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No. of Recommendations: 14
Continued success with Abbott comes down to three things---

Humira needs to continue to dominate biologics for psoriasis and rheumatoid arthritis and win new indications. To this end, Humira had another good Q with US sales up 18% to $825 million and international sales were $1.2 billion --- up a forex adjusted 19%

The Xience stent needs to continue to dominate the stent market and steal market share. For Q2 sales were up a remarkable 47% year-over-year. Sequential sales increased by only 1%. Total stent sales were down.

Our global DES franchise sales, which include XIENCE sales as well as third-party DES revenues, were approximately $485 million in the second quarter. Global XIENCE sales increased both sequentially and year-over-year. This was offset in the quarter by a double-digit decline in third-party DES revenues. XIENCE remains the #1 drug eluting stent globally, with worldwide market share of approximately 35%.

DES sales in Q1 were $480 million--- a 1% increase sequentially

DES sales in Q2 2010 were $330 million – a 47% increase. The year-over-year increase is impressive and the sequential not so much.

Total stent sales were down 13% in the US [home of the third party pay system] and 1.5% internationally. Global sales were down 6.1%. Generally stent sales across companies have been weak for a couple of years. Xience has been the exception growing fast and taking market share. Times have been so hard at JNJ the company exited the stent business and shut down Cypher.

J&J to quit struggling heart stent business

By Ransdell Pierson and Lewis Krauskopf

NEW YORK | Wed Jun 15, 2011 1:55pm EDT
(Reuters) - Johnson & Johnson will stop selling drug-coated heart stents, a former profit driver for the diversified healthcare company that has stumbled due to safety concerns and fierce competition from rival products.

J&J said on Wednesday that it would end development of its Nevo heart stent and cease manufacturing its Cypher stent, widening the field for rivals like Abbott Laboratories Inc and Boston Scientific Corp.

The company's Cordis unit will stop selling the drug-coated stents -- tiny mesh tubes that prop open heart arteries -- by year's end. It will continue to sell its far less lucrative bare metal stents.

"The stents were kind of an albatross," said Gabelli & Co analyst Jeff Jonas, adding "the remaining cardiovascular business is attractive."


Drug eluting stents have problems with post-surgical blood clots. Xience has had some of the lowest rates of post-surgical complications including next to no vascular thrombosis—no doubt the reason for its market share. With the DES market slowing overall, Xience may be near the end of high growth. Abbott does have a cutting edge absorbable stent in development that could once again supercharge stent growth when approved

Also in our Vascular pipeline is our ABSORB bioresorbable vascular scaffold. It's designed to slowly metabolize and eventually be absorbed by the body after providing support to the vessel during the healing process, leaving no permanent metallic implant behind. It received CE Mark in January, and a full-scale launch in Europe is planned by the end of 2012.


Abbott’s pipeline needs to keep seeing FDA approvals and additional new candidates and adequate R&D. The second quarter R&D update includes a new drug and a new stent. There are also FDA approvals for diagnostic tests.

Some of the products like androgel and Lupron are just new delivery systems,dosing schedules, or indications

• Initiated Phase 3 Study of Bardoxolone Methyl; Announced 52-week Phase 2 Data

• Announced with Reata the beginning of a pivotal Phase 3 clinical trial to evaluate the safety and efficacy of bardoxolone methyl in patients with chronic kidney disease (CKD) and Type 2 diabetes. Results are expected in 2013. The New England Journal of Medicine published Phase 2 clinical trial data, showing that bardoxolone has the potential to delay kidney disease progression.

• Launched XIENCE nano™ Everolimus Eluting Coronary Stent System for the treatment of coronary artery disease in small vessels in the United States. XIENCE nano offers a new option for treating patients with coronary artery disease in vessels as small as 2.25 mm in diameter.

• Announced interim efficacy and safety results from a 54-week, Phase 3 open-label study of Abbott’s investigational treatment for advanced Parkinson’s disease showing patients treated with levodopa-carbidopa intestinal gel (LCIG) for 12 weeks reported improvement in motor symptoms. LCIG is in Phase 3 development in the United States and is approved for use in 38 countries.

