Abbott and Ache Labs: A Perfect Match?

Abbott Labs (NYSE: ABT  ) has begun its new future swimmingly. After spinning off its former pharmaceuticals division at the beginning of the year, the stock's picked up more than 13% and has shareholders smiling from ear to ear. Is it time to step back on this surging stock, considering its future will be guided by the slower growth of nutritionals, medical devices, and generic drugs?

Maybe not. While pharmaceuticals have traditionally been a high-growth business, Abbott's making moves outside the U.S. to invigorate its future. Enter the emerging markets: Abbott's been mentioned as one of a few suitors looking to acquire Brazil's Ache Laboratorios Farmaceuticos, one of the South American country's top drug makers. But only a few months into Abbott's new, post-pharmaceuticals life, Abbott's interest in this acquisition deserves a deeper look.

What's up with Ache?
Ache Labs is Brazil's fourth-leading drugmaker in terms of sales. The company's currently privately owned, with several families holding significant stakes. That ownership dynamic presents a problem to the sale: While a couple of the families are looking for a big buyer, at least one isn't looking to part with their share in Ache. It's thus still uncertain whether a sale will even happen altogether -- but if it does, big names are lining up to make a bid.

Joining Abbott are some of the biggest names in the business. Novartis (NYSE: NVS  ) and Pfizer (NYSE: PFE  ) have reportedly weighed another round of bids for the company, which is expected to sell for somewhere between $4 billion and $6 billion. GlaxoSmithKline (NYSE: GSK  ) had also once been rumored as a potential buyer. However, Glaxo CFO Simon Dingemans said in February that the company wasn't interested in multibillion-dollar acquisitions, and reports say that it's no longer in the hunt for the purchase.

But Abbott ditched its pharmaceutical business already -- why's it interested in buying a drugmaker?

Ache is a leader in Brazil's prescription medicine business and also is making headway into the over-the-counter drug market. That's big for Abbott, which operates its generic drug business entirely outside of the U.S. Generic drug sales haven't been anything special for Abbott recently as they reported only 2% operational growth last year. Still, the business is the company's second-largest segment by sales, and buying a growing household name like Ache would help strengthen this division and protect against any market downturn in the near future.

Abbott's been feeling the pressure from rivals in the generic drug space recently. Teva Pharmaceuticals (NYSE: TEVA  ) has also pushed into emerging markets after its U.S. sales slowed in 2011, and the company's set to be a top rival of Abbott's in the near future. Gaining a leg up in Brazil on Teva would be a big win.

Brazil's growth story
There's more than just generic drugs at stake, however: Buying Ache would open up a route straight into the heart of one of the world's most promising markets.

Brazil's generic market is on a tear. It recorded 17% year-over-year sales growth in 2012 -- and that was the lowest growth seen since 2001. With Brazilians still responsible for much of their health care costs, cheap generics represent the future of medicine for the nation's growing middle class. By picking up Ache, Abbott would cement itself as a dominant player in this market.

Entering the generics market would also give Abbott an opportunity to push its other products in the country. The company has already had success expanding its nutritionals business in India; taking advantage of Brazil's growing economic clout would open up another emerging market for the company's top-selling division.

Still, buying Ache isn't a perfect match. Abbott would have to sell off any branded pharmaceutical lines, as keeping them around after its branded drug spinoff doesn't make any sense. That point alone makes pharmaceutical-friendly acquisition competitors Novartis and Pfizer well-suited to picking up Ache. Furthermore, Brazil's growth has slowed down recently: The country reported only 0.9% GDP growth in 2012, a far cry from levels earlier this century. While the Brazilian government still predicts optimistic growth of around 4.5% this year, the nation will have to keep moving forward if Abbott's counting on growing its sales here.

While Ache would be a pricey buy, it's nonetheless an acquisition worth pulling the trigger on for Abbott. Cementing a foothold in emerging markets is key for this company's future, and there are few attractive countries with an established, growing middle class like Brazil. Only time will tell whether Abbott can beat out its competitors for this buy, and investors should be wary of the company overpaying for Ache; however, at the right price, Abbott would find this pickup to be just what the doctor ordered.

Charting Abbott's future
Abbott Labs has changed forever after losing its branded pharmaceutical business to a spinoff. If you're a current investor, or might be buying shares soon, make sure you truly understand the stock by reading The Motley Fool's brand new premium report on Abbott Labs. The report outlines all of the must-know opportunities and risks, along with a full year of analyst updates to keep you up to speed. Best of all, you can claim this report today by clicking here now.


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