HeartWare succumbs to activist investors, calls off planned Valtech purchase

HeartWare's Ventricular Assist System, also known as the HVAD

Under pressure from Wall Street and activist investors, HeartWare ($HTWR) has terminated its planned takeover of Israeli cardiology implant maker Valtech Cardio. The acquisition was worth $929 million based on a HeartWare share price of around $81. But it now trades for $34.

The move is a win for activist investors at Engaged Capital, who purchased a 1.3% stake in the company. In return for the termination of the agreement with Valtech, Engaged Capital has agreed to withdraw its nominees to serve on HeartWare's board of directors.

"We are pleased to have reached an amicable resolution with HeartWare following the termination of the Valtech transaction. We appreciate the steps the company has taken today to maintain focus on its core ventricular assist device (VAD) business," said Engaged Capital CEO Glenn Welling, in a statement. "We invested in HeartWare because we are confident in the strength of HeartWare's core VAD business and in the significant opportunity for growth within the global mechanical circulatory support market. We believe HeartWare's VAD franchise is significantly undervalued and that additional objective, financial perspectives represented on the board can help support HeartWare's efforts to drive growth and enhance shareholder value."

Engaged Capital argued that HeartWare should focus on its core left ventricular device business to set itself up for an acquisition. After all, the company is one of only two companies in a fast-growing market with steep barriers to entry. Moreover, competitor Thoratec was recently acquired by St. Jude Medical ($STJ) for $3.4 billion, giving shareholders a high premium.

To achieve a similarly high valuation, HeartWare needs to earn a "destination therapy" indication for its HVAD device, making it eligible for long-term use, not just as a bridge to heart transplantation.

At J.P. Morgan, the company announced that it was going to submit for the indication 6 months earlier than anticipated, but the good news was overshadowed by the continued struggles of its next-generation MVAD. A delay of its clinical trial sent the stock tumbling to $27, and another activist investor, Hudson Executive Capital purchased a 5% stake in the company, making today's announcement more likely.

The termination earned the approval of Leerink equity analysts Danielle Antalffy and Puneet Souda, who originally called the acquisition highly strategic: "Given the current uncertainty around timing and incremental investment required to return HTWR's next-gen MVAD to the clinic following the announcement 2 weeks ago of a protracted delay to allow for investigation into suction issues with the device, we believe this is the right strategy for HTWR at the moment."

As a result of the termination, HeartWare will make a $30 million loan to Valtech, as called for in the original agreement.

"Our focus in the coming months will be on returning the MVAD System to the clinic, further enhancing the HVAD System, particularly in light of our plan to submit for the Destination Therapy indication for HVAD in the middle of this year, and progressing our innovative circulatory support pipeline," HeartWare CEO Doug Godshall said in a statement. "By stepping away from the acquisition, all of our resources will be dedicated to strengthening our existing business to put the company in the best position to take advantage of the significant opportunities within our ventricular assist device (VAD) portfolio. We recognize from our discussions with shareholders over the past several weeks that they, too, share our enthusiasm for the strength of our core VAD franchise, and we look forward to realizing this value together."

The Cardioband for minimally invasive mitral valve repair--Courtesy of Valtech Cardio

Valtech boasts the CE-marked Cardinal annuloplasty ring system for surgical mitral valve repair and Cardioband for minimally invasive, transcatheter mitral and tricuspid valve repair. It's developing two additional implants for mitral valve replacement, including one that is installed using the minimally invasive transcatheter technique.

Transcatheter mitral valve repair and replacement has the potential to exceed the multibillion-dollar market for transcatheter aortic valve replacements. But Hudson and Engaged Capital pointed out that the market is in its early stages, and far from a sure shot.

"HeartWare's decision last fall to acquire Valtech represented a unique opportunity to bring together two, complementary portfolios for substantial, high-growth markets and create a broad technology pipeline for the treatment of patients with heart failure," Godshall said in a statement. "While we continue to believe Valtech's portfolio of mitral and tricuspid interventional tools holds tremendous promise, HeartWare finds itself in a different set of circumstances than when we first entered into the agreement."

- read the release from HeartWare | here's more from HeartWare