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Abbott’s Grab for St. Jude to Consolidate Cardio

Global health care conglomerate Abbott Laboratories plans to purchase St. Jude Medical Inc. in a transaction valued at about $25 billion. Abbott of Abbott Park, Ill. is acquiring the medical device manufacturer to strengthen its cardiovascular portfolio to better compete with industry leaders, such as Medtronic Inc. and Boston Scientific Corp. St. Jude Medical is headquartered in St. Paul, Minn. but has a cardiovascular-device facility in Sylmar that manufactures implantable defibrillators and pacemakers. The acquisition will combine those product lines with Abbott’s artery-opening stent and heart repair products to provide patients with a full array of cardiovascular devices. “Our combined scale will expand the global reach, competitiveness and impact of our medical device innovation for physicians and hospitals,” Michael Rousseau, chief executive of St. Jude, said in a statement. “This transaction provides our shareholders with immediate value and the opportunity to participate in the significant upside potential of the combined organization.” Per the deal, St. Jude shareholders will receive $46.75 in cash and 0.8708 shares of Abbott stock, totaling approximately $85, for each St. Jude share. Abbott is set to spend about $19.3 billion on the deal, which has a total value of $25 billion based on the assumption of about $5.7 billion of St. Jude debt. The day the acquisition was announced, St. Jude’s stock price increased more than 25 percent, from $61.95 to $77.79, while Abbott’s decreased by almost 8 percent and continued to decline thereafter. Josh Jennings, an analyst at research firm Cowen and Co., said Abbott’s stock may have been under pressure because of the concerns surrounding St. Jude’s revenue growth as well as concerns that this transaction could be dilutive to Abbott’s stock. He also mentioned other questions that came to the forefront after the announcement, including trepidations about Abbott’s overall strategy and the appropriateness of the acquisition in relation to that strategy. Both companies have extensive histories that include numerous mergers, acquisitions and spin offs. In February, Abbott announced the purchase of diagnostic device and service provider Alere Inc. of Waltham, Mass. However, Abbott requested to end that deal in light of some financial discrepancies, including the medical test maker’s failure to file an annual report with the Securities and Exchange Commission. Alere’s board rejected the request to terminate the acquisition agreement. “Abbott has been busy,” said Kenn Phillips, chief executive of business development organization Valley Economic Alliance in Sherman Oaks. “Locally, I’m not sure how this (St. Jude acquisition) would help or hurt the local jobs or help to reduce the cost of insurance. Generally, a buyout does help companies reduce their overhead expense but doesn’t pass on the savings to the consumer.” Despite the uncertain effect the St. Jude acquisition will have on its Sylmar facility, Cowen and Co.’s Jennings felt the deal was a positive for both St. Jude shareholders and other stakeholders. “There was a valuation range we felt was appropriate,” said Jennings. “I think for St. Jude’s business particularly, you have an element with this acquisition that enhances their cardiovascular franchise. You are adding a coronary business, which was a hole in the portfolio. … If you are thinking about breadth and scale with cardiovascular, they are now more on par with Medtronic and Boston Scientific.” St. Jude released its first-quarter financial results last month, reporting $1.45 billion in revenue and net income of $259 million (90 cents a share), which both exceeded analysts’ expectations. In addition, the company has some key products in the pipeline, including CardioMEMS — an implantable, wireless pulmonary-artery pressure-monitoring device — which is awaiting a national coverage determination as well as an MRI-safe pacemaker that is pending U.S. approval. “We anticipate continued strong growth in heart failure, neuro and cardio and improving results for cardiac rhythm management through the year as St. Jude receives additional product approvals to help its top-line progress and the stock to work,” said Matthew Taylor, an analyst at Barclays, in his April 20 report. “Despite a pushout in expectations for MRI-safe pacer approval in the U.S. and CardioMEMS national coverage determination resolution relative to our expectations, the pipeline looks full to us, and we think St. Jude can accelerate revenue growth through the year.”

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