• Announced U.S. Food and Drug Administration (FDA) approval of AndroGel® (testosterone gel) 1.62%, a clear, odorless, gel formulation shown to restore testosterone levels in hypogonadal men with half the volume of gel at the starting dose compared to AndroGel 1%.

• Launched in the United States a new six-month administration formulation of Lupron Depot® (leuprolide acetate for depot suspension), a palliative treatment for advanced prostate cancer.

• Submitted regulatory applications in the United States and Japan for a new molecular diagnostic test designed to detect abnormal gene rearrangements in non-small-cell lung cancer tumors. The test is intended to be used with Pfizer’s crizotinib, an oral first-in-class anaplastic lymphoma kinase (ALK) inhibitor, also under regulatory review.

• Announced a global agreement with Biotest AG to develop and commercialize BT-061, a novel anti-CD4 biologic for the treatment of autoimmune diseases. BT-061 is in Phase 2 clinical trials for rheumatoid arthritis (RA) and psoriasis and in preclinical studies in other immune-related diseases.

• Announced CE Mark for FreeStyle InsuLinx Blood Glucose Monitoring System, the first blood glucose monitoring device from Abbott that includes a mealtime (bolus) insulin calculator.

• Received FDA approval for expanded indication for RX ACCULINK Carotid Stent System _The FDA approved an expanded indication for RX ACCULINK® to treat patients with carotid artery disease at standard risk of adverse events from carotid endarterectomy (surgery)

The proprietary drug pipeline is of particular interest. With proprietary drugs at 43% of total revenue, Abbott needs to keep the pipeline full and moving to continue meaningful growth as patents expire. Some of its other divisions are growing much faster than drugs but are still such small percentages of the total business they would be unable to make up for a severe slowdown in the proprietary pharmaceutical segment. Abbott does not currently have a strong portfolio of drugs and it is in desperate need of some blockbuster FDA approvals.

The following are some of its better candidates [there are 20 drugs in Phase II and Phase III]:

Last month, Phase II bardoxolone data were published in the New England Journal of Medicine and presented at a European renal meeting. These data showed that bardoxolone produced sustained improvements in kidney function over 52 weeks in patients with moderate to severe CKD and Type 2 diabetes. And last month, they initiated the global Phase III clinical program for bardoxolone with the partner company. Results from this 1,600-patient study are expected in 2013, with potential commercialization in the 2014 timeframe.

They have three Hepatitis C drugs in Phase II development, including protease, polymerase and NS5A inhibitors. Hepatitis C is a hot bed of research. Unfortunately they are behind and Vertex was approved in May for its potential blockbuster Incivek. Often the second or third drug to market never sees wide adoption and they are years from approval.

A Phase III study of daclizumab, a next-generation biologic being evaluated in MS, is currently underway. They expect to present Phase II data for daclizumab at a European clinical meeting in October. Again, there are a couple of new MS drugs already out there including an oral medication from Novartis.

Elotuzumab has demonstrated good response rates in multiple myeloma, the second most common blood cancer in the U.S. They recently began the Phase III program for elotuzumab with a partner company.

Abbott let the pipeline dwindle over the years and only recently began to revive it. Consequently they are a few years behind more aggressive companies like Novartis that has multiple new drugs coming to market every year.

This has the potential to be a huge problem if Humira sales slow which is why the Humira revenue growth is key to Abbott’s health for the next few years. So far it is working and Humira continues to perform well.

The following table reports operational revenue internationally rather than reported. Reported was high due to forex

Segment sales Percent change
============================================================
US Int Global US int global

Nutritionals 655 835 1,490 (3.60) 8.20 2.60

Established
Pharmaceuticals -- 1,339 1,339 n/a 3.20 3.20

Diagnostics 152 704 856 4.40 0.70 1.40
Diabetes Care 133 201 334 4.30 (6.70) (2.40)

Point of Care
Diagnostics 60 18 78 17.60 10.50 16.00
=============================================================
Subtotal 1,000 3,097 4,097 (0.40) 3.30 2.40

Proprietary
Pharmaceuticals 2,302 1,860 4,162 8.80 9.10 8.90

Vascular 395 440 835 (9.50) 1.10 (4.40)
Medical Optics 102 187 289 2.90 (0.20) 0.90

Molecular
Diagnostics 45 60 105 5.50 20.70 13.40
===============================================================
Subtotal 542 687 1,229 (6.20) 2.20 (1.90)

Other Sales 94 34 128 (1.50)(28.10) (8.50)


The table shows the growth in Q2 for Abbott’s operating segments. Both diagnostics divisions are growing in the double-digits. Combined they are only 9.7% of the business and we hope as investors Abbott will continue to expand the diagnostics business.

