Jim Cramer takes a closer looks at the litigation facing Abbott and what it means for the company

For months, one of my favorite stories in healthcare, Abbott Labs, ABT, went way down by what I can only describe as a great miscarriage of justice. This is a company with one of the best fundamental stories in the industry. It's got four core businesses that are all going nicely, including its best-in-class medical device unit specializing in cardiology and diabetes management. I like Abbott so much that we re-established our position in it for the Travel Trust over this year. We've owned it off and on again for ages, one of the most well-respected companies in America. But about six months ago, something insane happened here. See, Abbott has an infant formula business as part of its nutrition segment. It's a small part of that business is making a specialized formula for premature babies who desperately need specialized nutrition. Only Abbott and a company called Reckitt Benckiser make this stuff because it's not particularly profitable. It's a really niche business. You know what? I think it's actually more of a public service type of business. Yet Abbott and Reckitt started being hit with these lawsuits. And you know, I've got to tell you, this one really steams me. These were suits where plaintiffs claim that the premature baby formula caused a potentially fatal condition called necrotizing enterocolitis, or NEC for short. Everyone calls it NEC. Never mind that practically every medical authority on Earth says it's not true. They were getting sued. In March, Reckitt Benckiser lost a court case in Illinois. They were ordered to pay $60 million. Okay, bad. But what was really bad was it was $35 million more than the plaintiff was even looking for. That's right. The court wasn't satisfied with the amount that the plaintiff asked for. So it awarded the plaintiff more than double what they were seeking. That crushed Reckitt's stock, and it knocked down Abbott's too. It was a gigantic market cap loss for Abbott. Billions and billions of dollars, and nobody saw it coming. The last time I talked about the issue in July, Abbott was facing his first case in St. Louis, which is a notoriously plaintiff-friendly jurisdiction. Sure enough, just 10 days after that segment, the jury ruled against Abbott, ordered the company to pay a whopping $495 million. At the time, there were still about 1,000 of these NEC cases outstanding. So if Abbott kept losing like that, and they don't win necessarily on appeal, and of course, Abbott is appeal-ious, they would have lost $495 billion. That's more than enough to sink this $206 billion business. So it became existential. It was frightening. Yesterday, though, we got a very positive update. For the past five weeks, Abbott's been facing its second NEC trial with Reckitt's Meade & Johnson division as co-defendant. Last night, the jury ruled in favor of Abbott and Meade & Johnson, finding the companies not liable. Now, this is a huge decision. First, the case itself was extremely high stakes. The plaintiff was seeking $6 billion in punitive damage on top of $276.9 million in compensatory damage. That's a big number, equal to roughly 80% of Abbott's earnings last year. You lose too many of those, you're out of business. Also, crucially, this trial was held in the same St. Louis courtroom where they lost in July. For the very same judge. That's why I told you I was pretty pessimistic about Abbott's chances when the proceedings began. But this time around, despite the plaintiff-friendly venue, the jury found in favor of Abbott and Reckitt. In favor. And that is very important. This was a real surprise because things didn't seem to be going all that well for the defendants during the trial. It was the regulators bent over backwards to protect them. Earlier this month, baby formula makers seemingly scored a big win for their side when the FDA, the CDC, and the NIH issued a joint consensus statement asserting that, and I'm going to quote, for infants where the supply of human milk is insufficient, these formula are part of the standard care for premature infants, end quote. And then went on to explain, quote, one, there is no conclusive evidence that preterm infant formula causes NEC. And two, there is strong evidence that human milk is protective against NEC, end quote. Basically, the formula doesn't cause this disease. It's just not as good at preventing it as actual milk. But if you had enough milk, you wouldn't be using the formula in the first place. Now, there's a reason all these federal agencies came out swinging for Abbott and for Reckitt. This premature infant formula is essential to the human care system, the health care system for babies. Yet these companies make very little money from it. If they're going to get sued endlessly for trying