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Abbott Labs (ABT) is going to announce its Q3 results on Oct. 17. It is the third major healthcare company in our coverage to announce its results after Roche Holdings (OTCQX:RHHBY) and Johnson & Johnson (JNJ) announces its earnings on Oct. 16. (See our articles titled "Roche Holdings Q3 Earnings: What We Are Watching" and "Johnson & Johnson’s Q3 Earnings: What We Are Watching.") We expect continued strong performance by key pharmaceutical drugs Humira, AndroGel, and Lupron supported by its nutritional franchise. We believe margins could improve as a result of improved efficiencies across several operating divisions. Our price estimate for Abbott Labs stands at $67, in line with the current market price.

Humira, Nutritional to Drive Growth

Humira is Abbott's blockbuster drug and contributed nearly 20% to the company’s total revenues in 2011 and in the first half of 2012. It has shown consistent double-digit growth rates. We have big expectations from Humira in Q3 2012 as well. Other drugs such as AndroGel, Creon, Lupron, and Synthroid may also continue with their strong showings. We expect a decline in revenue from Tricor to offset some of the growth as the drug went off-patent in July 2012. Another worry is the government investigation on Depakote, a drug for which the company has set aside $1.5 billion as litigation settlement.

After facing a setback following the voluntary recall of infant formula Similac in 2010, the company seems to be gaining consumer confidence and market share. The company's pediatric nutritional business registered double-digit growth in recent quarters, largely due to Similac and other pediatric nutritional products like PediaSure, Ensure, and Glucerna. We expect the nutritional segment to continue to post strong growth.

We expect moderate growth from the Vascular and Diagnostics division after the company launched various products, including its next-generation drug-eluting stent XIENCE Xpedition and XIENCE PRIME in different parts of the world.

Focused on Business Split, No Major Upside Without a Promising New Drug

We believe that in the short term Abbott might be better off than most of its major competitors, as no major patent expiry is due in the near term except for Tricor. Separately, Abbott will complete its spin-off by the end of 2012 and create two publicly traded companies. This will make the old Abbott immune to changes in product patents and should bring about more stability in its cash flows.We, however, believe that the company's current valuation already reflects all of these factors after appreciating nearly 35% in the last year.

The company doesn't have a very strong Phase III pipeline with any potential blockbuster drugs, which limits its growth potential. As such, we don't see major upside to the company's current market price. While the company's hepatitis C drug has shown promising results in Phase II clinical trials, we will wait for further details before taking any stand.

Disclosure: No positions.

Source: Abbott Q3 Earnings Preview: What We're Watching