The Future Arrives for Abbott Labs

It's finally here: With Abbott Labs' (NYSE: ABT  ) split officially complete and the beginning of AbbVie's publicly traded life, Abbott's set sail away from the lucrative seas of branded pharmaceuticals and into a new ocean of opportunity. The spinoff also brings up a whole new set of questions for investors, however. Where will this company find its growth in the coming years -- and what do you need to know and watch for as Abbott looks to refocus its business on a new core?

Nutritionals: An international game
Abbott's nutritionals division is now the company's largest by sales with the spinoff official. While this segment -- and the company itself -- won't have anywhere near the growth of the old branded pharmaceutical business, there's still more than enough promise around to satisfy investors

The nutrition industry has experienced good times internationally, with emerging markets and growing worldwide middle classes contributing to recent growth. Pfizer's (NYSE: PFE  ) nutritional unit, which the company recently sold off to Nestle for more than $11 billion, recorded nearly 85% of its sales abroad in emerging markets. Population growth in large, developing countries like India and Indonesia can fuel Abbott's nutritional business to higher heights in coming years.

Right now, Abbott does a good job in the international market. Through the first nine months of last year, the company's international nutritional sales totaled more than 54% of the segment's total revenue. While sales growth abroad was much higher in 2011, currency fluctuations -- particularly the dollar's relative strength -- didn't help Abbott last year. Considering the Federal Reserve's ongoing quantitative easing and its potential weakening of the dollar, that might not be as pressing an issue in the near future.

Infant and pediatric nutrition, which make up the majority of the segment's sales, have plenty of room to grow. Competitor Heinz (UNKNOWN: HNZ.DL  ) saw 16% growth in its infant nutrition business during last year's first nine months, and with sales soaring in many still-untapped markets -- particularly double-digit sales growth in India's baby food market -- there's considerable opportunity for Abbott's largest division.

No star-studded sales here
Nutrition isn't all the new Abbott has going for it, however.

The company's diagnostics division and vascular segment may not be the most glamorous -- or sales heavy -- branches, but with billions of dollars in revenue coming from each, they're important pieces of the company that investors can't overlook. With growth for each division down for 2012 through nine months, Abbott will need to turn around these two smaller segments in the future.

Vascular sales in particular could grow significantly in coming years. With heart disease and diabetes on the rise worldwide, the company's stent business -- where it currently holds the market leader in its drug-eluting stent Xience -- should only continue to grow.

Even with recent data supporting bypass operations over stents for some diabetics, Abbott's Absorb stent -- which dissolves completely into the bloodstream after it's finished -- should keep Abbott's vascular sales growing in the future even after Xience's billion-dollar revenues begin to decline.

A generic market around the world
Generic drug sales make up the final large chunk of Abbott's revenue. While these lower-margin products can't fully replace the branded pharmaceuticals that the company's losing, like in the nutrition business, sales abroad can produce enough growth to keep this segment on the right track.

The opportunity in emerging markets -- which have growing middle class populations able to afford cheap generics, but not costly brand-name drugs -- is obvious. Generic growth abroad, along with the nutrition business, should keep investors firmly watching Abbott's international efforts in the coming future.

It's not just emerging markets that could fuel generic growth, however: Rising health care costs in advanced economies could force even first-world nations to accept generics on a broader scale. Cash-strapped France is pushing for a higher utilization rate in generics, while increasingly tight hospital budgets in the United States could see more generic medications pushed domestically, as well. As of 2011, generic drugs were used in just 78% of cases in the U.S. -- far below the likes of fellow advanced economies like Germany, where generic utilization rates exceeded 90%.

Don't expect massive margins or profits from this segment. Any strengthening of the U.S. dollar could seriously put a dent in business abroad with the relative cheapness of generics in less affluent markets. Even with currency fluctuations this year, however, some of Abbott's generic competitors have still managed to do quite well: Shares of Mylan (NASDAQ: MYL  ) picked up 24% over the past 52 weeks, with Watson Pharmaceuticals' (NYSE: ACT  ) stock gaining nearly 42% over that same time frame.

Even without the blockbuster drugs of its branded pharmaceutical business, Abbott can still succeed with drugs -- investors just can't expect the same reliance on hits like Humira, with slow, steady growth around the world more important for the segment's future.

Strong and steady wins the (long-term) race
None of these divisions will likely give Abbott the kind of high-powered growth that brand-name pharmaceuticals could – nor should you expect any sort of miracle product like Humira. But what you can hope for in the future is a steady, sturdy company that's greater than the sum of its parts.

Abbott's new business core, while lacking the glamour factor of branded drugs, offers great opportunities for the company to expand in emerging markets abroad while maintaining a sizable position in advanced economies. Though Abbott's future may disappoint traders looking for a quick buck, long-term investors may just find the type of consistent stock here that can sustain solid returns for years.


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