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Abbott's St. Jude Medical Hit With FDA Warning Letter

- By Alberto Abaterusso

In a warning letter dated April 12, the U.S. Food and Drug Administration criticized Abbott Laboratories (ABT) for neglecting to properly investigate and resolve issues related to cybersecurity threats and a battery malfunction in its cardiac devices.

In particular, the FDA accused St. Jude Medical, which was acquired by Abbott earlier this year for $25 billion, of being neglectful despite knowing its devices were equipped with defective batteries. Subsequent to the death of a patient in 2014, 400,000 devices were recalled by the company. However, St. Jude Medical continued to fit patients with the devices within a few weeks of the recall.

In its warning letter, the FDA also said that "by basing its risk evaluation on 'confirmed' cases and not considering the potential for 'unconfirmed' cases to have been shorts, St. Jude Medical underestimated the occurrence of the hazardous situation."

Concerning at-home monitoring equipment, the FDA cited in its letter that the manufacturer failed to prove the devices were equipped with the most recent updated software in order to prevent cybersecurity vulnerabilities.

According to the company, these issues occurred well before the closing of the merger and have since been addressed by Abbott.

The FDA is requiring Abbott to provide a written description of the steps it has taken to correct these violations and an explanation of how it will prevent similar violations from occurring in the future.

If the company fails to adequately meet these demands, the FDA could implement an injunction, conduct a seizure and issue monetary fines.

Abbott is currently trading around $42.76 per share, down 73 cents or 1.67% from the previous trading day, with a price-sales (P/S) ratio of 3.04 and a price-book (P/B) ratio of 3.07.

The price-earnings (P/E) ratio (TTM) is 45.9 and the forward P/E ratio is 17.7. The dividend yield is 2.45%.

As of today, analysts recommend buying shares of Abbott with an average target price of $47.85 per share.

During the fourth quarter of 2016, Joel Greenblatt (Trades, Portfolio) and Keeley Asset Management Corp (Trades, Portfolio) initiated positions in Abbott Laboratories, buying 1,010,598 and 35,610 shares respectively.

Vanguard Health Care Fund (Trades, Portfolio), Richard Pzena (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) increased their positions by 2.38%, 0.64% and 18.97%, while George Soros (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) reduced their positions by 11.57% and 0.51%.

First Eagle Investment (Trades, Portfolio) sold out.

Abbott is a member of the Standard & Poor's 500 Dividend Aristocrats Index.

Disclosure: I have no positions in any stock mentioned in this article.

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This article first appeared on GuruFocus.