The biotech IPO market this year has made one thing obviously clear. It’s a wasteland when it comes to the same for medical devices.
“In contrast to biotech, the medtech IPO market has been notably weak in 2013,” says Roz Sweeney, an analyst with research and advisory firm Nerac, summing up the current device industry predicament. “There is a sense that medical device sales are becoming more commoditized and increasingly driven by price.”
In the third quarter for instance, there were 19 healthcare IPOs, 15 of which were of biotech firms, according to Renaissance Capital.
Given this context, there has been great excitement surrounding San Diego-based Tandem Diabetes Care’s initial pubic offering. Tandem, which has developed the world’s first touchscreen insulin pump closed its IPO last week raising $138 million by selling 9.2 million shares at $15 apiece.
The shares were initially priced at $13 to $15, so the final IPO price was in the upper range of what the company expected. Investor interest also led the company to increase number of shares that were offered in the IPO.
Tandem Diabetes’ positive experience with the IPO market was different than another device world IPO. In the summer, Nanostring Technologies, which makes a breast cancer diagnostic device, had to readjust its expectations when investors showed less enthusiasm for its IPO.
Given that Tandem had a good showing, does this mean that in 2014 device companies will have an easier time going public. Does this mark a turning point?
The answer is, well, not really.
“ I believe that based on this one data point, it might be a bit early to call this a definitive “turning point”, but it certainly is a long-awaited first step in the right direction.” says Paul Teitelbaum, in an email. Not sure yet if this translates to a robust IPO market for most medical devices in general, because the “high temperature” of this particular device space makes it a bit of an anomaly.”
In other words, diabetes is an exciting space and investors understand it given the market’s experience with similar public companies.
“Dexcom, a continuous glucose monitoring company for diabetes, is trading at 16x revenues (very high) and Medtronic recently announced FDA approval of their “artificial pancreas….,” Teitelbaum points out.
A Silicon Valley healthcare venture capitalist echoed Teitelbaum’s thoughts, in that just one company’s good performance doesn’t signal a broader green light for the device industry’s IPO prospects.
“I think that Tandem Diabetes is a classic example of a good device company that was ready to go public for which the market was understanding of their business and ready to invest in it. That does not mean there is a broad window for medical device IPOs,” says Ross Jaffe, managing director of medtech venture capital firm Versant Ventures. “The nice thing about Tandem is that being in the diabetes space it had some nice comparable companies in Insulet and Dexcom, both of which [like Tandem] went public post approval and with early revenue and both of which have now grown their revenues and their market caps are up significantly over the last year or so.”
But device industry experts broadly agreed that if like Tandem, there are a few more successful IPOs in the next several months, 2014 might bode well device industry IPOs.
“The short answer is that there has been a drought in med tech IPOs for 5 years and with the strength of biotech right now, I am sure some med tech hopefuls, having waited for years for the window to open for them, will test the waters and we'll see if the market embraces them,” says Dimitri Drone, PricewaterhouseCoopers U.S. Pharmaceutical & Life Sciences Deals Leader, “We need to hope that the first to potentially go out are strong and show well, as that will certainly have implications for the broader med tech market.
What kind of device companies would whet the appetite of investors?
“There are a number of medical device companies out there now with only early revenues (e.g., less than $10 million) and/or who address a market of less than $1 billion. Those won’t be candidates for a fully-underwritten IPO but rather an acquisition,” declares Teitelbaum of Mesirow Financial. “My estimates are that if a company has over $30 million in revenues, is growing at over 100% annually, addresses a market of at least $10 billion, and is on track to be profitable within 12-18 months, they could be a candidate for an fully-underwritten IPO.”
Jaffe noted that the bar will continue to be significantly high for any company going public in 2014.
“Companies will need to have FDA approval, showing significant size of revenue ramp and … have reimbursement in place so people can see the company achieving that growth,” Jaffe says. “Investors want a story that they can invest in, one in which they can see the path to growth.”
Neither Jaffe, nor Teitelbaum, however, were willing to identify device firms that currently meet their profiles for a successful IPO.
“I honestly don’t know how many of them are out there” that meet all the criteria and haven’t been bought, Jaffe noted.
[Photo Credit:iStockphoto.com user ozdigital]