to help, they'll simply have to get out of the business entirely. Abbott really didn't want to go there. But in the previous case, they lost nearly a half a billion dollars, and they had to do a fiduciary duty to their shareholders to avoid that kind of damage. I asked Mr. Ford, why don't you get out of the darn thing? But they felt that it was the wrong thing to do. See, the crazy thing is, even though all these, Mr. Ford being the CEO, I'm sorry, even though all these agencies came out in defense of this in the National Institutes of Health report, the judge actually blocked Abbott and Reckitt from showing what I just mentioned to the jurors. They blocked the report. Then last week, the lead lawyer for the defendants, James Hearst from Kirkland & Ellis, a total renowned hitter, was sanctioned by the court and banned from the case, trying to get his incredibly important evidence in front of the jury. Banned from the case! But despite the venue, despite the judge, despite the fact that Abbott's lead lawyer had been thrown off the case, Abbott and Reckitt still won. Several analysts wrote about the ruling overnight, and the overall consensus that his outcome strengthens Abbott's position in future NEC cases, And let me tell you something, it's going to be for a lot less money than Wall Street thought after the last two wins. If there's going to be any money given to the plaintiffs at all, I think that's right. My hope is that this trial victory makes it easier for Wall Street to focus on Abbott's fundamentals, which frankly are fantastic. Remember what could happen now. If you're a plaintiff, you run the risk that you may not recover anything. The lawyers are only paid if they recover something. So why pursue this? Why pursue this matter? Now, Abbott reported just over two weeks ago, and for the third straight quarter, they turned in a solid beat and raise result. This was a clean top and bottom line beat. In-line guidance for the current quarter, while management also raised their full-year earnings forecast. Excluding COVID tests, they're looking for 9.5% to 10% organic growth for the full year. That is very big. In response to that solid quarter, the stock gained a respective 1.5%. But you know what? It would have rallied a lot, lot harder if it weren't for the ongoing trial. With that $6 billion guillotine of punitive damages looming in the background. Sure enough, today, Abbott caught fire, jumping over $5 from nearly 5% response to the trial victory. The stock's now at its highest level since early March, just before we started worrying about this baby formula litigation because of that first trial I mentioned, where the plaintiff got more than the plaintiff asked for. By the way, I told you to stick with Abbott on July 18th when the stock closed at $100 and change. If you kept the faith and bought at those low levels, you're up nearly 19%. There's much more to be gained ahead of time. Here's the bottom line. For most of this year, Abbott Labs has been weighed down by this ludicrous NEC litigation issue. I kept telling you that Abbott was in the right here. And even if some venues might rule against him, I said it was worth sticking with the stock because the business is just that good. Now, finally, Abbott's gotten his first big break in court. And though the problem isn't over, I am hopeful that things are finally headed in the right direction. Wall Street can start focusing on the excellent fundamentals of Abbott's business again, rather than just fretting about the litigation risk, which was reduced and reduced dramatically after yesterday's huge win. Let's go to David in New York. David. Hi, Jim. I'm a long time listening, first time caller. I'd like to know what you think about Moderna. It's very far down from this all time high. I'm struggling with Moderna because they have not been able to deliver on many things that they promised. I know they're a great company, but in the end, if you are talking about personalized vaccines, personalized cancer vaccines, can we see some? Let's see some numbers. Their numbers aren't there yet. If they give us numbers, we will go positive on it. But there's no reason right now to get positive. Abbott finally got a break in court. And I think this outcome will allow investors to focus on the strong fundamentals of this company again. And I'll tell you, a huge position for my travel trust. I really believe in it. Much more money ahead, including my exclusive one of this past year's top S&P 500 performers that nobody talks about, which is wrong. It's called Go Daddy. Then with less than a week until Election Day, I think there's one issue business people are most concerned with. I'll reveal it and tell you where I stand. And all your calls for Abbott Fire and tonight's edition of The Lightning Round. So stay with Kramer.