Abbott announces multi-billion dollar merger with St. Jude Medical
Representatives from Abbott Laboratories have announced the acquisition of St. Jude Medical in a multi-billion dollar merger deal believed to transform the medical industry.
The deal was valued at $25 billion, which combines the $46.75 per share in cash that St. Jude Medical investors would receive as a cash payment and .8708 shares of Abbott received for each share of St. Jude.
As a result, St. Jude’s market capitalization increased by 27.3 percent, but shares of Abbott fell by 5.6 percent, or $5 billion. This may be a result of investors’ apprehension of the deal’s profitability, or the question of whether the government will pursue antitrust claims against the combined market giant.
In its press release, Abbott revealed that it will assume and most likely refinance $5.7 billion of St. Jude’s debt and expects to save $500 million each year by 2020 if everything proceeds as expected. The company anticipates combined annual sales of cardiovascular devices of $8.7 billion.
Despite some investor suspicions, Abbott defended the acquisition deal by reassuring that “[t]he combined company will have an industry-leading pipeline expected to deliver a steady stream of new medical device products across cardiovascular, diabetes, vision and neuromodulation patient care.” In other words, Abbott’s stance as a supplier of a wide variety of cardiovascular devices would strengthen and allow the company to diversify its product base.
Abbott CEO Miles White also asserted that earnings per share would eventually increase as a result, estimating a 21 cents per share increase by 2017 and 29 cents per share increase in 2018.
This is not the first mention of acquisitions for the laboratory giant. In February, Abbott announced that it would merge with the premier diagnostics company Alere. However, the Friday after the St. Jude deal was announced, Alere publicized that it rejected Abbott’s contract buy-out of $50 million, thus terminating the merger. Abbott’s attempts to back out of the deal came after authorities investigated Alere following accusations of unethical foreign practices and sales approaches.
Whether or not Abbott will be successful in terminating the agreement is highly uncertain. However, another attempt that could impact Abbott’s company image and market influence is probable.
Abbott is not the only medical-based company striking multi-billion deals in 2016. Medical supply companies like Abbott continue to face investigations over antitrust disputes as they continue to grow in size and influence.
These negotiations are far more expansive to have stemmed from the Affordable Care Act alone. The New York Times suggests that the mergers are also a result of changing Medicare and Medicaid requirements of “bundling” medical expenses.
This bundling refers to combining all expenses related to a patient’s condition on one medical bill, or as one lump sum payment amount. Therefore, an individual would not have to pay separately for doctor visits, medical devices, medication and anything else needed for treatment.
Instead, one could pay it all under one itemized bill. So far, Medicare and Medicaid have only required this umbrella payment method for hip and knee replacements in certain areas, but, in the future, they are likely to include treatments of more terminal illnesses.
The same rule applies to medical suppliers as to any other company—diversification is key. It would be more beneficial for a hospital to buy from a supplier that could provide all the medical devices necessary for a patient’s treatment than if it had to purchase such equipment from various companies. The less intermediaries and the more variety of products a supplier offers, the better chance it has at supplier contracts than a very specialized firm.
As the healthcare industry continues to evolve, the consumer, or patient, is consequently affected. If bundling methods are successful, they could lead to a more efficient and affordable healthcare system; however, the matter becomes difficult because of the opponents of such healthcare reform. This could cause supply companies to become too large, thus eliminating free and open market competition.
If one firm has too much influence and negotiation power, it could limit competition by preventing new suppliers from entering the market. The possibility of creating monopolies is what authorities have already begun investigating.
Nonetheless, Abbott’s deal illustrates the efforts of suppliers to remain competitive.Whether investors agree it will increase or decrease profitability, board members of the corporations assert that it is a necessary step to keep up with the ever-changing industry.