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With Alere on Board, Abbott Targets Growth From Integrated Next-Generation Diagnostics

NEW YORK (360Dx) – Abbott Laboratories is investing dollars and resources toward integrating Alere, a new business that is an important lever for its growth in rapid diagnostics, CEO Myles White said during a conference call with analysts and investors this week.

While the Alere business could take a few years to ramp up and reach market-level growth, Abbott will look immediately to accelerate adoption and achieve scale with several next-generation Alinity diagnostic systems that have recently launched in certain countries and are still launching in others, White said.

The biggest challenges that Abbott has at this stage are executing well on its opportunities to scale new products, continuing to integrate Alere and medical device maker St. Jude (which Abbott acquired a year ago for around $25 billion), and keeping up investment to sustain growth "over comps that are getting tougher," Matthew Taylor, an analyst with Barclays, said in a research note Thursday.

The Alere business, now branded rapid diagnostics within Abbott's Diagnostics business segment, reported revenues of $540 million in Q4 2017, the first quarter for which Abbott reported the new segment's results. Infectious disease testing, including for flu and strep, was a primary sales driver, Abbott said.

Although the firm reorganized the Alere business within weeks of closing the acquisition in October 2017, it could take two to three years for its new business to "emerge" and begin to show market growth rates, White said.

He noted that St. Jude was already showing noteworthy financial results, with 10 percent growth in Q4 2017, after showing little revenue growth in previous years. It's going "to take a little longer" to get Alere back on an investment cycle with products and launches that Abbott wants to achieve, he said, adding, "St Jude has exploded on the scene here over one year. I don't think Alere will explode on the scene, but I don't think Alere will be flat either."

Abbott CFO Brian Yoor said during the conference call that he expects mid-to-high single-digit organic growth from diagnostics for full-year 2018. For its Alere business, he noted, Abbott expects about $500 million in Q1 2018 and a little more than $2 billion in full-year 2018.

JP Morgan analyst Michael Weinstein said in research note this week that he expects $2.09 billion in sales from the Alere business in 2018.

By comparison, Alere's revenues were $586.9 million in Q1 2016 and $2.48 billion for full-year 2016. But since 2016, the firm has divested businesses and has experienced some setbacks.

In March 2016, for example, Alere reported that it had received a subpoena from the US Department of Justice under the Foreign Corrupt Practices Act, and that it would subsequently delay filing its annual earnings report for 2015 for a second time.

Abbott had offered to buy Alere for $5.8 billion in February 2016, but sales and accounting issues at Alere delayed the deal. In April 2017, the firms amended the terms of their acquisition agreement and dismissed lawsuits they had filed against each other. Under the amended terms, Abbott agreed to buy Alere for a new price of about $5.3 billion.

Then, in October 2017, Alere sold its Triage B-type natriuretic peptide (BNP) assay business and its Triage MeterPro cardiovascular and toxicology assets to Quidel to obtain antitrust approvals required for its acquisition. Triage MeterPro had $146 million in revenues in 2016, and the BNP business revenues "as structured under the transaction" were $51 million in that year, Quidel said at the time of the acquisition.

Although uncertainty during the buildup to closing its acquisition by Abbott has taken a toll on Alere's revenues and growth, White is bullish on the future of the business.

Alere "had a lot of internal operating challenges," and hadn't been investing in the business of late, he said, adding that it would take a while for its product pipelines to become reinvigorated.

Restoring "the cohesiveness and performance of functions in some of the business" is going to take a while, he said, adding that he expects "Alere to emerge" in two to three years. Abbott plans to invest in new products, refreshing other products, and in R&D and SG&A, he noted.

The firm reorganized Alere and appointed Abbott managers for new business units within a few weeks of closing the acquisition, he said.

The firm continues "to see several levers for growth acceleration, including opportunities for geographic, platform, and test-menu expansion," White said, adding that he is satisfied with the pace of Alere's integration. "We're ahead of schedule on literally everything," he said.

However, by the end of 2018, he expects to be able to say that the Alere business had a good year and showed growth, and he reiterated something he has been saying since Abbott made its bid for Alere — that "we like all of the underlying assets and products."

The good news, he added, is that Abbott's diagnostics business had "so many other opportunities," and pushing market penetration of its next-generation Alinity systems is among them.

"This highly differentiated platform promises to be a significant sustainable growth driver over the coming years," White said.

The global launch of Alinity, a group of integrated next-generation diagnostic systems for each diagnostics area in which Abbott competes, will be a multi-year process, White noted. However, Abbott initiated the launch last year and received CE marking for each of its six systems that enables their marketing in Europe. The firm has launched two systems for core labs, one for transfusion diagnostics, one for point-of-care testing, one for hematology, and one for molecular diagnostics applications.

The firm will launch the systems in additional countries over time and already has a few US clearances, he noted.

In May 2017, for example, Abbott received 510(k) clearance from the US Food and Drug Administration for its i-STAT Glucose test for use on the i-STAT Alinity point-of-care system. And in October, the FDA cleared a line of Alinity clinical chemistry and immunoassay diagnostic instruments.

The timing could be right for the introduction of larger, integrated diagnostic systems, according to JP Morgan. In a research note it published last year, the investment bank noted that the diagnostics market continues to be an oligopoly with Roche, Abbott, Siemens, and Danaher representing the four largest players.

Key opinion leaders interviewed by the bank noted that "as hospitals continue to consolidate and lab equipment contracts become larger, the oligopoly structure will become more pronounced." Hospital systems, in these circumstances, look to vendors with a broad portfolio to standardize equipment and workflows "across various labs in a respective system."

Abbott intends to focus hard on achieving scale with new Alinity systems, said White, aiming to persuade customers to replace its older systems in the field with the next-generation systems and increase its market share while doing so.

Abbott's teams have been doing well "in the 6 to 8 percent growth range with a lot of aging and older systems, and now they have an entirely new product line out there in all categories," he said.

Menu expansions have "gone extremely well in the last 10 to 12 months," he said, noting that the pace of adoption becomes faster with the availability of full testing menus.

Abbott has 25,000 to 27,000 instruments placed in the main core lab categories, and "my goal is to replace that entire base and take a fair amount of [market] share over the next five to 10 years," he said.

JP Morgan's Weinstein said in his research note that Abbott's 2018 forecast for diagnostics — mid- to high-single-digit growth without Alere revenues — represents about 20 percent of the firm's sales. The forecast is reflective of strong end markets and Abbott's confidence in the Alinity upgrade opportunity, Weinstein said.

He noted that changes to the US tax law would enable Abbott to repatriate $8 billion in previously trapped cash, giving the company "access on an ongoing basis to its global cash flows."

White noted that despite an expected effective tax rate of between 14.5 and 15 percent, he is not likely to invest in M&A anytime soon.

Apart from paying down debt related to acquisitions, he is directing "a significant amount of the benefit from tax into R&D and SG&A," he said, adding, "I think that's warranted given not only the product launches [but] how fast we want to run with some of [them]."

He noted that when he looks at investment options, he wants to ensure that the firm not only has sustainable product pipelines, innovation, and enhancements to products, but also that the firm is doing its "best in marketing areas and so forth to maximize the opportunity that's in front of" it.