By Joseph Walker
St. Jude Medical Inc., looking to tap new markets as it grapples
with stagnant revenue growth, agreed to pay $3.4 billion in cash to
acquire Thoratec Corp., the leading maker of a promising type of
heart pump.
St. Jude's offer of $63.50 a share is a 10% premium to
Thoratec's closing price on Tuesday and a 35.4% premium to its
closing price on Friday, before the deal talks were reported.
St. Jude's bid is a bold bet Thoratec can maintain its dominant
position in a relatively immature market where new, superior
technologies could emerge in the coming years, analysts said. St.
Jude, based in St. Paul, Minn., has historically shied away from
large acquisitions. If completed, the Thoratec deal would easily be
St. Jude's largest ever, surpassing its $1.25 billion purchase of
Advanced Neuromodulation Systems Inc. in 2005, according to
Dealogic.
St. Jude is aiming to expand its portfolio of devices for the
treatment of heart failure, a condition affecting some six million
people in the U.S. St. Jude has made heart failure an increasingly
important part of its growth strategy, and its current products
include a remote patient monitoring system and a special type of
pacemaker to improve the heart's pumping function.
St. Jude said Thoratec is a major player in a global market for
heart devices with the potential to reach more than $1 billion in
sales in 2016 and annual growth of 10%.
"St. Jude Medical continues to view heart failure to be a major
growth opportunity where we can help patients, payers and our
shareholders," Chief Executive Daniel Starks said during a
conference call with analysts on Wednesday.
St. Jude said it expects to complete the transaction in the
fourth quarter, but there is a chance that competing device makers
could step in to make competing bids. St. Jude said its agreement
includes a 30-day "go-shop" period, in which Thoratec will seek out
competing offers. Analysts identified Medtronic PLC and Abbott
Laboratories as among potential suitors for Thoratec.
Medtronic and Abbott declined to comment.
Along with competitors Medtronic and Boston Scientific Corp.,
St. Jude has been on the hunt for new markets as sales of its core
business of pacemakers and implanted defibrillators have declined
or stagnated in recent years. St. Jude said it expects sales of the
devices, which represent nearly half of its total revenue, to be
flat to down 2% this year compared with 2014.
Thoratec, based in Pleasanton, Calif., is the leading maker of
surgical implants that mimic the heart's blood-pumping function.
St. Jude said it expects global sales of the implants, known as
ventricular assist devices, or VADs, to be $750 million in 2016,
with Thoratec controlling 60% of the market. Thoratec also recently
gained regulatory approval in Europe to sell a heart pump implanted
via a catheter; St. Jude said it expects that market to potentially
reach $300 million in 2016.
Thoratec has been challenged recently with safety concerns about
VADs, including their potential to cause blood clotting. Thoratec
expects global sales this year of $465 million to $475 million,
down from $477.56 million in 2014.
Thoratec and competitor HeartWare International Inc. are both
developing next-generation VADs that are smaller and easier to use
than currently available devices, which analysts say should reduce
doctors' concerns about safety risks. Both companies' new devices
are in clinical trials, creating the risk that St. Jude will be
stuck with an inferior technology if HeartWare's product turns out
to be more effective, analysts said.
Some investors would have preferred for St. Jude to hold off on
its bid for Thoratec until the release of data from HeartWare and
Thoratec's clinical trials, said Vijay Kumar, an analyst with
Evercore ISI.
Mr. Starks said he was comfortable with the deal's long-term
risks.
"People who want all the cards turned over to manage their
business need to find a new line of work," he said during the
conference call.
Separately, St. Jude reported on Wednesday that its global sales
fell 2.6% to $1.41 billion in the second quarter. Excluding the
impact of currency fluctuations, revenue would have been up 6%, the
company said, thanks in part to an 18% sales increase for its
devices to treat a common heartbeat abnormality. The company
reported a profit of $290 million, or $1.02 a share, up from $270
million, or 93 cents a share, a year earlier.
Thoratec said on Wednesday its preliminary second-quarter
revenue was between $128 million and $129 million.
Shares of St. Jude fell 0.4% to $76.28 in afternoon trading.
Shares of Thoratec rose 9.9% to $63.25, and HeartWare shares
increased 6% to $89.48.
Chelsey Dulaney contributed to this article.
Write to Joseph Walker at joseph.walker@wsj.com
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