(Story updated at 1:50 p.m. Eastern.)
St. Jude Medical has forged a $3.4 billion deal to acquire cardiovascular device company Thoratec to diversify its portfolio of heart failure products.
The deal comes as St. Paul, Minn.-based St. Jude reported lagging sales in its cardiac rhythm management business, its largest by revenue. The deal also builds on St. Jude's May 2014 acquisition of CardioMEMS, which makes a wireless technology that's placed in the pulmonary artery to measure cardiac performance.
St. Jude will pay $63.50 per share for Thoratec in the all-cash transaction. Pleasanton, Calif.-based Thoratec manufactures the HeartMate ventricular assistance devices for heart failure patients.
The current generation of ventricular assistance devices—while lifesaving for patients awaiting a heart transplant—are cumbersome because they feature external battery packs and need to be charged every four to six hours. “To take them to the next level, there have to be some technological leaps,” said Maxim Jacobs, an analyst at Edison Investment Research.
As a major medical device player, St. Jude has the resources to continue the evolution. “You have a giant company that obviously made the strategic decision that they want to do well in LVADs (left ventricular assistance devices),” Jacobs added.
The next-generation VADs could also increase the number of hospitals that are able to implant them. “As they improve the device, and they lower the number of days patients spend in the hospital, then it becomes a profitable program for the hospital,” Jacobs said.
The Thoratec agreement includes a “go shop” period, which allows the company to solicit alternative bids over the next 30 days. If Thoratec finds another suitor during that period, it will pay $30 million to St. Jude. After the go-shop period, the termination fee rises to $111 million.
The relatively small termination fee opens the door for a company like Medtronic or Boston Scientific to swoop in, Jacobs said. Alternatively, those companies could be taking a closer look at HeartWare, Thoratec's main competitor.
The medical device space has suffered from stagnant sales as hospital volumes decline and insurers place restrictions on reimbursement. That leaves companies vulnerable to market share losses when a competitor moves in. “A lot of it is just physician preference,” Jacobs said.
Even when adjusting for foreign currency exchange rates, St. Jude reported a 1% decrease in second-quarter cardiac rhythm management sales compared with the prior-year period.
However, its atrial fibrillation and structural heart and vascular products had a stronger performance, with sales increasing 18% and 7%, respectively, on a constant currency basis.
Overall, the company reported that total sales in the second quarter declined 3% to $1.4 billion, though the decrease was largely due to unfavorable currency exchange rates. On a constant-currency basis, sales would have increased 6% year over year.
Net income was $290 million in the second quarter, up from $270 million in the second quarter of 2014.
St. Jude also raised its earnings forecast for the full-year. The company now expects 2015 revenue to increase 4% to 6% year over year, up from last quarter's projection of 4% to 5%. However, it said the adverse currency impact will be as much as $385 million to $410 million.
Earnings per share are now expected to be in the range of $3.96 to $4, up from its earlier projection of $3.92 to $3.97.