Abbott Asset Sale Gives Ammunition for Perrigo: Real M&A

Free from an underperforming unit, Abbott Laboratories is positioned to go after potential targets from Insulet Corp. to Perrigo Co.

Abbott said this week that it’s selling part of its generic drug business to Mylan Inc. in exchange for a 21 percent stake in the new entity, which will be based in the Netherlands for tax advantages. Abbott, which could get about $5 billion when it cashes out of that stake, may seek deals that would bolster its medical-device business. The $62 billion company could expand its presence in the diabetes market by buying Insulet or Tandem Diabetes Care Inc., said Leerink Partners LLC, which also sees diagnostic-equipment maker Volcano Corp. as a target.

With rival Medtronic Inc. planning to move its legal address overseas, investors may encourage Abbott to find its own tax inversion deal -- something that Chief Executive Officer Miles White said he wouldn’t rule out if it makes sense. Perrigo, the $21 billion company that gained an Irish address by buying Elan Corp. last year, is one possibility, Royal Bank of Canada said.

“From a growth perspective and just from a competitive standpoint, Abbott will need to be acquisitive,” Danielle Antalffy, an analyst at Leerink, said in a phone interview. The Mylan deal means “they’ll ultimately have even more cash, theoretically $5 billion or so, over time to make acquisitions.”

A representative for Abbott declined to comment.

Inversion Mania

When Mylan announced the purchase of Abbott’s generic drug operations in developed markets this week, it became the latest company to strike a crossborder deal to avoid high U.S. corporate taxes. More than 15 companies have announced plans to do so since 2010, including AbbVie Inc., the drugmaker that split from Abbott last year and is attempting to buy Dublin-based Shire Plc.

Abbott meanwhile is putting itself in a better position to acquire assets that can improve growth, according to Michael Weinstein, an analyst at JPMorgan Chase & Co. The Abbott Park, Illinois-based company increased sales just 1.65 percent last year, about half the median rate for life-science equipment makers of more than $5 billion, according to data compiled by Bloomberg.

“The transaction, in our view, is a win for both companies,” Weinstein wrote in a July 14 report. “We expect Abbott to be an aggressive acquirer going forward, with a bolstered balance sheet and a strong cash flow position.”

One Stop

Medical-device makers are already bulking up as they strive to become more of a one-stop shop for hospitals, and Abbott is behind in that game, Debbie Wang of Morningstar Inc. said. CEO White said this week that expanding the company’s medical-device offerings is a priority and he’s looking for acquisitions in that industry.

“Their entire portfolio is very holey right now,” said Wang, a Chicago-based analyst. A takeover of a company such as C.R. Bard Inc., an $11 billion seller of catheters and stents, would “offer them a real foot in the door with hospitals,” she said.

Within Abbott’s medical-device business, diabetes treatment is one area that could benefit from acquisitions, said Joshua Jennings, a New York-based analyst at Cowen Group Inc.

“I do think that’s the priority in terms of use of proceeds and capital redeployment for M&A transactions,” he said in a phone interview.

Diabetes Targets

Insulet and Tandem, which make insulin pumps, could help fill gaps in Abbott’s lineup, said Antalffy of Leerink. Insulet has a market capitalization of $2.1 billion, while Tandem is valued at $307 million.

Diabetes will affect about 33 percent of U.S. adults by 2050, up from 9 percent in 2012, according to estimates from the Centers for Disease Control and Prevention. Insulin pumps are small computerized devices that are programmed to mimic the body’s normal release of the hormone, eliminating the need for injections.

Volcano, a maker of technology that assesses when heart stents are necessary, would also be a logical target, Antalffy of Leerink said. Analysts named Abbott as a potential buyer for Volcano last year after activist investor Engaged Capital LLC took a stake in the $839 million company and said it was an attractive acquisition candidate.

“Volcano would fit really, really nicely,” Antalffy said. “It would be accretive to Abbott’s top-line growth and there would be a ton of cost synergies there.”

Stock Moves

Volcano shares fell 2.1 percent to $16.02 today. Insulet dropped 0.9 percent, while Tandem rallied 6.9 percent. C.R. Bard slipped 0.7 percent, and Perrigo climbed 1.2 percent. Abbott declined 0.3 percent to $41.05.

Representatives for Bedford, Massachusetts-based Insulet and San Diego-based Tandem declined to comment. Representatives for Murray Hill, New Jersey-based C.R. Bard, and Volcano, also based in San Diego, didn’t respond to requests for comment.

Abbott should also consider using an acquisition to shift its address to a country with a lower tax rate so it can avoid paying hefty repatriation levies on overseas earnings, said Glenn Novarro, a New York-based analyst at RBC Capital Markets, a unit of Royal Bank of Canada. About 70 percent of Abbott’s revenue came from foreign countries last year. The company had more than $7 billion in cash and equivalents at the end of March.

“If there’s one company in my universe that should do an inversion, it’s Abbott,” Novarro said in a phone interview. “All medical-device CEOs need to be thinking about inversions to remain competitive.”

Perrigo Fit

Perrigo would be an appropriate size for Abbott, Novarro said. Tax-inversion transactions typically require the foreign company’s shareholders to end up with at least 20 percent of the stock of the combined firm.

The Irish-domiciled drugmaker rose 8.7 percent earlier this week after reports that it tapped an investment bank to explore a sale. Abbott is one of only a few large pharmaceutical companies without name-brand products that would compete with Perrigo’s store labels, making it a logical suitor, according to David Steinberg of Jefferies Group LLC.

A representative for Perrigo declined to comment.

While a Perrigo deal may make sense from a tax standpoint, it’s less ideal strategically compared with some companies in the medical-device industry, said Prashant Inamdar, an analyst at Westwood Holdings Group Inc., which oversees about $19 billion including Abbott shares.

Plus, deal speculation has pushed Perrigo’s stock up 20 percent in the last 12 months, making a potential takeover more expensive.

‘Out of the Bag’

“The cat’s out of the bag,” Inamdar said in a phone interview. “A lot of these companies that would be potential targets, they know and they’re trying to extract maximum value. So there’s nothing left at the end of the deal for Abbott shareholders.”

Even so, Inamdar said he’d like to see the company do something to bulk up its product list and there are targets out there.

The deal with Mylan is “step one in a multi-step process,” said Novarro of RBC. “I would view their device business as a work in progress, something that’s likely going to look a lot different over the next five or 10 years.”

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