Abbott pays $5.8bn to climb the diagnostics rankings

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Back in September Abbott Laboratories told EP Vantage it was interested in large acquisitions, and six months later a $5.8bn deal has arrived. Buying the molecular diagnostics company Alere will make Abbott the world leader in point-of-care testing, and paying a 50% premium for a heavily indebted company shows how avidly Abbott covets this title.

Abbott increasing its offering of simple, cheap bedside tests is another indicator of where the money is in medtech. The kind of sophisticated laboratory-based testing equipment that has been the core of Abbott’s diagnostics operations is expensive, and payers are increasingly unwilling to spend. This deal is not just about increasing a product offering, but moving into what is arguably a more appealing area.

If Abbott had made its intention to buy – if not its target – clear, the same is not exactly true of Alere. The beginnings of an attempt to take the group private surfaced in September with the group’s founder obtaining financing worth $8.6bn to purchase Alere’s stock and to pay down its debt.

But a more traditional trade sale had been telegraphed before that: in April 2015 Alere hired Jim Hinrichs, who had overseen the sale of CareFusion to Becton Dickinson for $12.2bn, as chief financial officer. Quite apart from this, some Alere shareholders have been vocal in their fervour for a trade sale, and will surely be delighted by today’s outcome.

Leader in POC, second overall

Integrating Alere’s technology ought to push Abbott’s annual diagnostics sales past the $7bn mark, Abbott says, meaning that the combined group will leapfrog Danaher to take second place to Roche in the in vitro diagnostics sector. But Roche’s technology, like Abbott’s, centres on automated testing apparatus designed to process large volumes of samples in specialised laboratories, rather than that done on the spot in the hospital or doctor’s office.

The in vitro diagnostics sector, 2014 and 2020
Global sales ($bn) Market share Rank
Company 2014 2020 CAGR 2014 2020 2014 2020
Roche 9.2 10.9 +3% 18.2% 16.6% 1 1
Abbott-Alere - 9.0 - - 13.7% - 2
Danaher 5.4 6.9 +4% 10.6% 10.5% 2 3
Abbott Laboratories 4.7 - - 9.4% - 4 -
Siemens 5.2 5.0 -1% 10.3% 7.6% 3 4
Thermo Fisher Scientific 3.1 3.8 +3% 6.2% 5.8% 5 5
Sysmex 1.8 3.3 +10% 3.6% 5.1% 8 6
Becton Dickinson 2.7 3.2 +3% 5.4% 4.8% 6 7
Alere 2.3 - - 4.5% - 7 -
bioMérieux 1.8 2.3 +4% 3.6% 3.5% 9 8
Ortho Clinical Diagnostics 0.9 2.1 +15% 1.8% 3.2% 14 9

While Abbott’s diagnostics segment brought it $4.6bn last year, according to EvaluateMedTech’s consensus data, its bedside tests amounted to only a tenth of that. But Alere already claims to be the global leader in point-of-care diagnostics.

Canaccord Genuity analysts estimate that the combined company will have around 54% of the global point-of-care market, which they say is worth $5.5bn and is growing at mid to high single digits.

The largest chunk of Alere’s revenues comes from cardiometabolic diseases, where it markets tests for disorders including coronary heart disease and diabetes; second biggest is infectious diseases, with tests for MRSA and Clostridium difficile, for example. Its tests tend to reach the US market via the Clia waiver route, which is customary for simple tests that have a low risk of error and can be carried out by non-lab-trained personnel.

And an easy route to market helps keep costs low – no bad thing in a time of cost-cutting and pressure on pricing exerted by hospital chains.

Debt

The tests might be cheap, but the company is not. Abbott will pay $56 per common share for Alere against a closing price on Friday of $37.20. The $5.8bn price is 3.2 times Alere’s estimated 2016 sales, and 14.2 times Ebitda.

Alere will become a subsidiary of Abbott and its net debt, currently $2.6bn, will be assumed or refinanced by Abbott.

The usual cost-cutting measures are in the offing. Abbott foresees annual pretax synergies of nearly $500m by 2019 and increasing thereafter, “including both sales and operational benefits”. It says the transaction will be immediately accretive, adding 12-13 cents to EPS in 2017 and more than 20 cents in 2018.

It is always intriguing to watch a company move into a different area. The question is, will Abbott be satisfied with its second-place ranking, or might further purchases be on the cards, allowing it to challenge Roche?

To contact the writer of this story email Elizabeth Cairns or Madeleine Armstrong in London at news@epvantage.com or follow @LizEPVantage or @medtech_ma on Twitter

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