Medical device giants looking to boost their atrial fibrillation product portfolios would do well to take a long, hard look at cardiac device-maker AtriCure (NASDAQ:ATRC).
Things have been looking up recently for Cincinnati-area AtriCure, and if the company hits a few near-term milestones its got in its sights, its price to a strategic acquirer will only rise. AtriCure appears likely to be the first company poised to obtain a label for the surgical treatment of atrial fibrillation (AF) from the U.S. Food and Drug Administration, and that could spark lots of interest from huge device firms like Medtronic (NYSE:MDT), St. Jude Medical (NYSE:STJ) and Johnson & Johnson (NYSE:JNJ).
But why not pull the trigger now?
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“We’re coming upon a time in which AtriCure’s strategic value will increase over the next 12 to 18 months,” said Matt Dolan, an analyst with Roth Capital Partners. “But you could make an argument that the company is an attractive acquisition as it stands today.”
The trends certainly seem to be lining up in AtriCure’s favor. First, there’s the mergers and acquisitions market in the medical device space, which is strong and likely to get even stronger in the coming years, according to Thomas Gunderson, an analyst with Piper Jaffray.
“Increasingly, large device companies are looking to the smaller players for their innovation,” Gunderson said. “If you want growth, you have to go out and buy it.”
There are plenty of recent deals for cardiac-device companies that bear that out. Last year, ATS Medical was acquired by Medtronic for $370 million, and AGA Medical was acquired for $1.3 billion by St. Jude. More recently, Boston Scientific this year purchased Atritech, which makes an atrial fibrillation device called the Watchman, in a deal that could be worth up to $375 million.
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Then there’s the AF market itself. A new report’s scope goes far beyond just AF — a condition characterized by abnormal heart rhythm — but it captures the trend, nonetheless. The U.S. cardiac rhythm management, electrophysiology and ablation device market is estimated at $8.1 billion and expected to grow to more than $12 billion by 2016, according to market research firm iData Research.
AF is projected to lead to 3.3 million hospitalizations by 2025, and while some AF cases can be treated with drugs such as the blood thinner warfarin, drugs don’t work for everyone suffering from the condition. That means there’s a market need for several different types of drugs, devices and procedure to treat AF.
“A-fib is a big market opportunity and a huge unmet need,” said Dolan. “It’s an area of cardiovascular care that a lot of the big players are interested in.”
Aside from market forces and market opportunity, AtriCure has one other big factor that should make it an attractive target for the big device firms: its own momentum.
Jan Wald, an analyst with Morgan Keegan, wrote the following about AtriCure in a recent note to investors: “AtriCure is executing on its plan. It is growing in the high teens and is likely to continue to do so. It is making good progress on its clinical trial program. It is introducing new products that should drive growth for the next three to five years.” (AtriCure CFO Julie Piton wasn’t available for comment for this article.)
If there’s any chink in AtriCure’s armor, it may be its approach to treating AF — though it’s a small chink, at most. The company’s ABLATE clinical trial, which could yield the much-coveted surgical AF label, is investigating an open-heart approach to treating AF with ablation, as opposed to a minimally invasive, catheter-based approach. As is the case with most surgical procedures, the minimally invasive approach is generally viewed as being more desirable, but that doesn’t mean the open-heart approach doesn’t have merit, according to Wald.
“All the real excitement is in catheter ablation, not surgical,” Wald said. “I personally think that’s a mistake.”
However, AtriCure is also in the midst of clinical trials for a “hybrid” AF procedure that combines catheter ablation with a technique that involves ablation via three small incisions between the ribs on each side of the heart. By investigating different techniques using its surgical devices, AtriCure may be positioning itself to control a larger share of the market once it obtains the necessary regulatory clearances.
Of course, no discussion of an acquisition would be complete without delving into the topic of price. To come up with a ballpark figure for a small-cap company like AtriCure, Piper Jaffray’s Gunderson recommends multiplying next year’s revenue by a factor between four and six. With analysts expecting sales of about $75 million in 2012, that’d put AtriCure’s price tag between $300 million and $450 million.
At such a seemingly reasonable price, AtriCure’s cardiac rhythm management devices would look pretty nice tucked into the portfolio of Medtronic, St. Jude, Boston Scientific or Johnson & Johnson’s Cordis division.
At this point, a deal appears more of a question of “when,” not “if.”
