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Abbott Labs (ABT) is set to announce its Q4 results on January 23. It will be diversified healthcare company's last quarterly and annual earnings, which will include the performance of research-based proprietary drugs since its split effective from Jan. 1, 2013. We expect continued strong performance in its pharma business supported by its nutritional franchise. Sales in the vascular division could increase marginally (excluding certain royalty and supply arrangement revenues relating to Promus). We believe margins could improve as a result of improved efficiencies across several operating divisions. While a strong U.S. dollar will weigh on overall reported sales, it could also lower costs rather than sales, as has been witnessed in the last couple of quarters.

We are updating our model and price estimate for Abbott Labs.

Pharma, Nutritional to Drive Growth

Post-spin-off, Abbott Labs is now left with generic drugs as research-based proprietary drugs like Humira have been retained by AbbVie. However since the split is effective from Jan. 1, earnings will include sales from proprietary drugs including Humira and AndroGel, which are expected to exhibit continued strong growth. However, expected loss of revenues from cholesterol drug Trilipix/ TriCor and HIV drug Kaletra, will offset some of the gains. With Abbott's significant presence in rapidly growing emerging markets like India, China and Russia, we expect established pharmaceuticals, which are mainly generic drugs, to also perform well, if one excludes the currency impact.

We expect the nutritional segment to continue to post high single-digit growth on back of Similac and other pediatric nutritional products like PediaSure, Ensure and Glucerna. This will be offset by a relatively slow growth from adult nutritional products. Moderate growth is expected from vascular and diagnostics division (excluding to certain royalty and supply arrangement revenues and currency impact), after the company launched various products including its next-generation Drug Eluting Stent (DES) XIENCE Xpedition and XIENCE PRIME in different parts of the world.

However, the U.S. dollar is still firm against most of the currencies around the globe, which will continue to weigh on overall revenues from international market. While Abbott Labs will have relatively lower margins excluding AbbVie business, we expect overall margins to improve slightly. Abbott has manufacturing operations around the world, and a strong U.S. dollar has historically favorably impacted costs, too.

Long-Term Growth Intact

Per capita income levels in many emerging markets are rising rapidly, which should lead to better insurance coverage and better healthcare. Additionally, new studies and increased access to information have led to rising health consciousness in these markets. These factors should drive growth for new "Abbott Labs."

In the pharmaceutical business, the company committed to several purchases in the past like Solvay and Piramal to diversify its portfolio of offerings and expand into emerging markets. On a similar note, the company recently opened a nutritional R&D center in India and struck an R&D deal with a Russian group to boost its nutritional business.

In the vascular business, the company will soon be launching its next-generation DES XIENCE Xpedition in the U.S., following recent FDA approval. Further, Abbott has begun phase III clinical trials in the U.S. to prove efficacy and safety for world's first drug eluting bioresorbable stent, Absorb, which dissolves in patients' bloodstreams after finishing treatment of narrowed /diseased arteries. While the device is currently approved and being sold in Europe and other markets, the large U.S. market still evades it, pending clinical trials.

Disclosure: No positions.

Source: Abbott Earnings Preview: What We Are Watching