Abbott Laboratories: High Single-Digit Long Run Revenue Growth
Summary
- Its diabetes care business is forecasted to grow by 17% in the long run with a heavy focus on continuous glucose monitoring.
- Resilient nutritionals business which is expected to grow in the high single digits due to changing consumer lifestyles.
- Highly focused on growing cardiovascular-related business with a 77% increase in cash in 2020 due to COVID-19 related revenues.
- COVID-19 related revenue is expected to drastically decline in the second half of 2021 and disappear completely in 2022.
- We valued the company based on a DCF valuation and obtained a neutral rating.
Abbott Laboratories (NYSE:ABT) is a global diagnostics equipment company that caters to a wide variety of markets. In this analysis, we focused on the company’s potential to grow beyond the pandemic and its main growth drivers. Firstly, the company has focused significantly within the diabetes market with its Freestyle Libre product which is forecasted to grow at a 17% CAGR. Second, the Nutritionals segment of the company is a resilient business that has steadily grown even through economic downturns. The ROA generated from the nutritionals business is higher than the average ROA of the company. Next, we looked at the future product pipeline and the ability of the company to continue growing with additional cash available. We also pointed out the potential of COVID-19 related revenues completely disappearing in 2022 due to the global vaccination efforts.
Source: Abbott
Market Leader in Continuous Glucose Monitoring with 17% Growth in the Near Term
In the past 4 years, Abbott has been steadily growing its Diabetes Care business with the launch of Freestyle Libre, a continuous glucose monitoring (CGM) system. CGM systems allow patients to continuously track their sugar levels throughout the day providing a useful indicator to patients with diabetes on their sugar levels. There are currently 3 companies that provide CGM systems in the market. Based on the market share data, Abbott is a leading player with 53% market share followed by Dexcom (DXCM) and Medtronic (MDT) with 39% and 8% market share, respectively. The global CGM market was valued at $4,978 mln in 2020 and is forecasted to grow at a CAGR of 17.24% until 2025.
Source: Abbott, Dexcom, Globe News Wire
Traditionally, a glucometer is used which requires a fingerstick procedure every time to check sugar levels. This method doesn’t allow for continuous real-time glucose monitoring and costs patients roughly $4,380 per year. In comparison, Abbott’s Freestyle Libre reduces the yearly cost of monitoring sugar levels by 62% while also providing real-time data to patients. Abbott’s product is also 28% cheaper than competing CGM products. Overall, CGM systems are beneficial as it reduces hospital visits and ambulance use which further lowers costs for patients with diabetes. In the US, this is a significant cost reduction in the US healthcare system as roughly 10.5% of the US population currently suffer from diabetes.
As of Q2 2021, the Freestyle Libre product has a global user base of 3.5 mln. The product has seen tremendous growth in the past as the product has registered an average growth of 10.26% for the past 9 quarters. Additionally, Abbott has been improving its CGM product consistently since its initial commercial launch in 2017. This is reflected by the FDA approval the company has received for its improved and more integrated Freestyle Libre 2 in 2020. The company also received a CE Mark for Freestyle Libre 3 and Libre Sense Glucose Sport Biosensor which is focused on CGM for athletes.
We projected the Diabetes Care revenues for Abbott. For 2021, we forecasted Freestyle Libre sales for the second half of 2021 by taking the average sales growth over the past 7 quarters. We applied the average quarterly growth of 9.07% to Q3 and Q4 of 2021. Overall, this provided us with a yearly growth of 44%. From 2022 onwards, we forecasted revenues based on the global CGM market CAGR of 17.24%. Based on our forecasts, we expect the Freestyle Libre product to contribute 93% of the total Diabetes Care revenue for Abbott from 2021 onwards.
Diabetes Care | 2019 | 2020 | 2021F | 2022F | 2023F | 2024F | 2025F |
Freestyle Libre ($ mln) | 1,842 | 2,635 | 3,795 | 4,449 | 5,216 | 6,115 | 7,169 |
Growth (%) | 63% | 43% | 44% | 17% | 17% | 17% | 17% |
Others ($ mln) | 682 | 632 | 277 | 325 | 381 | 452 | 530 |
Growth (%) | -15% | -7% | -56% | 17% | 17% | 19% | 17% |
Diabetes Total Revenue ($ mln) | 2,524 | 3,267 | 4,072 | 4,774 | 5,597 | 6,567 | 7,699 |
Growth (%) | 31% | 29% | 25% | 17% | 17% | 17% | 17% |
Freestyle Libre as % of Diabetes Revenue | 73% | 81% | 93% | 93% | 93% | 93% | 93% |
Source: Abbott, Globe News Wire, Khaveen Investments
Resilient Nutrition Business with High Single-Digit Growth
The global dietary supplements market was valued at $140.3 bln in 2020 and forecasted to grow at a CAGR of 8.6% until 2028. The primary growth drivers of the market are the increased consumer awareness and health consciousness coupled with the hectic work schedules of the working population leading to a lack of fulfillment in people’s daily nutrition. The geriatric population is also growing leading to higher expected demand for dietary supplement products. There is also increased awareness on the importance of nutrition for children with increasing per capita income in developing countries which is expected to increase consumer spending on nutrition-based products.
