Biotech Values

[DewDiligence]

Abbott Is Picture of Health in Otherwise Sickly Drug Industry

[No new insights here, but this makes a good companion piece with #msg-34774636.]

http://online.barrons.com/article/SB123457619288886731.html

›February 14, 2009
By NEIL A. MARTIN

It looks as if Abbott Laboratories has discovered the secret of healthy living. While most of its rivals are flat on their backs, the pharmaceutical giant has been cranking out promising new products, dodging competition from makers of generic drugs and posting double-digit gains in profits.

The company's shares (ticker: ABT) managed to climb 32% over the past three years, while health-care stocks as a group fell 15%. And with Abbott 's main products poised for strong growth, the stock could do even better over the next few years.

The stock isn't cheap. At a recent 56, it's trading at 15.3 times expected earnings for this year, versus the sector's multiple of 12. But bulls argue convincingly that the premium is deserved because of the company's earnings power. Abbott has a broader product base than many drug companies, including a sizeable medical-devices business, and it has relatively little exposure to patent expirations, the bane of Big Pharma. Looming patent expirations on key drugs helped convince Pfizer (PFE) that it should strike a $68 billion deal for Wyeth (WYE).

The Illinois-based Abbott, with a market value of $87 billion, posted a 17% earnings jump last year, to $3.32 a share, on nearly $30 billion of sales. In contrast, the sector's earnings were flat.

Abbott's gains have been fueled in part by its fast-growing business in heart stents, which are used to prop open damaged arteries. Stent sales surged 78% last year, to $1.2 billion, and Abbott's Xience drug-coated stent, which hit the U.S. market last summer, has leapfrogged to a leading position in the U.S. market, mainly at the expense of competitor Johnson & Johnson (JNJ). Coming next: versions of Xience for Europe and Japan.

But Abbott's biggest growth engine is Humira, an injectable drug used to treat rheumatoid arthritis, Crohn's disease, psoriasis and other ailments. Humira sales jumped 48% last year, to $4.5 billion, or 15% of total revenue. Abbott also does a brisk business in cholesterol drugs such as Niaspin, and nutritional products like Similac baby formula.

Though it's clearly getting harder for drug companies to increase earnings -- think pricing pressures from possible health-care reform -- Abbott executives exude confidence. "We are committed to double-digit earnings growth over the next several years," says CEO Miles White, who has been at the helm for 10 years.

Two years ago, Barron's cast a skeptical eye on Abbott, concerned about the safety and effectiveness of the company's drug Tricor. One of Abbott's top sellers, Tricor helps patients lower triglycerides, a type of noncholesterol fat. Since our earlier story, laboratory studies have failed to support the concerns, and a company spokesman cites data showing the drug to be safe.

In fact, Abbott is working with British drug maker AstraZeneca (AZN) to develop a drug that combines TriLipix -- a next-generation fenofibrate, the generic name for Tricor -- with AstraZeneca's blockbuster cholesterol drug Crestor [#msg-35203689], a statin. Abbott plans to submit a new-drug application for this combination in the second half of this year.

That's just one of several important product-initiatives under way. Just a few weeks ago, Abbott moved to expand its niche in ophthalmology, announcing it would purchase vision-care company Advanced Medical Optics (EYE) for $2.8 billion in a deal that positions it to benefit from the growing need for cataract treatment as baby boomers age.

Meanwhile, Abbott is developing an asthma treatment called Flutiform and expects to file for approval this year. A drug called ABT-847 is being tested for treatment of psoriasis and Crohn's disease, and the company is exploring further applications for Humira.

"We continue to advance a number of compounds with breakthrough potential," says White. "We are focusing on discovering new treatments across a spectrum of therapeutic areas," including oncology, neuroscience and immunology.

As it proceeds, Abbott is facing far fewer problems than rivals in maintaining product exclusivity. The company has lost protection for only one of its major products, Depakote, used to treat bipolar disorders, which went off patent last year. And it faces no patent losses over the next few years. Humira remains on patent through December 2016.

Patents expired last year for J&J's Risperdal antipsychotic and Merck 's (MRK) Fosamax bone-building drug, leading to cheaper copycat versions. Pfizer loses the patent for its blockbuster Lipitor cholesterol drug in 2011, and Eli Lilly (LLY) that year will lose protection on its big antipsychotic drug Zyprexa. Swiss drug maker Novartis (NVS) loses patent protection for its top-selling blood-pressure drug Diovan in 2012.

For Abbott, the combination of strong products and solid patent protection adds up to potentially stellar profits. Morgan Stanley analyst David R. Lewis believes Abbott will beat consensus earnings estimates in 2010 and 2011 with per-share net of $4.23 and $4.72, respectively. When he adds up the value of Abbott's various businesses, he arrives at $102.4 billion, or about $66.44 a share, which is in line with his 12-month target price of $67.

Portfolio manager Rick Helm of the Cohen & Steers Dividend Value fund (DVFAX) likes the company's consistent dividend growth. Indeed, Abbott has raised its dividend for 36 years and shows no signs of slowing the increases. The dividend now stands at $1.44, for a yield of 2.6%. Pfizer, on the other had, recently ended a 41-year run of dividend boosts.

"We expect Abbott's dividend to grow nearly 10% this year and roughly 9% a year for the next few years," says Helm, whose $146 million fund focuses on companies with rising dividends. But he also sees ample room for stock appreciation: "We believe there's 40% upside in the stock based on the growth of the company's core businesses, lack of any significant generic competition in its key products and a pipeline that's not sexy but has a number of promising products."

Abbott, founded in 1888 by Chicago physician Wallace Abbott, has undergone a revolution in recent years, improving both its products and profitability through diversification and acquisitions. Once regarded as slow-moving, dull and problem-plagued, the company now participates in some of the largest and fastest growing markets in medical technology.

Credit for the change mostly goes to White, 53, a Stanford University MBA who joined the company in 1984. He has made a number of key acquisitions that have propelled revenue and earnings gains and brought major new products under the Abbott roof. Abbott got Humira through the 2001 acquisition of Knoll Pharmaceuticals, while the 2006 purchases of the vascular and endovascular businesses of the former Guidant Corp. brought Xience into the fold.

Abbott is less acquisition-minded these days, focusing more on internal research-and-development and organic growth than pursuing more acquisitions. "The good news is that we don't need to do any more M&A to deliver on our commitments," White says.

That doesn't mean that double-digit growth is in the bag. The key will be to keep Humira hot. After all, that mainstay product been growing an average of 30% annually in recent years, nearly triple the growth of the rest of Abbott.

There's some concern on Wall Street that the sales growth is unsustainable, that it will have to level off and then decline. It would certainly be hard to replicate Humira's recent growth with another product.

But even if Humira's sales growth does decline, it should still be robust. The drug is nowhere near saturating its current markets: Its penetration of rheumatoid-arthritis treatments alone could climb from 25% now to 33% in 2016, says Morgan Stanley's Lewis, with more patients switching from products like J&J's Remicade. And Abbott is exploring new applications such as treating ulcerative colitis -- potentially a $500 million market. Use of the drug for that ailment is in Phase III clinical trials, as is its use for pediatric Crohn's.

In all, Lewis sees Humira sales increasing by an average of 23% a year through 2011. Though not even half of last year's blistering pace, it should be enough to keep Abbott's profits, and stock price, moving ever higher. In these times of global economic turmoil, settling for 23% growth doesn't sound too bad at all.‹