Why Is Medtronic Acquiring Heartware?

Medtronic (NYSE:MDT) said Monday that it had entered into an agreement to acquire Heartware in a $1.1 billion deal which will help it expand its current portfolio of heart products. According to the terms of the deal, Medtronic will pay $58 per share of Heartware, which translates to a 93% premium over Heartware’s closing price on Friday. Below we discuss the key reasons as to why Medtronic might be considering this acqusition:

Expand Its Current Heart Portfolio: Medtronic is already a leader in the coronary stent market and cardiac rhythm management products. This acquisition will help Medtronic expand its current breadth of heart failure products. The company’s strategy to expand its offering to all heart-failure devices will likely pay-off in the future.

This comes from the fact that with an aging population and the high costs required to cure heart failure, the healthcare expenditures in the U.S. are expected to rise and reach approximately $39 billion per year. This makes it one of the largest expense areas in the healthcare system. It is also worth noting that the number of patients with heart failure could exceed 8 million by 2030.

With this acquisition, Medtronic will be able to market Heartware’s proprietary Ventricular Assist System (the “HVAD”) that includes an implantable blood pump, which is a continuous flow blood pump capable of pumping up to 10 liters of blood per minute. This provides circulatory support for patients in the advanced stage of heart failure. Futher, the HVAD System is implanted adjacent to the heart, avoiding abdominal surgery, which is generally required to implant similar devices.

An Easy Market To Tap: In the last few years, the market for ventricular assist devices has been primarily dominated by Thoratec and Heartware, along with a few other relatively smaller players. None of the major device companies participated in this market until St. Jude Medical announced its acquisition of Thoratec in a $3.4 billion deal in 2015. With the acquisition of Heartware, Medtronic has also marked its entrance into the $800 million ventricular assist device(VAD) market, which it expects to grow in double digits post 2017. ((Medtronic to Expand Heart Failure Portfolio with Acquisition of Heartware International, Medtronic Investor Relations, June 27, 2016)

Medtronic Can Easily Absorb Heartware’s Losses: Due to problems related to HVAD devices and a failed acquisition attempt, Heartware’s stock has fallen by around 60% over the past year. Further, the company hasn’t yet turned profitable since it went public in 2009. This comes from the fact that more than 40% of Heartware’s expenditures are related to research and development expense. Medtronic’s strong cash position can help fund these expenses for Heartware.

Fully Implantable VAD Opportunity: The current VAD devices use a driveline to connect the heart pump in the body to an external power device for energy transfer and monitoring. A large number of players in this market, including Heartware, are trying to develop a fully implantable VAD, which would remove the need of a driveline by having a wireless connection to the external device. After the completion of the acquisition, Medtronic can accelerate the process of the development of a fully implantable VAD by pumping-in more cash for the research and development of such a device. It must be noted that there are no such devices in the market currently and Medtronic might want to capture the first mover’s advantage by successfully developing a fully implantable VAD.

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