It's not an easy time to be a health care investor.
Between the patent cliff, taxes, and Europe's meltdown, there's enough information and legislation swirling about to keep concerned shareholders up for days. Perhaps the biggest trend of a changing industry has come from spinoffs, however: Abbott Labs (ABT +0.58%) made waves in health care by offloading its pharmaceutical business, and other companies have joined in the spinoff game by dumping unwanted divisions.
With some of the biggest players in the industry shaking things up, investors are left wondering what to make of companies they've invested in – and what to expect from the future. Let's take a look at the new Abbott Labs and one of its most unheralded, yet lucrative, divisions: diagnostics.
Underhyped, but growing nonetheless
Abbott's diagnostics division isn't often given much hype. The company's nutritionals segment, its highest-selling unit, commands the attractive and lucrative emerging markets, while its vascular segment boasts the leading drug-eluting stent today as well as strong candidates to lead the future of the industry. Make no mistake, however: Abbott's diagnostics department isn't sitting idly by.
Abbott recorded total diagnostics sales of around $4.3 billion in 2012. That was good enough to rank Abbott as the fourth-largest diagnostics company in the world by sales in 2012, behind the likes of massive conglomerate Siemens (SI 1.31%), which recorded more than $5.1 billion in diagnostics sales, and leader Roche (RHHBY 1.11%), which topped the industry last year with more than $7.1 billion in diagnostics revenue.
Most of Abbott's diagnostics revenue, however, came from its Core Laboratory Diagnostics branch. Abbott's chugged along with this division despite a failed attempt back in 2007 to sell the division to GE (GE 3.53%) for more than $8 billion, a deal ultimately scrapped because the two companies couldn't agree to terms. In the end, that looks like a win for Abbott: The unit pulled in more than 80% of total diagnostics sales and saw operational growth of 7% in 2012, although its 6.9% growth abroad was heavily muted by currency issues.
Still, that's far better growth than Abbott's larger but stagnant generics business, and good enough to rank among the company's fastest-growing units. With hospitals and physicians more attuned than ever to getting things right and avoiding diagnosis mistakes , Abbott has a good opportunity to keep growing here. The company expects future core lab growth to stem from blood screening, hematology, and immunochemistry diagnostic products.
Molecular diagnostics -- a hot field that Abbott hasn't performed so well in -- aren't doing quite as well, seeing contraction of 2.3% in the U.S. with strong growth abroad that currency fluctuations took down. Still, molecular diagnostics recorded only $455 million in revenue last year, and its less-impressive fortunes won't greatly impact the company's performance. The molecular diagnostics industry is flourishing, but if Abbott wants to capitalize, it will need to turn things around here. The company does expect to launch more than 15 new molecular diagnostics products in the next few years, however, so this could be the company's secret weapon of the future -- investors, keep an eye on this.
Likewise, Abbott's point-of-care diagnostics branch is also small with sales of just $348 million last year; unlike molecular diagnostics, however, this division is soaring. The unit recorded growth of 16% in 2012, heavily fueled by domestic sales growth of 18.1%. Why's that important? The point-of-care diagnostics market is expected to grow from $13.8 billion in 2011 to $16.5 billion by 2016, according to BCC Research. Abbott may not be making a killing here, but if the company can capitalize on that trend, this smaller unit can help fuel growth for a company in need of it after the spinoff of its branded pharmaceuticals business.
Keep your eye on diagnostics
While diagnostics may not yet be Abbott's superstar division, this unit has some serious potential. With core lab sales growing at a good clip, this unit --- along with Abbott's nutritionals -- will serve as one of the major drivers of the company's future growth in its post-branded pharmaceuticals life. Meanwhile, if Abbott can turn around its molecular diagnostics branch with new products and ride the growth of the point-of-care diagnostics market, this company's future could look even brighter. In all, this is one division of Abbott's that you don't want to overlook.
