Alere's Bad News Tests the Limits of Patience

(Bloomberg Gadfly) -- Not again.

Alere Inc., the beleaguered medical-test maker, can't seem to go very long without divulging more bad news -- and that's as it tries to force Abbott Laboratories to follow through on an $8.4 billion takeover offer. This week, Alere Inc. said that it's still working through the material weaknesses in its internal accounting controls that spawned government investigations and delayed its regulatory filings last year.  Not only that, but now there are more problem spots: Alere said it's also reviewing "inappropriate conduct" at its Korean subsidiary, Standard Diagnostics, as well as revenue-recognition practices for Japanese locations.

Because of this latest setback, Alere won't be able to file its annual report on time for a second straight year. It said it's going to try to sort things out within the 15-day grace period -- but it also said that last year and wound up finally releasing its 10-K in August. Alere has fallen about 5 percent so far this week and was trading at around $38 on Wednesday -- well below Abbott's $56-a-share takeover offer -- as traders cast further doubt on the deal's odds of completion.

Alere says this latest accounting review will likely result in a redistribution of revenue, rather than a reduction in its overall sales for the past few years. This certainly doesn't help Alere's case that it's got everything under control, but it's not clear if this development would represent the kind of material adverse change in Alere's business that Abbott needs to show in order to walk away from the merger agreement. The status of Alere's Arriva diabetes decision, which was removed from the U.S. Medicare program after allegedly submitting claims for dead people, is another story.

Alere is expecting a decision any day on whether it can retain its Medicare billing privileges while it awaits the resolution of an administrative appeal. The company has said  that because it's currently spending millions of dollars to send out testing supplies it's not being paid for, its Arriva unit is at risk of going out of business. The shutdown of a division that generated $88 million in revenue for the first nine months of 2016 sure sounds material.

Abbott is also trying to argue that Alere breached the companies' merger agreement by failing to provide its acquirer with complete and timely information about all of its woes.

Abbott claims it wasn't informed of the Arriva division's removal from Medicare until weeks after Alere had been notified. And while Alere allegedly discovered the potential accounting concerns at its Asian subsidiaries in January, Abbott says it learned of the problems in mid-February, according to court transcripts. Alere's lawyers countered that it informed Abbott's side of the Asia issue a day or two after the company told its audit committee ... which still doesn't put the issue of immediate and forthcoming disclosure to rest.

I argued months ago that Abbott and Alere should sit down and hash out a price renegotiation. Both companies still have something to gain if they can get a deal done and both have something to lose from continuing to duke this out in court. If Alere's not talking price already, maybe this latest reminder of the company's track record with negative surprises can finally inspire it to consider a compromise -- or perhaps rile up investors enough to pressure management into one. I'd think shareholders would be willing to sacrifice a couple bucks to finally get some certainty and put this tortured news cycle to rest.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

1. Alere is also facing a criminal probe into its Medicare and Medicaid billing practices and is taking a charge of as much as million in connection with an FDA-requested recall of certain devices.

2. This may be Abbott's more effective argument. While the scope of Alere's setbacks has expanded, Abbott was aware of many of the underlying problems during the deal negotiations and still decided to not only go through with the deal but raise its offer. That's not going to be a great look in front of a Delaware Court that's never ruled in favor of the acquirer on material adverse change cases.

To contact the author of this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.