Abbott Acquires I-Stat, Resolves FDA Problems

Last week’s announcements at Abbott Labs represent major milestones in its diagnostic unit

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CEO SUMMARY: On December 15, Abbott revealed that it would pay $392 million to acquire I-Stat. Days later, on December 18, Abbott disclosed that the FDA had deemed its Lake County, Illinois diagnostic manufacturing plant to be “in substantial conformity” with the Quality System Regulation. Abbott can now restart manufacturing and sales of test kits that had be taken off the market in 1999.

IT WAS GOOD HOLIDAY NEWS for the diagnostics division at Abbott Laboratories last week. In separate announcements, the company disclosed its acquisition of I-Stat Corporation and its resolution of long- standing problems with the Food and Drug Administration (FDA).

Both developments will have some type of impact on many laboratories across the country. I-Stat’s point-of-care instruments are widely used in hospitals. The FDA’s action means that Abbott can begin to manufacture and sell some of the 125 diagnostic test kits which the FDA had pulled from the market in 1999.

The FDA issued a determination letter that described Abbott’s Lake County, Illinois diagnostic manufacturing facility to be “in substantial conformity with the Quality System Regulation (QSR).” This finding is related to the consent decree that exists between Abbott and the FDA. The new finding specifies certain follow-up actions that Abbott must take and the consent decree will remain in force for another five years.

Abbott executives state that it will take several months to reinstitute manufacturing for the affected test kits. The company intends to reintroduce products on a rolling basis during the next 12 months. However, even as these test kits become available, Abbott faces another daunting task.

Rebuilding Customer Trust

Abbott must convince its laboratory customers to switch back to its brand of test kits. But these customers remember the turmoil, pain, and significant costs involved when the FDA required Abbott to pull those tests kits from the market in 1999. For many laboratories, considerable effort was required to locate, install, and validate substitute test kits.

Not only did many laboratory directors and pathologists work urgently to make this switch without disruptions in patient care, but they ended up feeling like Abbott had not dealt forthrightly with them during the crises. Abbott knows it has a tough sales and marketing challenge ahead. It must rebuild trust among many lab customers before it can successfully obtain orders for the test kits now about to be offered again for the first time in four years.

The financial consequences of Abbott’s fight with the FDA are also considerable. When Abbott paid the $100 million fine to the FDA in 1999, it was the largest such fine ever levied by the FDA. Since that date, Abbott has lost about $250 million per year in sales from those products pulled off the market and has been unable to introduce additional assays built around new technologies. It has also spent considerable money in attempts to rectify the deficiencies identified by the FDA.

Interest In POC Market

Abbott’s acquisition of I-Stat reveals several interesting developments within the point-of-care (POC) testing marketplace. It will pay approximately $392 million to acquire the 90% of I-Stat’s stock which it currently does not own. The price it is paying is a 20% premium over I-Stat’s share price the day before the acquisition was announced.

In 1998, I-Stat and Abbott entered into a marketing, distribution, and stock-purchase agreement with Abbott. There were also research, development, and licensing arrangements for additional diagnostic products.

In recent years, I-Stat disagreed with Abbott on certain aspects of this relationship, including allocation of manufacturing cost savings. In the summer of 2002, I-Stat had announced it would terminate the distribution agreement with Abbott on December 31, 2003. It incurred a $52 million charge during 2002 to accomplish this goal. For 2004, I-Stat was forecasting a profit.

“Abbott was a disappointment as a distribution partner by any measurement,” observed Al Kildani, Analyst at C.E. Unterberg Towbin. “I-Stat wanted to walk away from the agreement, take back control and regain the distribution, build a sales force, and become profitable for the first time ever. And that would have happened in the next quarter for the first time.”

Below I-Stat’s Expectations

As I-Stat’s exclusive distributor, Kildani believes that Abbott had not performed to the expectation of I-Stat in building sales volume and revenue. Sales of I- Stat’s Portable Clinical Analyzer represent about 15% of company sales. Disposable cartridge sales used in the instrument are 75% of I-Stat’s sales.

Point-of-care testing is a hot market, compared to routine testing done in core laboratories, which explains Abbott’s interest in acquiring I-Stat. Christy Wistar, Director of Investor Relations for Abbott, states that Abbott’s sale of I-Stat products brings in $75 million a year. She estimates the market for POC testing is currently $500 million and will double to $1 billion in five years. “Since much of that growth would come at the expense of traditional labs, such as Abbott’s clinical business,” noted Wistar, “Abbott’s investment in I-Stat’s point-of-care products now makes sense.

Abbott Makes Its Move

“The original distribution deal was very favorable to Abbott,” Wistar stated. “I-Stat wanted to terminate it, and it did. We saw this as an opportunity to secure access to the platform and solidify our presence in the point-of-care segment. We expect this business to grow in the double-digits: about 20% to 25% a year. We expect sales of $100 million next year.”

Having resolved its major problem with the FDA and taken steps to acquire I-Stat, Abbott Laboratories is poised to become a different force in the laboratory marketplace. It remains to be seen how lab directors and pathologists respond to these developments.

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