Abbott Laboratories’ Agrees to Buy St. Jude in $25 Billion Deal

Friday, April 29, 2016

Abbott Laboratories’ deal to acquire medical-products maker St. Jude Medical Inc. for $25 billion was the largest in a flurry of health-care deal-making Thursday that could total more than $40 billion.

France’s Sanofi SA said Thursday it made an unsolicited, $9.3 billion offer to purchase San Francisco-based Medivation Inc., which sells a lucrative prostate-cancer drug. AbbVie Inc. of North Chicago, Ill., agreed to pay $5.8 billion, plus up to an additional $4 billion in potential future payments, to acquire privately held cancer-treatment developer Stemcentrx Inc. of South San Francisco, continuing AbbVie’s aggressive push to build an oncology business.

The deals show health care remains an engine of M&A activity despite a crackdown on tax-lowering maneuvers known as inversions that drove a number of large deals in recent years.

Fueled by industry fundamentals more than tax-lowering strategies, health-care companies have announced $121.12 billion in global deal activity this year, second only to the technology industry’s $145.78 billion in deals so far this year, according to Dealogic.

Health-care consolidation has itself sparked new deals as health insurers, hospitals and medical-device suppliers respond to cost pressures by gaining heft and scale to increase their negotiating leverage with each other and gain pricing power.

In the pharmaceuticals industry, companies are looking to invigorate their aging product pipelines and fuel growth. AbbVie and Sanofi, for example, are each grappling with how to offset expected revenue declines as some of their biggest products lose patent protection and face competition for the first time. The latest deals place a big bet that cancer medicines will continue to command premium prices and generate big sales.

For Abbott, its acquisition is a way to bulk up its medical-devices business to better compete against rivals Medtronic PLC and Boston Scientific Corp. Abbott said it was also aiming to gain a better negotiating position with its hospital customers, which themselves have become larger and more powerful in recent years.

Insurance companies are aiming to hold down health-care costs by paying less for services from doctors and hospitals, who then look to reduce supply-chain expenses by using fewer vendors in exchange for greater discounts. That’s pushing device makers like Abbott to offset pricing pressure from their customers with deals that let them offer greater volume and more products.

“The hospital chains have gotten larger, and more sophisticated about what they’re purchasing and what they’re willing to pay,” said Raj Denhoy, a Jefferies & Co. analyst, in an interview. “Device companies have been on the receiving end of that, but if you’re larger you have more power to negotiate.”

Abbott’s deal to acquire St. Jude Medical is the largest health-care merger so far this year. The offer values each St. Jude share at about $85, representing a 37% premium to the stock’s closing price Wednesday.

Abbott has an eclectic mix of businesses that include nutritional drinks like Ensure, glucose monitors for diabetes patients, and selling branded generic pharmaceuticals in international markets.

Abbott’s medical-devices business has been seen by some analysts as a drag on the company’s otherwise encouraging growth, especially in emerging markets like China and Latin America. Excluding the impact of foreign currency fluctuations, Abbott’s medical-device sales rose 0.5% to $1.2 billion in the first quarter of this year, lower than the company’s overall revenue growth of 5.1%.

St. Jude’s sales fell 1.4% to $5.54 billion in 2015, and its earnings declined 12% to $880 million. The majority of the St. Paul, Minn., company’s revenue comes from heart devices including pacemakers and implanted defibrillators. Those products complement Abbott’s line of stent devices, small tubes that prop open diseased arteries, and could help the company cross-sell to hospitals, analysts said.

When combined, the merged company will have annual cardiovascular sales of $8.7 billion. The transaction still requires shareholder and regulatory approvals. The companies expect the deal to close in the fourth quarter.

Abbott CEO Miles White, speaking on a conference call with analysts on Thursday, said acquiring St. Jude would give the company a larger product portfolio and sales force to win business in a more consolidated market.

“The value of having breadth in your product lines, the changing way the health-care community has consolidated or purchases or selects products, all those factors come to a point over time where the strategic value of Abbott and St. Jude coming together becomes compelling,” Mr. White said.

Another large medical-device firm, Medtronic PLC, gave a similar rationale when it agreed to acquire Covidien PLC in 2014, arguing that hospitals would increasingly look to purchase medical supplies from fewer and fewer vendors. Medtronic, which also inverted its tax base to Ireland in the Covidien merger, is a major competitor to St. Jude in the pacemaker and implanted defibrillator markets.

Lehigh Valley Health Network, a hospital system based in Allentown, Pa., buys most of its cardiology devices from two to three companies, down from six to eight suppliers in prior years, said Bill Matthews, the hospital system’s chief procurement officer, in an interview. Lehigh’s purchasing power also has improved as it has grown larger through acquisitions, he said.

“Bigger is better,” Mr. Matthews said. Still, he worries that the power balance may shift back to device-makers and other suppliers as the industry consolidates. “I worry about it in terms of how it’s going to affect competition, and our ability to continue to put pressure on pricing.”


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