Is Abbott Investors' Frustration Justified?

Abbott stock traded lower Wednesday after the company's Q2 earnings call, but are investors ignoring the company's unique position in medtech?

Amanda Pedersen

July 21, 2022

5 Min Read
Photo of sign in front of Abbott Laboratories' headquarters in Abbott Park, IL, taken in March 2022.
Image courtesy of Stacey Wescott / Tribune Content Agency / Alamy Stock Photo

Despite beating analyst expectations on the top and bottom lines and bumping the bottom of its earnings per share (EPS) guidance by 20 cents, Abbott shares slipped by 1.55% Wednesday after the company reported its second-quarter earnings.

Marie Thibault, a medtech analyst at BTIG, shared some thoughts in a report Wednesday as to why investors might have been dissatisfied with Abbott's quarterly report.

"We think this stock reaction ignores the fact that [Abbott] is the rare company that has a valuable tool (COVID test revenue) to offset macroeconomic, [foreign exchange], and formula recall pressures," Thibault wrote.

The analyst acknowledged that the company's 20-cent adjusted EPS guidance raise following the 30-cent Q2 beat "looks underwhelming" and that adjusted EPS may decline year over year in 2023, but she underscored that Abbott is able to raise 2022 guidance despite foreign exchange headwinds, continued macroeconomic concerns, the company's recall on infant formula, China lockdowns, and other challenges.

"In a tough earnings season, we think this resilience should be rewarded," Thibault wrote.

Granted, this wouldn't be the first time Abbott investors missed the forest for the trees. Last year, after the company missed analyst expectations on sales for the first quarter of 2021, the stock dropped almost 4% as investors focused on the top line miss and ignored more positive takeaways from the report.

Throughout the COVID-19 pandemic, Abbott has proven that its diversified portfolio is its secret sauce.

Has COVID-19 testing been the ultimate growth driver for Abbott?

stack of Abbott BinaxNow COVID-19 self-test kits, taken in January 2022

"You're in this enviable position where you've probably grown operating margins more than anyone else in medtech since the start of COVID," Robbie Marcus, a J.P. Morgan medtech analyst, said during the Q&A portion of the company's earning's call. "A lot of that has been from the benefit of COVID testing sales, which are at healthy margins and still healthy reinvestment against that."

He went on to ask Abbott CEO Robert Ford how investors should start thinking about the company's base operating margin, assuming COVID-19 testing sales slowdown in the future.

"I would say on the cost structure piece, I don't necessarily fully agree with you, the way you characterized it in terms of COVID being the ultimate driver here," Ford said. "I think we made a lot of progress on our gross margins historically, whether it was in devices and in nutrition."

Ford said the company's biggest challenge in terms of gross margin is inflation, although he acknowledged that input costs have gone up more on the commodity side and less so in medical devices and diagnostics.

"Yes, there's some noise that happens here with one supplier, another supplier, and we deal with it. But the real challenge we've had, I would say, over the last six months here, has been on the nutrition side," Ford said. "And part of that is ... some of it is commodities. So, we're going to have to see how those look like over the next couple of months, seeing some slowing down of some commodities, but that's the biggest of driver there."

Of course, the formula recall is also hurting the company's nutrition business, with costs that the company doesn't expect will continue into next year. For example, Abbott has been paying WIC rebates for competitive formula products since March when the company initiated the recall. The company has also brought a lot of formula from overseas, Ford said, which has been costly in the current air freight environment. That's not to mention money that Abbott has put into brand recovery on that side of the business in light of the public criticism the recall has drawn.

"We're going to look at our cost structure. We're going to look at areas that have a higher hurdle now for passing an investment hypothesis or thesis, and we're going to ... we'll take action where we need to take action," Ford said. "So that's how I'd characterize our margin."

Let us not forget about Libre 3

Investors would also be remiss not to take into account the big win Abbott scored in diabetes during the second quarter with FDA clearance of FreeStyle Libre 3 system for people four years and older living with diabetes.

"The FreeStyle Libre 3 system is a direct result of listening to our customers – and giving them the innovation and sensing technology they've been looking for," Jared Watkin, senior vice president of Abbott's diabetes care business, said in June. "It's a game changer for the millions of people living with diabetes. They'll be able to manage their health minute-by-minute with the world's smallest and thinnest sensor and most accurate 14-day continuous glucose monitoring system."

The company notes that FreeStyle Libre 3 has a 7.9% overall mean absolute relative difference (MARD), making it the first continuous glucose monitoring (CGM) device to demonstrate a MARD below 8%. MARD is the standard way to measure continuous glucose accuracy. Abbott also said the Libre 3 sensor is the smallest and thinnest on the market at the size of two stacked U.S. pennies. Other touted features include a one-piece applicator to apply te sensor, and a strong Bluetooth integration (rang up to 33 feet).

Ford said Wednesday that the company's U.S. team is excited for the Libre 3 launch, although he acknowledged that the launch process is "a little bit more gradual" as the company works with pharmacy contracts, builds inventory, and familiarizes physicians with the product, and so on.

"But given what I've seen in Europe, I think this is a great opportunity for our U.S. business, which, by the way, did really well this quarter, right? Even without Libre 3," Ford said. "We grew 53% in the second quarter, and I actually think that we can maintain that 30% to 40% growth rate in the U.S. even without Libre 3. So, I think that's going to be an important growth driver for us toward the end of the year and as we go into 2023."

Interestingly, Ford noted that CGM products are a bit different than traditional medical devices in the United States because it is "very pharma-like" where patients have to pay out of pocket, or deal with co-pays, etc.

"I think in an environment where employers and consumers are going to be looking more closely at managing their expenses, I think the value proposition of Libre is going to be even stronger," he said.

About the Author

Amanda Pedersen

Amanda Pedersen is a veteran journalist and award-winning columnist with a passion for helping medical device professionals connect the dots between the medtech news of the day and the bigger picture. She has been covering the medtech industry since 2006.

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