Abbott: A 'Must Buy' Pharma For Long-Term Gains

| About: Abbott Laboratories (ABT)

Abbott (NYSE:ABT) recently released the findings from a three year study evaluating its drug Humira in patients with moderate to severe Ulcerative Colitis. At 60 weeks, the remission rate was an incredible 55% of these refractory cases. In the same field, last week Humira received a "positive opinion" by the European Committee for Medicinal Products for Human Use (OTCQB:CHMP) regarding survey results concerning Humira administered to pediatric patients with Crohn's disease. Both Ulcerative Colitis and Crohn's disease are Inflammatory Bowel Disorders and are remarkably similar to each other.

Abbott also recently announced its Hepatitis C research findings. At 12 weeks (SVR-12), there was a 99% favorable response to Abbott's drug combination given to patients suffering from active Hepatitis C. Abbott's stock price jumped 3% to an all time high of 72 dollars that day. Currently, Abbott is at 66 dollars per share.

Third quarter earnings results just released October 17, 2012 were hit and miss. At first glance, an EPS of $1.30 represented a 10% increase from Abbott's guidance range. A double-digit growth. At a second glance, currency differential accounted for most of the growth. Abbott still narrowed its EPS guidance to $5.06 to $5.08 from $5.00 to $5.10 for 2012. The actual EPS projected for 2012 would be $3.83 to $3.85 under GAAP which still reflects a strong performance.

Pharmaceuticals and Analysis

Around 54% of Abbott's revenue stems from its pharmaceutical sector and Humira is the star player. Humira is an immune suppressing biological and is the second highest revenue producing medication in the world. It represents 15 to 18% of Abbott's earnings. Other drugs such as AndroGel account for 34% of revenue.

Abbott has remarkably few patent expires on the horizon compared to GlaxoSmithKline (NYSE:GSK), Merck (NYSE:MRK), and Pfizer (NYSE:PFE). It appears that Abbott is depending on recent global acquisitions providing a list of drugs sold in emerging markets. The nutritional sector should get a boost from R&D openings in India and Russia. Projected medication sales in Asia, China, and South America is a large, positive number. All these areas are recruiting and setting up physicians, and it is the doctor who writes that prescription. Sales appear to directly surpass the 16 billion dollar projections, which translates into a 5% to 8% increase in stock price.

JAK Inhibitors

These compounds are another group of biologicals that are currently in studies evaluating their effectiveness treating Rhuematiod Arthritis. Eli Lilly (NYSE:LLY), Pfizer , Novartis (NYSE:NVS), and Johnson & Johnson (NYSE:JNJ) are all heavily invested in the JAK inhibitors. The earliest JAK Inhibitors could hit the market would be early 2013. However, most JAK Inhibitors are in Phase III trials, and there is a reasonable chance these compounds will fail and not receive FDA approval. JAK Inhibitors will compete directly with Humira, so if the verdict is disapproval for marketing, revenue from Humira will continue to skyrocket.

Either way, with new indications for use in the pipeline, Humira's growth may be rejuvenated. Humira still dominates in the Rheumatoid Arthritis treatment market. If the JAK inhibitors are approved, these compounds will compete for market share against Humira. If Humira gets FDA approval for use in patients suffering from Ulcerative Colitis and Crohn's Disease, it opens a 1.4 million strong market just in the U.S. This market is larger than the rheumatoid Arthritis market.

No matter how I look at the numbers, I see Humira exceeding 12 billion dollars in sales by 2016, bypassing the projected 10 billion dollar forecast.

I believe Abbott's earnings will grow from 39 billion in 2011 to the upper 40's to 50 billion dollars per year by 2016. Unfortunately, it is difficult and dangerous to forecast Abbott's EBITDA margin due to the European currency markets and the uncertainty regarding U.S. tax structure.

Abbott is expected to split into two publicly traded companies in early 2013. If anything a split should stabilize the pharmaceutical sector and buffer any effects of losing the patents. Abbott has settled litigation with Impax and has no current or pending court dates.

Analysis Summary

Abbott will lose patent exclusivity on some minor products; Tricor (2012), Kaletra (2016), Niaspan (2013), and Trilipix (2016), but compared to Pfizer, GlaxoSmithKline, Eli Lilly, and Novartis, Abbott is in a much better position.

Humira may face competition beginning in 2013 by JAK inhibitors from Eli Lilly, Pfizer, Novartis, and Johnson and Johnson. If this class of compounds receive FDA approval, JAK inhibitors will be indicated for treating Rheumatoid Arthritis and myeloproliferative bone marrow disorders. After examining the studies, I feel that Humira's indications will expand to include the treatment of Ulcerative Colitis and Crohn's Disease. Both of these inflammatory bowel afflictions are considerably more common than Rheumatoid Arthritis. At the very least, Humira will obtain authorization to treat inflammatory bowel disease as an OFF-LABEL application. Abbott's market for Humira will increase by 1.4 million people just in this country. Revenue will respond accordingly.

Hepatitis C infects 170 million people worldwide and is often fatal. The results of that study were astounding-99% clearance of the virus after 12 weeks. If the results are reproducible and verified this represents a significant medical breakthrough. The market is immense and most likely to exceed Humira in revenue.

Abbott's global sales continue to grow rapidly. The margins are less, but there is a substantial volume.

When the Patient Protection and Affordability Care Act become implemented, mandated increased Medicaid rebates appear. Such action will affect margins but the percentages, and absolute number of patients involved is small enough not to affect revenue significantly.


Most analysts rate Abbott as a hold to a strong buy. Given my analysis, Abbott is a safe buy at current market prices of $65 to $69 per share for the long-term investor going out to 2017. Abbott is in a position to gain a lot of market share and enter into real, significant markets for new drugs. In a few years, Abbott has the potential of becoming the market leader in pharmaceuticals.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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