Baby formula is in short supply around the US, raising concerns about nutrition for the 3 of 4 infants that rely on it for some portion of their nourishment. Supply chain issues have created problems since the start of the pandemic, but health care equipment provider Abbott Laboratories’ (ABT 0.75%) subsidiary Abbott Nutrition in particular has drawn the heat for the current severe shortage. Despite mounting losses, recovery is in sight.
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Shortages triggered by recall and plant shut-down
In mid-February, Abbott voluntarily recalled all powdered infant formula produced by its Sturgis, Michigan plant following complaints of infant bacterial infections. Four infants were hospitalized with infections caused by the common environmental bacteria Cronobacter sakazakii. The infants had consumed four different types of formula manufactured at different points over the past year.
Abbott’s internal investigation did not turn up any link between the ill infants and its baby formula. While the bacteria was found in non-product contact areas of the plant, none of the strains matched those of the sick infants. Open containers from the homes of the children were tested in three of the cases, and only one was contaminated with the bacteria that caused the illness. No bacterial contamination was found in unopened containers. Still, Abbott closed its plant to allow the FDA to investigate and to improve testing procedures.
The closure exacerbated pre-existing shortages in infant formula, since Abbott is one of the four main providers to the US market. Abbott has increased production in its four other plants to compensate for loss of output from the Michigan facility. In mid-April, Abbott announced that it had doubled its supply of Similac Advanced powdered formula being shipped from its FDA-registered facility in Ireland, and tripled the amount of Similac Ready-to-Feed liquid formula coming from its Ohio headquarter plant.
Impact on revenue
Pediatric nutritional sales took a big hit from the product recall. Q1 earnings showed US pediatric nutritional sales of $308 million, which is a $170 million drop from the same period of the previous year.
As of the first quarter, the recall on infant formula did not appear to spillover into other areas. Pedialyte, Abbott’s other primary product in the infant nutritional segment, sales remained strong. US adult nutritionals also showed a slight sales gain from $328 to $339 million from the previous year. Some impact may be seen in future quarters, however, because plant capacity has now been borrowed from other products to meet demands for infant formula.
Abbott’s role in the ongoing baby formula shortage has drawn a great deal of public attention. Understandably, safety concerns and lack of product may encourage parents to switch to alternative brands wherever possible. Still, widespread shortages are likely to limit options for the next several months.
As a silver lining, improved testing protocols and plant upgrades are likely to make Abbott’s future product even safer. Abbott claims that it has responded to the concerns from the FDA’s inspection, and corrective measures include autosampling throughout the process, and more stringent product and environmental testing. Abbott is now waiting for FDA’s clearance to resume production.
Covid diagnostic tests compensate for losses
The loss of revenue from the Nutritionals segment was easily recouped in other business areas. Overall company quarterly revenue was $11.9 billion, a 13.8% increase from first quarter 2021.
The large Diagnostics segment has been the main growth driver. The $3.3 billion in quarterly sales from Covid-related rapid diagnostics tests dwarf pediatric nutritionals sales. While Covid-related sales are difficult to predict, they are expected to slow as the year progresses. This slowdown will have a much greater impact on the company’s top line than the infant formula.
Overall, some analysts expect the debacle to cost around $325 million, although this could certainly run higher as the plant remains closed. Abbott expects it will take 2 weeks after FDA clearance to start producing infant formula, and 6-8 weeks after that for the product to hit retail shelves. Best case, normal sales will resume in August. The first half will show significant losses from the Pediatric Nutritionals segment, but sales should resume in the third quarter when the plant goes back online.
