Little Canada-based medical device company St. Jude Medical Inc. officially unveiled plans Wednesday for its largest-ever deal: a $3.4 billion proposal to acquire California heart-device firm Thoratec Corp.
St. Jude CEO Dan Starks told investors that the price — a 40 percent premium over Thoratec’s weighted 30-day average stock price — would be fair in light of the company’s long-term growth prospects and its strong position in devices that aid circulation in patients with failing hearts.
The deal would also saddle St. Jude with a lot of debt, though exactly how much is not yet clear. Two bond-ratings agencies said they may downgrade the company’s credit rating. Moody’s Investors Service said St. Jude may use new debt to fund the entire deal, which it called “richly priced.”
In an interview, St. Jude Chief Financial Officer Don Zurbay said the company plans to aggressively pay off the loans and return to more typical debt loads by the end of 2017. “The deal can really make a lot of sense strategically … but also financially, if we can pay down the debt fairly quickly,” he said.
Although the deal is scheduled to close by the end of the year, its outcome is far from certain.
Thoratec is actively soliciting acquisition offers from other companies for the next 30 days, during which it may accept a higher offer and pay St. Jude a $30 million termination fee. Even after the “go-shop” period ends, Thoratec can still accept a better offer and pay a fee of $111 million. The deal also needs approvals from regulators and shareholders.
Thoratec sells an implantable system called a left ventricular assist device, or LVAD, which mechanically pushes blood through the circulatory system for patients whose hearts are too weak or injured to do it by themselves. The advanced heart-failure devices retail for as much as $100,000, and Thoratec controls more than 60 percent of the market.
Thoratec recently got European approval to sell another type of circulatory-assist device called a percutaneous heart pump, or PHP, which pumps blood mechanically but is small enough to fit inside a delivery tube inserted in a blood vessel.
The companies’ joint news release, published before the markets opened Wednesday, said the two devices have a combined global market of $1 billion that will grow 10 percent annually.
Starks said the bid for Thoratec was a long-term move. He noted that about 80 percent of Thoratec’s sales are in the U.S., but company officials see “a familiar set of dynamics” in which global sales of popular devices continue growing for many years after U.S. growth levels off.
“The short-term [revenue] is really just a pot-sweetener,” Starks told investors Wednesday. “The heart failure space, long-term, is a place where we are winning, where we have an opportunity to win even bigger. And as we think about what do we want our heart failure business to look like five years out, the Thoratec portfolio is a very attractive part of that picture.”
Thoratec reported a $50.4 million profit on $477.6 million in revenue for the 12 months ended Jan. 3. That’s down from a $73.3 million profit on $502.8 million in revenue for the previous year.
The deal announcement came as St. Jude reported quarterly earnings Wednesday. The company posted a decline in sales because of swings in international currency rates, but it beat earnings forecasts in the three months ended July 4.
St. Jude reported adjusted earnings per share of $1.03, beating the analysts’ consensus estimates by 3 cents and exceeding the same quarter last year by a penny, after accounting for restructuring and other costs.
But like many U.S.-based companies that sell goods overseas, sales of medical devices in weaker currencies like the euro hurt the Minnesota manufacturer’s top-line revenue when reported in U.S. dollars.
Net sales were $1.41 billion in the quarter, a 3 percent decline.
The company said foreign currency differences shaved $118 million from sales. Without those differences, the quarter would have been a 6 percent increase.
St. Jude also released updated earnings guidance for the year.
Although currency impacts are likely to be more severe than expected for the full year, company officials said their constant-currency earnings per share forecast is in a range of $3.96 to $4 per share.
St. Jude shares dropped 4 cents Wednesday, to $76.67. Thoratec shares, which jumped 18 percent Tuesday after Bloomberg reported talks that could lead to a deal, gained another 10 percent Wednesday, or $5.88, closing at $63.46.