Last month, Biomedical Business & Technology highlighted the mini-wave of consolidations in the medical diagnostic sector. But at least two of those potential deals – significantly, in the multi-billion-dollar category — have failed to materialize.

In mid-July GE Healthcare (Fairfield, Connecticut) and Abbott (Abbott Park, Illinois) mutually reported that they had abandoned the deal for GE to buy two of Abbott’s diagnostic units, with some of those commenting on the development pointing primarily to “buyer’s remorse” on the part of GE.

And shortly after, the board of directors of Ventana Medical Systems (Tucson, Arizona) rejected the hostile $75-a-share offer to be acquired by diagnostic powerhouse Roche (Basel, Switzerland), terming it “inadequate in multiple respects” and the method used in its offer “high-handed.”

Abandonment of the acquisition of the two Abbott units by General Electric, for more than $8 billion, was the only real surprise of the two actions, given GE’s stated goal of broadening its presence in medical diagnostics through a continuum-of-care strategy. It has been positioning to extend its presence in the large-hardware end of imaging by adding the decidedly “micro” sectors of in vitro molecular diagnostics and point-of-care systems.

Both companies issued press statements saying that they had “mutually” agreed to walk away from the deal because unable to reach a final agreement on terms and conditions. Abbott stockholders reportedly had found the acquisition priced below value, but some analysts indicated that the primary impetus for deal abandonment came from GE. The proposed consolidation was first unveiled in January.

Bid too high and fear of ‘warning’?

Larry Biegelsen, med-tech analyst with Wachovia Capital Markets, issued a report saying that the original $8.13 billion offer “appeared high.” Plus, he and other analysts suggested that GE probably was concerned about the FDA warning letter sent to Abbott’s diagnostics division in Irving, Texas, in March, concerning problems with its instruments testing. Several analysts also were in agreement that the apparent extended timeline in reaching a deal conclusion indicated that GE was attempting to renegotiate the terms downward.

In its statement, Abbott said that deal termination would have no impact on its EPS guidance for the full year 2007 or the second quarter, and that its earnings outlook for 2008 would remain unchanged. Biegelsen, however, said that termination of the deal reduces Abbott’s “growth profile” and financial flexibility.

And he projected potential offers for the diagnostics units could come in the future. “Although [Abbott] indicated they will manage the diagnostics business for the long-term, we believe there were other bidders leading up to the time of the original agreement with GE and these bidders may re-emerge,” Biegelsen wrote in his report.

Short of stockholder value

Ventana, for its part, reviewed Roche’s unsolicited offer of $3 billion – first disclosed in late June — and determined that wouldn’t satisfy its stockholders. Jack Schuler, chairman of Ventana, issued a statement saying, “simply put, we believe that Roche is trying to capture value for its stockholders that rightly belongs to Ventana’s stockholders.”

Christopher Gleeson, president/CEO of Ventana, said that Roche’s offer “does not come close to adequately compensating Ventana stockholders for the accelerating momentum of our business, the near-term potential from our innovative platforms, the numerous catalysts that are poised to drive long-term value, our game-changing, next-generation technologies, and the company’s growing menu of differentiated, high-value diagnostics that are expected to deliver on the promise of personalized medicine.”

Gleeson also called into question assertions made by Roche that its preliminary earlier efforts at negotiating a deal were “friendly.” He said that Roche’s public disclosures were attempts to mislead the market “as to Ventana’s board’s prior interactions and contacts.” He said that Roche’s overtures to the Ventana board were “vague at best” and that the Ventana board “carefully analyzed and considered them and any inference otherwise is simply misleading and inaccurate,” said Gleeson.

He said that despite Roche’s assertions, the Ventana board notified Roche and its advisors “clearly and repeatedly — and well before June 25th — that [it] would be considering their most recent proposal and responding after a special board meeting scheduled for later that week.” Instead, he said, Roche chose to initiate its bid for the company without waiting to receive Ventana’s response.

“We can only attribute this to high-handed tactics being used in an effort to deprive our stockholders of fair value. Negotiating at these levels is a non-starter.”

Breach of trust is ‘cautionary’

In a letter to Roche, Ventana said that Roche’s interest in the company may be based upon confidential information shared with it for collaborative purposes. “At a minimum, that indicates a serious breach of our trust. That, together with your high-handed tactics, will no doubt serve as a cautionary tale to those with whom you may seek to do business in the future.”

In response to the rebuff, Roche appeared to confirm that company’s assertions when it threatened to play hardball and pursue takeover action at Ventana’s annual meeting. Roche said that if Ventana refuses to negotiate it will continue to pursue a transaction unilaterally and “will consider measures in connection with Ventana’s 2008 annual meeting.” It added: “Such action may include the nomination of new directors to Ventana’s board and/or proposals to amend Ventana’s bylaws,” Roche said in its statement.

Roche would have to get the bylaws changed in order to circumnavigate Ventana’s “poison pill,” or shareholder rights plan, which would make an unsolicited acquisition costly and difficult.

Roche CEO Franz Humer said in the statement that it “continues to believe that its offer of $75 per share in cash [for Ventana] is a full and fair offer and a unique opportunity for Ventana’s stockholders to receive value now that reflects Ventana’s current business and full future potential. It remains Roche’s preference to enter into a negotiated transaction with Ventana,” Roche said.

Since Roche made its offer, Ventana’s shares have consistently traded at more than $80, well above Roche’s offering price.