A Diagnostics Deal for GE and Abbott

CEO Miles White fuels his M&A streak with an agreement to sell two-thirds of Abbott's diagnostics business to GE for $8.1 billion in cash

Editor's note: This is an updated version of a previously published story.

Over the past nine months, Abbott Laboratories (ABT) dished out $10.1 billion on acquisitions, including Guidant's vascular-stent operations and cholesterol-drug specialist Kos Pharmaceuticals. This year many industry analysts figured Chairman and Chief Executive Miles White would take a breather to allow the company to absorb its newest assets or lighten its $7 billion debt load.

The analysts figured wrong. Just a month after closing its $3.7 billion deal for Kos, Abbott announced on Jan. 18 that it was selling roughly two-thirds of its $4 billion diagnostics business to General Electric (GE) for $8.13 billion in cash. White promises he won't do anything rash. But in an interview with BusinessWeek, he says he'll likely use the money to buy more medical-products outfits to help boost overall sales and profits by at least 10% a year into the next decade. When it comes to acquisitions, White says: "You can never afford to rest."

The purchase is the second for GE in three days. On Jan. 15, the conglomerate announced it would pay $4.8 billion for Smiths Aerospace, a British aviation-parts maker with $2.4 billion in sales and 11,000 employees. That deal comes on the heels of a transaction by Siemens (SI). A direct competitor of GE in medical-imaging equipment such as computed tomography (CT) scanners, Siemens two weeks ago closed its $5.3 billion takeover of Bayer's (BAY) diagnostics unit.

No Regrets About M&A

White, 51, has been transforming Abbott by wheeling and dealing almost since the day he was promoted to chief executive in 1999, after running Abbott's diagnostics operations. He began with a bang, paying $7.2 billion in cash for the Knoll Pharmaceuticals subsidiary of Germany's BASF (BF) in 2001. Among other purchases, White also bought TheraSense, an Alameda (Calif.) maker of blood-glucose monitoring devices for diabetics, for $1.2 billion in cash, in 2004.

While many big drug companies have regretted their growth-by-acquisition strategies, analysts say Abbott has done well. The Knoll purchase, for example, yielded Humira, a drug for rheumatoid arthritis that topped $2 billion in sales in 2006. More recently, Abbott's $4.1 billion takeover of Guidant's vascular-stent operations in early 2006 gave the company a drug-coated stent, branded Xience. If the product passes final clinical trials, it could hit the U.S. market by yearend and is projected to reach $1.5 billion in sales in 2008.

"They've generally been pretty shrewd purchasers," says Phillip Nalbone of RBC Capital Markets (RY) in San Francisco. Abbott hasn't overpaid, he notes, and it has been adroit in integrating personnel and facilities, often putting managers of new entities in charge of kindred operations that Abbott had before.

Wall Street Likes What It Sees

White's dealmaking has lifted Abbott's top and bottom lines. In 2006, Abbott earned $3.8 billion on sales of $22.5 billion, with gross margins nearing 59%, says Glenn Novarro of Banc of America Securities (BAC) in New York. That's up roughly 10% annually from $2.4 billion in net income on $13.2 billion in sales in 1999, when gross margins were 54.5%, and puts Abbott ahead of Merck (MRK), Bristol-Myers Squibb (BMY), and Eli Lilly (LLY) in sales and earnings growth.

The sale of the relatively low-margin diagnostics businesses should further widen Abbott's operating margins by 2 percentage points, Novarro says. He rates Abbott a buy and forecasts its stock rising to $54 a share within the next 12 months.

Abbott shares, which have risen 29% in price in the past year, advanced $1.24 to close at $52.79 on Jan. 18, after touching a 52-week high of $52.92. GE gained 2¢ a share to close at $38.

Production and Regulatory Woes

Abbott hasn't been only a buyer. The North Chicago company spun off its $2.6 billion hospital supply division, now known as Hospira (HSP), in mid-2004. Like Hospira, the diagnostics operations going to GE were considered slow-growth outfits within Abbott, which lacks the breadth of GE's $16.6 billion health-care segment in producing big-ticket medical equipment for hospitals, clinics, and high-volume labs.

The business also had been troubled. The U.S. Food & Drug Administration had barred Abbott from producing many of its diagnostics tests for four years after uncovering problems at its main plant throughout the 1990s. Abbott returned to the market in 2003 after paying more than $225 million in fines and related costs.

In the GE deal, Abbott is keeping its molecular and diabetes diagnostics businesses, while GE is picking up Abbott's clinical and consumer testing units, which had sales of $2.7 billion in 2006 and 12,000 employees.

A Better Fit

Joseph Hogan, president and CEO of GE Healthcare, says GE should be able to accelerate growth at the mainline diagnostics business by reclaiming market share lost while Abbott was shut out of the marketplace by the FDA and by pushing sales in emerging economies outside the U.S. He also notes that Abbott's $200 million home-diagnostics business has been growing by 20% to 30% a year.

The integration also should be easier because GE's Diagnostic Imaging division is based in Waukesha, Wis., less than 70 miles from Abbott's headquarters and flagship diagnostics facility. "It fits within our portfolio so well, and gives us much broader capability," says Hogan. "It just didn't fit Miles' strategy."

White first talked with GE Chairman and CEO Jeffrey Immelt about selling Abbott's diagnostic operations a half-dozen years ago, but the FDA scrutiny got in the way. The two began talking in earnest again last spring. White says Siemens and Royal Philips Electronics (PHG) also contacted Abbott about buying the businesses. Abbott negotiated only with GE, however.

Ready for the Next Deal

White's role model for Abbott is Johnson & Johnson (JNJ), probably the most admired company in Big Pharma. J&J has grown through takeovers and is praised by analysts for letting its divisions run themselves. It also counterbalances its drug operations with segments that sell medical devices, such as stents and artificial joints, and consumer products. Abbott similarly relies on pharmaceuticals for 55% of sales and medical and nutritional products for 45%.

By selling the diagnostics operations, White shifts that ratio to an out-of-whack 65% and 35%. If Abbott does no major deals in the next few years, the share for medical products and nutritionals will rise to 40% within a few years as their growth outpaces pharmaceuticals, White says. But that's not his plan. Abbott has a 20-person business-development team that works full time with business-unit chiefs to find and evaluate deals. "We make sure we're up to date on our homework so that if we want to get into a new segment, we can," White says. "We won't be doing nothing."

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