Medtronic Buys HeartWare for $1.1 Billion

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Medtronic PLC (Dublin) said it agreed to acquire HeartWare International Inc. (Framingham MA) for $1.1 billion, adding more heart-treatment products to the giant medical-device maker. Medtronic will pay $58 a share in cash for HeartWare, a 93% premium over HeartWare’s closing stock price prior to news of the deal.

Before the announcement, HeartWare’s stock had fallen 60% over the past year amid declining sales, problems with product studies and an acquisition–later terminated–that was seen as dilutive to Heartware.

The companies said last Monday that the acquisition gives Medtronic more diagnostic tools and treatments for heart failure, a condition where the heart isn’t pumping enough blood to meet the body’s needs. HeartWare makes surgical implants that mimic the heart’s blood-pumping function, known as ventricular assist devices.

Medtronic estimated that the global VAD market is about $800 million now and is expected to grow by a percentage in the mid-to-high single digits in the current year and accelerate to a percentage in the high-single, low-double digits in future years. The companies said they expect the deal to close during Medtronic’s second fiscal quarter, ending in late October.

Medtronic said it didn’t expect to adjust its fiscal 2017 revenue outlook or earnings because of the acquisition, and that it expected the deal to add to earnings in its third year. In January 2015, Medtronic closed a $50 billion acquisition of Dublin-based Covidien that combined two of the world’s largest medical-supply companies.

That deal allowed Medtronic to move its corporate headquarters from Minneapolis to Dublin in a so-called tax inversion deal that reduced the company’s tax burden. Medtronic, for its fiscal year ended April 29, reported earnings of $3.54 billion on revenue of $28.83 billion. Heartware, in its most recent fiscal year ended Dec. 31, had a loss of $72.8 million on revenue of $276.8 million. Medtronic shares closed the week up 5% at $87.03, while HeartWare surged 92% to $57.55.

Steve’s Take: Medtronic’s move to acquire HeartWare for $1.1 billion to help expand its current portfolio of heart products looked like a fairly routine purchase until I saw the price of $58 per HeartWare share–a 93% premium over its closing price prior to news of the deal.

Frankly, I knew next to nothing about the Massachusetts-based device maker, other than its horrible track record over the past year with its stock nosediving, sales declining, and clinical studies gone awry. Its specialty was making surgical implants that mimic the heart’s blood-pumping function, known as ventricular assist devices, or VADs. So why was Medtronic even considering this acquisition at such a huge premium?

After a little digging, I discovered us baby boomers are coming to the rescue again. With an aging population (yours truly at the forefront) and the high cost required to treat heart failure, data suggest that healthcare expenditures for heart failure in the U.S. are expected to rise and reach approximately $39 billion per year.

This makes heart failure one of the largest expense areas in the healthcare system. With this acquisition, Medtronic will be able to market HeartWare’s proprietary Ventricular Assist System, which provides circulatory support for patients in the advanced stage of heart failure.

The last few years, the market for VADs has been dominated by Thoratec and Heartware. None of the major device companies dined upon this market until St. Jude Medical acquired Thoratec in a $3.4 billion deal in 2015. With the acquisition of Heartware, Medtronic is gobbling up the only other dominant player in the VAD space. Mmmmm…tastes delicious, don’t you agree, Medtronic and HeartWare holders?