A Good Deal For Boston Scientific?!?!?

I am a hard-core skeptic and smart-ass when it comes to Boston Scientific (NYSE: BSX), but I have to give the company some props for a deal today that could really pay off long-term.

The Deal
Boston Scientific announced this morning that it was acquiring privately-held Atritech in a multi-stage deal. BSX will pay Atritech shareholders $100 million in cash upfront, with as much as $275 million more coming over the next four years if the company hits certain (unspecified) milestones.

Who/What Atritech Is
Atritech is attempting to get U.S. approval for its Watchman Left Atrial Appendage Closure technology. Put very very simply, the Watchman device that somewhat resembles a hot-air balloon or jellyfish and is designed to prevent blood clots from leaving the left atrial appendage of the heart and potentially causing a stroke or wreaking other havoc.

The device has an expanding nitinol frame and a polyester mesh that basically unfolds when deployed. One of the positive features is that it compacts down in such a way that it can be inserted relatively easily through a transcatheter procedure (not unlike how stents or angioplasty balloons are delivered). Like stents, it is designed to be left in place permanently.

The Watchman has been designed as a mechanical alternative to the treatment of atrial fibrillation. Atrial fibrillation, which affects anywhere from 3 million to 7 million people based on whose numbers you use, can be a very serious disease - due in part to the fact that it often leads to the formation of clots that migrate and cause problems like stroke. While some atrial fibrillation patients are managed with medication to stop or reduce the condition (like Multaq from Sanofi-Aventis (NYSE: SNY), others do not respond and go on clot-preventing drugs like warfarin. Unfortunately, warfarin has a lot of problems of its own and is not really a desirable long-term therapy.

A Big Market ... For The Right Device
With a market potential of $1 billion or more, many companies have tried to advance device-based approaches to the disease. Companies like Atricure (Nasdaq: ATRC) and Medtronic (NYSE: MDT) have gone the route of ablation (basically burning or freezing heart tissue to stop the a-fib). Others, like AGA Medical (since acquired by St. Jude (NYSE: STJ)) have tried the implant route.

So far, though, nobody has really captured the hearts and minds of doctors and the FDA. Defibrillation does not work all that often, and ablation success rates have been pretty mixed as well. In fact, so many mechanical approaches have been tried (unsuccessfully), I think some docs have gotten a little jaded about the market and device-based approaches. Still, build a winner and they will change their minds eventually. 

Questions Still To Be Answered
Although Atritech has promise, it's not a slam-dunk. The company's first pivotal study, PROTECT, was a success, but not an unqualified success. There was a 38% reduction in endpoint events (stroke, cardiovascular death, etc.) in the patients receiving the Watchman, and 87% of those recipients were able to discontinue warfarin within 45 days of the procedure.

Unfortunately, there were some problems. The success rate of the implantation was 91% and that strikes me as a bit problematic, though perhaps that number can improve with training. Of greater concern to the FDA, though, was the relatively short duration of the study (for what will be a lifetime implant) and the possibility that the study cherry-picked patients in a way that excluded those more likely to have bad outcomes.

As a result, though the company got a narrow FDA panel approval in April of 2009 (7 to 5 in favor), the FDA was not convinced. The FDA has insisted on a small confirmatory study, and the company has launched the PREVAIL study with an expected enrollment completion in 2012.

With that sort of enrollment completion target, it is probably not reasonable to expect FDA approval until 2015. That, in turn, is probably why the company is selling to BSX today. This is not a great funding environment for development-stage med-tech and Atritech probably was not going to get enough revenue and cash flow from its foreign sales of Watchman to avoid further rounds of dilutive financing.

The Bottom Line
For BSX, this is clearly not a deal that helps them today or tomorrow. It's a deal that could, however, pay big dividends in the future and give the company a credible chance of being a player in a major undeveloped market. Moreover, I do not think the company is overpaying - a lot of the purchase price is contingent and BSX may find that they ultimately paid less than 1x annual revenue from the device if everything works out.

Frankly, I would have liked to have seen a better outcome for Atritech. Atritech's CEO, Jim Bullock, is a really good guy - I worked with him when he was the CEO of Endocardial Solutions (which he sold to St. Jude a while ago) and we at Piper Jaffray were basically his go-to analysts and bankers. Still, a sale is a sale and this deal was likely the best choice of less-than-perfect menu of options.

Does this radically change the outlook for Boston Scientific? No way. A winning device in a-fib would be a big plus for this company, but that won't materialize for at least four years (if at all). By the same token, investors in BSX should expect more deals like this Atritech transaction. Boston Scientific needs to reinvent itself and recharge its pipeline. Unfortunately, BSX's current financial and stock market condition is such that buying hot near-term ideas is probably prohibitively expensive/dilutive. So, I look for them to keep doing deals whereby they acquire promising, but not fully proven, technologies with a lot of the purchase price hinging on ultimate success.