(Bloomberg) — Abbott Laboratories (NYSE:ABT) agreed to buy heart-device maker St. Jude Medical Inc. (NYSE:STJ) for $25 billion, its biggest ever acquisition as the industry consolidates to gain bargaining power with hospitals.
St. Jude Medical shareholders will receive $46.75 in cash and 0.8708 shares of Abbott common stock, representing a total of approximately $85 per share, according to a statement Thursday.
Medical-device makers are merging to get access to new technology as hospitals push for lower prices. After shying away from mega deals since splitting its brand name pharmaceutical business to AbbVie Inc. in 2013, Abbott is now joining Medtronic PLC and Johnson & Johnson, which both made their largest purchases in recent years. Abbott Chief Executive Officer Miles White talked often about his desire for bigger purchases while pursuing smaller deals, although the recent rounds of M&A lifted the prices of potential targets, leaving fewer options.
Abbott, an industry leader in heart stents, has been bulking up its generic-drugs business in emerging markets and nutrition products sold directly to consumers in recent years. With St. Jude, it’s gaining complementary products like pacemakers and defibrillators. There is an obvious hole in the medical device business and specifically around cardiovascular products, and St. Jude is the perfect fit to fill that gap, according to Jonathan Palmer, a Bloomberg Intelligence analyst.
“The synergies between the two companies are real and overall the fit between the device portfolios is a good one,” Michael Weinstein, an analyst at JPMorgan Chase & Co in New York, said in a note to investors. “Abbott will look like a very different company going forward, less of an emerging market nutritionals play and more of a diversified device, diagnostics, nutritionals and branded generics company.”
The agreement is raising further questions about Abbott’s planned acquisition of Alere Inc. for $5.8 billion. Abbott said in the statement it has financing for both St. Jude Medical and Alere. That initially sent Alere shares higher in early trading, but the stock pared gains after Abbott Chief Executive Officer Miles White said on a conference call his company has financing, “broadly,” for Alere, declining to comment further. Last week, White had declined to reiterate his commitment to Alere, which hasn’t yet filed its 10-K report with U.S. regulators and has been subpoenaed by the Justice Department.
St. Jude Medical closed yesterday at $61.95, giving the company a market value of about $17.6 billion. The stock jumped to $77.63 at 9:42 a.m. in New York. Abbott dropped 7.4 percent to $40.61, while Alere rose 1.4 percent $43. 46.
The acquisition will further reshape Abbott following the 2013 split with AbbVie. The company, based in Abbott Park, Illinois, has cash on hand, obtained by selling its generic drug business for medicines marketed in Europe and the developed world to Mylan NV.
Abbott and St. Jude have worked together since 2008, and in 2012 agreed to an initiative called Choice Alliance that allowed them to pool their offerings to sell to U.S. hospitals and other customers.
Last August, Abbott denied a report that it was preparing an offer for St. Jude Medical. Since then, St. Jude’s stock had dropped 19 percent through Wednesday, more than the 1.1 percent decline in the Standard & Poor’s 500 Health Care Sector Index and Abbott’s drop of 4 percent.
Abbott started talking to St. Jude at the end of last year, CEO White said on the call.
Abbott has a track record of generating solid profits in mature markets that other companies have overlooked or exited, including generics drug and diagnostic tests. White described areas like heart rhythm management as “stable, well established and even mature” and said he welcomed their “rock solid” contributions and potential for incremental innovation and growth.
“When you put all that together, it’s the combined representation of that breadth of products that makes the combined company so much more competitive,” he said on the conference call.
The deal has challenges for Abbott, said Weinstein, the JPMorgan analyst.
“Strategically, investors are likely to frown on the transaction, given (1) the shift in Abbott’s mix away from consumer-facing, emerging-markets strategy it has been building in recent years and (2) St. Jude’s challenges in cardiac rhythm management and repeated stumbles in executing on its pipeline,” he wrote in his note. “Financially, however, we expect the transaction to be well received.”
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