Proprietary pharmaceuticals depend heavily on Humira at 43% of pharma revenue and 21% of Abbott’s total revenue. These percentages are why I follow Humira quarterly. If it decelerates, Abbott is going to have a tough time growing. At present, they are in the process of extending indications and that will help sustain sales.

Division percentages of total revenue:

Nutritionals 15.5%
Established Pharmaceuticals 13.9%
Core Laboratory Diagnostics 8.9%
Diabetes Care 3.5%
Point of Care Diagnostics 0.8%

Proprietary Pharmaceuticals 43.3%
Vascular 8.7%
Medical Optics 3.0%
Molecular Diagnostics 1.1%


pharmaceuticals

Abbott has three important drug franchises –Humira, Kaletra, and Tricor/Trilipix

Humira’s patent is good until 2016, but the near-term is going to be threatened by competition. At launch in 2003, there was Remicade [1998] Enbrel [1998], and Amevive [2003] as major competitors. Now there are two new entrants with less frequent dosing from JNJ—Simponi and Stelara. Humira is the biggest drug in Abbott’s portfolio

Kaletra is a combination HIV medication that may start to see sales erosion in 2013.

The other franchise is for cholesterol as adjunctive therapy and that is Tricor/Trilipix. This is a drug that was first used back in the 1960’s. It should have been unbranded years ago but Abbott has managed to hang on to it through as series of reformulations and repackaging to extend its branded life. Tricor is in the most immediate danger.

The Tricor story is typical and shows how drug companies will tinker with an ancient drug to keep the patent far beyond its expected life. Tricor has been redone over the years to qualify for extended patent coverage by altering the dosing and the delivery. Dosage has been changed three times and the delivery form has gone from capsules to pills. By 2012, Teva will likely have a Tricor generic and Abbott’s Tricor revenue will be cut in half shortly thereafter. Tricor does around $1.2 billion per year.

Trilipix is the Tricor heir apparent and is a time release medication. Abbott is in the process of cannibalizing its own Tricor sales in an attempt to shift business away from Tricor and put doctors in the habit of writing Trilipix on prescriptions. The patent is good to 2025. This is similar to the move AstraZeneca made from Prilosec to the little purple pill Nexium. It did work for AstraZeneca.

Overview of segment results Q2 and guidance

Established pharmaceuticals [EPD]

These are drugs that are off patent but still see demand mainly in emerging markets. EPD reported global sales of more than $1.3 billion. More than half of EPD sales are in emerging markets, with sales at $775 million, up 25%. For 2011, sales are expected to be $5 billion

Nutritional business

Gobal sales increased 5.4%, driven by double-digit growth internationally. US results were down due to low sales of infant formula. In September 2010, the company was forced to recall Similac due to beetle contamination. Getting market share back is a slow prcess that will take until the back half of 2011. U.S. Nutritional sales as a result, were down 3.5% in Q2, in line with guidance.

Outside of the U.S., Nutritional sales increased 14%. Growth was driven by emerging markets sales $630 million, up 16%. For the full year 2011, Abbott expects $2 billion in emerging market Nutritional sales and revenue should double over the next 5 years. In China alone, nutrition sales may reach $1 billion by 2014.

Diabetes

Worldwide sales increased 2.7%. U.S. sales were up 4% and international sales were up approximately 2%. They received CE Mark [required for European sales] in May for the new FreeStyle InsuLinx blood glucose monitor. InsuLinx is designed to help provide suggested insulin dosing advice for patients with diabetes. Q3 global diabetes should expect high single-digit revenue growth.

Core Lab and point of care

The Core Lab business [includes immunoassay and hematology] global sales increased 8%. U.S. sales increased 4.4%, driven by strong growth of the ARCHITECT platform. Abbott saw strong growth in emerging markets, up 9% in the quarter. Asia and China were up double-digits. Q3 is expected to have high single-digit growth.

