Abbott-St. Jude merger gives providers what they want: fewer vendors

The now-completed merger of medical device giants Abbott Laboratories and St. Jude Medical will help hospitals streamline their procurement efforts, but vendor consolidation could also lead to higher supply costs.

Suburban Chicago-based Abbott's $25 billion purchase of St. Jude, based in St. Paul Minn., closed last week. It merged two of the industry's largest devicemakers. It also gave Abbott the key to nearly every area of the $30 billion cardiovascular device market.

The deal follows other recent mergers aimed at giving providers a one-stop shop for their medical-device needs, including the mergers of Medtronic and Covidien; Zimmer and Biomet; and Becton, Dickinson & Co. and CareFusion.

While providers defer to contracts negotiated by their group purchasing organizations for most drugs and medical supplies, most GPOs don't have extensive contracts for devices such as stents and artificial joints, so the majority of providers negotiate directly with manufacturers. Under constant pressure to reduce supply chain-related costs, providers have made it clear that they value being able to negotiate with a single vendor for a wide array of products.

“In an effort to better service the providers, the vendors are getting bigger, better and more efficient at providing products,” said Joanne Wuensch, a managing director at BMO Capital Markets, which trades Abbott securities, according to the company's disclosure. “We've seen a theme for the past three years. ... It's all designed to better service the providers so that they can deal with a smaller number of vendors.”

A one-stop shop is particularly important for procedures that are under bundled-payment programs that limit reimbursement and reward efficiency, such as joint replacement. A controversial bundled-payment program is soon to be piloted for cardiac care, a major market for the combined company. Abbott and St. Jude's combined cardiovascular and neuromodulation portfolio represents sales of more than $8.7 billion.

In the bundled-payment world, a devicemaker has significant leverage if it offers more products used in the bundled episode of care than its competitors, said Bob Kirby, a Fitch Ratings analyst who covers device and drug companies. Manufacturers can make deals if the buyer purchases multiple products. That can ultimately help buyers with their goal of lowering supply costs for the episode.

“If your products are the larger portion of that cost and the number of devices and products within (the bundle), you can actually affect the overall cost and procedure of that episode a lot more than if you were just one of many,” Kirby said.

But consolidation also relieves pressure on manufacturers to competitively price their products. Kirby said medical device pricing often isn't as volatile as the drug market—but noted that a loss of competition could mean that Abbott is able to keep the price of new devices high for longer.

While pricing likely won't change in the short-term for hospitals that have existing contracts with Abbott and

St. Jude, providers may eventually see an increase in supply costs now that the combined company holds a massive amount of market share, said James Spann, global leader of supply chain and logistics at Simpler Consulting.

As a condition for Federal Trade Commission approval of the deal, Abbott agreed to sell off two businesses that produce certain cardiac devices. The FTC determined that under the proposed deal, Abbott would have controlled 70% of the market for vascular closure devices and the merger would eliminate nearly all competition in the market for steerable sheaths, of which St. Jude had a near-monopoly. Vascular closure de-vices are used to close holes in arteries following the insertion of catheters.

“I think that there are significant supply risks from a price and product availability perspective for hospitals, and it may be in the best interests of supply chain leaders to review their existing agreements,” Spann said in an email.

Abbott's purchase of St. Jude, first announced in April 2015, is expected to be accretive to the company's earnings in the first full year and at an increasing rate thereafter.