Abbott Expects Health Economics To Spur Adult Nutrition Growth
This article was originally published in The Tan Sheet
Executive Summary
The firm plans to emphasize health economics and outcomes research “to a great degree to help the medical community understand the importance of nutrition … and its impact on lowering costs in the health care system,” CFO Thomas Freyman says.
Abbott Laboratories Inc. will promote the economic benefits of nutritional products as part of its plan to expand its margins in the nutrition sector, says finance chief Thomas Freyman.
[Abbott Nutrition] “is an important part of our company now,” Freyman, executive VP and chief financial officer, said March 14 at the Barclays Capital Global Healthcare Conference.
The firm expects sales in high-growth markets outside the U.S. to be a key driver in pushing overall annual nutrition growth past 20% by 2015.
For its fiscal 2013, Abbott Nutrition recorded sales of $6.47 billion, with the U.S. up 9.5% and international growth of 6.3%. The firm in January reported that international pediatric nutrition sales grew 15% to $581 million in its fourth quarter as nutritionals sales were up 10.2% to $1.72 billion (Also see "In Brief" - Pink Sheet, 28 Jan, 2013.).
Freyman reminded analysts at the conference in Miami that Abbott Nutrition is more than pediatric products. While around 55% of its business is infant formula and other pediatric nutritionals sales, 45% is adult nutrition.
“For us, a big part of the growth story is expanding category use, which we're working on through a lot of execution on the ground and good brand promotion, but also expansion of the use of these adult nutrition products in the markets,” he said.
The firm’s adult product line includes EAS whey protein and other sports nutritionals, Ensure nutrition shakes, Glucerna protein bars and other specialized products for people with diabetes and ZonePerfect meal replacement bars.
Freyman said the firm expects to emphasize health economics and outcomes research (HEOR) “to a great degree to help the medical community understand the importance of nutrition, of adult nutrition and its impact on lowering costs in the health care system.”
HEOR studies evaluate patient-reported and health economics benefits of a medical product, determining how its use helps health care providers, third-party payers and regulatory agencies as well as consumers.
At a July 2012 HEOR conference Abbott hosted in Singapore, Abbott Nutrition executive Robert Miller said the studies “have the potential to provide simple answers to complex health care issues.”
“As scientists and economists together, we are looking for ways to improve health outcomes, yet cut costs for society,” said Miller, divisional VP for research and development and science, during an Abbott report on the conference.
A health care cost-effectiveness expert, John Nyman, explained that because the effect of medical products “cannot be sold, their value is difficult to ascertain.” As a result, some HEOR studies look to quantify effectiveness by measuring subjects’ “quality-adjusted life years,” which account for both quality and quantity of life lived, combining morbidity and mortality in a single measure, said Nyman.
Nyman, a professor at the University of Minnesota School of Public Health, Division of Health Policy & Management, explained that a second measurement common in HEOR studies – incremental cost-effective ratios – compares costs for different treatments relative to their effectiveness.
He said that a cost-effectiveness analysis shows the cost to achieve a gain in a health measure, such as a reduction in cholesterol level, of a treatment intervention.
Margin Initiative Spans Business
The Abbott Park, Ill.-based firm’s work to expand the nutrition business margins also contributes to the sales growth, he said. The firm expects to grow the nutrition business operating margins around 700 basis points to more than 20%.
Freyman said the margin initiative extends across the nutrition business, from top-line reviews to be sure the firm is investing in areas with greatest opportunity and disinvesting in less-profitable areas, to bottom-line decisions on costs and distributions.
He noted Abbott’s construction of three additional nutrition product plants is partly a reflection of demand. “But it also provides us with the capability of getting our production closer to our customers, improving logistics costs and building those plants in a very efficient way that we think can help improve our margins,” he said.
Abbott Nutrition this year expects double-digit growth outside the U.S., led by sales in China but also driven by sales in India and other countries. “We have a very broad range of exposure to emerging markets, and all of them are executing extremely well,” Freyman said.
The firm’s margin-growth plan includes transitioning from relying on independent distributors in its international markets. “We've been de-emphasizing that over the last year or two, bringing the margins into the company, taking full control of our distribution in the countries,” Freyman said.
He added that planned cost-efficiencies will include leveraging selling, general and administrative expenses through infrastructure investments, particularly in emerging markets.