Abbott: Diagnostics on a Roller Coaster, but Remaining Segments Offer Growth

Abbott’s ABT first-quarter results demonstrated underlying strength even as the diagnostics segment saw significant declines on diminishing demand for COVID-19 tests. As these dynamics were already reflected in our full-year projections, we’re holding steady on our $104 fair value estimate. Total quarterly revenue fell 15% in constant currency year over year, with lower diagnostic sales partially offset by growth in the remaining segments. We anticipate the brunt of the diagnostic declines will affect the first half of 2023, followed by moderation in the second half. However, this diagnostics roller coaster has not had any impact on Abbott’s narrow moat, which remains rooted in intangible assets and switching costs.

We were pleased to see real spots of strength in the first quarter, including nutrition and devices. U.S. pediatric nutrition rose 36% compared with the nadir this business hit in the first quarter of 2022. This gives us confidence that the firm is likely to regain most of the share it lost during the time its Sturgis, Michigan, manufacturing facility was shut down. We think the firm’s array of specialty formulations and its brand equity in infant formula will ultimately reestablish Abbott’s leadership position in this market, barring any more regulatory tangles.

The U.S. rollout of Libre 3 remains robust—quarterly sales up 40% year over year—though we expect growth to moderate as 2023 unfolds. The Libre franchise now accounts for roughly a third of Abbott’s medical device revenue, and we expect it to grow to $9 billion by 2027 due to improvements in accuracy that make it more attractive to the Type 1 diabetes market, and ongoing penetration of the Type 2 market. Abbott also posted double-digit organic growth in heart failure, structural heart, and neuromodulation, which we view as signs of higher procedure volume. We remain cautious about hospital staffing, but Abbott’s comments suggest providers have developed some workarounds to address the tighter labor pools.