In February this year, Abbott Laboratories (NYSE:ABT) announced the acquisition of Alere (NYSE:ALR), one of the world’s leading POC testing companies for $5.8 billion. This acquisition gave Abbott—a leading company in the healthcare sector with a market cap of $66 billion—an opportunity to dominate the POC (Point of Care) pregnancy and fertility testing market. However, over the last few months, the chances of the deal going through appear to have diminished with both parties increasingly becoming noncommittal. 

Alere has been forced to allow Abbott to audit its books as the deal inches towards stalemate. And even after the Abbott confirmed Alere's financial's there are still questions being asked. Abbott's representatives in the deal believe that Alere is still withholding some key information. "Although Alere has provided some information to Abbott, Alere has denied Abbott the access to which it is entitled under the Alere merger agreement," Abbott said in a filing with the SEC. "In light of the above, Abbott cannot predict at this time whether the Alere acquisition will occur on a timely basis, if at all."

In response, Alere said that "Abbott continues to make seemingly endless, unreasonable requests for even more information to which it is not entitled under the merger agreement." Therefore, it appears that the negotiations could continue in the foreseeable future before the deal is finally sealed.

Why the two companies should quit the games and complete the tie-up

Abbott operates in a variety of markets including a segment that covers female health diagnostics products. Alere’s tie-up will boost this unit thereby increasing the company’s market share in the overall POC testing market.

Self-test POC pregnancy and ovulation are amongst the leading female health products in the point of care market. With Alere having been among the top players in this segment, there are bound to be significant—production and selling—synergies that will yield more returns for Abbott in the coming quarters.

With $2.43 billion in annual revenues, Alere will certainly contribute significantly to Abbott’s revenue mix of $20 billion. Given Alere’s acquisition P/S ratio of about 2.3x, it will slightly improve Abbott’s current P/S ratio of 3.2x. The two companies continue to trade independently at NYSE, as they work towards completing the deal.

Alere submitted delayed results for the fiscal year 2015 as the feisty negotiations with Abbott continued. And while the company's revenue and earnings slipped slightly, it still looks like it's in a very good position given its P/S valuation metrics versus Abbott's.

The point of care diagnostic testing world market was valued at roughly $12.9 billion in 2015 and it is expected to jump to nearly $17 billion by the year 2018. This suggests that the market is comprised of several small players with a few top dogs. This case can be supported by Alere’s sizeable market share, which is represented by less than $1 billion in annual revenues.

Other reports also suggest that by the year 2021, the POC testing market will top $36 billion with the CAGR estimated at just under 10% for the next five years. Asia-Pacific is expected to grow at a higher CAGR of 14.2% and this should help it to catch up with market leaders—North America and Europe—within the next few years.

However, it is good to note that the 2018 estimate of about $17 billion is narrowed down to the diagnostics testing segment whereas the 2021 forecast of about $36 billion includes a larger percentage of the professional global in vitro diagnostic (IVD) testing market, which had a market value of about $62 billion last year.

Illustratively, the $36 billion estimate covers  “glucose monitoring kits, infectious diseases testing kits, cardiometabolic monitoring kits, coagulation monitoring kits, hematology testing kits, urinalysis testing kits, cholesterol test strips, drugs-of-abuse testing kits, tumor/cancer markers, pregnancy and fertility testing kits, fecal occult testing kits, and other products,” as per the report published by MarketsandMarkets.

Abbott Laboratories will be acquiring a company that knows the ins and outs of the POCT market and in doing so it has positioned itself perfectly to capitalize on the projected market growth. This acquisition will also provide Abbott with an all-round integration, as well as, valuable diversification into an already expansive market.

Abbott Laboratories financials also suggest that it is in a flexible position to add new products to its product pipeline. The company enjoys solid profitability margins of 11.08% in net profit margin and 15.07 in operating margin while its return on equity of 8.86% is also compelling.

The company is also one of the best dividend paying pharma stocks with a yield of about 2.31% and a payout of 77%.

Conclusion

Shares of Abbott are down more than 10% over the last twelve months while the S&P 500 is up about 4.2%. The stock price has hit highs of $43-$45 and lows of $36-$38 since the start of the year with two clear notable rallies and declines coinciding with the company’s earnings announcement dates.

As such, Abbott has been pretty volatile, but the long-term picture could be rosier if it can complete Alere tie-up without major drawbacks.

In an acquisition or merger, pulling out of a deal is usually a costly move and the company that turns its back is the one that gets hurt. Am not sure if this would be the right thing for Abbott to do. The Alere acquisition makes perfect sense for its business mix and the industry's prospective growth numbers should add a compelling aura for the deal to go through.