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Anniversary Triggers Edwards Takeover Speculation

Anniversary Triggers Edwards Takeover Speculation

By VITA REED

Two years after spinning off from Baxter International Inc., Edwards Lifesciences Corp. is the subject of industry speculation that the Irvine heart valve maker once again could become part of a larger company.

Biomedical industry sources cite Edwards as being on the radar screen of several larger players interested in tapping into the company’s stronghold, tissue heart valves.

The talk has been triggered by the April 1 expiration of a tax provision related to Edwards’ break from Deerfield, Ill.-based Baxter. Up to now, an Edwards acquisition would have resulted in unfavorable tax implications for its former parent. Edwards management was barred from agreeing to a sale or merger under the terms of the spinoff.

Some analysts and industry sources cite good reasons for the talk, not the least of which is Edwards’ stake in profitable tissue heart valves.

But other analysts and industry officials offer compelling reasons as to why an Edwards buy isn’t imminent. The main counterargument: Edwards’ lackluster revenue growth.

The list of potential suitors is long and includes some of the industry’s top names, according to sources: Johnson & Johnson, Medtronic Inc., Guidant Corp., Boston Scientific Corp. and St. Jude Medical Inc.

Edwards spokesman Scott Nelson declined comment for this story. So did officials from companies cited as possible acquirers of Edwards.

“We don’t respond to rumors or speculation about our M & A; activity,” said Christine Campbell-Loth, a spokeswoman for Minneapolis-based Medtronic, Edwards’ key rival.

Campbell-Loth did say Medtronic always is looking at expanding its existing business lines or finding new potential growth areas.

An analyst who spoke on background said he hasn’t heard anything specific about Edwards but doesn’t discount the notion the company could be in play.

“The Edwards brand name is just so good. I can certainly see (why) a bigger company would want that,their heart valve franchise is tremendous,” the analyst said.

Edwards’ credibility among cardiac surgeons is attractive to any potential suitor, the analyst said.

In fact, the analyst said, “We’ve been frustrated that they’ve not gone to more aggressive extremes” to take advantage of the Edwards name.

Edwards is named for the late Lowell Edwards, a biomedical pioneer who began working out of his Santa Ana garage in the 1950s and is credited with co-inventing the first commercially viable artificial heart valve.

As for potential buyers, “J & J; is always logical,” the analyst said. “(Guidant has) openly talked about building their cardiac surgery business, but they haven’t done much yet.”

Not everyone on Wall Street shares such views.

“I would be skeptical,” said Timothy Nelson, a medical technology analyst with US Bancorp Piper Jaffray in Minneapolis. “The reason is that their revenue growth rate is still (relatively) low. It would be a drag on a larger company’s growth rate.”

For the fourth quarter, Edwards reported sales of $160 million, down from $187 million in the year-ago period, due in part to the company’s sell off of slow-growing businesses. Sales were up 2.4% from the third quarter.

While consolidation has been a device industry trend, Nelson contends that buyers are looking for acquisitions that won’t dilute their growth prospects.

“You will hear talk as the (tax) anniversary date approaches,” said another analyst who follows Edwards. “But I’m not sure that the economics (make sense).”

That analyst, who asked not to be named, contends that larger medical device companies are more attracted to fast-growing companies because the acquirers are seeking to maintain 15% or better sales and profit growth rates.

Two oft-cited potential Edwards suitors, St. Paul, Minn.-based St. Jude and Minneapolis-based Medtronic, could run into regulatory roadblocks, according to sources. Edwards holds about 34% of the overall heart valve market, while St. Jude counts 30% and Medtronic 14%.

“The question is whether either one of those could take (Edwards) without FTC issues,” one analyst said.

In the past, Edwards officials have said they’re more likely to be acquirers in the industry’s ongoing consolidation. The company has worked to build up its business by investing in research and development and acquiring rights to develop more products to treat vascular diseases as part of a bid to expand beyond heart valves.

“I wouldn’t be surprised to see Edwards announcing technology acquisitions over the coming months,” said Chief Executive Michael Mussallem in a June interview. “We are more focused than ever on pursuing the addition of new technology.”

“They’ve made tremendous progress; they’ve been shedding anchors,” analyst Nelson said. “This is a longer-term process, however. They haven’t had the ability to do big acquisitions.”

Instead, Nelson said, Edwards has focused on joint ventures and minority investments as a way to goose revenue growth.

In December, Edwards acquired the rights to develop coronary stents in an exclusive pact with Fort Lauderdale, Fla.-based Orbus Medical Technologies Inc.

“Their valve franchise is better than good. It’s exceptional,they’ve displaced St. Jude Medical,” said Dr. Alexander Arrow, a medical technology analyst with Ladenburg Thiemann in Los Angeles.

But, Arrow said, “there is a big discrepancy in their growth rates (between) their heart valves and their very invasive catheters.”

Arrow was speaking of Swan-Ganz catheters, which makes up the second-largest portion of Edwards’ revenue.

Medical device consolidation has heated up during the past year. Johnson & Johnson, Medtronic and Tyco International Ltd. each made big acquisitions in 2001.

Medtronic bought MiniMed Inc. of Sylmar for $3.3 billion and paid $420 million for Medical Research Group Inc., a private company with ties to MiniMed.

Manufacturing and service conglomerate Tyco bought C.R. Bard Inc., a maker of various healthcare products, for about $3.3 billion last year. Tyco also snagged Mallinckrodt Inc. for about $3 billion.

Tyco isn’t a likely suitor for Edwards, though. The company, which has corporate operations in New Hampshire and is legally based in Bermuda, has struggled with a heavy debt load and plans to split itself into four companies.

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