The Curious Case of Abbott and Alere

As MPO readers are certainly aware, Abbott Laboratories has been quite active in the M&A department this year. Following the string of medtech industry consolidation efforts—which shows absolutely no signs of slowing—Abbott purchased St. Jude Medical Inc. for $25 billion in April.

However, other than a slight blip in early July when the Federal Trade Commission (FTC) requested that both companies provide additional information, the deal seems to be going off without a hitch. Confirming this, later in July, Abbott chairman and CEO Miles White told analysts about the requirement, “I think that will be a close call just as we work our way through the administrative [aspect] of the FTC’s request. But I’d say there [are] no big surprises at all.”

Unfortunately, the same can’t be said for Abbott’s earlier deal this year, which was somewhat overshadowed by the St. Jude buy. The company’s $5.8 billion acquisition of point-of-care testing company Alere Inc. has been rife with troubles from the outset, and surely has Abbott executives wondering if they misdiagnosed Alere’s condition before committing.

Problems arose less than a month after the acquisition’s announcement, when Alere informed Abbott that its 2015 annual report filing would be delayed due to “revenue recognition in Africa and China,” as reported by Bloomberg. A little unsettling, sure, but certainly not a deal-breaker.

However, deal-breakers were on the horizon: In mid-March, the U.S. Department of Justice subpoenaed Alere, seeking documents related to sales and practices in Africa, Asia, and Latin America. Abbott couldn’t have been happy with the results—Alere’s shares were down nearly 8 percent in early trading following the news.

Soon, the narrative began to turn malicious. The delayed filing, combined with another investigation into Alere’s practices (this time over potential overseas bribery concerns) caused Abbott to attempt to terminate the deal in early April. Naturally, Alere’s board “promptly rejected” the request, despite Abbott’s offer to pay the company $30 million to $50 million to cancel the acquisition agreement.

On the heels of this scandal came the deal that shook the medtech industry nearly as hard as the Medtronic-Covidien acquisition. Late in April, Abbott announced its $25 billion dollar purchase of St. Jude Medical. The bold move had many wondering whether Abbott had the resources to handle two multi-billion dollar deals, but White held fast, saying the company’s “financing plan contemplates broad completion of both transactions—the capacity to do that, the capacity to fund with both debt and equity all of the things that are in our radar screen as a company, including our liquidity, et cetera.”

So the merger slogged on. Despite the company’s best efforts, Abbott appeared to have no easy way out of the agreement— according to legal experts, Alere’s potential violation of the U.S. Foreign Corrupt Practices Act (FCPA) wasn’t necessarily a deal-breaker. That was most unwelcome for Abbott, considering that FCPA violation investigations can take years, result in criminal charges, and engender compliance changes. Adding insult to injury, the potential tens of millions of dollars (or more) in penalties would be Abbott’s concern once the deal had closed.

Regardless, the deal continued—now with Abbott very closely reviewing Alere’s books in order to uncover any potential future catastrophes—but it seemed the roadblocks would not end. In July, Alere voluntarily recalled its INRatio devices (which monitor patients taking warfarin, a sensitive blood-thinning medication) due to concerns about the effectiveness of recent software updates. The recall is expected to cost between $70 million and $90 million this year, but according to Canaccord Genuity analyst Mark Massaro, “The decision to pull the device shouldn’t be material to the Abbott acquisition,” provided that Alere files a new 10-K report that doesn’t raise any new significant issues.

Alere finally submitted its delayed annual report in August, but it did little to assuage Abbott’s uneasiness. The filing “[did] not eliminate Abbott’s concerns about its business controls and practices given the litany of issues that have come to light since our agreement was announced,” Abbott spokesman Scott Stoffel told Bloomberg. “Alere has also failed to provide an adequate explanation for the extended filing delay and has refused to provide detailed and relevant information on several outstanding issues.”

Did Abbott then have a case to pull out of the agreement? Even if so, it appears the deal still drags on—in September, Alere and Abbott allowed a mediator to review the dispute over antitrust clearance for the merger. The mediation will focus on Alere’s claim that Abbott executives are purposefully slowing securing the necessary regulatory approvals to combine the companies. Both companies have bickering points to contend with: Alere claims that Abbott seeks to unfairly back out of the deal, and Abbott claims that Alere withheld information about the earlier bribery probes. Stay tuned for updates—the results of this tussle haven’t panned out yet.

Finally, in very recent news, on Sept. 19, Abbott announced the sale of its Medical Optics division to Johnson & Johnson for a cool $4.3 billion (see Top of the News for more details). Not altogether unexpected given Abbott’s likely product portfolio simplification efforts following the St. Jude buy, but one does have to wonder: was the sale perhaps Abbott’s reaction to acquiring a bit more than it could chew?