Recently, leading medical devices company, Boston Scientific (BSX), decided to acquire California based Sadra Medical, a development stage company. Apart from an upfront payment of $225 million, Boston Scientific is liable to pay another $225 million on achievement of certain milestones through 2016. Based on the company’s current 14% stake in Sadra the actual upfront payment works out to $193 million in addition to $193 million of potential milestone payment.
The transaction, subject to approvals, is expected to close by the year -end or first quarter of 2011. The acquisition of Sadra Medical will dilute earnings by 1-2 cents for three years beginning 2011 and become accretive thereafter.
Sadra is developing percutaneous aortic valves replacement to treat patients with severe aortic stenosis. Recently, a series of feasibility studies of Sadra’s Lotus valve system was completed in Europe. With the acquisition of Sadra, Boston Scientific will be able to target the highly competitive market of percutaneous aortic valve replacement. This market, currently valued at $400 million globally, is expected to grow to $2 billion by 2016.
The market for percutaneous treatment for heart valves is very competitive with the presence of players like Edwards Lifesciences (EW) and Medtronic (MDT). In September, Edwards had presented encouraging data on mortality rates from a study of its Sapien transcatheter heart valve (THV). Moreover, it was also observed that the patients experienced a better quality of life under the Sapien treatment. Although the Sapien portfolio of valves is approved in Europe, it is yet to receive approval in the US.
In October, Medtronic received conditional approval from the US Food and Drug Administration (FDA) for studying its CoreValve system for transcatheter aortic valve implantation. The device is meant for patients suffering from symptomatic, severe aortic stenosis who are too weak to undergo open-heart surgery. The CoreValve system has been implanted in more than 12,000 patients outside the US since it received CE Mark approval in March 2007.
Recommendation
Boston Scientific had been witnessing declining revenues from two of its largest segments – Cardiovascular and Cardiac Rhythm management. However, the company has laid down several strategies such as expanding its product portfolio, selectively reinvesting in the business and concentrating more on non-DES and non-CRM areas to reposition the business.
In this respect, we believe the decision to acquire Sadra Medical is a smart strategic move by the company. The company believes that percutaneous aortic valve replacement is a fast-growing market within structural heart therapies.
For the long term, we have a Neutral rating on Boston Scientific. The stock retains a Zacks #3 Rank (Hold) for the short term.
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