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Abbott Laboratories (ABT - Analyst Report) reported first quarter 2014 earnings of 41 cents per share, above the Zacks Consensus Estimate of 35 cents.

Earnings were down 2.4% from the year-ago quarter but above the management's guidance range of 34–36 cents. Including one-time items, first quarter earnings came in at 22 cents per share, down from 34 cents in the year-ago quarter.

Abbott Labs generated sales of $5.2 billion in the first quarter of 2014, down 2.5% year over year and short of the Zacks Consensus Estimate of $5.4 billion.

The disruption in Abbott Labs’ international nutrition business in Aug 2013 and the timing of supply of key products in Established Pharmaceuticals segment due to an expected plant shutdown for capacity expansion purposes negatively impacted sales by 2.6% points.

First Quarter in Detail

Abbott Labs operates through four segments, namely Established Pharmaceuticals Division (EPD), Medical Devices, Diagnostics and Nutrition.

EPD sales declined 6.6% year over year to $1.1 billion including a negative impact of 5.9% due to currency fluctuations. Sales in key emerging markets edged up 0.2% on an operational basis (excluding foreign currency fluctuations) driven by growth in Brazil, Russia and China. However, sales from developed and other markets declined 1.5% on an operational basis.

Even though sales in this division was impacted by the timing of supply of key products in women's health portfolio due to an expected plant shutdown for capacity expansion purposes, Abbott Labs' expects sales growth from key emerging markets to accelerate in 2014.

The Medical Devices business generated sales of $1.3 billion, down 1.2% year over year. Diabetes Care sales were down 10.5% due to the implementation of CMS or the competitive bidding for Medicare patients in the U.S. The Vascular business was down 0.5% despite continued uptake of drug eluting stent systems Xience Xpedition and Absorb in key geographies.

On a positive note, Medical Optics business was up 7.6%. Cataract sales, accounting for more than 65% of total Medical Optics sales, outpaced the overall market and recorded double-digit growth propelled by a number of new products launched in 2013, including the Tecnis OptiBlue IOL in Japan and the Tecnis Toric IOL in the U.S. along with further penetration of the Catalys Precision Laser System for cataract surgery.

As expected, the Nutrition business was down 4.0% year over year to $1.6 billion. Pediatric Nutrition sales declined 8.5% as sales in this business were adversely impacted by a supplier recall in early Aug 2013 in certain international markets. This sales disruption is estimated to have reduced sales by approximately $75 million in the first quarter in international Pediatric Nutrition business. Adult Nutrition sales grew 2.2%, driven by solid growth of its key brand Ensure. 

Diagnostics business sales increased 2.6% year over year to $1.1 billion. Key areas of focus in this division include the Core Laboratory Diagnostics, Molecular Diagnostics and Point of Care Diagnostics businesses. Core Laboratory sales increased 2.4% and Point of Care Diagnostics increased 2.2%. Worldwide sales of Molecular Diagnostics were up 4.6%.

2014 Outlook Reiterated

Abbott Labs continues to expect earnings per share in the range of $2.16 to $2.26 in 2014. The Zacks Consensus Estimate currently stands at $2.20 per share, well within the company’s guidance. Shares were up in pre-market trading.

Our View

Abbott Labs currently carries a Zacks Rank #3 (Hold). Even though earnings were above expectations in the first quarter, sales fell short. The supply constraints in the EPD segment continue to pull down the sales growth of the division. We were disappointed by the disruption in international markets of the Nutrition business which was one of the fastest growing businesses for Abbott Labs. The disruption is likely to stretch into the first half of 2014.

Nevertheless, Abbott Labs plans to launch a number of new products globally in 2014 to recapture its lost market share in the nutrition business, including a new infant formula, Eleva, recently launched in China. The company intends to increase its global capacity to meet demand with three new manufacturing facilities scheduled to be operational in China, India and the U.S. in the second quarter.

We believe that Abbott Labs is extremely diversified with its presence in nutrition, diagnostics, generic pharmaceuticals and medical devices markets after having separated its proprietary pharmaceutical business into a new company called AbbVie (ABBV - Analyst Report) in early 2013.

Some better-ranked stocks in the healthcare sector include Allergan (AGN - Analyst Report) and Biodel Inc. (BIOD - Snapshot Report). Both carry a Zacks Rank #2 (Buy).

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