When examining the adult nutrition products, Abbott appears to be a leader in the US with products such as Ensure, PediaSure, Ensure Plus, and Glucerna providing $1,231 mln in revenue in 2019. In comparison, the other products in the graph below are owned by individual competing companies with no other company owning more than one brand of the leading products. Based on this data, we believe Abbott is a market leader within the adult nutrition market.
Sales of the leading adult nutrition liquid and powder brands (2019)
Source: Statista
Along with being a leading company in the dietary supplement market, the ROA generated by the nutritionals segment is consistently one of the highest for the company. The 3-year average ROA for the nutritionals segment is 52% which is higher than the company’s 3-year average ROA of 47%. Furthermore, we see a significant change in ROA for the company’s revenue segments in 2020 except for the nutritionals segment. The sales of the nutritionals segments grew 3.21% in 2020 despite the economic downturn and global lockdowns. Additionally, the nutritionals business also grew during the 2008 global financial crisis at an average of 7% while other business segments experienced negative growth rates. Based on this, we believe the nutritionals business is a strong segment for the company as it has consistently grown over the past 2 decades even through economic downturns.
Source: Abbott, Khaveen Investments
Even in terms of the total sales derived per manufacturing site reflects the strength in the company’s nutritionals business. The company only has 14 manufacturing sites for nutritionals products while the segment accounted for 22% of revenue in 2020. In total, the company has 93 manufacturing sites. Based on the table below, we see Abbott achieves the most revenue per manufacturing site from its nutritionals business at $546 mln per year. The average revenue generated per manufacturing site for the company is only $371 mln per year.
Total Sales per Manufacturing Site | 2018 | 2019 | 2020 |
Established Pharmaceutical ($ mln) | 147 | 160 | 154 |
Nutritional ($ mln) | 516 | 529 | 546 |
Diagnostic ($ mln) | 326 | 335 | 450 |
Medical Devices ($ mln) | 421 | 453 | 437 |
Average Sales for Total Manufacturing Sites ($ mln) | 325 | 346 | 371 |
Source: Abbott, Khaveen Investments
For the revenue projections, we annualized 2021 revenue based on H1 2021 revenues. From 2022 onwards, we forecasted revenue growth to be based on the global dietary market CAGR of 8.6%. Overall, we believe this is a strong segment for the company as revenues have been consistently growing even through economic downturns. Furthermore, the market growth drivers suggest increasing demand for dietary supplement products in the next decade.
Revenue Segment | 2019 | 2020 | 2021F | 2022F | 2023F | 2024F | 2025F |
Nutritionals ($ mln) | 7,409 | 7,647 | 8,288 | 9,001 | 9,775 | 10,615 | 11,528 |
Growth (%) | 2.5% | 3.2% | 8.4% | 8.6% | 8.6% | 8.6% | 8.6% |
Source: Abbott, Grand View Research, Khaveen Investments
Strong Pipeline of Products Expected in the Next 3 Years
Abbott has a strong pipeline of potential products that are expected to be soon released into the market. The company is significantly expanding its heart-related products since the 2017 acquisition of St Johns Medical providing access to high-growth cardiovascular diagnostics markets. While the company has not provided a forecast on the potential TAM, it is estimated to be near a billion dollars. The company also aims to further expand within the cardiac rhythm management market starting with a single chamber device in 2022 and expanding towards a dual-chamber system. The global cardiac rhythm management market is forecasted to grow at a CAGR of 7.5%.
Abbott also developed the first rapid handheld blood test for concussions. This rapid test allows for quick testing for a concussion on the spot without conducting a CT scan. This is expected to reduce unnecessary CT scans by 40% and reduce wait times in emergency rooms as well. The quick nature of the test which can be performed anywhere provides the company with a significant opportunity at sporting events. With more than 100,000 institutions that conduct sporting events, the product has a significant opportunity that is currently not available in the market.
