Late last week, Abbott Laboratories
The writing may well have been on the wall. Just before the deal was announced, Abbott presented at the JPMorgan annual health-care conference. The company spoke very little about its medical diagnostics division, aside from a few comments on new products in diabetes testing (the diabetes care and molecular diagnostics business segments are not included in the unit's sale). Abbott instead spent a good portion of its presentation discussing the integration of Guidant's vascular business, which was acquired in 2006.
A look back at Abbott's last 10-K filing nearly a year ago sheds some light on why the diagnostics business was up for sale. The division accounted for over 14% of the company's sales, and as a unit, sales growth had been increasing at just over 11% for each of the past two years. Approximately two-thirds of the sales in this unit were derived from the immunochemisty products, and the remaining third from the diabetes care segment. The growth, however, came almost entirely from diabetes care, which increased 35% from fiscal 2004 to 2005, versus only 2% for the larger immunochemisty segment. Abbott was apparently content to divest the larger but slower-growing business.
Abbott has been aggressive with acquisitions lately, acquiring Kos Pharmaceuticals and its cholesterol maintenance drug products for $3.7 billion in cash and the aforementioned Guidant vascular unit in early 2006 for approximately $4.1 billion. The influx in cash from GE will bolster Abbott's highly leveraged balance sheet and help offset cash depletion derived from these past cash acquisitions. It may also foretell additional activity on the mergers and acquisition front.
I look at the future of medicine and believe that improved diagnostics for both disease identification and progression will play a large and ever-expanding role. Early detection has always been a critical factor in the success of cancer and heart disease treatment. That doesn't necessarily mean that the field makes for a great investment; diagnostic products may never show the profitability margins of pharmaceuticals or medical devices. The healthcare division of GE has always focused on diagnostics with an emphasis on medical imaging and bioassay technologies. This division has been increasing its contribution to GE's top and bottom lines over the past few years, and the addition of the Abbott business unit should expand the product offerings in the bioassay segment.
As a shareholder in both Abbott and General Electric, I can look at this purchase as a wash. Abbott is shoring up its balance sheet by divesting the slow-growing segments of its molecular diagnostics division. And General Electric gets to expand its health-care division -- which is already directed at disease analysis rather than treatment -- with the addition of a respected and mature medical diagnostics product line. Whether this deal becomes a win-win scenario remains to be seen.
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