Boston Scientific Corp. agreed to acquire closely held Sadra Medical Inc. for as much as $386 million to compete in the $2.1 billion market for implantable cardiac valves that don’t require open-heart surgery.
Boston Scientific, the owner of 14 percent of Sadra, will pay $193 million upfront, with additional payments of as much as $193 million for certain milestones, the companies said in a statement. The purchase fits within a Boston Scientific goal, announced today by Chief Executive Ray Elliott, to expand in asthma, diabetes, obesity and heart valve disorders.
Boston Scientific, based in Natick, Massachusetts, faces an industrywide slowdown in its two biggest markets, heart-rhythm devices and cardiac stents used to open clogged arteries. The company will cut costs to improve profitability over three years, and seek to double sales growth to 6 percent to 8 percent within five years, Elliott said.
“We have quietly, carefully put together a plan to drive growth,” Elliott said at a meeting with investors and analysts in New York to describe his long-term strategy.
Boston Scientific rose 21 cents, or 3.2 percent, to $6.77 at 4 p.m. in New York Stock Exchange composite trading. The shares declined 17.5 percent in the past 12 months.
The acquisition of Los Gatos, California-based Sadra puts Boston Scientific in competition with heart-valve maker Edwards Lifesciences Corp., of Irvine, California, and Minneapolis-based Medtronic Inc., which paid $700 million to acquire CoreValve, another valve maker, in 2009. Boston Scientific “looked at” CoreValve prior to Medtronic’s acquisition, Elliott said.
“We didn’t feel that was the winning technology,” he said. “We feel the deal we did today was the winning technology.”
Edwards’s new valve, which is implanted using a thin wire threaded through the arteries, reduced death rates in a study of patients too sick for open-heart surgery. Abbott Laboratories, based in Abbott Park, Illinois, and New Brunswick, New Jersey- based Johnson & Johnson, the world’s largest maker of health products, are among those seeking deals to enter the market for transcatheter valves, said Antoine Papiernik, managing partner at Sofinnova Partners in Paris, in a telephone interview. While the Edwards valve is cleared for sale in Europe, it hasn’t been approved for U.S. use.
Implantable Valve Market
If the ongoing medical trials of Edwards’ valve show it also works for less severely sick patients, the market for the new valves may reach $2.1 billion by 2015, said Larry Biegelsen, a Wells Fargo Securities analyst based in New York, in a note to investors.
The Sadra acquisition will lower Boston Scientific’s earnings by about 1 to 2 cents a year through 2013, then add to the company’s earnings, according to the statement.
Acquisitions will continue to be a part of the company’s growth strategy, Elliott said. It expects to end 2010 with $1.6 billion in cash and to generate $7 billion in cash flow in the next five years, he said.
Today’s five-hour meeting “will get some investors to take a fresh look, particularly as they do deals to build a pipeline,” Mike Weinstein, an analyst at JPMorgan Securities in New York, said in an e-mail.
Boston Scientific had $624 million in cash and short-term investments as of Sept. 30, according to data compiled by Bloomberg. Over the past five years, the company has announced nine pending or completed acquisitions, with an average size of $6.37 billion and an average premium of 9.7 percent. The biggest deal was the $25.2 billion purchase of Guidant Corp. in 2005.
The company’s goal is to deliver about $5 a share of increased per-share earnings during the next three years, Elliot said. The company hasn’t had a full-year profit since 2005.
Boston Scientific has 150 new products in its research pipeline, Elliott said. The company also sees “huge opportunity” to expand sales in emerging markets, including China and India, and will invest as much as $40 million through 2011 to develop those markets, Elliott said.
Compound annual sales growth should average about 6 percent through 2015, with half the growth coming from new markets, Elliott said.
“It is too early for Boston Scientific to get much credit for their pipeline growth story,” Derrick Sung, an analyst at Sanford C. Bernstein in New York, said in a note to clients. The growth areas “all sound very promising, but the success rate for new medical device technologies remains low and Boston Scientific does not have the track record to give us confidence that they will necessarily execute successfully.”
Boston Scientific will cap its research spending at $1 billion annually, while shifting about 30 percent of the budget to higher-growing product areas than its current businesses, Elliott said. The company also aims to reduce manufacturing costs and to trim about $200 million in “waste” from its research spending, he said.