Baby formula is in short supply around the U.S., raising concerns about nutrition for the three out of four infants who rely on it for some portion of their nourishment. Supply chain issues have created problems since the start of the pandemic, but healthcare equipment provider Abbott Laboratories' (ABT 0.57%) division Abbott Nutrition in particular has drawn the heat for the current severe shortage. Despite Abbott's mounting losses, the company's recovery is in sight.
Shortages triggered by recall and plant shutdown
In mid-February, Abbott voluntarily recalled all powdered infant formula produced by its Sturgis, Michigan plant after four infants who consumed formula from the plant were hospitalized with infections caused by the common environmental bacteria Cronobacter sakazakii.
Abbott's internal investigation did not turn up any link between the ill infants and its baby formula. While the bacteria was found in non-product-contact areas of the plant, none of the strains matched those of the sick infants. Open containers from the homes of the children were tested in three of the cases, and only one was contaminated with the bacteria that caused the illness. No bacterial contamination was found in unopened containers. Still, Abbott closed its plant to allow the U.S. Food and Drug Administration to investigate and to improve testing procedures.
The closure worsened preexisting shortages in infant formula since Abbott is one of the four main providers to the U.S. market. Abbott has increased production in its four other plants to compensate for loss of output from the Michigan facility. In mid-April, Abbott announced that it had doubled its supply of Similac Advanced powdered formula being shipped from its FDA-registered facility in Ireland, and tripled the amount of Similac Ready-to-Feed liquid formula coming from its Ohio headquarters plant.
Impact on revenue
Abbott's pediatric nutritional sales took a big hit from the product recall. Q1 earnings showed U.S. pediatric nutritional sales of $308 million, which is a $170 million drop from the same period of the previous year.
As of the first quarter, the recall on infant formula did not appear to spill over into other areas. Sales for Pedialyte and Pediasure, Abbott's other primary products in the pediatric nutritional segment, remained strong. U.S. adult nutritionals also showed a 3.3% sales gain year over year, to $339 million. Abbott may post declining sales in other nutritional segments in future quarters, however, because it's borrowing plant capacity from other products to meet demands for infant formula.
Abbott's role in the ongoing baby formula shortage has drawn a great deal of public attention. Understandably, safety concerns and lack of product may encourage parents to switch to alternative brands wherever possible. Still, widespread shortages are likely to limit those shoppers' options for the next several months.
As a silver lining, improved testing protocols and plant upgrades are likely to make Abbott's future product even safer. Abbott claims that it has responded to the concerns from the FDA's inspection, and its corrective measures include autosampling throughout the process, and more stringent product and environmental testing. On Monday, Abbott and the FDA reached an agreement about resuming production.
Covid diagnostic tests compensate for losses
Abbott easily recouped its lost revenue from the nutritionals segment in other business areas. Overall company quarterly revenue was $11.9 billion, a 13.8% increase from Q1 2021.
The company's large diagnostics segment has been its main growth driver. Its $3.3 billion in quarterly sales from Covid-related rapid diagnostics tests dwarfed pediatric nutritionals sales. While Abbott's Covid-related sales are difficult to predict, they are expected to slow as the year progresses. This slowdown will have a much greater impact on the company's top line than the infant formula.
Overall, some analysts expect the debacle to cost around $325 million, although this could certainly run higher as long as the plant remains closed. Abbott expects it will take two weeks after FDA clearance to start producing infant formula, and six to eight weeks after that for the product to hit retail shelves. In the best case, normal sales will resume in August. The pediatric nutritionals segment will see significant losses over the first half of the year, but sales should resume in the third quarter when the plant goes back online. In the meantime, healthcare investors should keep their eye on the FDA investigation -- but not worry too much about Abbott's long-term prospects.