Abbott Laboratories (NYSE:ABT) announced on February 1st, 2016 the acquisition of Alere (NYSE:ALR). The deal comes just few days after Abbott reported a drop of 15% in its profits for the final quarter of 2015, mainly linked to the stronger dollar effects on its results in the Emerging Markets where it sells its products. The deal comes also at a time when the virus Zika is spreading alarmingly in the world, putting the attention on diagnostic test makers and vaccine developers, which are both among the core businesses of Abbott and Alere. The acquisition of Alere would costitute for Abbott its second biggest acquisition in recent years only superseded by the transaction of Solvay Pharmaceuticals, valued at $6.2bn.

Industry Overview

Last year, the healthcare M&A activity has been record breaking with a total value of around $724bn compared to $436bn in 2014 and at the beginning of this year it was estimated to continue to do so evidenced by a survey by KPMG, which showed nearly half the respondents predicted to see plenty of deals in the healthcare sector and by J.P. Morgan who forecasted to see a so-called “domino effect”, which would encourage corporations which were inactive in 2015 to take part in more deals in order to replicate the success of their peers. This view was further bolstered by the early announcement that Shire would buy Baxalta for $32bn and the correction of the market seen by an 8% drop in the S&P healthcare index between January and February which was seen as a positive sign as many large healthcare companies had large cash reserves and could benefit from lower valuations. However, the first quarterly data showed that while healthcare is dominating US M&A market with $65bn of a total of about $293bn, its value decrease by $25bn compared to 2015 due to several reasons. First of all, the recent development of Pfizer calling off the acquisition of Allergan has shown that lawmakers are cracking down on tax inversions which was the main catalyst for mergers in the last year. Second, most obvious mergers have been struck last year and it is doubtful whether it would be possible to find suitable targets. This view is shared by investors with less than 40% of buyers across all industries experiencing a rise in share prices after an acquisition. Last but not least, it is highly unlikely that serial buyers like Valeant Pharmaceuticals, Horizon Pharma and Endo International will be able to maintain their high level of acquisitions throughout 2016 as shareholders are discouraged by the lack of new drugs and the absorption of debt following recent transactions.

Alere

Alere Inc. is a Whaltam (MA, USA) based company that produces devices able to provide health information through diagnostic tests, with North America and Europe constituting its main market with 54% and 21% of total sales respectively. It is a fairly young company founded in 2001. With almost 10,000 employees, it has a market capitalization of $4.35bn and an enterprise value of $7.46bn. Even though its revenues have been growing at a CAGR of 11.3% from 2010 to 2014, Alere experienced a drop in sales by $27mn to $2.59bn from 2013 to 2014. Alere’s business can be broken down into diagnostics for cardiometabolic diseases like cardiovascular diseases (high blood pressure, high cholesterol etc.) and diabetes, toxicology (drug tests) and infectious diseases. Furthermore, its joint venture with Proctor & Gamble has allowed Alere to break into the patient self-testing market and offers home diagnostics tests mainly for drug abuse and cholesterol monitoring. More specifically, Alere’s professional diagnostics coordinates patients and their healthcare providers to manage patients’ condition in the process from the hospital to the rehabilitation at home. These products provide an analysis of the patients’ disease state, medical condition and response to the therapies they are subject to. The company also operates in the patient self-testing sector, assisting them in buying home INR monitors, which help manage anticoagulation issues in an easy manner. In addition, the company is a pioneer in the point-of-care and laboratory testing area, covering infectious diseases, cardiometabolic issues and toxicology. In 2004 the corporation introduced in the market the first digital pregnancy test, under Clearblue Digital Pregnancy Test. With a precision of over 99%, it detects in urines the pregnancy hormone human Chorionic Gonadotrophin (hCG). Alere also provides drugs-of-abuse tests, which can detect drugs through analysis of urine, hair, saliva or other body fluids.

Abbott Laboratories

Abbott Laboratories is a S&P 500 component. Illinois based, with more than 72,000 employees it operates in more than 150 countries worldwide in the healthcare sector. With a market cap of $62.58bn and an enterprise value of $65.46bn is one of the largest U.S. healthcare companies. In 2015, it had revenues for $20.405bn of which 70% are generated outside the US. Its core business can be divided into pharmaceutical products which consist of generic drugs sold outside of the US, diagnostic products, nutritional products for infants (Similac), adults (Ensure), athletes and healthcare institutions, and vascular products. More specifically, the company mainly focuses on four branches: Established Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products. Abbott Laboratories sells its products directly to wholesalers, private healthcare organizations, and government agencies. Revenues come mainly from the generic branded products, which are sometimes sold worldwide in co-promotion with other companies. Additionally, the company is also focused on producing diagnostic instruments, as its target does. Recently Abbott has struggled with falling revenues in the fourth quarter of 2015 and earnings forecasts which fell below the expectations of analysts.

