Is Abbott Labs' Run Higher About to End?

Shares of Abbott Labs (NYSE: ABT  ) hit a 52-week high on Monday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
The simple answer as to how Abbott reached new highs is health-care diversity. Unlike traditional pharmaceutical companies, Abbott is the world's largest nutritional medicine supplier, while also manufacturing medical devices. By focusing on multiple aspects of health-care Abbott has avoided the pitfalls that come with operating in non-diversified sectors.

Abbott's latest quarter continued a streak of strong sales growth with revenue rising 4.6% (including negative currency effects). Pharmaceuticals make up about 43% of Abbott's business and grew by 7% worldwide with its class-leading nutritional segment putting in gains of 10%. Abbott's well-diversified product line is paying dividends in an otherwise unstable market.

But not everything is going to end in fairy-tale fashion for Abbott shareholders and, if they aren't careful, their investment could turn into a pumpkin. Comprising a large portion of its business, branded drugs only have a finite patent-exclusive shelf life. TriCor, a $1 billion drug which has been protected by patents for the better part of 35 years, is expected to lose patent exclusivity this month. Competition is also a primary concern. Humira, Abbott's rheumatoid arthritis treatment, makes up about half of total pharmaceutical sales and is facing heavy competition from Pfizer (NYSE: PFE  ) and Amgen's Enbrel, and Johnson & Johnson's (NYSE: JNJ  ) Remicade. Abbott also faces fierce generic competition internationally from the likes of Dr. Reddy's Laboratories (NYSE: RDY  ) in India.

How it stacks up
Let's see how Abbott Labs compares to its peers.

ABT Chart

ABT data by YCharts.

As you can see from the chart above, generic-drug producer Dr. Reddy's has done well over the past five years whereas health-care reform and increased levels of competition and litigation have taken their toll on pharmaceuticals, as well as on medical device makers like Medtronic (NYSE: MDT  ) .

Company

Price/Book

Price/Cash Flow

Forward P/E

Dividend Yield

Abbott Labs 4.0 11.1 11.6 3.2%
Pfizer 2.1 9.7 9.4 3.8%
Dr. Reddy's Laboratories 5.7 29.2 15.6 0.8%
Medtronic 2.4 10.1 10.2 2.7%

Source: Morningstar. Yields are projected.

These metrics provide even more evidence for why we've seen a larger outperformance from Dr. Reddy's than its peers. Generic drug manufacturers pay far less in research and development expenses and have a nearly endless sea of drug hopefuls in their pipelines considering the finite timeframe of drug patents.

Abbott and Pfizer can offer their shareholders higher dividends with more predictable cash flow than a generic-drug producer like Dr. Reddy's, but they both will also deal with the huge shortfall of losing blockbuster drugs to patent expirations. Pfizer lost patent exclusivity last year on the best-selling drug in the world, Lipitor, which accounted for about 15% of its annual sales. Abbott's Humira (currently a fifth of total sales) will see its first patents beginning to expire in 2016.

Medtronic also presents itself as a nice value and has little to worry about with regard to patent issues. My primary concern with Medtronic is the recent upholding of the 2.3% medical device excise tax by the Supreme Court. With research and development budgets constrained by the new tax, which is set to take effect in 2013, investors are exhibiting caution for valid reasons.

What's next
Now for the $64,000 question: What's next for Abbott Labs? The answer going to depend largely on whether its plan to split its business into two separate entities -- a pharmaceutical research company called AbbVie, and a diversified medical products company keeping the legacy Abbott Labs name -- will unlock shareholder value.

Our very own CAPS community gives the company a highly coveted five-star rating, with a whopping 96.4% of members expecting it to outperform. Despite 2,600-plus member ratings, I've yet to weigh in with my own CAPScall -- and I'm still not ready yet.

Abbott is in the process of further getting its feet wet in two areas I think have plenty of potential: medical devices and diagnostic products, and has a plan in place to unlock shareholder value through separating into two entities. I'm still uncertain, however, how smoothly the transition into two separate entities will come about. I do see value in Abbott and its 3.2% yield, but I would rather hold off until after the proposed split later this year before diving into the stock. Instead, I plan to add it to My Watchlist with the intention of reviewing it post-split.

Abbott Labs clearly has a pipeline that's changing lives. If you'd like the inside scoop on a stock our Motley Fool Rule Breakers team feels could offer the next revolutionary product, then click here for your free access to our latest report.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Abbott Laboratories, Johnson & Johnson, and Medtronic. Motley Fool newsletter services have recommended buying shares of Pfizer and Johnson & Johnson, as well as creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 03, 2012, at 6:13 PM, JTFM1 wrote:

    What many are not aware of is that Abbott and Biosante have a closer relationship then most realize. Aside from the formation of Abbvie, Abbotts efforts to extend it's pipeline may include a partnership or even a buyout of Biosante. The reason for such a move would revolve around the growing acceptance that low dose testosterone has many benefits including the reduction of cardiovascular events.

    Biosante while conducting the safety trials for Libigel in the treatment of HSDD discovered that Libigel (low dose testosterone) when given to post menopausal women with moderate cardiovascular risk factors ( i.e, Hypertension, Dyslipidemia,Smokers, Diabetes mellitus, Documented CV disease including- myocardial infarction, stroke, hospitalization for unstable angina/acute coronary syndrome, revascularization of the coronary or peripheral circulations ) reduced the risk of having a cardiovascular event by 70 %. Biosante has since submitted patent applications accordingly.

    Androgel has made Abbott the leader in the use of testosterone for the male population. Abbott is also exploring the benefit of testosterone as it relates to cardiovascular risk in men.

    Interestingly Stephen Simes, present CEO of Biosante, was CEO of Unimed when they owned Androgel and it was later obtained by Solvay.

    Testosterone may very well be the next big thing in mitigating heart disease . So don't be surprised if Abbott wants to be the industry leader in this field. In order to accomplish this they will need Biosante's safety data and Libigel.

    It should be noted that Biosante would also give Abbott a boost to the cancer portfolio. GVAX is presently in 17 phase I or II clinical trials some of which could go directly to phase III trials.

  • Report this Comment On July 03, 2012, at 8:16 PM, JTFM1 wrote:

    Slight correction to previous comment. Should read high cardiovascular risk (not moderate).

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