Abbot Labs: Diagnosis: Shrewd Moves

Over the last nine months, Abbott Laboratories (ABT ) has dished out $10.1 billion for acquisitions, including $3.7 billion for cholesterol drug specialists Kos Pharmaceuticals Inc. This year, many analysts figured, Chairman and Chief Executive Miles D. 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 the deal for Kos, Abbott was set to announce on Jan. 18 that it was selling about two-thirds of its $4 billion diagnostics business to General Electric Co. (GE ) for $8.1 billion in cash. While emphasizing that he's not going to rush into doing deals, White 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."

White, 51, has been wheeling and dealing almost since the day in 1999 that he was promoted to CEO, after earlier heading Abbott's diagnostics operations. He began with a bang, paying $7.2 billion in cash for the Knoll Pharmaceuticals Co. subsidiary of Germany's BASF (BF ) in 2001. Among other deals, White bought TheraSense Inc., an Alameda (Calif.) maker of devices that monitor blood glucose, for $1.2 billion in cash in 2004.

While many big drug companies have come to rue 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. And a $4.1 billion takeover of Guidant Corp.'s stent operations in early 2006 gave Abbott a drug-coated stent, branded Xience. If it passes final clinical trials, it could hit the U.S. market by yearend; it's projected to reach $1.5 billion in sales in 2008. "They've generally been pretty shrewd purchasers," says Phillip Nalbone of RBC Capital Markets in San Francisco. Abbott hasn't overpaid, he notes, and has been adroit in integrating personnel and facilities, often putting managers of acquired entities in charge of similar Abbott units.

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 J. 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.

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

The business also had been troubled. The 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 blood-testing kits, which had estimated sales of $2.5 billion in 2006.

White's role model for Abbott is Johnson & Johnson (JNJ ), which has grown through takeovers and is praised by analysts for letting its divisions run themselves. It also counterbalances drug operations, which can be volatile, with stabler segments that sell medical devices and consumer products. Abbott similarly relies on pharmaceuticals for 55% of sales and medical and nutritional products for 45%.

Selling the diagnostics operations will shift that ratio to an out-of-whack 65%-35%. But not for long. Abbott has a 20-person business development team that works full-time with chiefs of Abbott units 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."

By Michael Arndt

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