The company’s cash grew by 77% in 2020 primarily due to increased revenues from COVID-19 related sales. The company stated a portion could be used to invest in the future product pipeline. Currently, the company has 100+ products in its pipeline which is expected to be commercially available in the next 3 years. We projected revenues related to cardiovascular markets for 2021 by annualizing the six months revenue. From 2022 onwards, we projected revenue growth to be in line with the market CAGR of the specific markets. Based on this, we expect a 16.55% revenue growth in 2021 and roughly 10% from 2022 onwards.
Medical Devices | 2019 | 2020 | 2021F | 2022F | 2023F | 2024F | 2025F |
Rhythm Management ($ mln) | 2,144 | 1,914 | 2,172 | 2,335 | 2,510 | 2,698 | 2,901 |
Growth (%) | -2.46% | -10.73% | 13.48% | 7.50% | 7.50% | 7.50% | 7.50% |
Electrophysiology ($ mln) | 1,721 | 1,578 | 1,836 | 2,005 | 2,189 | 2,391 | 2,611 |
Growth (%) | 10.25% | -8.31% | 16.35% | 9.20% | 9.20% | 9.20% | 9.20% |
Heart Failure ($ mln) | 769 | 740 | 842 | 1,006 | 1,202 | 1,437 | 1,717 |
Growth (%) | 19.04% | -3.77% | 13.78% | 19.50% | 19.50% | 19.50% | 19.50% |
Vascular ($ mln) | 2,850 | 2,339 | 2,664 | 2,880 | 3,113 | 3,365 | 3,638 |
Growth (%) | -2.70% | -17.93% | 13.89% | 8.10% | 8.10% | 8.10% | 8.10% |
Structural Heart ($ mln) | 1,400 | 1,247 | 1,598 | 1,761 | 1,941 | 2,139 | 2,357 |
Growth (%) | 12.99% | -10.93% | 28.15% | 10.20% | 10.20% | 10.20% | 10.20% |
Total Medical Devices Revenue Excluding Diabetes Care and Neuromodulation ($ mln) | 8,884 | 7,818 | 9,112 | 9,987 | 10,955 | 12,030 | 13,223 |
Growth (%) | -12.00% | 16.55% | 9.60% | 9.70% | 9.81% | 9.92% |
Source: Abbott, Dataintelo, IMARC Group, Global Data, Market Data Forecast, Markets and Markets, Globe News Wire, Khaveen Investments
COVID-19 Sales to Disappear by 2022 Losing 10% of Total Revenues
COVID-19 related sales contributed $3.3 bln in 2020 for Abbott. This represented 10% of the company’s total revenues. However, with the vaccination efforts globally, diagnostics revenue generated from COVID-19 is expected to vanish by 2022. This is also reflected in Abbott lowering forecasts for COVID-19 related revenues from $6.5 bln to $7 bln in 2021 to only $4 to $.5 bln in 2021. Based on the company’s updated forecast, 69% of COVID-19 related revenues for 2021 are already captured in the first six months of the year. This further supports the expected sharp negative growth in the next few months followed by a disappearance of the revenue stream in 2022.
Revenue Stream | 2020 | 2021F | 2022F |
COVID-19 related ($ mln) | 3,318 | 4,000 | 0 |
Growth (%) | 21% | -100% | |
% of Total Revenues | 10% | 10% | 0% |
Source: Abbott, Khaveen Investments
There is also high competition in the COVID-19 diagnostics equipment market. There are numerous COVID-19 testing kits currently available in the market as well making it saturated, with Quidel being a significant player. While Abbott has at-home testing kits which allow customers to test for COVID-19 in the comfort of their homes, the demand for the product is expected to decline. This is due to the CDC’s updated requirements which don’t require individuals to take COVID-19 tests if they’re fully vaccinated for domestic travel. Overall, we believe due to the high number of COVID-19 tests available along with the expected reduction in testing required in the future, this portion of revenues could disappear for the company in 2022.
Valuation
Abbott’s 5-year average revenue growth was 11.6%. The 5-year average gross and net margins are 57.6% and 8.15%, respectively. The gross and net margins appear to be stable for the company with net margins declining in 2017 due to additional costs incurred with the major acquisition of St Johns Medical.
Source: Abbott, Khaveen Investments
The ROA, ROE, and ROCE of the company appear to be growing steadily in the past 3 years. The decline in 2017 is due to the acquisition conducted by the company. Hence, the recovery over the past 3 years appears to be promising and is expected to continue growing into the future as well.
Source: Abbott
The company’s 5-year average free cash flow margin is 8.68%. The -15.38% FCF margin recorded in 2017 is due to the acquisition of St. Johns Medical with a total equity value of $25 bln. Excluding the St Johns Medical acquisition, the company has experienced positive FCF for the past 7 years.
