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Why Investors Should Focus on Abbott's Medical Devices

Motley Fool - Thu Jun 23, 6:26AM CDT

Diversified healthcare company Abbott Laboratories(NYSE: ABT) has been front and center in the news this year. Given the headlines surrounding the infant formula debacle and the influx of cash from COVID-19 diagnostics, it's easy to overlook the company's innovation in medical devices. But this segment provides a stable backbone that is integral to future growth.

Abbott Labs's diabetes products

The American Diabetes Association claims that diabetes is the most common chronic disease in the U.S., with 1.4 million Americans newly diagnosed each year. Abbott is a leader in the field, offering one of the most widely used continuous glucose monitors. The sensor tracks blood glucose and warns if the level gets too high or low, providing more convenient and reliable care than finger-prick tests.

In May, the FDA approved the Freestyle Libre 3, which Abbott claims achieves the most accurate measurement among the line-up of 14-day continuous monitoring systems. At about the size of two pennies, the sensor is also the smallest and thinnest. Abbott intends to maintain a similar price point as previous versions, substantially undercutting rival Dexcom's (NASDAQ: DXCM) G7 CGM System. While still expensive, Illinois recently passed legislation that forces insurance to cover these devices, and demand may increase if other states follow suit.

Abbott continues to innovate in this area, having recently partnered with CamDiab and YpsoMed to develop an automated insulin delivery device. This system will integrate Abbott's diagnostic sensor, CamDiab's mobile app, and YpsoMed's insulin pump to automatically deliver the correct amount of insulin to the patient. The companies expect to complete development by the end of this year.

The company is also working on a combined glucose-ketone sensor that will detect rising ketone levels so that the patient can take preventative measures that forestall diabetic ketacidosis. Ketone monitoring is often overlooked because it is a cumbersome and costly extra step. Pivotal trials on the technology are planned for next year.

Abbott Labs's cardiovascular products

Cardiovascular disease is Abbott's second primary focus in the medical device segment. The company supplies equipment for rhythm management, electrophysiology, heart failure, vascular, and structural heart indications. Two recent FDA approvals will expand the addressable market for cardiac devices.

Abbott's CardioMEMS HF System monitors pressure in the pulmonary artery so that doctors can manage a patient's treatment and prevent heart failure from progressing. The device has been available since 2014, but the FDA expanded the indication in February to allow the sensor to be implanted during an earlier stage of the disease. Heart failure is the leading cause for hospitalization within the elderly population, and more than 6.2 million Americans experience the disease.Abbot estimates that the new label increases the addressable market by 1.2 million Americans.

In April, the FDA approved Abbott's Aveir VR leadless pacemaker for patients with slow heart rhythms. The system offers a longer battery life, as well as a mapping capability to simplify implantation and retrieval processes. Although demand for pacemakers slowed during the height of the pandemic, COVID-19 has been linked to heart damage. At least one-in-five hospitalized COVID-19 patients experience heart irregularities, possibly caused by the viral infection of specialized cells within the heart that regulate its rhythm. Electronic pacemakers may be necessary to replace lost function.

What the future holds for Abbott

Abbott reported fantastic first-quarter results, with overall sales increasing 17.5% from the previous year to $11.9 billion. However, COVID-19 diagnostics tests accounted for $3.3 billion, almost one-third of total revenue. Future demand for pandemic products is uncertain, but management expects that much of the sales for the year may have already been realized.

With COVID-19 sales on the decline, the medical device segment becomes the dominant source of revenue. After removing COVID-19 sales, the $3.6 billion in medical device sales accounts for about 40% of total revenue. This compares to $2.0 billion from diagnostics, $1.9 billion from nutritionals, and $1.1 billion from established pharmaceuticals.

Furthermore, the growing prevalence of diabetes and heart disease promises reliable growth. The overall medical device segment grew 7%, on par with the growth from the established pharmaceutical segment but with a 50% higher operating margin. Meanwhile, nutritionals experienced a 7% decline due to the infant recall and production shut-down. The diagnostics division continues to be productive, recently unveiling a multi-pronged test for sexually transmitted diseases and monkeypox, but these will not come close to filling the hole as demand for COVID-19 screening falls.

While its missteps in manufacturing infant formula are certainly troubling, Abbott remains a well-diversified Dividend King with a dominant market position in several high-growth fields. Its price-to-earnings ratio of 24 is its lowest in the past three years, and in line with competitors. Overall revenue is likely to drop in upcoming quarters, and this may carry over into the stock price; keep an eye out for potential bargain opportunities.

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Natalie Forbes has no position in any of the stocks mentioned. The Motley Fool recommends DexCom. The Motley Fool has a disclosure policy.

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