|
|
|
|
||
Abbott Labs' problem child: Baby formula: Is the company's pediatric nutrition business worth the trouble it's causing?Abbott Labs' problem child: Baby formula: Is the company's pediatric nutrition business worth the trouble it's causing? Crain's Chicago Business; Chicago Vol. 45, Iss. 21, (May 23, 2022): 1. Product recalls, infant deaths, federal investigations and lawsuits are turning Abbott Laboratories' underperforming baby formula business into a major headache for the North Chicago-based medical products giant. Abbott began recalling several powder baby formulas in February when customers complained that infants fell ill with Salmonella Newport and another bacteria called Cronobacter sakazakii after consuming the products. The U.S. Food & Drug Administration investigated four hospitalizations and two deaths that occurred after infants consumed Abbott's products and haven't released findings to the public yet. Additionally, several lawsuits have been filed against Abbott by affected families. Abbott didn't respond to requests for comment on the investigation. Abbott says its formulas are not to blame for the illnesses and deaths, but FDA officials say it is too early to tell. In April, a separate collection of lawsuits targeting Abbott and baby formula competitor, Chicago-based Mead Johnson, with allegations that their cow-milk baby formulas are dangerous and sometimes deadly for premature infants were consolidated in front of a judge in Chicago. No recalls have been made over this issue, which spawned more than 80 suits. Attorneys in some of the suits previously told Crain's they're seeking millions of dollars per claim in damages. Abbott and Mead Johnson have denied allegations. Abbott's baby formula brands, including Similac, Alimentum and EleCare, are part of its larger nutrition business, which also makes adult and elder products like Ensure. Nutrition generated 19% of Abbott's $43 billion in sales last year, making it the company's third-largest business after diagnostics and medical devices. With Abbott riding waves of strong growth and good press for its COVID-19 rapid tests, which have boosted revenues the last several quarters, baby formula recalls and lawsuits have cast a cloud over the company's recent success. Abbott told analysts on a recent earnings call that baby formula weighed down nutrition revenues in the first quarter. Pediatric nutrition sales declined 20.6% to $847 million, contributing to a 7% sales decline to $1.9 billion for the nutrition segment. Analysts don't expect nutrition to recover until at least next year. Before this year, nutrition sales were growing, increasing 7.7% in 2021 and 4.7% in 2020, led by growth of the adult nutrition lines, where sales increased 13% in 2021 and 10% in 2020. But pediatric nutrition sales grew just 3.3% last year and 0.3% in 2020. Operating margins across the nutrition business shrunk from 23% in 2019 to 21% in 2021, which Abbott blamed on higher manufacturing and distribution costs. NEGATIVE ATTENTION Abbott's nutrition business also faces potentially costly lawsuits involving serious allegations that could damage its reputation and brands. And the growing severity of a nationwide baby formula shortage—partly caused by Abbott recalls and the suspension of production at its plant in Sturgis, Mich.—is attracting even more negative attention. "The fact that the lawsuits are there and that it's getting more and more attention—that's tricky, especially when it comes to touching probably the most vulnerable of our population, which is newborns and premature babies," says Jason Sherman, owner of Sherman Communications & Marketing, a public relations firm that represents health care, real estate and professional services clients. On May 16, Abbott said it reached an agreement with the FDA to reopen the plant within two weeks if it meets the agency's food standards and other measures, and that products could reach store shelves six to eight weeks later. This isn't the first time baby formula has caused trouble for Abbott. The business has performed inconsistently since Abbott spun off its branded pharmaceutical business as AbbVie in 2013. For several years following the spinoff, Abbott blamed pediatric products for several quarterly declines in nutrition sales. Abbott has long faced strict regulations in China, limiting its growth in a key overseas market. Since entering the market, Abbott has faced recalls in China, price-fixing allegations and a slew of Chinese competitors. Now the business is under fire in Abbott's home market, compounding its longer-term woes and raising questions about its future in the company's portfolio, where it's always been a bit of an outlier as a consumer product among medical devices sold to doctors and hospitals. But even if Abbott wanted to sell the baby formula business or the entire nutrition line, it's unlikely to attract an offer amid the controversy. Abbott would likely have to wait until the FDA investigation has closed, lawsuits are settled and public concern about the brand subsides. "Because it is fairly lucrative piece of business, I do think that if they can clean some of those things up, it would open the door for more companies," said Debbie Wang, a senior equity analyst at Chicago-based Morningstar. GROWTH OPPORTUNITIES Despite issues in China, the international market broadly remains an area of growth for Abbott's products, Wang says, including in Vietnam, India and countries in Latin America. The company is also one of the top five baby formula manufacturers in the world, tied with Mead Johnson. The two companies dominate the baby formula market, ahead of others including Nestlé and Danone. And unlike other Abbott products, the nutrition lines don't require a ton of ongoing investment. "There's nothing inherent in the (nutrition) business that makes it a bad business," says Erik Gordon, a professor at the University of Michigan's Stephen M. Ross School of Business. "But if you don't operate it correctly, you can turn any business into a mess." |
return to message board, top of board |