In a recent story called “The Return of the IPO,” Fortune magazine proclaimed initial public offerings have roared back to life, noting the successful stock sales for Telsa Motors and RealD, a maker of 3D film technology.
You can forgive medical device companies if they’re not exactly feeling the love from Wall Street.
Take the last two medical device companies from Minnesota to price their IPOs. Earlier this month, Electromed Inc. of New Brighton, Minnesota, said it raised $6.8 million at $4 share, far short of the $13.8 million the company said it would raise in May.
When Investment Rhymes with Canada
Canada has a proud history of achievement in the areas of science and technology, and the field of biomanufacturing and life sciences is no exception.
Last fall, AGA Medical Holdings Inc. in Plymouth raised $199.4 million at $14.50 a share, a considerable drop from the $275 million at $19 to $21 a share it had initially targeted.
The malaise is not limited to Minnesota. SurgiVision, based in Irvine, California, recently said it plans to float a greater number of shares at a heavily reduced price per share.
The company now plans to offer about 3.7 million shares at $5 a share. In June, SurgiVision said it would sell 2.5 million shares at between $13 and $15 a share. The result is that SurgiVision now expects net proceeds of $15.2 million from the offering — less than half the amount it anticipated less than two months ago.
So what’s going on? Well, there isn’t one easy answer, so I’ll try to break down some possible reasons.
It’s a stock market thing
From a weak economic recovery and stubborn unemployment to bond default fears, it sure doesn’t feel like the bull years of yesteryear.
However, corporate profits are up, and the major stock market indexes are performing much better than last year. For example, the technology-heavy NASDAQ index where many emerging medical device stocks trade closed Monday at 2119.97, considerably higher than the first quarter of 2009, when it dipped below 1500.
It’s a healthcare thing
Healthcare was once thought to be recession-proof. Not anymore. Last week, Medtronic Inc. (NYSE: MDT) sharply cut its 2011 sales and profit forecast, blaming dropping prices and a “softer global healthcare market.”
Yet this is the same Medtronic that reported an 8-percent sales jump in fiscal 2010, and just a few months ago expected to duplicate that feat in 2011.
In July, UnitedHealth Group Inc. (NYSE: UNH), the nation’s largest private insurer and a bellwether stock, said second-quarter profits jumped 31 percent to $1.1 billion from $859 million during the same period a year ago. Total revenue grew 7.4 percent to $23.3 billion from $21.7 billion.
As you can see, healthcare is not exactly a dying industry.
It’s a medical device thing
The medical device industry indeed faces trying times. The Food and Drug Administration is likely to make it much harder for companies to win regulatory approval for their technologies. And large and small players alike fear healthcare reform will lead to stingier or even no reimbursement from Medicare and Medicaid. Those factors also have made it hard for startups to raise money from venture capital firms.
That spells bad news for a startup going public with nothing yet to sell. But AGA Medical and Electromed already were offering FDA-approved, reimbursed products before they filed for their IPOs.
And after a slow start to 2010, medical device startups are once again attracting capital. For the second quarter, investors poured $755 million into 95 deals — a 40 percent gain in both deals and dollars from the previous three months, according to the MoneyTree Report from PricewaterhouseCoopers LLP and the National Venture Capital Association, and based on data provided by Thomson Reuters.
It’s a specific company thing
Normally, a bad IPO is a reflection of the company and its prospects. Yet both AGA Medical and Electromed are profitable companies with strong growth in recent years.
In 2008, AGA Medical generated a $9 million profit on sales of $166.9 million, compared to a profit of $12.6 million on sales of $127.5 million two years prior.
For the year ended June 30, 2009, Electromed had sales of $13 million and net income of $1.4 million, a 48.5 and 377 percent increase respectively over the previous year, according to documents filed with the Securities and Exchange Commission.
Clearly, medical device IPOs are falling off the shelves. But when it comes to the question why, the answers — like the economy’s prospects of late — remain murky.
