Engaged's managing member Glenn Welling said in a letter to HeartWare's board Monday that the company should either call off its Valtech deal or face a proxy campaign.
The investor noted the dilutive effect of the Valtech deal on HeartWare shareholders. Investors immediately expressed their displeasure with the all-stock deal Monday, pushing shares down 24% from the $81.81 per share price at market close Sept. 1 before the deal was announced.
Shares of HeartWare rose to $56.08 Monday afternoon after Engaged publicized its letter. However, shares are currently down 3.2% at $54.17.
The problem with the Valtech deal, according to the investor, is it takes the company's focus off its left ventricular assist device market.
A statement from HeartWare, responding to the activist's letter, stressed Valtech's mitral and tricuspid repair and replacement platform would aid HeartWare's leadership in the heart failure market. The statement also added that the company has received positive feedback from physicians about the target's Cardioband product.
Yehuda, Israel-based Valtech, in addition to its upfront payment, is eligible to receive milestones of up to $122.7 million, also to be paid in shares, and an earn-out payment of $375 million (in cash or stock at HeartWare's discretion) once Valtech products have reached $450 million in sales during the trailing 12-month period. There is also a provision for the issuance of warrants to purchase 850,000 shares of HeartWare at a price of $83.73, linked to the milestone of attaining $75 million in net sales for the trailing 12 months.
Engaged said LVAD devices serve an unmet need, have strong reimbursement and target an under-penetrated patient population. HeartWare's flagship device, HVAD, has 33% market share in the U.S. and 60% market share in the international market, according to Engaged's letter.
However, the main problem with the Valtech deal, according to the activist, is that it will make HeartWare less attractive as a sale prospect -- something Welling believes the company should do.
"There is no credible standalone plan that, on a risk-adjusted basis, will generate as much value as a sale to a strategic acquirer," Welling said in his letter to the board. "The recent acquisition of the company's only competitor and the significant interest shown in the asset validate our assertion. However, the decision to approve the acquisition of Valtech leaves us concerned that the board does not understand, or worse yet, is actively attempting to thwart, this inevitable outcome."