Abbott's biggest deal since '01 cheered by Wall Street; stock goes up 4 percent

Tuesday, January 10, 2006

CHICAGO -- Abbott Laboratories Inc.'s deal to buy part of Guidant Corp. for about $4 billion was applauded Monday by investors and analysts, who said it would give the manufacturer of drugs and diagnostic tests new clout in medical devices.

If it goes through, the three-way deal with Boston Scientific Corp. announced a day earlier would be Abbott's largest acquisition since 2001 and would quadruple its annual sales in the growing vascular products business.

Despite the steep price, the news prompted a 3.7 percent increase in Abbott's stock for its biggest single-day rise since 2004. Shares in the North Chicago, Ill.-based company, which had fallen 20 percent since July, rose $1.52 to close at $42.41 in heavy trading on the New York Stock Exchange.

"It's hard to see the impact [on Abbott] as being anything but positive," said Bruce Cranna, an analyst for Leerink Swan in Boston. He called the price tag "a small price to pay for really getting a much more substantial foot in the door in vascular."

Abbott agreed Sunday to pay Boston Scientific $3.8 billion for the direct purchase of Guidant's vascular intervention and endovascular businesses, if the Massachusetts company's $25 billion bid for Guidant is successful. It also pledged to lend Boston Scientific $700 million and make as much as $500 million in payments if a promising stent now in development is approved for marketing in the United States and Japan.

The status of the transaction remains uncertain, with Johnson & Johnson still in competition with Boston Scientific for Guidant. But Abbott said it will gain from either outcome since it reached a separate agreement with J&J in November as part of that company's bid for Guidant. While not disclosing a specific value for that deal, Abbott says it would give it access to an important stent delivery system known as rapid exchange.

"We forged both of those agreements so that Abbott's vascular business will have some significant growth opportunities in either situation," Abbott spokesman Jonathon Hamilton said.

Abbott has been a comparatively small player since 1999 in the vascular devices business, where growth hopes center on drug-eluting stents: metal-mesh devices coated with drugs to prevent scar tissue from creating new blockages after artery-clearing surgery. It had worldwide vascular sales of $221 million in 2004 and $176 million through the first nine months of 2005.

Acquiring the Guidant businesses would add about $1 billion annually to that, making Abbott No. 3 in vascular devices behind Boston Scientific and J&J.

'Ample cash flows'

Standard & Poor's affirmed its double-A rating on Abbott's AA long-term debt Monday, citing its "dependable and ample cash flows generated by a range of high-margin businesses."

Pharmaceutical sales account for slightly more than half of Abbott's approximately $21 billion in annual revenue, with the proportion growing steadily since the 2001 acquisition of drugmaker Knoll Pharmaceuticals for $6.9 billion. That's one reason why Abbott's stock has sagged recently, dragged down by a volatile sector.

Making the Guidant deal would further diversify the company while giving it a "fourth leg to their stool," according to Morningstar analyst Tom D'Amore -- adding a significant presence in medical devices to go with large businesses in drugs, diagnostics and nutritional products.

"They've identified coronary stents as one of the most profitable, largest and fastest-growing areas in medical devices," D'Amore said. The transaction also "further demonstrates the company's commitment to higher-growth, higher-margin businesses," he said, following the spinoff of its slow-growing hospital products business into Hospira Inc. in April 2004.

Dan Popowics, equity analyst for Fifth Third Asset Management, which owns 3.97 million Abbott shares, called it as "a good use of their cash" for Abbott to make its "opportunistic" Guidant deal.

"This gives them just a little bit more scale [in medical products], more of a product line and access to a very exciting stent that Guidant has had under development that looks to be very competitive," he said.

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