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Second activist investor buys 5% stake in HeartWare, putting Valtech deal in doubt

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MVAD pump--Courtesy of HeartWare

HeartWare's ($HTWR) acquisition of Israeli cardiac implant maker Valtech Cardio is now in even greater jeopardy.

Reuters reports that a second group of activist investors, led by former J.P. Morgan CFO Doug Braunstein, purchased a 5% stake in the struggling company in hopes of blocking the transaction.

Braunstein and other investors at hedge fund Hudson Executive Capital were no doubt encouraged by the recent 30% plunge in HeartWare's stock price following news at the J.P. Morgan Healthcare Conference that the trial of its next-generation MVAD ventricular assist device would be delayed due to patient safety and product design issues.

In October, fellow activists Engaged Capital purchased a 1.3% stake in HeartWare. The firm earlier this year nominated a trio of members to HeartWare's 9-person board of directors.

Both groups oppose the company's stock-based acquisition of Valtech, saying the deal is too risky and dilutive to existing investors.

The acquisition was worth $929 million based on HeartWare's closing price of $81.81, as of market close on Sept. 2, when the deal was announced. Wall Street greeted the announcement with disgust, immediately pushing the stock down 16%. The deal involves the issuance of at least 4.4 million new shares to the 17 million outstanding.

HeartWare now trades around $30 due to continued opposition to the deal and a string of bad news related to the investigational MVAD, though they rose 5% on news of Hudson's stake in the company. Hudson paid $39.15 per share for the 5% stake, according to Reuters.

The activists want HeartWare to focus on its core ventricle assist device business and set itself up to be acquired. After all, HeartWare is one of only two players in a device segment with steep barriers to entry.

St. Jude Medical paid a steep premium when it acquired rival Thoratec for $3.4 billion. To receive a similarly lucrative deal, HeartWare must obtain an expended indication possessed by its rival that would enable its HVAD device to be used as a long-term "destination therapy" and not just on those patients awaiting a transplanted heart.

There was some good news on that front at J.P. Morgan. HeartWare said that based on promising data from a second trial, it intends to submit for FDA approval of the new use in mid-2016, 6 months earlier than previously expected.

The Cardioband for minimally invasive mitral valve repair--Courtesy of Valtech Cardio

Valtech boasts the CE-marked Cardinal annuloplasty ring system for surgical mitral valve repair and Cardioband for minimally invasive, percutaneous mitral and triscupid valve repair. It's developing two additional implants for mitral valve replacement, including one that is installed using the minimally invasive transcatheter technique.

Transcatheter mitral valve repair and replacement has the potential to exceed the multi-billion market for transcatheter aortic valve replacements. But Hudson and Engaged Capital point out that the market is in its early stage, and far from a sure shot.

"There's been really a few months ago $1.5 billion roughly spent on about 80 patients, 40 of whom are dead," Boston Scientific ($BSX) chief medical officer Dr. Keith Dawkins commented on the run to acquire companies in the field during remarks at J.P. Morgan. (Though Boston Scientific recently disclosed an option to acquire one of them, dubbed MValve.)

According to The Wall Street Journal, Engaged Capital also opposes HeartWare's insertion of a "poison pill" in the Valtech deal to ward off potential acquirers if the acquisition goes through.  

HeartWare responded to Engaged Capital, and now Hudson Executive Capital, by adding former Medtronic ($MDT) exec and NEA partner Dr. Stephen Oesterle to its board.

The deal was originally expected to become official in late 2015, but closure (if it occurs at all) is now scheduled for early-2016.

- here's Reuters' take
- here's the Wall Street Journal's take (sub. req.)
- here's HeartWare's release about Dr. Stephen Oesterle

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