Source: Abbott, Khaveen Investments
To value the company, we used a DCF model as the company is profitable and has stable cash flow generating abilities. We got an industry average EV/EBITDA of 19.61x based on comparable companies that compete with Abbott Laboratories.
Company | EV/EBITDA |
Abbott Laboratories | 19.43x |
Thermo Fisher Scientific (TMO) | 16.84x |
Medtronic | 23.23x |
Stryker (SYK) | 23.75x |
bioMerieux (OTCPK:BMXXY) | 15.01x |
Siemens Healthineers (OTCPK:SEMHF) | 23.38x |
Qiagen (QGEN) | 15.60x |
Average | 19.61x |
Source: Seeking Alpha
For the revenue projections, we annualized 2021 revenue based on the six months revenue recorded. From 2022 onwards, we forecasted revenues of the individual business lines of the company except established pharmaceuticals based on the market CAGR. For established pharmaceuticals revenue, we forecasted revenues based on the average growth from 2017 to 2021. We did not use the market CAGR as this segment consists of products sold only outside the US and does not have a clear breakdown of revenue per product. Diagnostics revenue is expected to grow at -23.2% in 2022 due to the disappearance of COVID-19 related revenues as discussed above. For the others revenue segment, we forecasted revenue growth from 2022 onwards based on the average revenue growth in 2020 and expected revenue growth in 2021. Thus, we obtained a revenue growth forecast of 12.2% and –0.5% in 2021 and 2022, respectively. From 2023 onwards, we project revenues to grow at around 10%.
Revenue Segments | 2019 | 2020 | 2021F | 2022F | 2023F | 2024F | 2025F |
Established Pharmaceuticals ($ mln) | 4,486 | 4,303 | 4,500 | 4,650 | 4,804 | 4,964 | 5,130 |
Growth (%) | 1.4% | -4.1% | 4.6% | 3.3% | 3.3% | 3.3% | 3.3% |
Nutritionals ($ mln) | 7,409 | 7,647 | 8,288 | 9,001 | 9,775 | 10,615 | 11,528 |
Growth (%) | 2.5% | 3.2% | 8.4% | 8.6% | 8.6% | 8.6% | 8.6% |
Diagnostics ($ mln) | 7,713 | 10,805 | 12,004 | 9,216 | 9,975 | 10,797 | 11,687 |
Growth (%) | 2.9% | 40.1% | 11.1% | -23.2% | 8.2% | 8.2% | 8.2% |
Medical Devices ($ mln) | 12,239 | 11,787 | 13,972 | 15,704 | 17,682 | 19,908 | 22,415 |
Growth (%) | 7.6% | -3.7% | 18.5% | 12.4% | 12.6% | 12.6% | 12.6% |
Others | 57 | 66 | 76 | 88 | 101 | 117 | 135 |
Growth (%) | -8.1% | 15.8% | 15.2% | 15.5% | 15.5% | 15.5% | 15.5% |
Total Revenue ($ mln) | 31,904 | 34,608 | 38,840 | 38,658 | 42,337 | 46,402 | 50,895 |
Growth (%) | 4.3% | 8.5% | 12.2% | -0.5% | 9.5% | 9.6% | 9.7% |
Source: Abbott, Khaveen Investments
Based on the revenue projection and discount rate of 8.2% (company’s WACC), we get an upside of -1.71% for Abbott Laboratories.
Source: Abbott, Khaveen Investments
Verdict
The main growth drivers of Abbott Laboratories are its diabetes care business, nutritionals business, and cardiovascular-related business. The company has been constantly improving the Freestyle Libre product to maintain its market leadership and increase its user base by developing special products and features for athletes as well. The diabetes business is expected to experience strong growth in the mid to high teens in the long run. Next, the nutritionals business segment has been a fundamental growth factor for the company in the past. The segment has been resilient through economic downturns as witnessed during the global financial crisis and the recent COVID-19 pandemic. As a stable segment for the company, the nutritionals segment is forecasted to grow in the high single digits.
We also explored potential future products, especially within the cardiovascular market. With the increased cash available due to COVID-19 related revenues, it provides the company with the ability to invest heavily into its future product pipeline. We expect more than 100 potential products to be released within the next 3 years. A significant risk associated with the company is the expected disappearance of COVID-19 related revenues from 2022 onwards. The company has forecasted revenues to significantly decline in the second half of 2021 and we expect it to completely disappear in 2022. This is based on the global vaccination efforts and changed regulations regarding domestic travel and testing in the US. Overall, after factoring in the growth potentials and risks related to COVID-19 revenue, our revenue forecast shows a high single-digit revenue growth until 2025. Based on our DCF valuation, we rate Abbott Laboratories as a Hold with a target price of $121.05.
This article was written by
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