Originally Published MDDI May 2002

NEWS & ANALYSIS

John Bethune

Bess Weatherman: Looking for a few great companies.

During the last year, as investors have soured on all kinds of high-tech industries, the healthcare sector has become increasingly attractive. Medical device companies in particular accounted for a dominant share of recent IPOs, and in the first quarter of 2002 have turned in double-digit earnings growth, according to most analysts.

In this environment, one of the major venture-capital players in the field, Warburg Pincus LLC (New York), has stepped forward with a bulging wallet, looking hard at the medical device industry. The private equity firm announced on April 29, 2002, the final closing of a huge $5.3 billion global investment fund (known as WP VIII). Although the fund will be investing in a variety of industries, it can be expected to put a substantial share of its cash into the medical device sector.

According to Warburg Pincus managing director Bess Weatherman, who specializes in medical device investments, the fund has no quota for medical device investments. "One of the core Warburg Pincus philosophies is that we can, at any given period, choose the best places to invest our money," she says. "All that being said, if you look at a rolling average of all our funds, healthcare investing overall has accounted for 20 to 25% of our capital." Within the healthcare sector, Weatherman says, the firm focuses on four areas: medical devices, biotechnology and pharmaceuticals, healthcare services, and European healthcare. In all, Warburg Pincus has about $3 billion in healthcare companies under management.

Although WP VIII has invested in some healthcare companies, no medical device companies have yet been added. Though not at liberty to give specifics, Weatherman says that several companies are being actively considered.

Warburg Pincus has developed a reputation as a savvy judge of companies with strong growth potential, particularly in the healthcare arena. Notable device companies in its portfolio include American Medical Systems (Minnetonka, MN) and Wright Medical Group (Arlington, TN). According to Weatherman, the firm "likes to invest in areas that we know well," which include urology and gynecology, orthopedics, and cardiology.

In assessing a company, Weatherman says she looks for three characteristics. "First, the company should have a great management team that really knows the sector and has a strategic vision for that sector. Second, it holds, or has the potential to develop, a franchise position in its market with a physician customer base. Third, it should have a strategy and a means to develop new products that offer new and better clinical solutions for patients."

Describing other criteria for candidate investments, Weatherman describes herself as "agnostic" on company size. That said, however, she notes that "given the size of this fund, and the fact that the device industry is not huge, we tend to focus on larger companies as well as companies with substantial market opportunities." This doesn't rule out early-stage companies, she says, but "we won't do just a one-product company and flip it in an IPO on a promise; we need real proof that a business can be sustained."

Weatherman is bullish on the medical device sector overall. Positives for the industry, she says, "are the demographics and the inherent value of medical devices in solving clinical issues for patients." The main challenge for the industry, she adds, is that "the balance FDA tries to strike between medical innovation and regulation is tilted away from smaller companies. It's just very expensive to design and complete a clinical trial that will gain approval for a product."

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