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St. Jude Medical to Buy Thoratec for $3.4 Billion -- 2nd Update

07/22/2015 | 02:58pm US/Eastern
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

Access Investor Kit for St. Jude Medical, Inc.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US7908491035

Access Investor Kit for Thoratec Corp.

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