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

Modern Healthcare - - NEWS - By Adam Ruben­fire

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 reim-

A one-stop shop is par­tic­u­larly im­por­tant for pro­ce­dures that are un­der bun­dled-pay­ment pro­grams that limit re­im­burse­ment and re­ward ef­fi­ciency, like joint re­place­ment.

burse­ment 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 de­vices 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.

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