Medtronic Inc. (NYSE: MDT) said Thursday that it will acquire ATS Medical Inc. (NASDAQ: ATSI) for $370 million in cash and debt, a move that further expands the medical device’s giant foray into the fast growing market for products that treat structural heart disease.
Medtronic, based in Fridley, Minnesota, will pay $4 for each share of ATS Medical, headquartered in Plymouth, Minnesota. Though Medtronic’s offer represents a 54 percent premium over ATS Medical’s closing price of $2.54 Wednesday, another bidder could emerge, said Tim Lee, an analyst with Piper Jaffray in San Francisco.
“We think ATS offers compelling strategic value to any acquirer,” Lee wrote in a note to investors. “ATS provides the acquirer with a leading mechanical valve franchise, an emerging tissue valve franchise, and most importantly, an R&D pipeline in transcatheter valves.”
Lee notes Edward Lifesciences, a major maker of trancatheter valves, will lose its patent protection in 2011 or 2012.
“As such, we think any company working towards entering the transcatheter space may be giving a long hard look at ATS if they haven’t already done so,” Lee wrote.
Cardiovascular technology, including replacement heart valves and atrial fibrillation (unusual heart quivering) therapies, has been one of Medtronic’s fastest growing units. In fiscal 2009, cardiovascular revenue jumped 15 percent to $2.44 billion from the previous year.
“The acquisition of ATS Medical will further strengthen our CardioVascular business,” Scott Ward, Medtronic senior vice president who runs the company’s cardiovascular business, said in a statement. “ATS is an innovative and successful company that is well respected by cardiac surgeons throughout the world.”
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
The company has also aggressively pursued the market through acquisitions. Last year, Medtronic spent over $1 billion to acquire CoreValve Inc. in Irvine, California and Ventor Technologies Ltd. in Israel. Both companies are developing ways to implant replacement heart valves through catheters snaked up the groin instead of cracking open the chest in major surgery.
In 2008, Medtronic acquired CryoCath Technologies Inc. for about $380 million. The Canadian company makes catheters (tubes) that can deliver subzero temperatures to the heart. The technology restores normal electric signals by freezing the tissue or pathways behind the irregular quivering. Last month, Medtronic said the first results from its clinical trials of CyroCath technology showed the therapy was far more effective at treating atrial fibrillation than drugs.
The companies estimates the combined market size for heart valves and atrial fibrillation to be $4 billion.
With ATS Medical, Medtronic will inherit the Open Pivot bileaflet mechanical and 3f pericardial valve technology, along with its CryoMaze family of ablation products, which is similar to CyroCath’s products. Last year,the company’s heart valve therapy revenue grew 17.7 percent to $56 million from $47.6 million in 2008. Revenue from its CryoMaze cryoablation products increased 11.8 percent to $18.9 million.
ATS Medical, however, has struggled to generate profits. The company lost $6.3 million last year, a significant improvement over 2008 when it lost $19.3 million. ATS Medical said 2010 sales will grow seven to eight percent, about half its growth rate last year. The company’s stock hasn’t hit $4 a share in over five years.
Analysts say ATS stuck with mechanical valves too long, allowing competitors like Edwards Lifesciences to dominate tissue-based catheter market. However, the company’s Forcefield technology, a device that prevents blood clotting caused by mechanical devices, could be a game changer, some analysts think.
In a brief phone interview, ATS CEO Michael Dale said Medtronic’s sales and marketing prowess will speed ATS Medical products more quickly to market. Medtronic and ATS are a good strategic fit, he said.
“ATS represented an outstanding platform in the surgical space for Medtronic to build on,” Dale said.
