The COVID-19 pandemic has been a boon in disguise for Abbott Laboratories (ABT). Although the company’s shares tumbled from the high of $91.86 on January 22 all the way down to $62.82 on March 23, they had recovered much of the lost ground and closed at $86.04 on April 09. The company had even gained 2.44% in March 2020, a feat considering the extremely bearish sentiment in the market. Abbott Laboratories is down by 0.94% YTD (year-to-date), higher than 13.65% lost by S&P 500 in the same time frame.
Abbott Laboratories has emerged as one of the more resilient companies during these uncertain times. The company’s molecular point-of-care test for COVID-19 can play a major role in controlling this global pandemic. But Abbott Laboratories is not only dependent on the success of its coronavirus efforts. The company offers other leading products which make a huge impact in other areas of healthcare. Prominent amongst them include Freestyle Libre CGM (continuous glucose monitoring), Alinity family of lab diagnostics system, and the company’s extensive range of devices targeting heart conditions. Going beyond a sturdy and diversified business model, the company is also a consistent dividend payer. Hence, this blue-chip stock can be a good pick for both value as well as income investors.
Abbott Laboratories has been at the forefront of testing efforts directed at the COVID-19 pandemic
Today, the world is in dire need of diagnostic tests capable of testing patients infected with the novel coronavirus. The lack of test kits and the high turnaround time of available tests have been affecting efforts to tackle this pandemic.
Abbott Laboratories seems to have found the solution to this problem by coming up with the fastest COVID-19 test to date. This test runs on the company’s ID NOW molecular diagnostics platform, known for its high accuracy and portability. FDA has granted emergency-use authorization for this molecular point-of-care test, capable of delivering positive results in 5 minutes and negative results in 13 minutes. This implies that although the test is not FDA approved, it can be marketed during these emergency times. The ID NOW is also the most adopted point-of-care testing platform across hospitals as well as physician doctor’s offices in the U.S. Besides, healthcare providers in urgent care settings who do not own ID platform may even opt for purchasing ID Now for running these tests.
The test can play an important role in the fight against the pandemic. Considering its very low turnaround time, it is obvious that the test is in high demand across the world. Abbott laboratories plan to start shipping 50k tests per day starting April.
In March 2020, Abbott Laboratories also secured emergency use authorization from FDA for COVID-19 in-lab molecular test, Abbott RealTime SARS-CoV-2 EUA, which runs on Abbott’s molecular instrument, the m2000 RealTime system. The company had immediately deployed 150,000 of these tests. The company plans to produce 5 million kits daily for both tests combined.
The company is a leading player in many other high growth markets
In 2019, Abbott reported revenues of $31.9 billion and profit close to $3.7 billion. There are many more growth drivers in Abbott’s arsenal.
At the forefront is the company’s CGC (continuous glucose monitoring) system, Freestyle Libre. This product has already earned close to $2.0 billion in revenues in 2019, a YoY increase of 70%. FreeStyle Libre is the global market-leading wearable CGM with around 2 million users across the world. The product’s user base has roughly doubled each year and is now the highest user base across all CGMs in the U.S. FreeStyle Libre also enjoys a broad payer coverage and is the only CGM widely available through the pharmacy channel. In February 2020, Abbott released new real-world data which demonstrated positive health outcomes for type 1 and type 2 diabetes patients after using CGM FreeStyle Libre.
In February 2020, Insulet (PODD) and Abbott have collaborated to integrate the FreeStyle Libre CGM with the former’s tubeless insulin pump, Omnipod Horizon system, to form automated insulin delivery system.
The company is now awaiting approval for FreeStyle Libre 2, which is currently under FDA review. Already approved in Europe in October 2018, this product offers optional customizable glucose alarms for patients who need them. The company aims to secure approval for this next-generation Libre system as iCGM (interoperable continuous glucose monitoring) which implies that it will have met the special controls established by FDA required for interoperability with other devices including insulin pumps. Potential FDA approval will further expand the company’s addressable market opportunity in diabetes space.
FreeStyle Libre is categorized under the company’s medical devices segment, which raked in around $12.2 billion revenues in 2019. This segment also includes multiple other devices such as heart ablation catheters, heart valve clips, cardiac monitors, stents, neuromodulation devices, and diabetes-care devices. In January 2020, the company secured FDA approval for an expanded indication of Infinity DBS (Deep Brain Stimulation) to include the targeting of an area of the brain called the internal globus pallidus to treat Parkinson’s Disease symptoms.