Point of Care Diagnostics sales increased 17%, driven by strong Troponin and the CHEM 8 test cartridge sales. For the third quarter Abbott guides double-digit growth.

Molecular diagnostics

Global sales increased more than 18%, with international sales growth of more than 30% [reported]. They placed their 1000th m2000 analyzer.

Molecular Diagnostics intends to expand their reach in companion diagnostics or personalized medicine. Personalized medicine evaluates patients’ suitability for intervention with certain classes of medications. Not everyone does well on every drug and gene testing helps identify a patient’s suitability for a particular therapeutic regimen. Abbott now has a molecular test to pair with Pfizer's drug in development for non-small cell lung cancer. The test for the anaplastic lymphoma kinase gene is in regulatory review in the U.S. and Japan.

During Q2 they received FDA approval for a real-time PCR molecular test for measuring the viral load of hepatitis C, completing the core menu on the m2000. Q3 will see strong double-digit growth.

Vision care

Worldwide sales increased 7.5%. Globally they continue to gain share in the cataract business with TECNIS multifocal and monofocal IOLs [interocular lenses]. Abbott also continued to grow share in their corneal business with the new RevitaLens contact lens solution gaining 6% share points since the beginning of the year. Q3 Vision care growth will be high single-digit.

vascular

Worldwide sales were $835 million, slightly ahead of Q1 guidance. In international vascular sales [more than half of total sales] there was 25% growth in the emerging markets. International markets are 2/3 of the global drug eluting stent market with the US seeing a drop in sales. In emerging markets, procedure volume is growing, on average, at a mid-teens rate.

The global DES sales were approximately $485 million in the second quarter. Global XIENCE sales increased both sequentially and year-over-year. This was offset in the quarter by a double-digit decline in third-party DES revenues. XIENCE currently has the biggest market share of stent sales globally, with worldwide market share of 35%.

Q2 saw the U.S. launch of XIENCE NANO--- a stent for small vessels. The small vessels segment of the market represents 10% of all the vessels that are treated.

The endovascular and other coronary businesses, [40% of the vascular business] had multiple new product launches in expanding geographies over the past year. The first quarter launch of new TREK balloon catheters in the U.S. and Japan, following a successful launch in Europe last year, drove double-digit sales growth of the balloon segment in the quarter.


XIENCE PRIME [next-generation drug eluting stent] continues to does well internationally and should be approved and launched in the US in the first half of 2012.

MitraClip is a minimally invasive device[MID] approved in Europe, Australia, Singapore and other countries for the treatment of select patients with mitral regurgitation. In the U.S., it's currently under FDA review. While not likely to be a blockbuster, MID heart surgery is on the rise and mitral regurgitation is a relatively common heart condition requiring surgery. MitraClip was recalled and will be back on the market in Q3.

Of most interest is the new absorbable stent in the vascular pipeline--- the ABSORB bioresorbable vascular scaffold. It's designed to slowly metabolize and eventually be absorbed by the body after providing support to the vessel during the healing process, leaving no permanent metallic implant behind. It received CE Mark in January, and a full-scale launch in Europe is planned by the end of 2012.

The global vascular business is expected to see mid-single-digit sales growth in Q3.

Proprietary pharmaceuticals

Proprietary Pharmaceutical sales increased 13% in the quarter, driven by growth of 9% in the U.S. and 19% internationally.

Global HUMIRA sales increased more than 18% operationally [no forex included] Performance was driven by international sales growth of 19% before exchange and U.S. sales growth of more than 18%. Demand for HUMIRA continues to maintain its global market share, and new competitive entrants are tracking in line with expectations. In the biologic space, JNJ has seen excellent growth with Stelara and its Remicade franchise has resumed growth after a couple of slow quarters. These are direct competitors and good news for JNJ is maybe not so good for Abbott. Stelara in particular saw its revenue double this quarter to $176 million for the quarter.

Internationally, double-digit market growth continues in the major European countries where HUMIRA holds the #1 share position.

