Abbott Labs Looks Cheap But The Devil Is In The Details - Intelligent Investing - Ideas from Forbes Investor Team - Forbes

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If you ever find yourself doubting that deep pockets attract litigation, just read some 10-K filings of companies in the fabulously-profitable pharmaceutical industry. Page after page describes litigation: shareholder lawsuits; claims by consumers that they were injured by drugs; and lawsuits between the drug makers themselves squabbling over patent rights.

If you’re a lawyer, those passages may warm your heart. But for the rest of us, the lawsuit disclosures add another layer of maddening uncertainty in choosing stocks. Which claims are B.S., likely to be settled for nuisance money, and where lurks the next Fen-phen debacle?

Abbott Laboratories (ABT), a company with very attractive financials and a relatively cheap share price, has a doozy of a lawsuit on its hands, one that attacks its most important product, Humira. The drug, which treats rheumatoid arthritis and other immune-system ailments, had 2009 sales of $5.5 billion, and is still growing rapidly. First-half 2010 Humira sales rose 28.1%, to $3.0 billion (somewhat inflated by foreign exchange rates).

The drug is part of an industry triumvirate, along with Enbrel and Remicade, that, along with some follow-on drugs, combined could bring in $33 billion by 2015. The stuff ain’t cheap. With 425,000 worldwide users as of early this year, it appears each person’s Humira habit brings Abbott about $13,000 a year. Enbrel and Remicade are similarly priced.

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Abbott actually already lost the lawsuit. A federal court jury in the Eastern District of Texas in June 2009 found that Abbott infringed a patent held by a Johnson & Johnson (JNJ) unit, Centocor, which sells Remicade, and ordered Abbott to pay $1.67 billion. The award was called the largest ever in a U.S. patent infringement case at the time. (New York University, which helped develop Remicade, is also a plaintiff in the case.) Then, earlier this year, Abbott had to deposit $1.87 billion (the award plus interest) into an escrow account, pending Abbott’s appeals of the award. Those could take years to resolve.

J&J, of course, is seeking additional damages since Abbott continues to sell Humira.

Even before the jury award, Abbott’s p/e ratio was in the mid teens. And this is a company, unlike others in Pharma, that isn’t facing patent expirations on its best medicines (unless it somehow loses the right to sell Humira).

Abbott’s dividend is solid and ever-rising.

And the payout provides a nice yield at the current stock price.

Abbott has produced nice revenue growth.

If Abbott wins the Humira case on appeal, or even if it limits the damages it has to pay to something close to the $1.87 billion and is allowed to keep selling Humira, the stock looks attractive. If its ability to continue selling Humira is compromised, Abbott will become a very different company.