Alinity family of lab diagnostics systems is another key driver for the company. This system is penetrating the European market at a fast pace due to the high renewal rate and a rapid increase in new clients. In 2019, the company secured FDA approval for Alinity for blood and plasma screening system. The company now aims to secure regulatory approvals for a critical mass of immunoassay and clinical chemistry test menu which will run on Alinity. Post-FDA approval of additional assays, Abbott Laboratories expects U.S. ramp-up of Alinity to be similar to that seen in Europe. In 2019, the company’s overall diagnostics products segment reported $7.7 billion in sales.
MitraClip is a leader in the minimally invasive treatment of mitral regurgitation or a leaky heart valve. The product reported around $700 million in sales in 2019, a YoY rise of more than 30%. Focus on expanding MitraClip’s label has been rapidly increasing its addressable market size. Despite this success, market penetration is only 5%, implying much more upside ahead. Abbott expects MitraClip to emerge as a multi-year, multi-billion dollar opportunity.
Abbott’s HeartMate 3 LVAD (left ventricular assist device) is approved by the FDA as a destination therapy for advanced heart failure patients ineligible for a transplant. The destination therapy designation implies that patients can trust the device to mitigate challenges such as stroke and blood clotting traditionally associated with LVAD devices. Patients can also expect outcomes similar to that seen with heart transplants. In 2019, the device saw a 20% YoY growth in revenues. This growth rate is expected to lower down with expanding base in 2020. In February 2020, Abbott managed to secure Breakthrough Device designation from FDA for its in-development FILVAS (Fully Implantable Left Ventricular Assist System).
In February 2020, Abbott announced FDA approval to commence Catalyst trial for the evaluation of its Amplatzer Amulet LAA (left atrial appendage) occluder to treat people with AF (atrial fibrillation). The trial will compare Amplatzer Amulet LAA with a newer class of blood thinners called NOAC (non-vitamin K antagonist oral anticoagulant) drugs.
Abbott is also making big advances in the remote monitoring space. In February 2020, the company secured European approval for Gallant ICD (implantable cardioverter-defibrillator) and CRT-D (cardiac resynchronization therapy defibrillator) devices for patients with abnormal heart rhythms and heart failure. In addition to having all the benefits of previous ICDs and CRT-Ds, the Gallant line of devices can connect with the company’s myMerlinPulse mobile app via Bluetooth. Hence, patients and physicians have access to data from these devices, thereby ensuring remote monitoring.
Abbott’s nutritional products segment is also a major driver for the company and reported sales worth $7.4 billion in 2019. The company’s established pharmaceuticals business which is focused on emerging markets managed to rake in $4.5 billion in 2019.
Abbott Laboratories is a Dividend Aristocrat
In December 2019, Abbott Laboratories announced 36 cents per share or 12.5% per share increase in its quarterly common dividend. This marked the 48th consecutive year of increased dividend payout. Subsequent to this announcement, the company’s dividend yield became 1.7%.
Abbott Laboratories is just 2 years away from joining the elite Dividend Kings group, stocks which have increased dividends for 50 consecutive years. I am pretty confident that the company will increase its dividends in 2020 and 2021.
Investors should consider these risks
Although ABT’s point-of-care COVID-19 test is touted to be a game-changer, it will definitely face competition from more than two dozen tests in the market today. The molecular diagnostic company, Cepheid’s point-of-care COVID-19 diagnostic, Xpert Xpress SARS-CoV-2, has also secured FDA emergency use authorization from the FDA. This test produces results in 45 minutes. Many other major Medtech players such as DiaCarta Inc, Becton, Dickinson & Company (NYSE:BDX), inBios International, and Luminex Corporation (NASDAQ:LMNX) have also secured emergency authorizations from FDA for their tests. Although the turnaround time of these tests is not as low as Abbott’s, physicians can still opt for these tests in case of price and availability constraints.
Going beyond tests that are focused on finding active infections by sequencing the genetic material of the virus, Cellex has come up with a rapid antibody blood test for COVID-19. This test detects two different types of antibodies produced by the body to fight off the COVID-19 infection. Cellex’s antibody-based test takes 15-20 minutes to get a result. This test, although not the most accurate, does not require any dedicated platform like ID Now. This makes it more accessible especially in markets where molecular testing is not well adopted.
