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Why HeartWare International Shares Plummeted 18% Today

By Todd Campbell - Sep 2, 2015 at 12:19PM

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Heartware International is spending hundreds of millions of dollars in stock to purchase Valtech Cardio.

Source: Heartware International

What: After announcing a $425 million all stock acquisition, shares in HeartWare International (NASDAQ: HTWR) tumbled by as much as 18% earlier today.

So what: HeartWare International has agreed to buy Israeli-based Valtech Cardio for up to 5.9 million shares of stock. The acquisition nets HeartWare International Valtech Cardio's line-up of surgical and transcatheter valve repair and replacement products used in the treatment of mitral valve regurgitation and tricuspid valve regurgitation, which are the two most common heart valve diseases.

The acquisition is structured to include an upfront payment in the form of 4.4 million HeartWare shares and additional potential payments of 1.5 million shares upon the achievement of specific milestones.

Specifically, HeartWare has agreed to hand over 800,000 shares of itself if Valtech Cardio's Cardioband notches regulatory approval in Europe and another 700,000 shares upon the first implant of either Cardioband or Cardiovalve in a human patient.

HeartWare is also giving Valtech warrants to purchases 850,000 Heartware shares at $83.73 if Valtech product sales eclipse $75 million annually, and if sales cross above $450 million annually, Valtech will receive another $375 million, either in stock or cash at Heartware's discretion.

Overall, the acquisition expands HeartWare into a highly complementary market given that HeartWare's ventricular assist devices are often accompanied by a mitral or tricuspid valve procedure.

Now what: There are approximately 4.2 million and 1.6 million mitral and tricuspid valve disease patients in the U.S., respectively, and that could mean that the market opportunity associated with treating these conditions is worth billions of dollars.

Of course, tapping into that market opportunity depends a lot on HeartWare receiving regulatory go-ahead to begin marketing Valtech's next-generation products, including Cardioband. A decision is expected out of the EU on Cardioband later this year, and HeartWare anticipates filing for U.S. approval of Cardioband next year.

Although the deal has a lot of moving pieces that are giving investors pause, Valtech gives Heartware a significant opportunity to boost its revenue, which totaled $73.6 million in Q2. If so, then acquiring Valtech could ultimately help propel HeartWare to profitability. However, because of the dilutive nature of this deal, the potential risks associated with obtaining approval and commercializing these products, and the fact that HeartWare is likely to keep losing money for the foreseeable future, only risk tolerant investors might want to consider stepping in and picking up shares on the sell-off.

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