. Jude Medical for $25 billion. The combined company will have an industry-leading pipeline expected to deliver a steady stream of new medical device products across cardiovascular, diabetes, vision and neuromodulation patient care.

On Oct 3, 2017, Abbott completed the acquisition of Alere, Inc. This buyout will also help the company gain access to new channels and geographies, including entry into fast-growing outlets, such as doctors’ offices, clinics, pharmacies and at-home testing.

The company’s website is .

The firms have identified the following factors for evaluating the investment merits of Abbott:

|Key Positive Arguments |Key Negative Arguments |

|Abbott has a presence in the diagnostics, nutrition, generic pharmaceuticals |Abbott lacks a major catalyst at this juncture to drive above-average growth|

|and medical devices markets with key focus on emerging markets. This |on a standalone basis given the recent spin-off. |

|diversification should enable the company to combat the occasional regional | |

|or market-specific issues. | |

|The EPD business, with its focus only on emerging geographies, has leading |While emerging markets contribute to the company’s overall growth profile, |

|positions in many of the largest and fastest-growing pharmaceutical markets |currency headwinds can significantly impact revenues given the uncertainty |

|for branded generics in the world, including India, Russia and Latin America.|in the global economic environment. |

|The acquisitions and subsequent integrations of both CFR Pharmaceuticals and | |

|Veropharma have further strengthened this division. | |

|Healthcare spending is rising in the emerging markets driven by increased |Moreover, the nutrition business (pediatric) in some international regions |

|disposable income of the middle class, which is significantly contributing to|continues to witness softness. |

|Abbott’s business. | |

|The acquisition of St. Jude will create a competitive medical device | |

|portfolio with an industry-leading product pipeline across cardiovascular, | |

|neuromodulation, diabetes and vision care. | |

|The acquisition of Alere has strengthened the company’s leadership position | |

|in the diagnostics market which has a huge potential. | |

Note: Abbott’s fiscal year coincides with the calendar year.

May 31, 2018

Long-Term Growth

Abbott operates four businesses, which provide the company with a diverse customer base and payer mix. The company foresees opportunities in its broad-based pipeline, which includes next-generation diagnostic systems, medical devices in coronary, endovascular and structural heart along with innovations in branded generics and nutrition businesses. These businesses look attractive with fast-changing research and development (R&D) cycles focused on brand enhancements, local solutions and improved formulations and packaging.

Approximately 50% of Abbott's sales are from emerging markets. Emerging markets represent significant commercial potential and are projected to drive 70% of global pharmaceutical growth over the next several years. Majority of that growth is projected to stem from branded generics. Factors like a rising middle class with increased disposable income and improving access to healthcare contribute to growth in the emerging markets. Moreover, these emerging markets are expanding their medical infrastructure and increasing the accessibility of health insurance, thereby boosting demand.

Abbott acquired St. Jude Medical on Jan 4, 2017 for $25 billion. The acquisition is estimated to generate annual pre-tax synergies of $500 million by 2020, including both sales and operational benefits. St. Jude will be combined with Abbott’s legacy vascular business into its cardiovascular and neuromodulation business. The addition of St. Jude adds multiple recently launched products that will drive continued strong growth in this business.

Nutrition is the fastest growing business in Abbott’s portfolio due to an aging population, increasing rate of chronic diseases and the rise of the middle class in the emerging markets. In the Nutritionals segment, key focus areas are immunity, cognition, lean body mass, inflammation, metabolism and tolerance. Abbott is keen on operating margin expansion as it takes steps to reduce raw material and packaging costs, improve manufacturing processes, build more efficient plants closer to its customers, improve product mix and simplify the distribution process. Thus, the management believes favorable socio-economic and demographic trends will sustain in the $30 billion global nutrition market.

Abbott acquired Alere, Inc. on Oct 3, 2017. Synergies from the buyout, in the form of revenues from Rapid Diagnostics, have been benefiting the company and strengthened its existing leadership position in the $50 billion global diagnostics market as well. Moreover, management projects rapid diagnostics to contribute little more than $2 billion to total FY18 revenues.

Overall, the growth story is attractive at Abbott.

