Abbott Laboratories' Golden Goose: The Nutrition Business

| About: Abbott Laboratories (ABT)

Nutrition is not a glamorous business, but an efficient one. It is suitable for employing large factories, continuous process manufacturing and direct-to-consumer marketing.

Nutrition, after the split of the company, accounts for roughly 30 percent of Abbott Laboratories' (NYSE:ABT) overall revenue for 2012 when adjusting out the $18 billion proprietary pharmaceuticals revenue. In the post-AbbVie world, nutrition is Abbott's largest division, with $6.471 billion in sales last year.


Abbott Lab is the U.S. leader in pediatric nutritionals and the worldwide leader in adult nutritionals.

In 2012, nutritional sales grew by more than 9 percent in the U.S., while operational revenue internationally jumped more than 8 percent. U.S. growth actually outpaced Abbott's domestic branded-pharmaceutical growth before the AbbVie spinoff, and the nutritionals segment topped all divisions with more than $1 billion in sales in overall growth.

Importantly, half of this business comes directly from the patients and consumers who use the products, rather than third-party payers. This makes Abbott Lab one of the most customer-facing companies in healthcare, which motivates the company to build direct, long-term relationships with the people it serves.

Abbott is watching changes in demographics very closely and is trying to adjust its business to the changes.

For example, the global population is aging rapidly, with the over-70 group expected to grow from 269 million to 1 billion by 2050. As the world leader in adult nutrition and the number-two maker of cataract devices, Abbott is well-positioned to serve this growing need.

Pediatric nutritionals are surging in particular. The unit recorded astounding 14 percent domestic sales growth in 2012, rising to total revenue of $1.44 billion in the U.S. But the best numbers come from overseas, as international sales of pediatric nutritionals dwarfed domestic sales by nearly $600 million in 2012.

Why the international surge? For years, Abbott has focused a lot of time and resources in expanding its nutritional business overseas, and it has paid off.

The company has been building research and development infrastructure closer to regional customers and launching products in emerging markets.


India plays a particularly significant role: Abbott has focused heavily not only on pediatric nutrition in the world's second-largest nation, but also on diabetes nutrition in a country where it's estimated more than 50 million people live with diabetes.

Growth in India and other emerging markets should also help Abbott in the sports nutrition business. The company is a major player in the business, and the worldwide sports nutrition market is expected to eclipse $6 billion by 2018.

A new plant is being built in the Indian city Jhagadia, in the state of Gujarat by Abbott India at an estimated cost of $66 million. It is located on 45 acres of land and it will make the Ensure range of nutritional drinks for elderly people and the pediatric nutritional drink PediaSure.

Abbott India had opened its first nutrition research and development center in India in 2012 at Bangalore through a tie-up with Syngene International Ltd., Biocon's contract research unit.

Abbott India has a network of 18 distribution points, which cater to 11,000 stockists and 70,000 retailers and employs over 1000 people.

Earlier in 2010, Abbott had acquired India's Piramal Healthcare's domestic formulation business for $3.72 billion, thereby making Abbott one of the largest drug firms in the country.


Of all business divisions, nutrition offers the best opportunity to improve margins.

The company is building three new efficient plants, partly as a response to demand, but also as an effort of getting the production closer to the customers, improving logistics costs, and building those plants in a very efficient way that can improve the margins.

There is also a focus on distribution. Over the years, as Abbott has expanded, particularly outside the U.S., it tended to rely on distributors to a large degree. This has changed over the last year or two, bringing the margins into the company, and taking full control of the distribution in the countries.

The company has a pretty detailed, well laid out plan to achieve its margin objectives. The goal is to get it in the 20 percent range by 2015, and at the pace it is going, there is a chance it will get there a little bit sooner.


About 55 percent of the business is pediatric, and 45 percent is adult nutrition, which is a very promising field. Abbott' products include some of the world's most trusted brands in pediatric, adult and sport performance nutrition.

The pediatric nutrition brand, Similac, is designed to meet babies' specific nutritional needs by supporting brain, eye and immune-system development and helping build strong bones. Similac Total Comfort, which was launched in key international markets, has quickly become the standard for infants with digestive system intolerance. Gain (also known as Similac Stage 3/4/5), is a line of growing-up milks for older babies and toddlers, is a particularly important product in fast-growing markets such as China.

For older children, the PediaSure family of products is the number-one pediatrician recommended brand for complete, balanced nutrition.

Abbott' presence in adult and medical nutrition is anchored by Ensure. The company is expanding the potential of the Ensure brand with specially formulated versions that help rebuild muscle and strength naturally lost over time, support digestive tract health and the immune system, and help build strong bones.

In 2012, Ensure Clear was introduced, a complete nutrition in a refreshing, fat-free beverage.

Other condition-specific products are Glucerna Triple Care, designed to help adults with diabetes, and a medical nutrition portfolio of products that meet the needs of patients recovering from illness.

Then there is a line of sports nutrition products, including Myoplex. These products help athletes and the occasional gym goer discover how much more they can do.

These products are generally marketed and sold directly to customers and to institutions, wholesalers, retailers, healthcare facilities, government agencies, and third-party distributors from Abbott-owned distribution centers or third-party distributors.

Regulatory aspects

Needless to say that getting approvals for nutritionals is easier than for new drugs.

Depending upon the country or region, if claims regarding a product's efficacy will be made, clinical studies typically must be conducted. Most other product development, such as a product form change from liquid to powder, generally does not require clinical studies.

In the U.S., the FDA wants to be notified of proposed new formulations or packaging changes related to infant formula products.

For other nutrition products, notification or pre-approval from the FDA is not required unless the product includes a new food additive.

In some countries, regulatory approval may be required for certain nutritional products, including infant formula and medical nutritional products.


Abbott does face a fierce competition in nutritionals.

Major competitors are Swiss giant Nestle which has recently purchased Pfizer's (NYSE:PFE) infant nutrition business for $12 billion and Mead Johnson Nutrition (NYSE:MJN), which has separated from Johnson & Johnson (NYSE:JNJ) in 2009.

Pfizer's old unit made 85 percent of its sales in emerging markets, and Nestle will battle with Abbott for dominance in these sought-after markets.

The Chinese market is especially important. China's infant formula market already represents more than 20 percent of the $41 billion worldwide market and could alone reach $25 billion by 2017. It's crucial that Abbott steps up its nutritional business in China.

For Ensure, competition comes from Boost, made by Nestle Nutrition, and store-label brands.


To stay ahead of the competition, intensive research is needed. 80 new products were launched in 2012 and 100 clinical trials started over the last three years.

Abbott's in-house HEOR studies (Nutrition Health Economics and Outcomes Research) are intended to help the medical community understand the importance of adult nutrition and its impact on lowering costs in the healthcare system.

Abbott's nutrition research is focusing on six health benefit platforms where better nutrition can have a significant impact on overall health: immunity, cognition, lean body mass, inflammation, metabolism and tolerance.

Investor's summary

For 2013, Abbott Labs is forecasting a double-digits growth for its global nutrition business. This includes low to mid-single digit growth for the U.S business and double-digit growth for the international business.

The greater growth opportunity probably lies outside the U.S. India and China are important to the company, but so is a broad exposure to all emerging markets.

The share price has done well since the split, it has ranged year-to-date from $32.75 to $36.32.

In this economy, nutrition is a good business to be in and the company has well thought-out plans to advance its leading position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.