Abbott has to expand indications for Humira and is in the process of getting the FDA to review it for ulcerative colitis. This will pave the way for incursion into Remicade territory. UC is a common GI disorder that is difficult to control. Remicade does a decent job but IV administration is expensive and time consuming and Humira with its simple subq injection could see wide adoption.

The expect Humira to grow in the high teens globally in 2011.

Sales of Niaspan were $247 million. They have seen a modest impact on prescription trends beginning late in the quarter following the discontinuation of the AIM-HIGH trial in late May. The failed trial may curtail future growth.

From the WSJ in May 2011:

Abbott’s Cholesterol Franchise Dinged By End to Niaspan Trial


By Katherine Hobson


Today’s news that an NIH-funded trial of cholesterol drugs ended 18 months early after it found no benefit from Abbott’s Niaspan is the second setback in a week for the drug maker’s cholesterol franchise.

The trial, called AIM-HIGH, looked at whether adding Niaspan — a high-dose, extended-release form of niacin, or vitamin B3 — to certain heart-disease patients’ statin drug regimens would prevent more cardiac events than a statin alone. As the WSJ reports, it didn’t; more details from the study will be out later this year.

At this point, the FDA has recommended no change to how the drug is currently used. Abbott, meantime, said in a statement the final results of the trial would be reflected in the Niaspan product label, but that it’s still unclear whether these results apply to patients different from those studied. Niaspan sales last year totaled $927 million.

Abbott suffered another cholesterol-therapy stumble last week, when an FDA advisory panel recommended the label for the company’s drug Trilipix be changed to reflect the results of a trial of a similar Abbott drug, TriCor. That study didn’t find a lower risk of heart attacks and strokes among diabetics taking TriCor and a statin vs. a statin alone.

The advisory panel — whose recommendations are often but not always followed by the FDA — said even though the trial in question didn’t directly examine Trilipix, that drug’s label should be changed and the agency should “require a clinical study looking at Trilipix and whether it lowers the risk of heart attacks and strokes.”

There’s been no conclusive clinical data suggesting that TriCor and Trilipix, which had combined sales of $1.58 billion last year, actually improve either of those outcomes. In December Abbott and AstraZeneca scrapped plans to produce a combination pill containing Trilipix and Astra’s statin Crestor after an initial rejection by the FDA.


From the CC:

Larry Peepo

Sure. This is Larry. Certainly, we've been watching the scripts, and everybody has seen what they've done, 6 weeks after AIM-HIGH relative to 6 weeks before, we'd say that they're down about 5%. So a pretty modest impact at this point. But we certainly continue to watch those. We believe that we've incorporated a reasonable estimate here for the second half for Niaspan and our outlook for 2011. And to your point, price will still play a bit of a positive role here in the second half. But still 6 weeks out. It's a little bit early to make an official call on it. We continue to watch it. But at this juncture, down 5%, 6 weeks before and compared to 6 weeks after is, again, a fairly modest decline at this point. But we feel like we've got a pretty reasonable expectation for the second half


Decrease in Niaspan revenue will hurt. Abbott says Q3 will see positive growth. The trial was not a death knell but it does put Niaspan back where it was and will not support growth for prevention of heart disease by coupling sales to statins. Niaspan sales did increase 17% in Q2. The study was halted at the end of May. The full impact will be seen in Q3 and is worth tracking

Synthroid and Lupron:

U.S. sales of Lupron were up 12%. Last month, Abbott announced FDA approval for a new 6-month formulation of Lupron Depot, expanding dosing options. They expect more than $750 million in total global Lupron sales in 2011.

U.S. sales of Synthroid remained strong at $140 million and will have revenue $450 million in total U.S. Synthroid sales this year.

Abbott is guiding to high single-digit sales growth in 2011, including mid single-digit growth in the U.S. and another quarter of strong double-digit growth internationally.

I am not the only one that thinks Abbott’s pharmaceutical division is on shaky ground. This is from the CC [transcript from Seeking Alpha]

Michael Weinstein - JP Morgan Chase & Co

Maybe just a couple of items just to clarify. One, you had a very good quarter for HUMIRA and you raised your HUMIRA guidance for the year. So if you could provide any color on what you think is going on in the underlying markets, both in the U.S. and o U.S., that would be appreciated. And then second, one item we're struggling a bit with it is that if we look at the international pharmaceutical performance, HUMIRA as we noted was very strong, but it looks like there's a pretty meaningful drop-off in sales of other products once you kind of back out HUMIRA and then submit a product that you list in the press release. So if you can give any color there as to what's going on. Are those old Solvay products that are dropping off? Any insights would be appreciated.