May 31, 2018

Target Price/Valuation

|Rating Distribution |

|Positive |85%↑ |

|Neutral |15%↓ |

|Negative |0.00% |

|Avg. Target Price |$67.12 ↑ |

|High |$71.00 |

|Low | $56.00↑ |

|No. of Analysts with Target Price/Total |17/20 |

Risks to the company’s target price include:

1) Uncertainty surrounding DES market dynamics

2) Any pipeline setback

Recent Events

On Apr 18, Abbott reported 1Q18 results. Highlights are as follows:

➢ Abbott reported 1Q18 adjusted earnings from continuing operations of 59 cents per share, up 22.9% year over year (y/y).

➢ In 1Q18, net sales came in at $7.39 billion, up 16.6% y/y.

➢ Abbott reiterated its FY18 earnings per share guidance. Adjusting certain net specified items for FY18, adjusted earnings from continuing operations are expected in the band of $2.80-$2.90. For 2Q18, the company expects adjusted earnings in the band of 70-72 cents.

Other Events

On May 4, 2018, Abbott informed the concerned physicians about a field corrective action associated with the possibility of outflow graft twisting in the HeartMate 3 Left Ventricular Assist Device, post implantation.

On May 3, 2018, Abbott announced the receipt of FDA clearance for the Advisor HD Grid Mapping Catheter, Sensor Enabled. Notably, this new design of this innovative product enhances the experience of physicians to create extremely detailed maps of the heart.

On May 2, 2018, Abbott announced the receipt of national reimbursement approval for its XIENCE Sierra from Japan's Ministry of Health Labour and Welfare (MHLW). Notably, the technologically advanced XIENCE Sierra system is an upgraded product from the XIENCE family. It is embedded with an improved stent design, a new delivery system and unique sizes to help physicians treat tough cases.

On Apr 23, 2018, strengthening their more than a decade-old relationship, Abbott and Sanquin announced about signing a multiple-year contract. Notably, the contract was signed for the supply of primary serological equipment and consumables, including Abbott's Alinity s system, for blood and plasma screening.

Revenues

Abbott reported 1Q18 revenues of $7.39 billion, up 16.6% y/y on a reported basis. Revenues surpassed expectations of most firms. In addition, foreign exchange translations had a favorable impact on sales of 4.2%.

On a comparable operational basis (adjusting the impact of foreign exchange, certain acquisitions and divestments), sales increased 6.9% y/y in 1Q18.

Established Pharmaceuticals (EPD)

Sales: Established Pharmaceuticals sales increased 9.9% y/y (up 6.8% on comparable operational basis) to $1.04 billion in 1Q18.

This business majorly focuses on emerging markets. Favorable currency translation also had a positive impact of 3.1%. Notably, the key emerging markets include India, Russia, China and numerous markets in Latin America as well as Brazil along with other countries. Sales in key emerging markets rose 8.7% (up 6.8% on comparable operational basis) to $793 million driven by double-digit growth in India, China and Brazil.

In the Other segment, sales improved 13.9% (up 6.6% on comparable operational basis) to $251 million.

In FY17, management continued to execute its present operating model that focuses on portfolio selling in core therapeutic areas where the company has well recognized and highly trusted brands.

In EPD, sales growth was led by strong performance across the key emerging markets including double-digit growth in India, China and Brazil. Per management, the market growth rate in Russia has begun slowing. Further, the company believes that the weakness in the Russian markets will prevail in 2Q18 and adversely impact EPD’s performance in that region. Nonetheless, the company’s consistent focus on enhancing local capabilities and expanding product portfolio within core therapeutic areas is targeted specifically to address local market needs and continues to strengthen Abbott’s unique position in these markets. Moreover, the management believes that these emerging markets will continue to present immense opportunities with favorable demographics.

Outlook: Organic sales are expected to grow double digit in 2Q18.

The bullish firms believe that EPD’s performance will improve in 2H18 following strength in emerging markets with favorable demographics.

Nutrition Division

The Nutritional Products segment offers pediatric and adult nutritionals. In the United States, the Nutritional Division includes products for infants and adults like Similac, Ensure and Glucerna.

