UPDATED: St. Jude to buy Thoratec for $3.4B, will pair its heart pump with the cardioMEMs patient monitor

Thoratec's HeartMate II left ventricular assist device--Courtesy of Thoratec

St. Jude Medical ($STJ) announced its intention to acquire Thoratec ($THOR), the maker of left ventricular assist devices that pump the blood of patients awaiting a heart transplant, for $3.4 billion. Its stock price is up 2.5% on the news.

The deal rounds out St. Jude's cardiology portfolio, which already includes pacemakers, cardiac imaging and remote monitoring. It will enter a high-growth market worth approximately $750 million a year, and has the opportunity to use its global reach to sell LVADs outside the U.S., which account for only 20% of Thoratec's sales.

St. Jude CEO Daniel Starks repeatedly emphasized the HeartMate LVAD's synergies with St. Jude's CardioMEMs heart failure monitor during the company's earnings call, held immediately after the deal was announced. "We are in the process of expanding our footprint in the heart failure community to support the development of our CardioMEMS franchise. Thoratec's existing field resources can help us accelerate this initiative," he said.

Later he said, "The details of how we think we can strengthen Thoratec's product line are things that we will not spell out for competitive reasons, but we have offered some hints. We've referred to the capabilities of our CardioMEMS sensor technology. We've referred to the capability of our remote monitoring infrastructure and investment and capabilities and we've referred to the EHR interface of our products from our CRM (cardiac rhythm management) origin, which we think have some good potential applications to help strengthen Thoratec's already attractive product pipeline." 

In addition, St. Jude touted Thoratec's entrance into the $300 million percutaneous heart pump market, thanks to the recent CE mark approval of the HeartMate PHP to keep patients' blood flowing during complex procedures like stent implantation. "This product line is used in high-risk PCI procedures conducted in the interventional cardiology cath lab, which is an entirely new call point for Thoratec, but a strong existing call point for St. Jude Medical," Starks said.

The deal is expected to close in Q4 2015, but only if another bidder does not swoop in. The agreement just reached includes a 30-day "go shop" period during which Thoratec can field better offers. Starks predictably declined to comment when asked if $3.4 billion was the company's final offer. Thoratec must compensate St. Jude Medical $30 million if it terminates the agreement for another suitor, and $111 million if the deal arose after the 30-day period.

Leerink equity analysts Danielle Antalffy and Puneet Souda said the deal makes strategic sense for the company and financial sense for St. Jude shareholders, but warned that dark horse bidders could emerge, such as Medtronic ($MDT), Abbott ($ABT) or Johnson & Johnson ($JNJ). They believe another bidder could push the sale price of Thoratec to $3.8 billion, or 7 times expected 2016 sales.

Those bigwigs might instead opt to buy LVAD rival HeartWare ($HTWR), whose shares have risen about 11% since Bloomberg broke news of the impending deal on Tuesday. Abiomed ($ABMD), maker of percutaneous, catheter-based heart pumps, also saw its stock rise when the rumor broke, but it's since fallen.

HeartWare's HVAD device has won plaudits for its ease of implantation, but unlike Thoratec's HeartMate II, the device doesn't have permission to be sold as a long-term solution to patients who are not eligible for a heart transplant. Its bid to secure that indication from the FDA is going to be a contentious because the company's clinical trial found a high (30%) stroke rate among bridge-to-transplantation patients.

St. Jude CEO Daniel Starks

Both companies are testing next-generation LVADs in Europe, and Thoratec has permission to do so in the U.S as well. HeartWare's investigational MVAD is less than half the size of the HVAD, making it even easier to implant. Thoratec is testing less invasive implantation techniques in the trials of its HeartMate III.

"Thoratec's strong core business and rich portfolio of new products complement St. Jude Medical's innovation-based growth strategy and will benefit patients, customers, employees and shareholders of both companies," said St. Jude CEO Daniel Starks. "The addition of Thoratec's leading ventricular assist device portfolio expands and enhances St. Jude Medical's established presence in heart failure therapies."

St. Jude CFO Donald Zurbay told Wall Street that the company "will borrow the funds needed to complete this transaction using a combination of public debt and bank term loans and we'll repay the debt using our worldwide cash flow."

Soon after deal was announced Fitch placed St. Jude's credit rating on a negative watch due to the increased debt load it would entail, though the organization said the deal made strategic sense.  

During St. Jude's Q2 2015 earnings report the company reported sales of $1.4 billion, an increase of 6% when foreign exchange rate fluctuations are excluded. The company also increased its revenue growth expectations for the year from 4-5% to 5-7% (at constant currencies) due in part to strong sales of its TactiCath contact force sensing catheter and CardioMEMs heart failure monitor.

- read the deal's release
- here's more about the earnings

Special Report: Top 10 med tech R&D budgets in 2014 - St. Jude Medical