Thomas Freyman

Yes, this is Tom. For HUMIRA, we're seeing really globally, good market performance to start with. In the U.S. in particular, growth rates have picked up this year and that is certainly bolstering the product. And in international, as you know, growth rates have been quite a bit stronger than the U.S., and they've continued to be in mid-teens or even better growth rates. So certainly, that is helping support the product. We're also executing quite well in the businesses in terms of share performance, most significantly in the derm and the gastro areas. But also, we're seeing some progress in RA as well, despite the fact that there's some -- a fair amount of competition in that space. So globally, we're just seeing good market growth, good share performance and very good execution on the part of our business people. And Mike, on the question on pharma growth, I think if you look at most of the products, we're seeing pretty strong growth across them in the quarter. So maybe you could be a little bit more specific about exactly what your question is on the pharma growth.


Larry Peepo

This is Larry. [indiscernible] quarter, so did HUMIRA obviously. There's not that many products actually in the proprietary business any longer. Again, a lot of the Solvay products other than, say, a Duodopa have moved over into the Established Pharma business. So most of the other products, as Tom said, had pretty good quarters.

Michael Weinstein - JP Morgan Chase & Co

Well, if you look at -- I'm sorry, but just to dive in here, but if you looked at international pharma and you backed out HUMIRA and you backed out Kaletra and let's say Lupron just for kicks as well, you would get that -- the balance of that international pharma piece is down about $250 million year-over-year. So about a $600 million business last year is now about a $350 million business once you strip out the stuff that you guys report. So I was just hoping to get some color on the products that are going away. Is that old Solvay business that you guys have decided to stop marketing? Because that is pulling down your international pharma growth by a fair amount.


Management response was that the heavy reliance on a handful of products is not a significant problem and that patent expirations will have little impact especially overseas. That may prove to be true if Humira sales stay strong. If they fall off even a small amount Abbott’s price per share will come under downward pressure. Their lack of near-term blockbuster drugs puts them in a precarious position.

A recent study that found 28% of patients developed antibodies to Humira is concerning. It is not a dangerous side effect but makes the medication less effective and patients will discontinue it. The study was of 272 patients over three years. Any biologic can cause this reaction. It does have the potential to slow sales.

Why own Abbott?

At the right price, the dividend yield was just too tempting to pass.

Even now after the stock has run up around 15% from my basis the yield is still 3.8% with the 48¢ per quarter dividend declared. Abbott has a decades long history of paying dividends and raises them regularly. The dividend is up nearly 10% year-over-year

The payout ratio for the last 8 quarters runs between 40% and 80%.

Debt is $19 billion with a debt/capital ratio of 43%. The interest coverage ratio is a non-stressed 16X. With annual CFFO in 2010 over $8.7 billion, the $2.7 billion 2010 dividend was easily paid out of cash flow. Abbott did make $9.4 billion in acquisitions 2010 [Solvay and Facet] that required issuance of debt and use of cash to keep the dividend intact. In years without outsized acquisition expense [and that has been most years since 2003], capex runs around $1.1-$1.6 billion and the dividend is easily covered.

The dividend is high and the cash flow is normally sufficient to cover it making ownership of Abbott attractive at the right price. I would not be adding at present. The company has some pharmaceutical weakness and is vulnerable to revenue erosion under the right [or more appropriately wrong] circumstances. Working in its favor is diversification that will improve as faster growing segments add more revenue. Abbott has done extraordinary work getting Humira and Xience to the top of their markets. They have acquired a pipeline of sorts through partnerships and have expanded into international markets more convincingly with the acquisition of Solvay. There are several positive trends for the company that partially offset the dangers facing them from over-reliance on Humira.

It is critical not to overpay for Abbott and at current prices we may be there.

For 2011 Abbott is looking golden. If they meet the new raised guidance of $4.58 to $4.68 that represents impressive double-digit earnings growth for they year.
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