In agreeing to buy the diagnostics group Alere for nearly $6bn in February Abbott appears to have relied on due diligence that was inadequate at best. The litany of foul-ups on the part of Alere that has followed – most recently a Medicare billing scandal – has surely made Abbott’s shareholders wonder how on earth the company walked into this disaster of a deal, and what it can do to escape.
Abbott is now suing Alere to try to get it to hand over financial information pertaining to corruption investigations that Abbott only found out about after signing the merger agreement. It says it is not asking the court to break the deal, but it does allege that Alere breached the merger contract. There might yet be scope for Abbott to break free.
The latest, but possibly not the last, straw on the camel’s back is the move from the Center for Medicare and Medicaid Services to immediately revoke coverage for devices produced by Alere’s subsidiary Arriva Medical, which sells blood glucose meters via mail order.
The CMS alleges that Arriva has billed Medicare for claims on 211 dead patients over five years. Alere, protesting that 5.8 million claims were submitted for its devices in that period, has launched a second appeal of the decision – the first was denied – seeking to have Arriva’s coverage retroactively reinstated. Analysts from Jefferies say it is not clear whether the decision will be overturned.
Arriva had sales of $88m during the first nine months of 2016, so it is only a small part of the business – Alere’s overall revenues during the third quarter alone were $582m. But almost all its sales, more than 90%, are to Medicare. Moreover, Arriva’s profitability is better than Alere’s overall average.
The CMS’s decision may or may not give Abbott leverage to break the deal. If not, it might have other chances. Last week Abbott filed a lawsuit in the Delaware Chancery Court asserting a single claim against Alere for breach of contract; specifically that Alere has refused to provide Abbott with documents under the merger agreement.
The documents relate to an investigation by the US Department of Justice into alleged kickbacks in Africa, Asia and South America. There is also a separate federal investigation into government billing practices. It does not seem unreasonable that Abbott would want access to all Alere’s information regarding these probes.
For its part, Alere says it believes it has fulfilled its contractual obligations. The preliminary injunction hearing is set for January 27 and can last up to two weeks based on historical precedents, the Jefferies analysts write.
So what now? Abbott has already offered its unwanted partner $50m to call the deal off, and received a flat refusal (Debt, integration and buyer’s remorse: can Abbott pull off its deals?, May 6, 2016). Perhaps another overture here is possible, though it seems probable that if a break fee existed as part of the merger agreement Abbott would have invoked it by now.
The group may end up going through with the acquisition and making the best of it, writing off whatever it cannot salvage. This is not ideal since in buying the company Abbott agreed to take on Alere’s $2.6bn net debt. In that case the company must hope its $25bn acquisition of St. Jude Medical, expected to close by the end of this year, is more successful.
There is one group of people who seem to believe that Abbott will find a way to wriggle out of the deal: Alere’s investors. The group’s stock is trading at around $36 – $20 below the acquisition price.