STOCK WATCH


Abbott Labs: The Junior J&J

Jeffrey R. Kosnett

Its market value is less than half of Johnson & Johnson's, but the market thinks Abbott is at least as capable of juggling an array of health businesses.



Think big health and you may think Johnson & Johnson, Pfizer, GlaxoSmithKline, Medtronic, Novartis, AstraZeneca, even Procter & Gamble and Walgreen. Shares of Abbott Laboratories have outgained every one of those so far in 2007. What's more, Abbott is sticking with positive, even aggressive, growth targets for the rest of this year and 2008.

On July 18, a down day for the market, Abbott (symbol ABT) rose 0.6%, to $53.70, on news that second-quarter sales grew 16% and that earnings increased 11%, to 69 cents a share. The results roughly equaled Wall Street's forecasts. In any case, it was good enough to avoid the post-earnings sell-offs that hit J&J and Pfizer in the past few days.

Although no one will confuse Abbott's growth rate with that of, say, Google, the company's roster of drugs features a number of brisk sellers. That differentiates Abbott from Pfizer and J&J, which sell a bunch of big-name meds that face generic competition and the threat of replacement by other drugs. Humira, a treatment for arthritis and Crohn's disease, is Abbott's biggest-selling drug, with first-half 2007 sales of $1.3 billion. The drug is only five years old and is based on biotechnology, which makes it harder to copy than a traditional drug even if it were about to lose its patent protection.

Abbott's product line, which mostly features drugs you've never heard of, sums up the company's strategy: It may be a large company, but it has characteristics of a niche player, with stakes in the treatment of epilepsy, bipolar disorder and HIV.

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Abbott's U.S. pharma sales are 27% higher than a year ago, a big number in a slow-growing industry. Some of that stems from Abbott's acquisition in 2006 of Kos Pharmaceuticals. The price tag was a fat $3.7 billion, or about 50% more than Kos was worth at the time and almost a full year's earnings for Abbott. Kos is big in cholesterol drugs, specifically to reduce "bad" cholesterol and build up the "good" kind. This is an attractive area of the drug business, although there is generic competition. How Abbott leverages this costly expertise in the years ahead is critical to the stock's outlook.

Abbott appeared set to seek out another, perhaps even bigger, buyout when it agreed to sell most of the non-drug part of the company to General Electric for $8 billion in January. But six months later, GE and Abbott called it off. Since that parting, GE is up 7%, while Abbott is up 1%. That may not mean anything, but it also may suggest that the market prefers to see Abbott remake itself into a pure drug maker instead of a junior version of Johnson & Johnson.

Then again, Abbott's easily-overlooked shares have out-returned J&J's solidly this year and over the past one, three and five years. So pointing fingers at its strategy isn't fair. In some industries, being an also-ran with obscure products is death. In drugs, it can work just fine. Abbott isn't risk-free, but the stock, which sells at 19 times estimated 2007 earnings of $2.81 a share, is a keeper.

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