After more than two long years of searching for the right target, Abbott Laboratories has finally made an acquisition that will help it revive growth in the drugs business, which contributes nearly 44 per cent to its operating income. The company's product portfolio is fairly diversified with sales coming from pharmaceuticals, diagnostic systems, hospital products and its nutrionals division.
In the largest ever acquisition in its history, Chicago-based Abbott Laboratories has acquired Knoll Pharmaceuticals, a unit of the German chemicals group BASF, for an estimated $ 6.9 billion. This acquisition is expected to infuse life into its new-drug pipeline and research, which had dried up in the past few years. The deal is very crucial for the company in light of the huge acquisitions its competitors were making.
Abbott has seen several ups and downs in the past. Its joint venture with Japan's Takeda Chemical Industries had to withdraw its new drug application for Uprima, a potential next-generation Viagra, because of safety concerns. But it recently succeeded in getting fast-track approval from the Federal Drug Administration for Kaletra, its new protease inhibitor that fights resistant strains of the HIV virus. Its biggest current drug is Deprakote, an anti-psychosis treatment, which generates nearly $700 million in sales.
Abbott has been trying for some time to find a target that would help its growth strategy. Its planned acquisition of Alza Corporation, a California drug-delivery and pharmaceuticals company, last year fell through after facing resistance from the Federal Trade Commission given the dominant position of the two companies in the market for prostrate cancer drugs. After the failure to acquire Alza, the company had set out to put together a patchwork of revenue-sharing alliances with smaller drug companies.
The Knoll acquisition, which will bring greater strength to Abbott's drug research and development, will boost Abbott's R&D budget by 50 per cent to nearly $1 billion. Central to this R&D effort is Knoll's Massachusetts-based mono-clonal antibody research centre that concentrates on making genetically engineered compounds that could help treat afflictions including cancer, asthma, arthritis and Crohn's disease. The acquisition also adds muscle to Abbott's new strategy of entering the arena of genetically oriented research.
Analysts, however, see the acquisition with some scepticism as the cash deal is likely to dilute Abbott's earnings per share in the forthcoming year. A large part of this scepticism arises from the fact that Knoll's drug portfolio, which generates $2.1 billion in annual sales, is considered relatively unexciting.
Analysts also believe that the acquisition is an expensive value placed on Knoll's future potential that hinges on a compound to fight rheumatoid arthritis, code named D2E7, which is currently under development. The drug is not scheduled for commercial approval until the third quarter of 2003, when it is expected to bring in atleast $1 billion in annual sales, which could then make the acquisition worthwhile. If the proposed drug lives up to its expectations, it will provide stiff competition to Johnson & Johnson's Remicade and Immunex's Enbrel.
The rest of Knoll's new-drug pipeline has compounds with the potential to treat some advanced pains, heart disease and mental illnesses.
While the acquisition is not an immediate fix to Abbott's earnings growth problems, it would surely help it stoke its furnaces. We need to wait to see how quickly Abbott can make it work.