Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

What is the next shoe to drop at beleaguered diagnostics company Alere?

It's been a rough few months since the maker of medical tests for malaria and strep throat agreed to sell itself to Abbott Labs for $8.4 billion including debt. Alere was already the subject of an SEC inquiry at the time the Abbott deal was inked in February. Since then, it's been subpoenaed by the Department of Justice as part of a U.S. Foreign Corrupt Practices Act investigation. Now, Alere is recalling a device used to monitor patients taking a sensitive blood thinner after the FDA said it wasn't convinced that the company had figured out a way to avoid erroneous test results that were in the past associated with three deaths.

Deal Doubts
As Alere gets hit by more and more bad news, the difference between its stock price and the $56 a share that Abbott Labs offered has widened.
Source: Bloomberg

In case that wasn't enough, don't forget that Alere still hasn't filed its 2015 annual report because it's sorting out issues with the way it recognized revenue in China and Africa. How bad can the issues be? Depending on what's in that 10-K, Alere's shares could climb back up to the $56 on offer from Abbott or drop to as low as $33 a share, according to Canaccord analyst Mark Massaro. So hopefully that's helpful.  

The devices Alere is recalling -- called INRatio -- have had problems for a while now and don't actually account for a big portion of the company's revenue at this point (less than 1 percent). Several analysts have dismissed the recall as immaterial to the merger. But some analysts also brushed off the Justice Department's foreign corrupt practices investigation as not a deal crusher either. It turns out that in the wake of that inquiry, Abbott tried to pay Alere as much as $50 million to just forget the whole takeover thing.

Here's Abbott Labs' spokesman Scott Stoffel's statement on Alere's latest round of bad news: Abbott is ``disappointed to learn that Alere is withdrawing the INRatio product from the market due to its inability to meet the FDA's standards" and ``is seeking to better understand this withdrawal as part of its ongoing review of financial and other information to ensure that all outstanding issues at Alere are clearly understood."

Doesn't sound like Abbott thinks the recall is immaterial. It's certainly not a pep talk. And really you can hardly blame Abbott. Sure, it's not a big revenue loss, but Alere is going to take charges of $70 million to $90 million this year in connection with the recall. That's on top of whatever fines or revenue adjustments may come out of these government investigations.

Why Are We Doing This Again?
Alere's revenue outlook isn't exactly gangbusters, but Abbott was targeting $500 million in operational and sales synergies by 2019.

It's just one more headache that Abbott doesn't need on a deal whose strategic benefit has also been called into question. Abbott would probably prefer to focus its $30 billion purchase of St. Jude -- which, by the way, has also raised a few critical eyebrows concerning its strategic merit but hasn't been beset by accounting issues or government investigations.

Violation of the Foreign Corrupt Practices Act may not in and of itself give Abbott a way out of the takeover, as my Bloomberg News colleagues Michelle Fay Cortez and David Voreacos wrote. But if Alere keeps coming up with unpleasant surprises, Abbott may yet find a path to walk away.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net