STJ ST. Jude Medical, Inc.

By Joseph Walker And George Stahl 

Abbott Laboratories' deal to acquire medical-products maker St. Jude Medical Inc. for $25 billion was the largest in a flurry of health-care deal-making totaling $40 billion on Thursday.

France's Sanofi SA said Thursday it made an unsolicited, $9.3 billion offer to purchase San Francisco-based Medivation Inc., which sells a lucrative prostate-cancer drug. AbbVie Inc. of North Chicago, Ill., agreed to pay $5.8 billion to acquire a privately held cancer-drug developer, Stemcentrx Inc., of South San Francisco, Calif., for $5.8 billion, continuing AbbVie's aggressive push to build an oncology business.

The deals are motivated by different factors, but show health care remains an engine of M&A activity despite a crackdown on tax-lowering maneuvers known as "inversions" that fueled a number of large deals in recent years. Health-care companies have announced $121.12 billion in global deal activity this year, the second most after the technology industry's $145.78 billion in deals so far for the year, according to Dealogic.

For Abbott, its acquisition is a way to bulk up its medical-devices business to better compete against rivals Medtronic PLC and Boston Scientific Corp. Abbott said it was also aiming to gain a better negotiating position with its hospital customers, which themselves have become larger and more powerful in recent years.

AbbVie and Sanofi, meanwhile, are looking to compensate for expected revenue declines as some of their biggest products lose patent protection and face competition for the first time.

Abbott's deal to acquire St. Jude Medical is the largest health-care merger so far this year. Abbott agreed to swap $46.75 in cash and 0.8708 shares for each St. Jude share. The offer values each St. Jude share at about $85, representing a 37% premium to the stock's closing price Wednesday.

Abbott has an eclectic mix of businesses that include nutritional drinks like Ensure, glucose monitors for diabetes patients, and selling branded generic pharmaceuticals in international markets. Abbott spun off its brand-name drug business into a separate company that became AbbVie in 2013.

Abbott's medical-devices business has been seen by some analysts as a drag on the company's otherwise encouraging growth, especially in emerging markets like China and Latin America.

Excluding the impact of foreign-currency fluctuations, Abbott's medical-device sales rose 0.5% to $1.2 billion in the first quarter of this year, lower than the company's overall revenue growth of 5.1%.

St. Jude's sales fell 1.4% to $5.54 billion in 2015, and its earnings declined 12% to $880 million. The majority of the St. Paul, Minn., company's revenue come from heart devices, including pacemakers and implanted defibrillators. Those products complement Abbott's line of stent devices, small tubes that prop open diseased arteries, and could help the company cross-sell to hospitals, analysts said. When combined, the merged company will have annual cardiovascular sales of $8.7 billion.

The boards from both companies have approved the transaction, which still requires shareholder and regulatory approvals. The companies expect the deal to close in the fourth quarter.

Abbott CEO Miles White, speaking on a conference call with analysts on Thursday, said acquiring St. Jude would enable the combined company to better compete in an increasingly consolidated U.S. health-care market.

U.S. hospitals, the largest purchasers of medical devices, have grown larger and become more powerful negotiators in recent years. Hospitals have also narrowed the number of suppliers they work with as a way to keep down costs. Mr. White said having a larger product portfolio and sales force would enable Abbott to win more business in a more competitive market.

"The value of having breadth in your product lines, the changing way the health-care community has consolidated or purchases or selects products, all those factors come to a point over time where the strategic value of Abbott and St. Jude coming together becomes compelling," Mr. White said.

Another large medical device firm, Medtronic, gave a similar rationale when it agreed to acquire Covidien PLC in 2014, arguing that hospitals would increasingly look to purchase medical supplies from fewer and fewer vendors. Medtronic, which also inverted its tax base to Ireland in the Covidien merger, is a major competitor to St. Jude in the pacemaker and implanted defibrillator markets.

Michael Weinstein, a J.P. Morgan analyst, said in a note to clients that "investors are likely to frown on" the strategic rationale of the deal because it shifts Abbott away from its focus on growing in emerging markets through its consumer businesses such as nutritional food products. St. Jude has also had "repeated stumbles in executing on its pipeline," Mr. Weinstein said.

Abbott sees the deal adding to its adjusted earnings in the first full year after closing. On a per-share basis, Abbott estimates the buy increasing earnings by 21 cents in 2017 and 29 cents in 2018. The companies see sales and operational benefits of $500 million by 2020.

In 2015, Abbott's sales rose 0.8% to $20.4 billion, and its earnings nearly doubled to $4.4 billion, which included a gain from the sale of discontinued operations. As of Wednesday, Abbott had a market value of $64.6 billion.

Abbott's deal for St. Jude comes as the company is trying to complete its $5.8 billion purchase of Alere Inc., the health-care diagnostics company that is grappling with foreign corruption probes.

Abbott agreed in February to pay $56 per share to acquire Alere, a 51% premium to the company's share price before the deal's announcement. Since then, Alere has disclosed it has received a subpoena regarding a foreign corruption investigation over payments in Africa, Asia and Latin America. The company also has missed a deadline to file its 2015 annual report with regulators because it is analyzing its revenue recognition in Africa and China over the past three years.

Last week, Mr. White declined to affirm his commitment to the deal. Thursday, though, Abbott discussed plans to issue $3 billion of stock "to rebalance its capital structure" and help finance the Alere and St. Jude deals.

--Peter Loftus contributed to this article.

Write to George Stahl at george.stahl@wsj.com and Joseph Walker at joseph.walker@wsj.com

(END) Dow Jones Newswires

April 28, 2016 17:27 ET (21:27 GMT)

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