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Will Medtronic's Twelve Buy Expedite Growth in Mitral Valves?

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In an attempt to enter the billion dollar transcatheter mitral valve replacement (TMVR) market, Medtronic plc (MDT - Free Report) recently agreed to purchase California-based medical device startup – Twelve, Inc. – for a total cash-and debt-free amount of $458 million. The transaction is expected to close in Oct 2015.

Notably, Twelve was formed through the twelfth spin-off by premier medical device incubator, The Foundry. Twelve is focused on developing a TMVR device that is yet to be commercialized.

On closure of the deal, Medtronic will pay $408 million to Twelve and the remaining $50 million will be payed once Twelve’s TMVR device wins CE Mark approval in Europe. Medtronic will incorporate Twelve’s TMVR device as part of its Coronary & Structural Heart division within the Cardiac and Vascular Group. 

Mitral valve regurgitation, a heart valve disorder characterized by backflow of blood, affected roughly 1.7% of the entire U.S. population in 2014 – comprising the largest segment of the total U.S. population suffering from heart valve-related disorders.

Twelve’s TMVR technology has been designed to treat inoperable patients suffering from mitral valve regurgitation. Post-acquisition, Medtronic believes this promising TMVR device, which incorporates a novel technology, will act as a significant growth opportunity for the company. This, in turn, will facilitate Medtronic’s expansion in the TMVR space.

Management at Medtronic expects this buyout to meet the company’s long-term financial metrics. Further, Medtronic expects the net impact from this deal to be neutral to earnings as the company intends to offset the dilutive impact of the transaction.

If we delve deeper into the TMVR market, we may note that currently, there exists no single approved TMVR device to treat mitral valve regurgitation. No doubt, an array ofmedical device developers, such as Medtronic, is currently targeting to make an impactful foray into this relatively underpenetrated market.

With this aim in view, in July 2015, Edwards Lifesciences Corp. (EW - Free Report) agreed to buy CardiAQ Valve Technologies – a privately held medical device developer of percutaneous mitral heart valve replacement system – for $400 million.

Following suit, Abbott Laboratories (ABT - Free Report) announced that it will acquire the remaining equities of Minnesota-based Tendyne (those that it already did not own), which is focused on developing minimally invasive mitral valve replacement therapies, for a total price of $250 million. Separately, Abbott also invested in Cephea Valve Technologies to develop a catheter-based mitral valve replacement therapy and secured an option to buy the company outright ona future date.

According to marketing analytics firm GlobalData, the compound annual growth rate (CAGR) for transcatheter aortic valve replacement (TAVR) market will increase 19.7% from 2013 to more than $3 billion in 2020. Since the TMVR patient population is almost four times the TAVR patient population, there is no doubt that the TMVR market will be worth more than the TAVR market.

We expect that the Twelve buyout will enable Medtronic to capture a considerable share of this huge market potential. However, since other medical device majors (as mentioned above) are also targeting to invade this market, how fast Medtronic manages to get the approval for the TMVR device is the crucial point. 

Currently, Medtronic carries a Zacks Rank #4 (Sell), while both Edwards Lifesciences and Abbott retain a Zacks Rank #3 (Hold). Abetter-ranked medical product stock is ICU Medical, Inc. (ICUI - Free Report) , with a Zacks Rank #1 (Strong Buy).

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