St. Jude Snaps Up AGA Medical

St. Jude Medical Inc. has entered the latter half of the year with a whopper of a buyout.AGA Medical Holdings Inc., a maker of devices for structural heart defects and vascular problems, will be acquired in cash-and-stock deal worth nearly $1.1 billion. St. Jude officials said the deal would not affect the company’s earnings outlook for 2010.

At $20.80, St. Jude’s offer is a premium of 41 percent compared to AGA’s closing price on the day the purchase was announced (Oct. 15). The deal, expected to close by the end of the year, also calls for St. Jude to assume $225 million of AGA’s debt (which brings the value of the deal closer to $1.3 billion). Officials at St. Jude said the acquisition would aid in the firm’s diversification into faster-growth treatment areas beyond its core heart rhythm management line of implantable cardioverter defibrillators and pacemakers—markets that have been slowed down. Defibrillators and pacemakers currently make up almost 60 percent of St. Jude’s $4.7 billion in annual revenue.

According to a regulatory filing, AGA officials agreed to pay a breakup fee ranging from about $21.7 million to $32.5 million if it were to terminate the merger agreement with St. Jude.

According to Rick Wise, analyst with Leerink Swann Healthcare Equity Research, the deal represents “a clearly positive strategic and financial fit.” He added that AGA’s extensive structural heart disease portfolio would “propel” St. Jude into one of the fastest-growing areas on the cardiovascular device sector—minimally invasive structural heart applications.

“Given AGA’s double-digit, growing top line and significantly higher gross margins, it should further accelerate St. Jude’s sales growth and margin expansion,” Wise wrote in research note.

AGA makes a variety of patches and plugs to fix holes and other structural defects in the heart in minimally invasive ways. It is a small market, but has growth tremendous potential—making the firm a particularly attractive acquisition. Many analysts say the market for devices to treat structural heart defects could represent $1 billion-plus opportunities for industry—though most of the technology currently is in early stages.

AGA sells a closure device for atrial septal defect, which is a hole in the wall that separates the heart’s upper chambers. The Amplatz Septal Occluder, a tiny device used to close holes in the heart, accounts for about 50 percent of the firm’s revenue. In the past, patients with this condition were treated with open-heart surgery. AGA also sells vascular plugs that are used to block blood flow to diseased peripheral vessels and tumors.

The biggest potential for growth is expected to come from expanded indications for its products. AGA currently has a closure device in clinical trials for the treatment of patent foramen ovale, or PFO, another type of hole between the heart’s upper chambers that may be linked to stroke or migraine headaches. In addition, the company also is testing a left atrial appendage closure device that, officials claim, has potential to reduce the risk of stroke in patients with atrial fibrillation.

According to St. Jude CEO Daniel Starks, AGA has “a strong core business with an enviable pipeline of products and clinical trials.”

St. Jude is the second-biggest maker of pacemakers and defibrillators, after Minneapolis, Minn.-based Medtronic, Inc. Natick, Mass.-based Boston Scientific Corp., is third in the market. St. Jude has gained market share recently due to recent setbacks at its competitors, firms are eager to find the next blockbuster in cardiovascular devices.Last year, for example, Medtronic paid more than $700 million for Irvine, Calif.-based CoreValve, which makes an aortic valve replacement product.

John Barr, AGA’s CEO, will report to Frank Callaghan, president of St. Jude’s cardiovascular division. For the foreseeable future, St. Jude also plans to keep AGA’s location in Plymouth. St. Jude has 14,000 employees worldwide (2,500 in Minnesota). AGA has 550 employees worldwide (400 in Minnesota). Officials did not expect for the deal to lead to any layoffs.

Founded in 1995 and based in Plymouth, Minn., AGA went public in October 2009 for $14.50. The firm had almost $200 million in sales in 2009, and predicts at least $217 million in sales in 2010. The company is named for three founders: Kurt Amplatz, Franck Gougeon and Michael Afremov.