Sales: Nutrition sales were up 7% y/y on a reported basis (4.7% on a comparable operational basis). Foreign exchange favorably benefited sales by 2.2%. Pediatric Nutrition sales increased 7.3% on a comparable operational basis. Adult Nutrition sales were up 4.3% on a comparable-operational basis.

Per management, in the United States, Abbott continues to achieve robust performance in pediatric nutrition with a portfolio of innovative product offerings for toddlers, particularly with strength in Similac brand.

Moreover, per management, the company has witnessed market stabilization in China and is adequately prepared for the new food safety regulations that have effective since the beginning of 2018. Outside China and India, Abbott witnessed improved market conditions in few international markets. However, growth in adult nutrition was led by Ensure and Glucerna brands in the United States and globally.

Outlook: Organic sales are expected to grow low to mid-single-digits in 2Q18.

Diagnostics Division

The Diagnostics division is divided into three product lines – Core Laboratory, Molecular, Point-of-Care and Rapid Diagnostics.

Sales: In 1Q18, Diagnostics revenues grew 58.7% y/y to $1.84 billion (up 5.5% on a comparable operational basis) driven by better-than-expected performance of the company’s Rapid Diagnostics business and strength in flu season across the United States.

Abbott continued to witness above-market growth in the Core Laboratory Diagnostics business on solid domestic and global performance. Notably, Core Laboratory and Point of Care Diagnostics sales grew 6.3% and 4%, respectively, on a comparable operational basis. The upside in the Point of Care Diagnostics business was largely driven by solid uptake of the company’s i-STAT handheld system in the overseas. Molecular Diagnostics sales were up 1.3% as strong growth in the infectious disease testing business was partially offset by the planned scale down of the genetics business. Rapid Diagnostics recorded sales of $559 million, driven by solid contributions from infectious disease testing that include flu and strep testing.

Recent Development

On Jan 2, 2018, Abbott announced the receipt of CE Mark and the commercial launch of Alinity h-series integrated system for hematology testing.

Outlook: Diagnostics sales are projected to increase by roughly 6% in 2Q18.

The firms with the bullish stance believe that revenues from Diagnostic business will continue to grow on the back of new product launches, benefits from Alere acquisition and strength in Alinity.

Medical Devices

The Medical Devices business generated sales of $2.74 billion, up 14.6% y/y on a reported basis and 9.4% on an operational basis.

Medical Device segment presently comprises new Cardiovascular and Neuromodulation business, along with Abbott’s Diabetes Care business.

Sales growth in the medical devices segment was driven by solid growth in Electrophysiology, Structural Heart, Neuromodulation and Diabetes Care. Moreover, the company achieved few product approvals and clinical trial milestones in 1Q18.

In Electrophysiology, Abbott gained from solid uptake of recently-launched products like the EnSite Precision — a cardiac mapping system. The company also witnessed strong demand for the recently-launched Confirm insertable cardiac heart monitor in the United States and Europe.

Growth in Structural Heart was led by continued double-digit growth of MitraClip, the company’s market-leading device for the repair of mitral regurgitation. During 1Q18, the company announced the receipt of national reimbursement in Japan for the same.

In Diabetes Care, international sales growth of 32.9% on an operational basis was driven by Abbott’s FreeStyle Libre, an innovative sensor-based glucose monitoring system that eliminates the need for routine finger sticks. In 4Q17, the company announced the availability of FreeStyle LibreLink app in Europe for use with compatible smartphones.

In Heart Failure, the company gained from the solid uptake of the recently-launched HeartMate 3 system. The management also informed about presenting positive trial data from the MOMENTUM 3 study supporting the efficacy of its HeartMate 3 LVAD in improving the survival and clinical results at two years for patients suffering from advanced heart failure. Abbott will submit the clinical data to FDA for expanded approval for current HeartMate 3 indication to authorize long-term use.

In Neuromodulation, Abbott saw double-digit growth drive by a portfolio of newly-launched products for treating movement disorders and chronic pain.

During 4Q17, in vascular, the company launched XIENCE Sierra drug-eluting coronary stent system in Europe. Following encouraging response toward the product, the company now plans to make the product commercially available in the United States in FY18.

