Abbott Milking More Profits By Imitating Baby Formula Business

Abbott Laboratories (NYSE: ABT) is making some internal changes to light a fire under its nutrition business, seeking to duplicate the success of the leader in the U.S. market for infant formula, Mead Johnson (NYSE: MJN).

Mead shareholders have certainly been enjoying a sweet ride. Over the past two years, shares of the suburban Chicago maker of Enfamil have more than doubled, to more than $64, far outpacing the Dow and Nasdaq.

Contributing mightily to the big boost in Mead’s stock price has been the hefty margins it’s been enjoying. Last year, Mead reported a gross profit margin of 63.4% of total sales. Prior to 2009, when Mead was spun off by Bristol-Myers (NYSE: BMY), competitors could only guess about the size and profitability of its infant formula business.

Now that the company is on its own, those results are transparent.

Evidently, Abbott gulped when it saw how much money Mead was making on its infant formula business and vowed to do everything possible to duplicate the success of its rival just down the interstate. Abbott doesn’t break out margins by unit, but its overall margin was 58.3% last year.

To close the gap between it, the makers of Similac infant formula have already started building facilities closer to customers in emerging markets to lower distribution costs. Abbott also said it is trying to improve production scale and yields, lower costs of materials and make its nutrition product mix more profitable.

The company also made a change at the top, putting 34-year company veteran John Landgraf in charge of global nutrition. Landgraf has experience managing global supply chains and in operations, previously serving as senior vice president of pharmaceuticals manufacturing and supply.

Regardless of Abbott’s growing envy of Mead’s margins, the need for new leadership of the company’s nutritional business probably became fait accompli last September, when Abbott had to recall some 5 million cans of certain Similac-brand powdered infant formula due to the possibility of the presence of a beetle.

At the time, the FDA said that the type of beetle, if ingested, could cause discomfort and irritate the gastrointestinal tract, causing the infant to lose his appetite. Notwithstanding the hunger-suppressant nature of the beetle, the problem certainly caused some parents to lose their appetites for Similac.

If Abbott is successful at getting back on track, will it be happy just improving margins? Or will it seek to cut into Mead’s market share in the United States and elsewhere around the world, perhaps throwing a roadblock in its competitors’ ride up the stock charts?

Slowing  Mead down isn’t going to be easy. First-quarter sales of $900 million were up 18% from the previous year, the company’s highest quarterly growth in years. Another good sign is Mead’s exceptional performance in the fast-growing markets in China and Hong Kong, where the company continues to see gains in market share.

Is it too late for investors to jump on the Mead bandwagon? Maybe not.

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