Abbott deal for St. Jude Medical continues consolidation trend

The acquisition of St. Jude Medical (NYSE:STJ) by Abbott (NYSE:ABT) continues the trend toward consolidation among large medtech companies, even as it necessarily means big-name targets are more difficult to find.

The $25 billion offer is the 2nd big deal for Abbott in the past few months; in February, the Chicago-area health products giant announced the $5.89 billion buyout of diagnostics firm Alere (NYSE:ALR).

Insiders say the Abbott-St. Jude deal makes perfect sense for 2 companies with complementary product lines – Abbott’s devices include coronary stents for blocked arteries, while Minneapolis-based St. Jude’s line includes heart valves, pacemakers and implanted cardioverter defibrillators.

St. Jude founder Dr. Manny Villafaña told MassDevice.com that the Abbott buyout has his blessing.

“I don’t see any problem with the merger,” Villafaña told us. “The company was just sitting there, they had good numbers, a unique technology, the valuation seemed proper; this was no surprise.”

“It’s a good merger; it’s good for the shareholders,” he said.

Layoffs unlikely for the short term

Villafaña added that he hopes Abbott will keep the St. Jude brand for its flagship heart valve.

“There are up to 3 million people walking around with a St. Jude valve,” he said. “They cherish the name. My 2 cents is, don’t play with that brand. It’s so unique, so instantly identifiable in the field. When you say the St. Jude valve, people instantly know what you mean.”

St. Jude is the largest medtech company still nominally based in Minnesota, after last year’s $50 billion Medtronic-Covidien deal moved Medtronic’s official headquarters to Dublin from Fridley. St. Jude has more than 18,000 employees worldwide, with 3,000 in Minnesota facilities.

“We’re not anticipating job losses through this acquisition; no one at St. Jude has suggested anything like that,” Medical Alley CEO Shaye Mandle told MassDevice.com.

Although deals of this scale usually mean layoffs as the companies integrate and redundancies are eliminated, Villafaña said he doesn’t expect to see significant job losses.

Villafaña agreed.

“There might be some synergies that will bring around some loss of jobs in certain areas,” he said. Mandle speculated that the buyout might even mean more jobs at St. Jude.

“I think Abbott’s resources will help quite a bit with projects in the pipeline,” Mandle said. “If I were the R&D folks at St. Jude, I’d be pretty excited right now.”

Lack of overlap makes merger a good fit

Medtech veteran Paul LaViolette, the former BSC COO who’s now a managing partner & COO at venture capital shop SV Life Sciences Advisers, told MassDevice that 1 reason the Abbott acquisition of St. Jude makes sense is that there’s little duplication across their portfolios.

“It’s a very interesting combination. There’s very little overlap, almost no overlap in the product franchises. It’s an efficient merger, that creates very impressive scale for Abbott, and puts them in a nascent position in some new markets, including valve intervention, and including [atrial fibrillation]. I suspect they’ll add more technologies over time, but it’s a very impressive combination,” LaViolette said.

Abbott has a strong coronary offering, stemming from the original acquisition of Guidant Vascular and Abbott’s structural heart line, including Mitraclip, he said. And although the company made an initial foray into [atrial fibrillation] with Topera, “they really have a lot of gaps in their product line, and their product line was, and I don’t mean this in a critical way, aging in a sense that it was heavily aligned with coronary intervention, and coronary procedures are generally flat due to the penetration,” he told us.

“St. Jude has built, obviously, a cardiac rhythm management business, and they are building additional heart failure assets with CardioMEMS and obviously Thoratec in the LVAD marketplace, and they’ve assembled some growth drivers that are going to be very complementary to the strong coronary presence that Abbott has and to some of the interesting growth drivers that Abbot has, like mitral valve intervention,” LaViolette explained.

Is medtech entering the final stages of consolidation?

As Minneapolis Star-Tribune business columnist Lee Schafer noted this week, the medical device industry is likely entering the next stage of consolidation, as defined by a Harvard Business Review article from 2002. The authors defined the stages all industries go through as they progress from their initial, fragmented opening state. The next stage, which they termed “scale,” sees widespread M&A activity as companies seek the scale to compete effectively in the marketplace. The 3rd stage, “focus,” ushers in the mega-deal, they wrote.

“After the ferocious consolidation of stage 2, stage 3 companies focus on expanding their core business and continuing to aggressively outgrow the competition. The top 3 industry players will now control between 35% and 70% of the market. By this time, there are still generally 5 to 12 major players,” the authors wrote. “This is a period of mega-deals and large-scale consolidation plays; the goal is to emerge as 1 of a small number of global industry power-houses.”

The final stage of consolidation, “balance and alliance,” sees the top 3 companies claiming 70% to 90% of the market and forming alliances with peers to generate growth.

“Companies don’t move through stage 4; they stay in it. Thus, firms in these industries must defend their leading positions. They must find new ways to grow their core business in a mature industry and create a new wave of growth by spinning off new businesses into industries in early stages of consolidation,” they wrote.

In medtech, “this sort of mega-consolidation is more rare,” said Stephen Parente, a health care economist at the University of Minnesota’s Carlson School of Management.

“My guess is while we won’t be seeing the end of this, there are not too many more really big deals out there to be made,” Parente told MassDevice.com.

“Medtech is not a large-company-driven industry; the number of opportunities to do a blockbuster deal is limited,” Mandle added, noting that expects consolidation to continue.

“I think we’ll continue to see healthy merger and acquisition activity in the next few years,” he told us.

Hospital price pressure a factor

The growing power of the health system customer base gives a big edge to companies with diversified product lines.

“Hospitals like to deal with fewer companies rather than more companies,” Villafaña explained. “With products like heart valves, defibrillators, they’re going to try to consolidate their supply chain. But there will still be room for smaller companies. New technologies are not coming out of the larger companies; it’s the small companies develop that them, and then they’re acquired by larger companies.”

“With the changes brought about by the Affordable Care Act, and the shift in healthcare from volume to value, there is really a change in what a successful business model looks like,” Mandle said explained. “I think the big takeaway from the Abbott and St. Jude deal is just how dramatically the environment in the U.S. is changing; these deals are very different than they would’ve been just 5 years ago.”

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