St. Jude Medical Inc. plans to be the first of the big cardiovascular device companies to sell ventricular assist devices after agreeing to buy leading VAD-maker Thoratec Corp. But there is a possibility that another rival could swoop in to take its place.

The companies announced a definitive agreement on July 22 for St. Jude to acquire Thoratec for about $3.4 billion in cash, net of cash acquired, or $63.50 per share, a premium of 40.1 percent over Thoratec's volume-weighted average trading price for the last month. [See Deal]

VADs, and in particular Thoratec's HeartMate line, have been on the market for more than 15 years. But diversified cardiac device companies have stayed away from the space until now, reflecting caution as Thoratec and potential rivals worked to improve the complicated technology and build a viable patient market. Now the St. Jude has signaled its interest, it's possible that other large competitors could try to jump in the ring.

The merger agreement includes a one-month "go-shop" period during which Thoratec can seek offers from other companies. If Thoratec finds a better offer during this period, it will have to pay a termination fee of approximately $30 million to St. Jude. If Thoratec decides to go with a different offer after the go-shop period, the break-up fee would be $111 million.

At least one analyst believes Thoratec could attract bigger offers now that it has shown it is ready to sell. In a July 22 note to investors, Leerink's Danielle Atalffy writes that Medtronic PLC is the most likely to offer more for Thoratec, but Abbott Laboratories Inc. and Johnson & Johnson are "potential dark horses." She estimates that the $3.4 billion offer is worth about 6.25 times Thoratec's 2016 projected revenues and that successful competitive bid will have to be about seven times 2016 projected earnings.

St. Jude: Synergies In Heart Failure, Interventional

St. Jude executives would not comment on the prospect of competing offers, but they argued that Thoratec is an ideal fit with its business.

Thoratec's portfolio and sales network will strengthen St. Jude's presence in the heart failure space beyond the cardiac rhythm management markets where it currently competes, CEO Starks said. Starks particularly emphasized synergies between Thoratec and St. Jude's CardioMEMS HF system, the implantable heart failure monitor designed to reduce hospital admissions, approved by FDA last year. (See Also see "St. Jude Sees New Techs Keeping It One Step Ahead Of The Field" - In Vivo, 14 July, 2015..)

For one, Thoratec's deep ties to heart failure specialists and cardiac surgeons can help St. Jude accelerate its ongoing marketing push for CardioMEMS HF, he noted. Longer term, St. Jude's CardioMEMS technology and remote monitoring capabilities could be used more directly to enhance Thoratec's VAD offerings.

"We've referred to the capabilities of our CardioMEMS sensor technology. We've referred to the capability of our remote monitoring, our remote monitoring infrastructure and investment and capabilities, and we've referred to the [electronic health record] interface of products from our CRM origin, which we think have some good potential application to help strengthen Thoratec's already attractive product pipeline," Starks said during a July 22 call with analysts.

The CEO also emphasized Thoratec's ongoing development of the HeartMate PHP system and clear synergies St. Jude can provide in accelerating adoption of the product. HeartMate PHP is a percutaneously delivered pump for circulatory support during high-risk coronary interventions, a departure from Thoratec's current market focus on support for heart failure patients awaiting a transplant or requiring long-term support in the absence of a transplant. Thoratec gained a CE mark for the system earlier this month and is preparing to start a U.S. pivotal trial. (See [A#01150727004].)

The PHP device will be used by interventional cardiologists, which, Starks points out, "is an entirely new call point for Thoratec, but a strong existing call point for St. Jude Medical." That advantage will allow it to make the most of the roughly $300 million market opportunity for pumps like HeartMate PHP, which will compete against Abiomed Inc.'s Impella 2.5 device.

Meeting Market Challenges

Thoratec’s VAD portfolio would put St. Jude in new markets currently worth over $1 billion and expected to grow 10 percent annually, Starks said. Thoratec controls about 60 percent of the $750 million worldwide VAD market and its HeartMate II is the most widely implanted and extensively studied left-ventricular assist device in the world, according to the company.

But the dominance of its HeartMate business has been challenged since the 2012 launch of HeartWare International Inc.'s HeartWare VAD system, the first meaningful competition to Thoratec after years of holding a virtual monopoly in the VAD space. On top of that, overall growth in the VAD market slowed in recent years partly in response to data suggesting possible safety concerns. (See Also see "Thoratec Looks To Next-Generation LVADs To Revive Sinking Sales" - Medtech Insight, 8 August, 2014..)

Thoratec responded to the challenges in 2014 by re-hiring its previous long-time CEO Keith Grossman, reassessing its market strategy and expanding investments on new product development, including the PHP device and its next-generation HeartMate III VAD system. (See Also see "Thoratec Seeks 'Cultural Revolution' As Rival HeartWare Makes Strides" - Medtech Insight, 10 November, 2014..)

St. Jude's Starks says the synergies he discussed in the heart failure and interventional cardiology sectors will help elevate Thoratec's ability to compete and grow. Further, he said he believes the VAD market has stabilized following a slowdown in 2013 and 2014.

Thoratec reported preliminary Q2 earnings on July 22 in conjunction with the deal announcements, which executives said showed "favorable trends" for the HeartMate franchise.

"We think that the market is currently growing at a mid, single-digit rate, as supported by Thoratec's early preliminary announcement of its second-quarter sales today, and so we're anticipating that going forward, that the VAD market will continue to grow at a mid, single digit, or improve to an upper, single-digit rate," Starks said.

In addition, he said, St. Jude's infrastructure will help expand the footprint for Thoratec's VAD offerings outside of the U.S. Currently, 80 percent of Thoratec's sales are generated from the U.S.

"As the U.S. market dynamics move through their sweet spot, we find that the attractive growth continues for quite a longer period as the global market develops at a slower pace," Starks said.

Thoratec shares jumped from $48.81 to $57.75 on July 21 after Bloomberg first reported that the deal could be pending, and the price continued to climb on July 22 after the acquisition was officially announced. St. Jude shares have remained relatively flat through the week.

St. Jude expects the deal to close by the fourth quarter of this year and for it to be accretive to the company’s adjusted earnings per share in 2016.

VADs Set To Enter Big Leagues With St. Jude's Plan To Acquire Thoratec

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