Then again, COVID-19 test will account for only a small portion of the company’s revenues in 2020. In the fourth quarter, the company’s Medical Devices segment reported $3.2 billion revenues, a YoY rise of 11.3%. The diagnostics segment reported a much lower $2.0 billion in revenues, a YoY rise of only 6.4%. COVID-19 tests which fall in the category of diagnostics are expected to have only limited impact on the company’s topline and bottomline.
And this impact is also not expected in the first quarter of 2020, since both of the company’s COVID-19 tests secured emergency authorization in the second half of March 2020. Hence, there has been no driver to offset the impact of COVID-19 disruptions in the first quarter of 2020. The company also earns over 60% of its revenues from international markets. The COVID-19 pandemic has disrupted manufacturing and supply chain in many of these markets. Patients are being advised to defer many procedures. This poses a significant risk to the company attaining its 2020 guidance. Analysts have been reducing consensus revenue and EPS estimates ahead of the first-quarter earnings. The company has guided for 2020 organic revenue growth in the range of 7% to 8% and diluted EPS between $2.35 and $2.45. The company may downgrade this guidance in the first-quarter earnings.
Investors have been increasingly worried about the FDA approval of Libre 2, which has been under review for quite some time now. Although the application was submitted in October 2019, the review is taking more time since Abbott has to resolve certain issues. Besides, the current pandemic may also affect the company’s plans to expand manufacturing capacity for Libre 1 and its penetration in international markets.
Device recalls are presenting another major challenge for a Medtech company. They not only impact topline but also expose the company to potential litigations. In January 2020, Abbott announced a recall of 14,000 NC Trek RX coronary dilatation catheters and NC Traveler RX coronary dilatation catheters with 4.0 mm, 4.5 mm and 5.0 mm balloon diameters, distributed from August 2019 to January 2020. Till then, the company had received 13 complaints as well as one report of death. FDA has categorized these recalls as Class I, which is the most serious type. Even in 2017, the company had identified 449,661 catheters as faulty and had asked healthcare providers to stop using them.
Abbott Laboratories currently trades at a PE (price-to-earnings) multiple of 42.57x and forward PE of 22.19x. The valuations are high, making the stock susceptible to significant share price volatility. The COVID-19 pandemic is also exposing the company to significant headline risk.
What price is right here?
According to finviz, the 12-month consensus target price for ABT is $95.13. I believe that this is a fair representation of the company’s growth potential. The company’s diversified business offers a strong combination of consistent dividends and share price appreciation.
Majority of analysts seem now expect lower revenues and earnings from ABT in the first quarter. Therefore, despite believing in the company’s fundamentals, they are lowering target prices. Raymond James analyst Jayson Bedford has lowered target price to $92 from $99 but keeps Outperform rating on the shares. The analyst believes that 5% of Abbott’s revenue is deferrable for more than 4-5 months, but remaining is semi-elective or unlikely to be materially impacted by the current environment. Barron’s believes ABT to be one of those Dividend Aristocrats which can be considered safe for consistent and growing dividends. JPMorgan analyst Robbie Marcus lowered the target price on Abbott to $88 from $101 but keeps an Overweight rating on the shares. The analyst believes ABT to be one of the best positioned in COVID-19 pandemic and potential economic downturn. Credit Suisse analyst Matt Miksic lowered the firm’s price target on Abbott to $94 from $104 and keeps an Outperform rating on the shares. Goldman Sachs analyst Amit Hazan has initiated coverage for the company with a Neutral rating and $96 price target. Wells Fargo analyst Larry Biegelsen reiterated Overweight rating and raised the target price for Abbott to $103 from $97.
I recommend investors to wait till the company’s first-quarter earnings results. Since the chances of lower revenues and earnings remain significant, there exists the possibility of investors picking up the stock at a much better entry point after some emotional selling. Even if the stock falls to its last low of $61.61, the sellers will be done within a few days. Thereafter, we can expect bargain hunters to start buying the stock pushing up prices. This is expected considering that ABT is a fundamentally strong pick.
However, I do not expect the stock to dip to this level, even after first-quarter earnings miss or revision of 2020 guidance. Considering the inherent uncertainty, I will recommend only retail investors with above-average risk appetite and investment tenure of at least one year to invest even in stable stocks such as ABT in such uncertain times.
Disclosure: I/we 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.