Abbott's deal headaches go beyond bad luck

For Abbott Laboratories it’s been one piece of bad news after another. But as they say, luck—whether good or bad—is often the residue of design.

Just last week, St. Jude Medical—which Abbott is buying for $30 billion-plus, including debt—faced accusations from a short-seller that some of its heart-monitoring equipment is vulnerable to being hacked. This came to light as Abbott was already dealing with hassles surrounding its planned $8.4 billion acquisition of medical-test maker Alere, whose business has come under a cloud amid accounting questions and government probes. (On Friday, Alere said it filed suit to force Abbott to complete the merger.)

If that weren’t enough, Abbott saw the value of its stake in Mylan (which it acquired in 2015 in exchange for part of its generic drugs business) eroded as the company came under fire for aggressively jacking up the price of its EpiPen allergy shot.

None of these things are particularly Abbott’s fault, but the $64 billion medical-device maker also didn’t wind up in these situations by accident. You can question the levels of disclosure and whether Abbott had all the facts, but at a certain point, it was Abbott’s—and specifically its CEO Miles White’s—decisions that led the company to where it is now.

Take Mylan for example. Even before the controversy over EpiPen, the stock had come under pressure following its failed pursuit of drugmaker Perrigo and perhaps overly aggressive resistance of a takeover approach from Teva. While White has repeatedly asserted that Abbott’s stake in Mylan isn’t a long-term holding, he hasn’t been in a hurry to sell, despite the fact that at least some investors wanted him to do so much earlier.

ROLLER COASTER

As far as Alere goes, much of the company’s problems came to light after the deal with Abbott was inked back in February. But Abbott was aware of at least one government investigation—and perhaps that should have set off more alarm bells. In the months since, Alere has been subpoenaed by the Justice Department regarding two investigations, is taking a charge of as much as $90 million this year related to an FDA-requested recall and admitted there were “material weaknesses” in its internal controls over revenue recognition and income taxes. If not the government investigations and accounting questions, perhaps Alere’s lack of revenue growth should have given White more pause.

The issues raised last week regarding the cybersecurity threat to St. Jude’s devices don’t seem like the kind of thing that should waylay Abbott’s purchase. St. Jude has staunchly refuted the claims, arguing that much of the analysis put forth by short seller Muddy Waters and MedSec Holdings was based on older versions of its Merlin@home pacemaker-monitoring equipment that hadn’t received security updates. Even if there are issues, the FDA is already aware of hacking risks in medical devices and has been working with companies to remedy vulnerabilities. A devastating recall is unlikely, says Joshua Jennings, an analyst at Cowen.

That said, this unpleasant development is giving new reason to be skeptical about an acquisition that investors already had doubts about in the first place. St. Jude was an expensive bet that a broader, more integrated medical-device portfolio will help Abbott capture additional market share from hospitals. If it works, that’s great. If it doesn’t, the decision to double down on medical devices and marginalize Abbott’s nutritional business could wind up creating a slower-growth, lower-valued company.

As CEO of Abbott, White has built up an impressive M&A track record over 17-plus years. He has almost $80 billion in publicly announced acquisitions to his name, not to mention the successful spinoff of AbbVie in 2013.

As for his most recent forays, it’s too soon to weigh in with a definitive verdict. Who knows—they could all end up paying off. But if he’s going to be willing to take credit for the success, he must also be willing to answer for these current headaches.

Brooke Sutherland is a contributor to Bloomberg Gadfly.

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