Abbott Labs Spins a Positive Mix

On Thursday, analysts and investors following Abbott LaboratoriesABT will get their first look at a quarterly financial report without the influence of the company's hospital products business, which was spun off in May as the independent HospiraHSP.

The third-quarter financial report should provide more clarity for a company that is anything but a pure play in any health care field. Mixing drugs, diagnostics, devices, nutritional products and joint ventures, Abbott can be a challenge to evaluate thanks to its many moving parts -- not to mention the comparisons from the pre-Hospira spinoff days.

After all, like Johnson & JohnsonJNJ, Abbott is a member of the Amex Pharmaceutical Index even though many analysts who cover Abbott focus on medical devices and hospital-based products. (Through Monday, Abbott's stock was down 5.5% for the year, making it the fifth best performer among the 15 Big Pharma stocks in the Amex index. The index was down 10.1%.)

Analysts brave enough to try figuring out Abbott are forecasting third-quarter earnings of $826 million, or 53 cents a share, on revenue of $4.66 billion. Those who follow the new Abbott appear to like it: The company has nine buy ratings, four hold recommendations and two sell ratings, according to Thomson First Call.

Spinning off Hospira didn't subtract too much from Abbott, according to an analysis by SG Cowen. Based on full-year estimates for 2004, subtracting Hospira cost Abbott about $2.24 billion in revenue and 16 cents a share. Cowen predicts Abbott's full-year revenue will now be about $19.3 billion and EPS will be $2.25. Hospira's products, on average, had slower sales growth and earnings growth rates than the aggregate of products that Abbott kept.

Based on estimated 2004 revenue, about 58% of the new Abbott is devoted to pharmaceuticals; 17% of sales comes from diagnostic products; 20% is derived from nutritional goods; and the rest is from assorted products.

"Abbott's near-term growth outlook is very attractive ... particularly related to large-cap pharmaceutical peers," said an Oct. 1 report by SG Cowen, which doesn't rate stocks. The company's growth is being aided by Humira, a drug for rheumatoid arthritis, and "improving diagnostic trends." Humira had $280 million in sales last year, and Cowen analysts believe that figure could triple this year.

A number of other drugs, however, are threatened with generic competition, patent challenges and competition from other brand-name drugs. "The company does have a robust-looking pharmaceutical product pipeline that could turn the tide, but at this point ... [we] believe significant revenue contributions from the new product pipeline will not occur until 2007-08," the Cowen report said. (Cowen's health care analysts don't own Abbott shares; the firm says it "does and seeks to do business" with companies mentioned in research reports.)

A more favorable view comes from Glenn Reicin of Morgan Stanley, who holds an outperform rating on the stock. In a mid-August report to clients, Reicin said Abbott's research pipeline "is among the most robust in the pharmaceutical industry." He said Abbott should be able to grow its earnings at an above-average rate vs. big drug company peers. "Double-digit EPS growth should be assured for the next three years," Reicin wrote. (He doesn't own shares; his firm has had an investment banking relationship with Abbott in the last 12 months.)