Why the medtech industry is binging on mega deals

Abbott Laboratories’ (Abbott Park, IL) $25-billion acquisition of St. Jude Medical (St. Paul, MN) last week is the latest manifestation of an ongoing trend that is reshaping the entire medical technology supply chain. As Joseph Walker and George Stahl note in the Wall Street Journal, “Insurance companies are aiming to hold down healthcare costs by paying less for services from doctors and hospitals, who then look to reduce supply-chain expenses by using fewer vendors in exchange for greater discounts. That’s pushing device makers like Abbott to offset pricing pressure from their customers with deals that let them offer greater volume and more products.”

As we reported last week, the acquisition will allow Abbott and St. Jude to compete in nearly every area of the cardiovascular market and hold the No. 1 or 2 positions across large, high-growth cardiovascular device markets. “This best-in-class combined portfolio will have the depth, breadth and innovation to help patients restore their health, reduce costs for payors and deliver greater value to customers,” said the companies in a press release announcing the deal. When combined, the merged company will have annual cardiovascular sales of $8.7 billion, according to the Journal. 

The dynamics of the healthcare market, shaped by Obamacare as well as industry fundamentals, will continue to favor consolidation. As noted by MassDevice, “While a good number of the large M&A deals have been concentrated in the cardiovascular and orthopedic segments, which have been plagued by large, heavily mature product categories, we should expect to see more consolidation generally." 

It is worth noting that healthcare companies are second only to the technology industry in global deal activity thus far this year. The tech sector made $145.78 billion in deals so far compared with $121.12 billion for the healthcare industry, according to data from Dealogic cited in the Wall Street Journal article.

Taking the long view, StarTribune columnist Lee Shafer sees the medical technology industry following a cycle of consolidation articulated more than a dozen years ago by management consulting firm A.T. Kearney in the Harvard Business Review.

“The first stage is when a few upstarts jump out to lead in a market that’s just developing, aggressively grabbing market share to make it tougher for others to jump in. Stage two is about getting bigger, buying competitors and complementary product lines,” writes Shafer.

That’s followed by a period of megadeals and large-scale consolidation with the goal of being among a handful of industry powerhouses.

“The last stage is where the medical device industry is headed, if it’s not already there,” continues Shafer. At that point, a handful of companies split up the market. “That’s clearly where Abbott wants to be, joining the likes of Johnson & Johnson and Medtronic.”

On its path to the medtech firmament, however, Abbott will need to clear one hurdle that has to do with another acquisition it made in February. Abbott agreed to buy in vitro diagnostic test maker Alere for $5.8 billion, an acquisition that would make it a leader in the rapidly growing point-of-care diagnostics sector. Since the deal was signed, however, the U.S. government announced that it was investigating Alere over its sales practices. When asked whether Abbott would try to extricate itself from the Alere deal during a media call announcing the acquisition of St. Jude, Abbott CEO Miles White declined to comment. Shortly afterward, Reuters reported that Abbott offered Alere $30 million to $50 million to terminate the agreement. Alere told Reuters that its board rejected the offer.

Stay tuned.