Medtronic to cover HeartWare’s cash burn by cutting back on other heart failure R&D

Medtronic (NYSE:MDT), which earlier this week closed on the $1.1 billion buyout of implantable cardiac pump maker HeartWare, plans to cover HeartWare’s cash burn by cutting other heart failure R&D programs, he said.

HeartWare’s implantable left ventricular assist devices are designed for end-stage heart failure patients, either as a destination therapy until death or as a bridge to heart transplantation.

“[W]e had a number of investments internally going on in R&D programs directed specifically at heart failure, including diagnostic programs and services, as well as enhancements to our [cardiac resynchronization therapy] product lines, and we basically are reallocating resources and people to support the activities within HeartWare and backing off on some of those because we actually think HeartWare return on investment will be even better,” cardiac & vascular president Mike Coyle said during a conference call discussing Medtronic’s fiscal 1st-quarter results.

Medtronic is confident that HeartWare’s flagship HVAD device can gain market share but is still evaluating the next-generation MVAD device, Coyle said.

“On HeartWare, obviously we’re very bullish on the HVAD system,” Coyle said. “I think you’ve seen, especially in their most recent quarterly earnings results, that in Europe there is … a nice bounce-back in terms of overall share, which obviously is consistent with our view that this product with its smaller size and its performance characteristics should be able to compete very effectively in that space.

“We continue to look at the MVAD device and decide how aggressively we want to pursue that, and we’re working closely with the leadership team there. [We are] very impressed with the people who are doing that work and we look forward to being a leader in this space for decades to come,” he said, according to a Seeking Alpha transcript.

Medtronic said today that the August 23 closing triggered HeartWare’s obligation to sell its 3.5% convertible senior notes due in 2017 and the 1.75% convertible seniors due in 2021.

Each note holder has the right to force HeartWare to buy back some or all of the debt on Sept. 27, plus interest, the company said. The debt’s owners can also convert the notes into $580 in cash for each $1,000 of debt, at a substantial discount on what they’d receive in the repurchasing.

HeartWare listed some $192.1 million in convertible senior note liabilities as of June 30, according to an SEC filing.

The $58-per-share deal for HeartWare cleared the field of the 2 major cardiac assist device makers, after Medtronic’s cross-town rival, St. Jude Medical (NYSE:STJ), paid $3 billion for Thoratec in October 2015 (St. Jude is now being acquired by Abbott (NYSE:ABT) for $25 billion).

The world’s largest pure-play medical device maker yesterday posted profits of $929 million, or 66¢ per share, on sales of $7.17 billion for the 3 months ended July 29 – a 13.3% increase for the bottom line.

Adjusted to exclude 1-time items, earnings per share were $1.03^*, 2¢ ahead of The Street, where analysts were looking for sales of $7.17 billion. Medtronic said sales grew more that 5% on a constant-currency basis.

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