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Abbott: A Potential Buy For 2012

March 10, 2012 | About:
Abbott Laboratories manufactures nutritional and pharmaceutical products, laboratory diagnostics, pharmaceutical therapies and medical devices and the coronary stent-- Xience. The company is highly diversified and I think this insulates it to an extent when one of its pharmaceutical products come off patent and generics companies replicate the product. (The company doesn't have any significant patent expirations until at least 2013.) It is the second largest company in the worldwide market for diagnostic products and the largest producer of nutritional products. The company also has a wide customer base, in several nations and markets that further insulate it from any one economic event or volatility in any one market, in my opinion. Abbott Laboratories, compared to other pharmaceutical companies has a much larger international presence. International sales for the company's diagnostic tools are more than double its domestic sales and more than half of its pharmaceutical sales are from outside of the United States. I think this represents a significant growth opportunity as these countries standard of living rises, their economies expand and disposable income increases-- along with improved medical care.

Abbott Laboratories pays out a dividend of $1.92 on an annual basis. This brings in a dividend yield of about 3.4% at the stock's current price and the dividend is both paid out as well as raised on a consistent basis. The payout ratio on the stock is 62% which is lower than the industry average of 69% but much higher than the company's nearest competitor Sanofi (SNY)'s payout ratio of 47%. This leaves the company with plenty of room to raise the dividend in the future comparatively, in my opinion. Abbott Laboratories' revenue and cash flow have been trending upwards over the past five years and the company's free cash flow in particular outshine that of its nearest competitors. This also supports the assertion that the company is relatively stable financially. In the trailing twelve months Abbott Laboratories produced $8,377 million in cash on a reported $4,550 million of net income which amounts to 21.8% of its revenue going to free cash flow. So the dividend is stable at this point in time in terms of cash flow. In further support of this assertion, the company just gave earnings per share guidance for 2012 of between $4.95 to $5.05-- this was in line with analysts' expectations of $5.02 earnings per share for fiscal 2012.

In 2010 Abbott Laboratories completed its acquisition of Starlims Tech LTD (LIMS). The company develops and supports a software-based laboratory information management systems with key components that support a modern laboratory's operations. This represents another segment of Abbott Laboratories diverse portfolio of offerings and one with tremendous growth potential, in my opinion. The technology has developed over the years from a sample tracking program to a sophisticated resource planning tool that manages multiple aspects of laboratory information. I think the recent trend in both legislation and the medical community to cut costs by avoiding duplication of services and streamlining record keeping also stands to benefit this segment in the near term.

Well we are on the subject of state of the art technology Abbott Laboratories research and development in nano technology has produced a line of coronary stents (Xience) that was proven in clinical trials to be the most effective stents on the market. XIENCE nano has received U.S. Food and Drug Administration approval for treating patients with coronary artery disease in vessels as small as 2.25 mm in diameter. This further improves the company's reputation in the Food and Drug Administration and improves the likelihood of other products the company has in the pipeline receiving approval without costly delays, in my opinion. I think the product also represents a significant source of revenue in the future with a higher percentage of the population moving into their senior years.

Abbott Laboratories is not a company without its legal challenges though. Last year the company had to set aside $1.5 billion to cover potential settlement losses in connection with the promotion in the sale of the company's drug Depakote for unauthorized uses. The Justice Department investigation is conclusive and is awaiting a final settlement figure. In recent news the attorneys general from the states of North Carolina, South Carolina, Ohio, Oregon, Florida, Illinois, Pennsylvania, and Texas are jumping on the band wagon for a piece of the pie.

In more positive news the company was successful in defending itself from a lawsuit brought against it by Johnson & Johnson (JNJ) to the tune of $1.6 billion-- the highest patent infringement verdict in American history. The lawsuit was originally won by Johnson & Johnson but overturned in a court of appeals sending it to the United States Supreme Court. The request to reinstate the settlement was then rejected by the Supreme Court leaving Johnson & Johnson open to countersuits. The disputed patent infringement was related to Abbott Laboratories block buster arthritis drug Humira. Sales of the drug constituted $3.4 billion in the United States last year and almost $8 billion worldwide. Sales of Humira represent about 20% of Abbott Laboratories' total revenue at this time. The company's defense was that its researchers discovered ways to create human antibodies and Johnson & Johnson tried to expand its existing patent rights to cover a class of antibodies that it did not invent or describe in its patent.

I think the acceptance of this evidence by the United States Supreme Court will be strong evidence in relation to two pending lawsuits the company has against Johnson & Johnson. One lawsuit claims that Johnson & Johnson's arthritis drug Simponi, made with human antibodies, is infringing on an Abbott Laboratories patent and the other claims that Johnson & Johnson's psoriasis medicine, Stelara, violates two other Abbott Laboratories patents. With the victories in the legal arena, the stability of the company's fundamentals, diversification in general and the advances in the company's technology specifically this would be a good stock to own for the long term.

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