St. Jude Medical Inc. will acquire AGA Medical Holdings Inc. for $1.1 billion in a cash-and-stock deal that it hopes will boost its portfolio of products that fix heart defects.

The purchase should help Little Canada-based St. Jude diversify away from its bread-and-butter offerings of pacemakers and implantable cardioverter defibrillators, a mature market with limited growth.

Plymouth-based AGA makes a variety of patches and plugs to fix holes and other structural defects in the heart in minimally invasive ways. That market, while currently small, has tremendous potential.

AGA "has a strong core business with an enviable pipeline of products and clinical trials," said Daniel Starks, St. Jude's chief executive. St. Jude also will assume about $225 million in debt, bringing the total value of the deal to $1.3 billion.

AGA stock shot up more than 40 percent to close Monday at $20.70, just below the proposed purchase price of $20.80. St. Jude stock was up 1.8 percent to close at $40.63.

Analysts said the deal makes sense, given St. Jude's search for new avenues for growth.

"St. Jude is clearly trying to line up an opportunity long-term," said Phil Nalbone, an analyst with Wedbush Securities in San Francisco. "It's a step in the right direction in terms of diversification."

St. Jude is the second-biggest maker of pacemakers and defibrillators, after Fridley-based Medtronic, Inc. Natick, Mass.-based Boston Scientific Corp., which has a manufacturing facility in the Twin Cities, is in third place.

While St. Jude has picked up market share because of recent setbacks at its competitors, all three companies are busy looking for the next blockbuster in heart medicine. In much the same vein as the St. Jude-AGA merger, Medtronic last year paid more than $700 million for CoreValve, a company in Irvine, Calif., that makes an aortic valve replacement product.

AGA survived bitter dispute

AGA is named after its three founders: Dr. Kurt Amplatz, Franck Gougeon and Michael Afremov. Despite a bitter legal dispute early on over control of the company, AGA has become a leader in the small but growing area of treatments for structural heart disease, with $119 million in sales last year.

The Amplatz Septal Occluder, a tiny device used to close a hole in the heart, accounts for about 50 percent of revenue. In the past, people with a hole in the heart faced open-heart surgery.

Nationwide, the volume of procedures using pacemakers, stents, angioplasties and heart bypass surgeries has fallen, even as less-invasive treatments have increased, said Dr. Gregory Helmer, an interventional cardiologist at University of Minnesota Heart at Fairview.

One reason is that patients tend to prefer a small device, inserted through a vein or artery or very small incision, over open-heart surgery. Another reason is the growing realization that holes in the heart can contribute to strokes.

Helmer, who has used the devices on his patients for about five years, said AGA "kind of led the way in terms of superiority of use." Helmer has no financial ties to AGA.

Deal offers new markets

The acquisition gives St. Jude an opportunity to seize the lead in several new markets, chief financial officer John Heinmiller said.

One of the most promising products in AGA's pipeline, he said, is a device that closes the left atrial appendage, a muscular pouch connected to the left atrium of the heart.

In healthy people with a strong heart rate, blood is pumped in and out of the left atrium of the heart and empties out completely from the appendage. In people with abnormal heart rhythms, blood can get left behind in the appendage, stagnating and potentially forming a clot that can travel elsewhere in the body and contribute to a stroke.

AGA has developed an occlusive device that stops blood from flowing into the appendage, eliminating the risk of a blood clot. "The market is potentially huge," Heinmiller said. That product is already sold in Europe and is in early clinical trials in the United States

Company executives are expected to discuss the transaction during St. Jude's third-quarter earnings call with Wall Street analysts Wednesday. Judging by the smallness of the bump in St. Jude's share price Monday, the AGA deal appears not to have dispelled concerns over growth in the market for defibrillators and pacemakers, which currently make up almost 60 percent of St. Jude's $4.68 billion in annual revenue.

"As positive as this deal might be in the long term, it doesn't answer questions about the sustainability of the market share of ICDs," Nalbone said.

Deal to close by year-end

Under the deal, holders of AGA stock will receive $20.80 for each share in the form of cash and/or St. Jude stock. The exchange will likely begin around Oct. 20 and last at least 20 business days. Officials expect the deal to close by the end of the year.

AGA's chief executive, John Barr, will report to St. Jude's cardiovascular division president, Frank Callaghan. St. Jude plans to keep AGA's current location in Plymouth.

St. Jude has 14,000 employees worldwide, 2,500 of them in Minnesota. AGA has 550 employees worldwide; 400 in Minnesota. Officials said they don't expect the acquisition to result in any job losses.

"This deal is built for growth," Heinmiller said. "We need all of our people."

Chen May Yee • 612-673-7434