Medtronic Takes HeartWare For $1.1bn

| About: Medtronic plc (MDT)

The heart pump developer HeartWare (NASDAQ:HTWR) has had a tough time of late: the past year has seen delays for its next-generation technology, the acquisition of its arch rival Thoratec by St. Jude Medical (NYSE:STJ), and its own attempts to diversify fall through. But things are finally looking up, with a $1.1bn deal from Medtronic (NYSE:MDT) on the table.

Still, some HeartWare investors will never recoup their losses: Medtronic's $58 per share offer is a 48% premium over HeartWare’s current price, but this is down from $75.60 a year ago. The number-one medtech player is now set to go up against its old enemy St. Jude – soon to be part of Abbott (NYSE:ABT) – in a new sector, left ventricular assist devices for heart failure.

This is only Medtronic’s third acquisition this year, a slowdown from 2015 when it struck 10 deals as well as closing the $50bn purchase of Covidien.

Medtronic acquisitions announced in 2016

Company

Sector

Price ($m)

Date announced

HeartWare International

Heart failure

1,100

June 27

Smith & Nephew’s gynaecology business

Gynaecology

350

May 18

Bellco

Haemodialysis

Undisclosed

February 1

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Medtronic estimates that the global VAD market is worth $800m, so it makes sense that it would want a piece of the action. And, despite its troubles, HeartWare is the second-biggest player in the space, which is set for high-single/low-double digit growth beyond 2017, Medtronic believes.

If anyone has the resources to put HeartWare’s next-gen MVAD device back on track, it is Medtronic. A trial of the product, a smaller version of its marketed HVAD, was halted in September, reports of adverse events arose in October, and in January the company said the device would have to be altered significantly to combat the side effect of pump thrombus (HeartWare suffers from blocked pipeline, January 13, 2016).

Medtronic must have done its due diligence, which suggests that the problems with the MVAD can be fixed – or that the case for the acquisition remains strong with or without the new device.

There is still scope to expand sales of the older HVAD device, and Medtronic could bring its scale to bear here. A new market could also open up soon: HeartWare has been planning to file the HVAD as a destination therapy – if approved this would put it on par with St. Jude/Abbott’s HeartMate II, which has had the go-ahead as destination therapy since 2010.

Selected left ventricular assist devices

Device

Company

Status

HeartMate II

Thoratec/St. Jude/Abbott

CE marked; FDA approved as bridge-to-transplantation and destination therapy

HVAD

HeartWare/Medtronic

CE marked; FDA approved as bridge-to-transplantation

HeartMate 3

Thoratec/St. Jude/Abbott

CE marked

MVAD

HeartWare/Medtronic

CE mark trial suspended

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HeartWare’s decision to pull out of its purchase of the mitral valve developer Valtech Cardio now looks wise – at the time, EP Vantage noted that the decision could make it more attractive to potential buyers including Medtronic (HeartWare loses heart for Valtech buy, January 29, 2016).

Medtronic has now taken the plunge. It could be that another party was interested, suggested by the sizable premium. Even so, HeartWare is much cheaper now than it was a year ago, and the biggest medtech company is taking the chance to make yet another bolt-on. More deals could follow if the stock market remains depressed.