Long Term Risk on the Horizon for Abbott Industries

by Troy Bayer
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Submitted by Troy Bayer as part of our contributors program.

Abbott Industries (ABT) is currently one of the stronger pharmaceutical stocks and outpacing most industry competitors and the S&P 500. Currently priced near its 52-week high of 63.20, ABT is projected for healthy growth over the remainder of the fiscal year.

With sales growth of 10% over the past year and Return on Investment Capital growth of 11.4% and 13.1% over 1 and 5-year spans respectively, Abbott is creating an expanding moat for the near term. Other positive indicators include constant EPS growth and a P/E ratio nearly 20% higher than the industry average.

Abbott has taken advantage of factors inherent to the pharmaceutical industry. The chemicals and ingredients in the treatment products are typically patented, which minimizes competition for a moderate period of time. In addition, these products go through a rigorous and timely process to receive U.S. Food and Drug Administration (FDA) approval for commercialization. FDA approval is a significant entry barrier for opponents attempting to launch a competing product line.

However, while Abbott has enjoyed success over the past five years, expectations over the long run should be weighed carefully. Abbott has several competitors developing new products that could result in a shrinking moat, reduction in sales, and ultimately drive down other stock indicators including price.

First, Bloomberg News recently reported that Roche Holding AG (RHHBY) has recently developed a new rheumatoid-based arthritis drug called Actemra that outperformed Abbott’s top-selling product Humira in clinical studies. The study concluded that Actemra performed better than Humira for reducing tender and swollen joints. The emergence of Roche’s new product could significantly affect sales of Humira as doctors prescribe Actemra as an alternative. Roche expects FDA approval within the year, at which point Abbott will be facing this new competition.

Abbott’s Humira product line accounts for $7.9B of their total sales figure of $39.27B, which is north of 20%. Roche predicted that Actemra will cut into the prescription of Humira by approximately 30%. FDA approval and subsequent commercialization of Actemra could potentially shrink Abbott sales by up to $2.37B.

Second, sales of Abbott’s high-cholesterol product Niaspan could be threatened in the future by the emergence of a new compound called nicotinamide ribocide (NR). A recent study conducted by Weill Cornell Medical College and the Polytechnic School in Lausanne, Switzerland revealed that NR was just as effective as Niaspan without uncomfortable side effects.

Niaspan currently yields just south of $1B in annual revenue for Abbott, but is considered vulnerable to competition because of negative side effects. These side effects include an uncomfortable redness and flush of heat when taking the item, according to Abbott.

The main component of Niaspan is the naturally occurring B-complex vitamin called niacin, which is believed to be the root cause of the item’s side effects. On the other hand, NR, which is a common metabolite of niacin and produces the same positive results on cholesterol reduction, does not appear to cause flushing.

ChromaDex (CDXC), a Colorado-based corporation, recently acquired the patent for NR from Cornell. There is a possibility that ChromaDex decides to commercialize an NR-based product to enter the cholesterol reduction market. While Chromadex is known for their phytochemical reference manuals and laboratory services, it would not be unprecedented for them to commercialize a product. Currently, the company has a product line of dietary supplements called BluScience, sold at major retailers such as GNC (GNC) and Walgreens (WAG).

A decision by ChromaDex to commercialize an NR-based product will further cut into Abbott’s sales potential. Coupled with the launch of Actemra, Abbott could see a negative effect on up to $3.37B of their total sales from their Humira and Niaspan product lines respectively.

While Abbott remains a consistently performing stock, there may be risk on the horizon that will lower their earnings ceiling.

Disclaimer: I do not have a position in any of the aforementioned stocks. The writer is not a licensed broker or investment adviser and therefore cannot recommend that you buy, sell, or hold any security. The writer seeks payment for writing on financial topics and has received a standard $150 as labor compensation from ChromaDex Corporation for this article. While every attempt was made to verify the information in this report, much has been derived from public sources and cannot be guaranteed for accuracy.

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