Terms of the deal call for an up-front payment of 4.4 million shares of HeartWare stock, which would be worth about $360 million at yesterday’s closing price of $81.81. The buyout also includes milestones of 800,000 shares when Valtech’s Cardioband annuloplasty device wins CE Mark approval in the European Union, worth $65.4 million at yesterday’s price, and another 700,000 shares (worth $57.3 million) on the earlier of 1st-in-human implants for either the Cardioband tricuspid or CardioValve device.
Framingham, mass.-based HeartWare will also put up warrants for 850,000 shares at $83.73 apiece, worth $71.2 million, once Valtech’s annual sales reach $75 million and a cash-or-stock earnout of $375 million once revenues reach $450 million. HTWR shares slid -3.0% to $79.34 in after-hours trading yesterday.
The deal forOr Yehuda, Israel-based Valtech is expected to close in late 2015, HeartWare said.
“We have been actively monitoring the mitral space for several years, given the overlap of patient population and referral channel with our VAD business,” president & CEO Doug Godshall said in prepared remarks. “We identified Valtech as having the broadest, most compelling portfolio several years ago, which led to an investment in 2013. This investment gave us a unique opportunity to observe Valtech’s significant progress across their portfolio of valve repair and replacement technologies. It is from this vantage point that we have concluded that Valtech’s platforms represent the most innovative and comprehensive portfolio of interventional and surgical products for mitral and tricuspid repair and replacement in development today. Valtech provides HeartWare with commercial-stage products for mitral repair, as well as a robust technology pipeline, an advanced R&D center and an impressive, experienced team with a proven track record. This combination represents an attractive opportunity for value creation for HeartWare shareholders, customers, employees and patients by expanding HeartWare’s footprint in the high-growth structural heart market.”
Cardioband is expected to win the CE Mark for mitral valve repair this year, with a limited commercial launch following in late 2015, HeartWare said. Valtech expects to seek an investigational device exemption from the FDA next year, with 1st use as a tricuspid treatment in late 2016. Early results released in June from a 40-patient safety and efficacy trial showed an acute procedural success rate of 89%, as well as a 20% reduction in septo-lateral diameter after adjustment of the device. Mortality after 30 days was 6.8% from 2 deaths, but both were deemed unrelated to the device.
Valtech’s Cardinal annuloplasty ring already has CE Mark approval for mitral valve repair and is slated to hit the market next year and in 2017 for tricuspid repair, the companies said. The CardioValve transcatheter mitral valve implant, which is being tested in animal studies, is slated to begin clinical study in early 2017. Valtech’s V-Chordal device, a mitral valve chord replacement system, has already undergone 1st-in-human trials.
“The timing for a CE Mark study [of V-Chordal] is being evaluated in relation to the commencement of multiple other Valtech trials, the companies said.
“Valtech’s robust portfolio of repair and replacement technologies provides us with the most comprehensive product suite to treat the mitral and tricuspid populations. We believe it will be critical to offer patients and physicians a multifaceted approach in the treatment of MR and TR, with both repair and replacement options,” Godshall said. “The mitral repair market is already a well-established and rapidly growing market with a significant, unmet, immediate clinical need. The Cardioband transfemoral annuloplasty system represents a more reproducible and predictable platform for mitral valve repair than existing solutions. We believe Cardioband will be a natural and clear selection as a first-line treatment for the broadest spectrum of MR patients, since it offers a safer option and, even in early clinical use, has already demonstrated a strong efficacy profile.”
“Valtech has benefited significantly from HeartWare’s early investment in our company. Since then, we have developed a strong relationship based on a shared mission to deliver transformative products to patients with advanced heart failure and degenerative heart conditions,” added Valtech founder & CEO Amir Gross. “By joining HeartWare, we can more quickly and fully realize the potential of our pipeline technologies and further influence the underpenetrated markets that we serve. HeartWare’s existing market development experience and commercial infrastructure provide a compelling platform from which to launch multiple products worldwide, including a near-term launch of Cardioband in international markets following anticipated CE Mark approval this year. Together, we can offer clinical heart failure teams a compelling portfolio of surgical and interventional technologies to serve the advanced heart failure population.”
The deal adds significant scale to HeartWare’s portfolio, an important consideration given the pending acquisition of the industry’s other leading implantable heart pump maker, Thoratec (NSDQ:THOR). U.S. anti-trust regulators last week approved St. Jude Medical‘s (NYSE:STJ) $3.4 billion bid for Thoratec, the market leader in left ventricular-assist devices.
Leerink Partners analyst Richard Newitter said the deal, although surprising, has a strong strategic rationale.
“While this deal is likely to come as a surprise to most investors from a timing perspective, HTWR emphasized that it is in no way indicative of a lack of confidence in the progression of the company’s current LVAD business,” Newitter wrote early today in a note to investors. “And though highly dilutive – HTWR is issuing 4.4M shares upfront, on top of the company’s ~17M shares currently outstanding, driving nearly 30% dilution – it is highly strategic as it: (1) Diversifies the portfolio away from LVADs; (2) allows HTWR to address heart failure patients further upstream in their disease; (3) brings to HTWR a fairly wide and deep product portfolio, with a number of commercial and clinical milestones coming over the next 18-24 months – giving HTWR entry into what we believe is a potentially massive Transcatheter Mitral Valve Replacement (TMVR) market in the long run.”
Barclays analyst Matthew Taylor said the deal is a long-term play for HeartWare.
“In our view, while the stock will likely react to the dilution and addition of regulatory risk, in addition to more spending on product development, exposure to mitral may end up being a positive over time. Essentially we view this as a near-term step back to take two steps forward for the company,” Taylor wrote today in a note to investors.