Per one of the bullish firms, Free Style Libre reflects huge untapped market potential in future as customers increasingly adopt the technologically advanced glucose monitoring system.

Recent Developments

On Mar 29, 2018, Abbott announced the start of the — GUIDE-HF clinical trial — largest heart failure medical device study in the United States. The trial will evaluate the effectiveness of CardioMEMS HF System in improving the survival and quality of life for patients with New York Heart Association (NYHA) Class II – IV heart failure. Per Abbott, positive results from the trial will help the company in expanding its customer base and provide additional clinical evidence to expand coverage for the CardioMEMS HF System.

On Mar 19, 2018, Abbott announced that the Ministry of Health Labour and Welfare ("MHLW") in Japan granted national reimbursement to its MitraClip therapy. The move is likely to improve the company’s Structural Heart business.

On Mar 6, 2018, Abbott announced the receipt of FDA approval for the world’s smallest rotatable, bileaflet mechanical heart valve — Masters HP 15mm. Notably, Abbott’s breakthrough pediatric mechanical heart valve will help treat newborns and infants with congenital heart defects (CHD), who are in need of a valve replacement procedure. Moreover, with approval, the company has augmented the Masters Series portfolio under the Structural Heart business. Interestingly, the Masters Series line now offers seven valves with diameter sizes varying from 15-27mm. Furthermore, the approval can be majorly attributed to positive results from a clinical trial on patients with a damaged, diseased or malfunctioning heart valve aged five years or below.

On Feb 27, 2018, Abbott announced entering into an agreement with In Vitro Diagnostics technologies player, Surmodics, Inc. Per the terms of the deal, the former will have exclusive worldwide commercialization rights over Surmodics' SurVeil drug-coated balloon. The deal remains aligned with Abbott’s focus to expand its broad line of vascular care products. Notably, the SurVeil drug-coated balloon by Surmodics is used to treat the superficial femoral artery and is under evaluation in a U.S. pivotal clinical trial. Significantly, this new-generation device is likely to complement and extend the company’s vascular devices portfolio including stents and vessel closure devices for addressing peripheral artery disease (PAD).

On Feb 7, 2018, Abbott announced the announced the availability of FreeStyle LibreLink app in Europe for use in smartphones (both iPhone and Android). Notably, diabetes patients using the FreeStyleLibre system in Europe will no longer need to carry the FreeStyle Libre readerseparately to get glucose result. Diabetes patients will now be able to check glucose results directly from their smartphones. Per company, the FreeStyle LibreLink app allows users to hold their smartphone near their FreeStyle Libre sensor to capture and view real-time glucose levels. Also, it shows eight-hour glucose history and how the glucose levels are changing. FreeStyle LibreLink app customers will have access to several updates and new features when compared to the FreeStyle Libre reader. The company also said that the app can replace the reader and also be used in combination with each other.

Outlook: Medical Devices sales are expected to increase mid-high single digits which includes continued double-digit growth in several sub-segments of the business 2Q18.

Margins

In 1Q18, adjusted gross margin (excluding restructuring charges) was 59.3% compared with 59% in 1Q17. R&D and selling, general and administrative (SG&A) expenses were $589 million and $2.54 billion (adjusted), respectively.

Earnings per Share

Abbott reported 1Q18 earnings of 59 cents per share, were up 22.9% y/y. The bottom line was above the expectations of most firms.

Moreover, the company’s reported earnings in 1Q18 came in at 23 cents per share compared with the 1Q17 figure of 22 cents.

Outlook: Abbott has reiterated its FY18 earnings per share guidance. Adjusting for certain net specified items for the FY18, adjusted earnings from continuing operations are still expected in the band of $2.80-$2.90. The company has also provided 2Q18 adjusted earnings per share outlook. It expects to report adjusted earnings from continuing operations in the range of 70-72 cents.

May 31, 2018

|Analyst |Sweta Jaiswal |

|Copy Editor |Saswata Sinha |

|Content Ed. |Urmimala Biswas |

|No. of brokers reported/Total |17/20 |

|brokers | |

|Reason for Update |1Q18 Earnings Update |

|Lead Analyst |Urmimala Biswas |

|QCA |Urmimala Biswas |

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