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[DewDiligence]

A sure thing for Abbott

http://www.boston.com/business
/healthcare/articles/2006/01/19
/a_sure_thing_for_abbott/

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By Steven Syre
January 19, 2006

Boston Scientific Corp. grabs the spotlight each time it raises its offer in the heated bidding war with Johnson & Johnson for the right to buy Guidant Corp. Put $27 billion on a poker table, and you tend to get noticed.

But Boston Scientific wouldn't even be in the game without another company, Abbott Laboratories, quietly backing it up. Abbott's critical role in the wings, as Boston Scientific's moneybags ally, only expanded as the pot grew bigger in the late rounds of the Guidant bidding.

Abbott, a drug company developing into a more diversified healthcare business, finds itself in position to benefit no matter who wins the right to buy Guidant. But it has more to gain with a Boston Scientific victory, a scenario that would turn Guidant's vascular device business over to Abbott.

Boston Scientific made its original bid for Guidant alone last month, but joined forces with Abbott when it increased its offer for the first time last week. Abbott agreed to take over Guidant's vascular business, particularly its coveted stent products, for $3.8 billion in cash in the event of a Boston Scientific victory. It also promised to loan Boston Scientific another $700 million.

Those arrangements helped deflect federal antitrust concerns and raised a pile of money to defray some of Boston Scientific's mounting acquisition costs.

When Boston Scientific increased its offer a second time, on Tuesday, Abbott pitched in with more help. It agreed to pay an additional $300 million for the stent business. Abbott also increased the size of the loan to $900 million and accepted a lower interest rate on the money.

Then Abbott pledged to buy $1.4 billion of Boston Scientific stock. That arrangement would make Abbott one of Boston Scientific's biggest outside stockholders, with a 4 percent interest in the Natick company.

That's a total of $4.1 billion to buy a business and another $2.3 billion invested with Boston Scientific in stock and loans. That's a commitment.

But it isn't the first time Abbott has come to the aid of a cash-strapped Boston Scientific. The numbers are just so much bigger this time.

Boston Scientific was still a privately owned company in 1987 when founders Peter Nicholas and John Abele made a deal with their new investor to raise cash. Abbott paid $21 million for a 20 percent interest and an option to buy the small medical-device company later.

Abbott eventually took a pass on the option, and Boston Scientific went public as a way to buy out its investor in 1992. Nicholas and Abele were reluctant to go public, but the process helped make them billionaires over time.

This time, Abbott sees a much bigger opportunity for itself in an arrangement with Boston Scientific. The prize is an entire line of products, important developing technology on drug-coated cardiac stents, and an experienced sales force.

Abbott has a more limited stent program of its own under development, but the Guidant deal would propel the company into the position of serious competitor immediately. ''It's like being born an adult," writes analyst Jan David Wald of A.G. Edwards & Sons.

Many investors hope Abbott's diversification plans make the company look like a mini Johnson & Johnson. Acquiring Guidant's vascular business would push Abbott in that direction. The deal would be ''transformational" for Abbott, says analyst Glenn Novarro, of Banc of America Securities.

The really good news for Abbott: It still comes out ahead if Johnson & Johnson ends up with Guidant. In that case, Abbott would acquire some important elements of Guidant's vascular technology [the RapidExchange delivery system]. Call it a smaller step up.

No one knows whether Boston Scientific or Johnson & Johnson will eventually come away with Guidant. But Abbott is the one sure winner in the game.
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