Citing “greater critical mass and revenue-generating opportunities” as key benefits, ev3 (Plymouth, Minnesota) and FoxHollow Technologies (Redwood City, California) Sunday unveiled a plan to merge in a $780 million cash and stock transaction. The proposed merger would create a new company with a market capitalization of about $1.7 billion, based on the companies’ closing stock prices on Friday.

“The two companies fit together like hand-in-glove,” Jim Corbett, president/CEO of ev3 told Medical Device Daily. “It’s like a LEGO-fit.”

ev3 is focused on endovascular technologies for minimally invasive treatment of vascular diseases and disorders. FoxHollow develops minimally invasive devices for the removal of plaque and thrombus for the treatment of peripheral artery disease (PAD), its flagship product the headline-making Silverhawk device.

FoxHollow shareholders would receive 1.45 shares of ev3 common stock plus $2.75 in cash for each share of FoxHollow common stock they own. Based on the companies’ closing stock prices on Friday, this represents $25.92-a-share consideration to be received by FoxHollow shareholders, or roughly $780 million, and a premium of more than 20% to the 30-day average trading price for FoxHollow’s shares.

With transaction close, FoxHollow stockholders would own about 41% of the combined company, and ev3 stockholders about 59%.

The companies said they expect to complete the merger in the fourth quarter.

According to the companies, ev3 and FoxHollow’s combined scale will create an organization that will have one of the largest U.S. distribution footprints in endovascular devices with one of the broadest and most technologically advanced product offerings.

The combined portfolio would include a broad spectrum of products to treat vascular diseases in both the peripheral and neurovascular markets, including atherectomy and thrombectomy, PTA balloons, stents, embolic protection devices, infusion catheters/wires, embolic coils and liquid embolics. It would also have direct operations or independent distributor presence in more than 60 countries, with more than 1,500 employees.

Corbett told MDD that he has become acquainted with John Simpson, CEO and founder of FoxHollow, over the past 18 months, and that they had discovered that they are like-minded. He said they both believe the primary way to drive a company is through product innovation.

“This combination,” Corbett said, “brings together two organizations that share a deep commitment to advancing the treatment of peripheral and neurovascular disease. By combining our respective strengths, we believe we can develop innovative technologies to address the needs of endovascular specialists and their patients, while also providing significant growth opportunities for employees and shareholders.”

Following transaction close, Corbett would become CEO and chairman of the combined company, and Simpson will become chief scientist and vice chairman. The new company’s board will include 10 members, six nominated by ev3, four by FoxHollow.

The merged company will be headquartered in Plymouth, with operating and manufacturing divisions in Irvine and Redwood City, California. Its main international office will be in Paris.

“Let me just say I’m very excited about this transaction, certainly it provides opportunities and it will provide opportunities for our employees, our customers, and our shareholders,” Simpson said during a Monday morning conference call. “[W]e will expand our position as a global leader with a larger portfolio of products to better serve our patients’ needs.”

The companies said that the merger is expected to produce annual cost savings in excess of $40 million. As a result, the combined company expects to generate adjusted EPS of 60 cents-70 cents in 2008 and 90 cents-$1.10 in 2009.

The operating income of an ev3/FoxHollow combination will be significantly enhanced, via added resources to fund R&D programs, future innovations and clinical studies, the companies said.

“A now-larger, more diversified [ev3] is closer to becoming a more profitable, faster-growing company sooner than expected as they leverage the combined sales force and eliminate duplicative expense,” Rick Wise, med-tech analyst with Bear Stearns, wrote in a research note.

ev3 and FoxHollow expect sales of the combined company to reach $585 million-$615 million in 2008 and $700 million-$750 million in 2009.

Wise also said that the combined sales force of the new company would be one of the largest in the endovascular space at nearly twice the size of other players like Johnson & Johnson (New Brunswick, New Jersey), Boston Scientific (Natick, Massachusetts), Abbott Laboratories (Abbott Park, Illinois), and Medtronic (Minneapolis).

“There are multiple areas of cross-selling here for both businesses, but one of the areas where there may be potential for channel conflict would be atherectomy vs. stenting, and John historically has not been a huge believer in stenting and obviously stenting is an important component of ev3 going forward, so how do you deal with that channel conflict?” asked David Lewis, an analyst with Morgan Stanley, during the conference call Monday.

Corbett and Simpson responded that they do not see a channel conflict.

“Some of what I’ve said about stenting is a little bit tongue-and-cheek in the past,” Simpson said, “but I do believe that there’s an opportunity to use both technologies. I think there’s an opportunity to now absolutely give the physicians all the technologies that they would like to have to treat peripheral artery disease. We all have our biases for what might be the most favorable, but inevitably the patient is better served when more alternatives are available, and this is a huge commitment to doing that.”

FoxHollow is best known for its Silverhawk technology for mechanical removal of plaque from the vasculature and last year it made headlines via a deal with Merck (Whitehouse Station, New Jersey) to supply the big pharma with biological samples for new drug discovery.

Merck paid $95 million to buy stock equaling an 11% stake in the company and committed to another $100 million over the next four years to expand the collaboration.