|The Cardioband for minimally invasive mitral valve repair--Courtesy of Valtech Cardio|
HeartWare ($HTWR) agreed to purchase Israel's Valtech Cardio for about $929 million, including milestone payments, in a stock-based transaction. It's common for patients receiving an LVAD to concurrently receive a mitral or tricuspid valve procedure, explaining why HeartWare boldly stepped out of its sole area of focus to acquire the relatively diversified Israeli company, transforming itself from a specialist to a cardiology generalist.
Wall Street greeted the announcement with disgust, pushing the stock down 16% in early trading on the news because it involves the issuance of at least 4.4 million new shares to the 17 million outstanding, making it dilutive to existing shareholders. Note that the terms of the deal are complicated and hard to valuate because they are based on the future price of HeartWare stock. The $929 million figure is based on HeartWare's closing price of $81.81, as of market close on Tuesday.
Despite the fall in HeartWare's share price, Leerink equity analysts Danielle Antalffy and Puneet Souda believe the transaction is "highly strategic" because it exposes the company to the mitral and tricuspid valve repair/replacement market, expected to be worth more than $7 billion.
The move could be viewed as a reaction to other deals, most notably rival LVAD maker Thoratec's ($THOR) impending takeover by St. Jude Medical ($STJ) for $3.4 billion, but also the combined $1 billion dropped by Edwards Lifesciences ($EW), Abbott ($ABT) and Medtronic ($MDT) on minimally invasive transcatheter mitral valve replacement makers.
Valtech is developing the CardioValve for transcatheter mitral valve replacement and Cardioband for minimally invasive, percutaneous mitral and triscupid valve repair. Both avoid the need for open heart surgery. Scheduled for launch in 2016 is the CE-marked Cardinal annuloplasty ring system for surgical mitral valve repair. Also in the developmental pipeline is the V-Chordal for surgical mitral valve replacement.
According to Leerink, HeartWare expects Valtech devices to contribute $140 million in revenue in 2020, rising to $800 million by 2025.
"We identified Valtech as having the broadest, most compelling portfolio several years ago, which led to an investment in 2013. This investment gave us a unique opportunity to observe Valtech's significant progress across their portfolio of valve repair and replacement technologies. It is from this vantage point that we have concluded that Valtech's platforms represent the most innovative and comprehensive portfolio of interventional and surgical products for mitral and tricuspid repair and replacement in development today," HeartWare CEO Doug Godshall said in a statement.
He singled out the Cardioband for mitral valve repair using a transfemoral (though the leg) approach to the heart, saying it "represents a more reproducible and predictable platform for mitral valve repair than existing solutions. We believe Cardioband will be a natural and clear selection as a first-line treatment for the broadest spectrum of MR patients, since it offers a safer option and, even in early clinical use, has already demonstrated a strong efficacy profile."
The deal calls for Valtech shareholders to receive 4.4 million shares of HeartWare stock up front; 800,000 shares upon the CE marking of the Cardioband (expected later this year); and 700,000 upon the first human implant of either the Cardioband for tricuspid valve repair or the CardioValve (expected in late 2016 or late 2017).
Valtech also gains the option to purchase HeartWare shares at the price $83.73 once its devices earn $75 million in trailing 12-month net sales, and receives an earn-out payment of $375 million once its devices earn $450 million in trailing 12-month net sales.
The deal is expected to close in late 2015. Until then, HeartWare's sole product will be its HVAD left ventricular assist device. The next-generation MVAD is in clinical trials for a CE mark. Also crucial to the company is the fate of its bid for an expanded indication in the U.S., which would enable use of the HVAD in long-term "destination therapy" patients, rather than solely those using the HVAD as a bridge to heart transplantation.
The FDA's decision is going to be contentious, because the company's clinical trial found a high (31%) stroke rate among bridge-to-transplantation patients. But the device did meet its primary endpoint in that trial. An FDA decision could occur next year, following additional trials.
An estimated 6,500 LVAD implantations were performed last year. Companies are increasingly interested in bundling the devices with other products because they provide access to a unique patient population, as evidenced by the latest deal. Meanwhile, St. Jude said following its agreement to acquire Thoratec for $3.4 billion, that it plans to pair the company's LVAD with its own CardioMEMS heart failure monitor.
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