HeartWare plunges on Valtech Cardio buyout

Shares of HeartWare International (NSDQ:HTWR) plunged 20.8% after the company announced a buyout of Israeli replacement heart valve maker Valtech Cardio.

HTWR shares closed at $64.82 apiece yesterday as investors reacted to the highly dilutive terms of the deal, which was worth some $929 million based on HeartWare’s closing price the day before it was announced. It’s now worth about $736 million, based on yesterday’s closing price.

Framingham, Mass.-based HeartWare 1st invested in Valtech in 2013, president & CEO Doug Godshall told analysts during a conference call yesterday, noting that “all roads led back to Valtech” as the company investigated targets in the mitral and tricuspid valve replacement space.

CFO Peter McAree said near-term revenues from Valtech will help HeartWare digest the acquisition, although Valtech’s $15 million annual cash burn could double to fuel that growth, he said, according to The Street.

The deal for Valtech calls for an up-front payment of 4.4 million shares of HeartWare stock, which were initially worth $360 million but would now be worth $285.2 million. 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 (now worth $51.9 million), and another 700,000 shares on the earlier of 1st-in-human implants for either the Cardioband tricuspid or CardioValve device(once worth $57.3 million, now worth $45.4 million). 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.

The 2 largest players in the aortic valve space, Medtronic and Edwards, are also pursuing the hot mitral valve space. Medtronic last month agreed to pony up as much as $458 million for Twelve Inc. and its transcatheter mitral valve implant, a day before Edwards closed its $400 million deal for TMVI maker CardiAQ Valve Technologies.

BTIG analyst Sean Lavin wrote in a note to investors yesterday that HeartWare’s entry into the space is relatively expensive, but the short-term negatives could be outweighed in 3 to 5 years. Leerink Partners analyst Richard Newitter said has a strong strategic rationale, even with the 30% dilution rate, because it broadens to HeartWare’s core left ventricular assist device business into complementary lines (mitral and tricuspid valve repair often accompanies LVAD implantation).

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.

The deal for Or Yehuda, Israel-based Valtech is expected to close late in the year.

HTWR shares opened down a hair today, at $64.51 apiece, and ticked up 0.3% to $64.98 in early trading.

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