Abbott Labs ( ABT ) acquired St. Jude Medical to create a more integrated offering and compete better against rivals such as Medtronic and Boston Scientific. St. Jude Medical does plug some gaps in Abbott's portfolio, and the cost synergies are likely to show up going forward. With the acquisition, which was closed earlier this year, the vascular business has become one of Abbott's largest segments. We currently forecast the vascular market to grow steadily and reach more than $25 billion by the end of our forecast period. At the same time, we expect Abbott to maintain around a 40% share in the market going forward, resulting in 3-4% annual growth in its vascular products revenue. While Abbott certainly has a size advantage, effectively integrating a new company is always a question mark. In Abbott's case, the risk is fairly significant because of the high debt load and significant competitive pressure in the market. So what happens if things don't pan out as expected? If price competition reduces our market forecast by 10%, and Abbott's share in the vascular market declines from 40% to 35%, there could be a nearly 10% downside to our price estimate for the company.
Our price estimate of $45 for Abbott Laboratories is slightly below the market.
The acquisition of St Jude Medical looked like a risky bet from the beginning. Earlier this year, credit ratings agency Fitch downgraded Abbott and St Jude Medial's IDRs to BBB. The agency stated that although St. Jude is a good strategic fit, the acquisition will put stress on Abbott's balance sheet for at least two years, thus increasing default risk. While BBB is still a fairly strong credit rating, the risks don't end there. The acquisition has also increased Abbott's exposure to the commoditized section of the cardiovascular medical device market. Johnson & Johnson's divestitures over the last couple of years suggest that the company is moving away from this business due to pricing pressure and a lack of growth. Additionally, Abbott's risk related to health care policy changes has increased as St. Jude is facing pressure from hospitals looking to cut costs.
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