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Abbott Climbs on 'Dose' of Good News; Raising Our Target

FDA approval and dosing label for FreeStyle Libre glucose monitoring system makes it a major player in the U.S. market.
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Abbott Climbs on 'Dose' of Good News; Raising Our Target

Shares of Abbott Laboratories (ABT) are climbing this morning following yesterday's announcement after the bell that the company received FDA approval on its FreeStyle Libre glucose monitoring system. Since this product has been so popular in Europe and other international markets, members will recall that we have been anxiously awaiting this decision, and we spoke about our excitement for the product recently in our Weekly Roundup from two weeks ago.

The big takeaway from this announcement is not just the system receiving approval. This was expected to occur at some point, with many on Wall Street targeting an early-2018 date. While the early approval is certainly contributing to today's upside in trading, the real positive surprise is that FreeStyle Libre received a dosing label. Dosing for this product refers to the product's ability to accurately and reliably allow for treatment decisions. This label is a best-case scenario outcome for Abbott, and the news makes FreeStyle Libre a major player in the U.S. market.

In addition, what separates ABT's product from its competitors, namely DexCom's (DXCM) system, is that fingersticks are no longer necessary in the FreeStyle Libre. For a comparison, DexCom's system requires users to administer a fingerstick twice per day for calibration. On the other hand, Abbott's Libre system requires zero fingersticks and can be used up to 10 days with a 12-hour warm-up period. This makes Abbott's product less invasive for its diabetic patients, something the market was asking for without major sacrifices to accuracy, which Abbott has achieved.

What's more, it appears that Abbott will be very aggressive with its pricing strategy in the U.S. The company is looking to sell its product for roughly $3.75 per day, much less than the current rate of DexCom's system. This should cause many DexCom's customers to switch to FreeStyle Libre. Given its popularity already in International markets, we expect the same to occur in the U.S.

Although we ultimately wished to have been bigger in this name, the stock price never broke from our initial purchase price of $46.60. This is an example of where our financial discipline (which we spoke to extensively earlier in the week here) has come back to bite us, but even so, our view is that this astute investing strategy holds true over the longer run. That being said, we have always viewed ABT as a core holding in our portfolio as the company does an excellent job of delivering double-digit earnings growth with a steadily increasing dividend.

Altogether, this surprise announcement ahead and superior to both the Street's and our own expectations has caused the stock to lift past our price target. With that said, we are raising our price target to $61 from $53, which reflects roughly 19x consensus 2019 earnings expections. Looking ahead, we see Abbott's upcoming acquisition of Alere ALR to be the next major event of the company.

Action Alerts PLUS, which Cramer manages as a charitable trust, is long ABT.