General Electric’s (Little Chalfont, UK) $8.13 billion acquisition of Abbott’s (Abbott Park, Illinois) core laboratory diagnostics business — a deal of mega-proportions that the companies disclosed late last week (Medical Device Daily, Jan. 19, 2007) — may have taken some industry-followers by surprise.

After all, Abbott is known as a leader in this $24 billion market that grows 6% to 8% a year, and its in vitro diagnostics business, including point-of-care, is expected to generate net sales of about $2.7 billion in 2006, according to Joe Hogan, president/CEO of GE Healthcare.

Thus, during an evening teleconference last Thursday, Miles White, Abbott’s CEO and chairman, explained the company’s thought process behind the sale by offering an evaluation of how this market has evolved in recent years.

In the 1980s and 1990s the core laboratories and diagnostics market was one where the most advanced assays were run on low-cost bench-top instrumentation, White said.

But over the past decade Abbott has seen fundamental changes in the nature of this market, White said, and those changes are what led to Abbot’s decision to sell its core laboratory diagnostics business to GE.

“Today, it’s a market driven by automated, capital-intensive, mainframe systems that are integrated with institutional IT systems,” White said. “These capital-intensive technologies require a financing, sales and service infrastructure more suitable for large capital equipment manufacturers such as GE.”

In making its decision to sell the business, Abbott also considered its five strategic objectives — strategic fit, ability to generate high growth, capability for innovation and differentiation, ability for high profit and high returns, and potential to generate strong cash flow — White said.

“And so when we considered the evolving dynamics of the core laboratory diagnostics market against the backdrop of our strategic goals it was clear to us that a large capital equipment manufacturer would be a better fit to take this business to the next level,” White said.

Still, White said Abbott did not take the decision to sell its core diagnostics business lightly.

“It was a decision that we carefully considered, given our long-standing legacy and commitment to this market. We would only consider this divestiture if it was the right situation for this business and we found that ideal situation with GE, one of the world’s largest and most respected companies with a leading imaging and healthcare systems [business] that made for a compelling strategic fit,” White said.

In a separate teleconference Friday, GE also said it sees the acquisition as a good fit for its company.

“This is an amazing amount of technology,” Hogan said, “and that’s why it fits so much better in a GE portfolio because we have that capability. We have 4,000 software engineers . . . as this business evolved within the Abbott portfolio it wasn’t in their core competency because they had more biochemistry and organic sciences capability.”

Hogan said GE actually had been eyeing the possibility of acquiring Abbott’s core diagnostics offerings for about five years.

“Overall this is the world’s premiere in vitro diagnostics business,” Hogan said. “Our capabilities — combined with Abbott’s in vitro diagnostics and point-of-care diagnostic businesses — will allow GE to provide customers with better tools for the full care continuum, enhancing their decision-making capabilities in key disease areas such as oncology and cardiology, and enabling early disease detection, diagnosis and treatment.”

Financially speaking, White said the $8.13 billion purchase price gives Abbott about $6 billion of after-tax cash, and the company will most likely use the bulk of that to pay down debt.

For Abbott, the deal is expected to be neutral to earnings-per-share in 2007 before specified items and accretive thereafter.

In case investors are wondering, White said, the company does not have any properties or businesses on its radar screen for any other upcoming acquisitions. But, he added, “We’re always evaluating the landscape and continuing to look for the best ways to build a high growth, high margin business.

“The most important thing to understand is we are and will remain a diverse broad-based company. That has not changed and it won’t,” White said. “What has changed over the last seven to eight years is the strength of Abbott’s diversification, specifically the mix of our cash flows and the diversification of our long-term earnings growth drivers.

“[This transaction] is one of several transforming changes that we’ve made to strengthen our diverse framework in a way that aligns Abbott for higher growth, higher margins and higher returns, in businesses that are driven by continual medical innovations.”