Abbott Laboratories (NYSE:ABT) is hitting all-time highs after the pharmaceutical company said a drug regimen it’s developing to treat hepatitis C showed stunning success, curing 99% of patients afflicted by the hard-to-treat disease.
Shares in the giant drug-maker have been on a tear in 2012, gaining more than 28% year-to-date. That beats the S&P 500 by more than 12 percentage points.
Abbott also is outperforming peers. Dow components Pfizer (NYSE:PFE) and Merck (NYSE:MRK) are up 19% and 25%, respectively, for the year-to-date, while Sanofi (NYSE:SNY) has gained 23%.
But after such a remarkable run, has the easy money in Abbott already been made, or is there more upside left to be had? To help decide whether you should buy Abbott Labs stock, let’s have a look at the pros and cons:
Huge Opportunity: Hepatitis C afflicts 180 million worldwide, and deaths from the disease are rising among baby boomers — that cohort of 78 million Americans born between 1946 and 1964. Indeed, in August, the Centers for Disease Control recommended that all boomers get tested for the disease. Bottom line: The market for new hepatitis C treatments is forecast to be a $20 billion opportunity by 2020.
Emerging Markets: Emerging markets accounted for more than 25% revenue in fiscal 2011, and those markets are going to grow at an appreciably more rapid rate than their developed counterparts. “Abbott’s management has reiterated their intention to tap these high potential emerging markets,” write Trefis analysts, adding that management has made “significant moves to expand its presence and product portfolio in many of the most populous and fastest-growing countries in the world.”
Autoimmune Success: Humira, a drug for autoimmune diseases, is the world’s second-best-selling drug in terms of revenue, according to Trefis. If Abbott is able to leverage its market-leading position in the autoimmune segment and sales exceed expectations, there should be significant price-share appreciation ahead.
Valuation: After such a hot run, the valuation no longer says “bargain.” Abbott’s forward price-to-earnings ratio of 13.4 represents a slight premium to its own five-year average, according to data from Thomson Reuters Stock Reports. Shares also trade at premiums by trailing earnings and by price/earnings-to-growth, which measures how fast a stock is rising relative to its growth prospects.
Relatively Weak Pipeline: Yes, Humira is the world’s best-selling drug for autoimmune disease and the hepatitis C regimen shows great promise, but even as Abbott continues to grow its mid- and late-stage drug development, its pipeline remains relatively weak, Trefis says.
Downgrades on Tap? Abbott already has surpassed Wall Street’s average and median price targets, meaning downgrades on valuation alone could be in the offing. That would spark at least a short-term selloff. Of the 20 analysts covering the stock, 12 rate shares at hold, seven say buy and one says sell.
So, should you buy Abbott Labs? Yes — just not yet. After putting up such huge gains, the easy money looks to have been made. However, the prospect of downgrades on valuation or some profit-taking should provide investors with a better entry point in the not-to-distant future.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.