Why Is Abbott Acquiring St. Jude?

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In one of the most prodigious health-care deals in recent memory, Abbott Laboratories (NYSE:ABT) entered into a definitive agreement to acquire St. Jude Medical (NYSE: STJ) for $25 billion. In this analysis, we analyse the key reasons as to why Abbott might be acquiring St. Jude?

1) Abbott To Have More Pricing Power

After the completion of this deal, Abbott will be positioned to have improved pricing and negotiating power in the highly competitive medical device market. This comes at a time when hospitals are trying to bring down their supply-chain expenses, as insurance companies are trying hard to prevent them from raising the healthcare services costs.

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2) Synergies From Cross-Customer Relationships

In an effort to bring down expenses, hospitals are trying to maintain their relationship with only a few vendors, which gives them the privilege of getting discounts on the products purchased. However, the combined company will be able to leverage their cross customer relationships to sell medical devices, adding to revenue synergies.

3) Slow Down In Abbott’s Existing Medical Device Business 

Abbott’s vascular business has been a drag on Abbott’s overall growth. The key reasons that can be attributed to the declining trend in vascular sales are pricing pressures and foreign currency fluctuations. Although St. Jude’s overall sales also haven’t been very encouraging either, the combined company can see growth from market share expansions and synergies emerging from the cross selling of products to customers.

ABT_Q&A_Vascular_sals

4) Effectively compete against rivals

With this acquisition, Abbott will be able to broaden its cardiovascular products portfolio and enter into the large cardiac rhythm management market, helping it compete effectively against its rivals, Medtronic PLC(NYSE:MDT) and Boston Scientifc Corp(NYSE:BSX). According to Abbott’s press release related to the deal, the combined company will likely be a market leader in most of the areas of the large cardiac rhythm management market. The following table shows how the combined company currently fares in various areas of the cardiovascular market:

Abt_Q&A_MPostn

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Abbott Laboratories

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