Abbott-GE deal reflects evolving character of imaging industry

The purchase of an in vitro diagnostics company has been in the cards for GE Healthcare for several years. Before playing that hand, however, GE wanted to buy an in vivo company, according to GE Healthcare president and CEO Joe Hogan, a requisite the company fulfilled with its purchase of Amersham in 2004.

"My thought was to do the in vivo molecular diagnostic piece first, to obtain the chemistry and biological understanding and clinical trial expertise," he told DI SCAN. "By doing that, I feel we can bring the in vitro in on top of a much better platform and have a better understanding of how all the pieces fit together."

Expected to close in the first half of this year, the proposed $8.13 billion cash deal to acquire two of Abbott Laboratories' four diagnostics divisions would bring GE point-of-care chemistry, such as cardiac assays used in the ER, and in vitro diagnostics, including blood and urine tests.

The cost may seem a bit pricey to some - about three times the $2.7 billion that these business divisions generated for Abbott in 2006 - but not to Hogan, who describes the price tag as in keeping with the market rate.

"It is not a revenue multiple you want to look at but rather an EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple, which is about cash," he said. "We paid about 15 times EBITDA. Other acquisitions in the pharmaceutical and diagnostics space have been in that 15 to 16 times EBITDA range over the last few years, so we think we are paying market price for the best in vitro asset out there."

Not included in the deal are Abbott's Molecular Diagnostics and Diabetes Care businesses. GE didn't want the diabetes testing business, which is oriented toward consumers. The company was interested in the molecular diagnostics division, but it wasn't for sale, according to Hogan.

"Abbott feels they need that on their therapeutic side, because molecular diagnostics go well with therapeutics," he said.

Missing out on this division will not hurt GE, as the company's Life Sciences business, acquired with Amersham, has some of the same technologies.

"Our plan is to build that out and not have to acquire that piece," he said. "That is where having Amersham really helps."

The proposed acquisitions would complement GE Healthcare's life sciences and medical diagnostics business units, created in the wake of the company's $9.5 billion purchase of Amersham in 2004. Life sciences focuses on technologies that help predict, diagnose, and treat diseases early. The medical diagnostics business concentrates on in vivo imaging agents.

GE will keep the IVD segment obtained from Abbott separate from the rest of the company, rather than merging it with either life sciences or medical diagnostics. Once the acquisition is completed, the new business unit will operate from its current digs, core laboratory diagnostics just outside of Chicago and the point-of-care business in East Windsor, NJ. The current general manager of global MR, John Chiminsky, will run the business from the Chicago-area headquarters.

Laboratory diagnostics include automated blood screening systems for infectious agents such as HIV; immunodiagnostics that measure antibody or antigen reactions; clinical chemistry instruments and reagents to measure such health indicators as glucose, electrolytes, and enzymes; and hematology systems to do blood cell analyses.

Point-of-care products, which focus on rapid blood analysis, include i-STAT, a hand-held blood analyzer used in emergency departments, surgical suites, and neonatal ICUs.

Hogan expects synergies with GE along with increasing sales volume to boost margins for IVD products from their current level of about 10% to nearer GE Healthcare's 18% to 19%.

"We will have our integration team attack different costs that have to do with administrative and sourcing expenses, where scale really helps," he said. "We will be able to help with logistics from our diagnostic imaging business."

GE's acquisition of Abbott's two diagnostics divisions would be the second such closing in 2007. On Jan. 1, Siemens officially acquired the diagnostics division of Bayer for $1.9 billion, which itself was a follow-up to the company's acquisition of Diagnostic Products at midyear.

Siemens' and GE's strategy of moving aggressively into in vitro diagnostics adds another dimension to an industry whose presence in medicine was once defined primarily by capital-intensive purchases, such as CT and MR scanners.

"Technology that can do in vivo and in vitro diagnostics represents a new era," Hogan said. "That is where medicine is going."