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Why Abbott Is Joining the 'Bigger Is Better' Bandwagon

The Abbott and St. Jude deal underscores how the desire to achieve scale is driving medtech OEMs. 

Arundhati Parmar

Mergers and Acquisitions
(Image courtesy of user Nicolás Meroño)

In the current healthcare paradigm, it appears that size does matter in the medical device industry.

That was in evidence Thursday with the latest megamerger between industry heavyweights. Abbott Labs is purchasing St. Jude Medical for a cool $25 billion.

"This is just yet another example where we see the continued trend of consolidation to drive scale and relevance in specific departments of the hospital within the medtech landscape," said Bob Lavoie, managing director and partner with L.E.K Consulting, whose MedTech group works with major device companies.

For Abbott, the deal, assuming it closes in the fourth quarter as announced, provides it heft in the cardiovascular department within hospitals.

"It certainly helps Abbott vascular in particular begin to move beyond interventional cardiology into much broader cardiovascular segments such as CRM, cardiac surgery in valves, heart failure with the VAD and the monitoring platforms that they get with St. Jude," Lavoie added.

For St. Jude, the deal provides them the ability to stay relevant as hospitals consolidate to become better suited to managing the change to accountable care.

"This helps St. Jude get the scale, access and relevance within the hospitals, especially in the face of increasing hospital consolidation and vendor consolidation that we see hospitals undertaking," he added. "There's some interesting high growth portfolio segments within St. Jude such as neuromodulation that this also gives Abbott some exposure to."

(See St. Jude Medical founder Manny Villafaña accept the 2016 MDEA Lifetime Achievement Award at at MD&M East, June 14-15, 2016 in New York City.)

A Wall Street analyst also echoed the theme of scale, noting that it's a deal with little product overlap.

"From our perspective, there is very little (if any) product overlap, but a real opportunity for cross-selling," wrote Joanne Wuensch, with BMO Capital Markets.

While the marriage of Abbott and St. Jude signals a continuing megamergers trend, all megamergers are not alike. For instance, the largest of all such deals--the $50 billion Medtronic-Covidien get together--is an example of scale and a broad portfolio relevance across multiple different departments and sites of the health systems

That's unlike the current scenario where Abbott is looking to strengthen its standing within a specific department within the hospital--cardiovascular service line, Lavoie of L.E.K. Consulting said in a phone interview.

While consultants and analysts alike viewed the deal in a positive way, there are some red flags. This deal is not just about integrating St. Jude into Abbott. Earlier this year Abbott agreed to fork over $6 billion to acquire diagnostics maker Alere.

"If both deals were to go forward, those are two very significant bites and two very significant integration efforts," Lavoie noted. "So that would be something to watch whether they can maintain their market and commercial focus in the face of two very significant integrations."

Despite Abbott's chief executive dismissing these concerns in a call with analysts Thursday, the integration story doesn't end there.

"The integration of St. Jude is of two companies," said Kenneth Graves, managing director at L.E.K. Consulting, in a phone interview. "You have Thoratec that St. Jude acquired last year, and they are still in process of integrating the two companies, and so with Abbott acquiring St. Jude there'll be a degree of integration in essence of two companies and not one."

(See St. Jude Medical founder Manny Villafaña accept the 2016 MDEA Lifetime Achievement Award at at MD&M East, June 14-15, 2016 in New York City.)

Arundhati Parmar is a senior editor at UBM.

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