Drivers

Last August, Abbott’s CEO Miles White declared that “Investors expect us to deploy cash, and we do, and we will”.  This statement seemed to foreshadow the next big acquisition, which turned out to be the acquisition of Alere. Over the past years, Abbott relied heavily on strategic acquisitions to broaden its product portfolio as well as to expand its geographical presence, focusing on the fast-growth emerging market. Similarly to precedent investments, Abbott’s acquisition of Alere is driven by a strong strategic rationale mainly stemming from the complementarity of its portfolio. The combination of the two companies will allow Abbott to become the leader in point of care testing − medical diagnostic testing on the spot without sending samples to a central laboratory – and to strengthen its diagnostics presence, taking advantage of the segment’s global growth. After the merger, Abbott’s diagnostics sales will amount to about $7 billion per year. By using its international sales and distribution networks, Abbott is confident in its ability to increase Alere’s products sales and move towards their common goal of improving patient care. The combined entity is expecting to take advantage of pre-tax synergies amounting up to $500 million through sales and operational benefits. More precisely, Abbott’s capabilities and infrastructure in emerging market where growth is faster than in the U.S. will drive accelerated growth of Alere’s portfolio and will reduce its heavy exposure to the American market – more than half of Alere’s sales currently come from the US. The merger is expected to create value for stockholders in the immediate future, as the P/E ratio of Abbott is slightly higher than the one of Alere, resulting in an accretive EPS process. Thereafter, Abbott expects approximately 12-13% of accretion in 2017 and more than 20% in 2018. As highlighted by both CEOs, the transaction has a strong strategic fit and will help the combined company to “offer our customers the best and broadest diagnostics solutions meeting the growing demand for fast, accurate and actionable medical information”.

Structure

Abbott Laboratories agreed on February 1st, 2016 to buy Alere paying a consideration of $56 a share, implying a total expenditure of $5.8 billion. Considering the closing price on the preceding Friday was $37.2, this implies an acquisition premium of around 50.5%. Abbott also pledged to fully assume or refinance the current Alere outstanding debt of $2.6 billion. After the announcement, Alere shares surged by around 45% to a level shy of $54 ($53.95) while Abbott stock went down by around 2% ($37.10).  From mid 2012, Alere shares experienced a steady price growth that led to a price increase from $18.10 to $54.64 (+302%) which was reached in August 2015. After this summer global markets uncertainty and third quarter profit miss, the price has rapidly spiraled down to January 15, 2016 price of $35.80 (-34.5%), reaching this bottom just days before the acquisition announcement. After the obvious price adjustment following the deal, the price has been on a slight downward path. To the present date, the price is 50.23 (-7.2% from the peak registered on February 1st, 2016). The equity story for Abbott is fairly similar, as it has experienced the same healthy steady growth in the aftermath of the global crisis moving from a price of $22.06 in April 2009 to its peak of $51.05 at the end of July 2015 (+231%). Over the following months, a number of factors have negatively affected the performance of the healthcare sector in general, and Abbott was no exception, as it reached a $37.2 price on the acquisition date, meaning the stock declined by about 26.5%. Following the deal, after the market initial apparent skepticism (typical from buyer side shareholders), the stock has been on a recovery trajectory and it is trading at the present date at $43.35 per share (+16.5%). The advisors for the transaction are J.P. Morgan to Alere, and Evercore and Kirkland & Ellis LLP to Abbott. Cravath Swaine & Moore are the legal advisors.

Sources and References: Financial Times, J.P. Morgan, Reuters, Forbes, Modern Healthcare, Market Realist, Handelsblatt, Abbott website, annual report and press releases, Alere website and annual report, Marketrealist

 

To contact the authors:

Federico Campanini                       federico.campanini@studbocconi.it

Giorgia Caruso                              giorgia.caruso@studbocconi.it

Federico Cattani                            federico.cattani@studbocconi.it

Alexandra Heidemann                    alexandra.heidemann@studbocconi.it

Lukas Klemend                              lukas.klemend@studbocconi.it

Basile Zurcher                                basile.zurcher@studbocconi.it

To contact the editor responsible for this article:

Giorgia Caruso                              giorgia.caruso@studbocconi.it