Michael Barbella, Managing Editor05.06.15
Hopefully it’s temporary.
With any luck (or some free will), the current chill in medtech’s once-hot initial public offering (IPO) market will only be a hiccup—a slight wrinkle, so to speak, in the sector’s long march toward recovery. Hopefully, the market will course-correct itself this quarter and recapture last year’s magic, when initial public offerings mounted an impressive comeback from chronic frailty. Thirty-four device manufacturers went public in 2014, more than twice the number that did so the previous year, according to an analysis by United Kingdom-based market intelligence firm Evaluate Ltd. Those offerings also were more profitable: Companies raised a total of $2.2 billion last year, nearly triple the haul recorded in 2013.
Only time will tell whether the market will regain its mojo. But if the first three months of 2015 are any indication, medtech IPOs could be in danger of backsliding into the abyss. Initial findings from PricewaterhouseCoopers LLP show public debuts by healthcare firms fell significantly in the first quarter (ended March 31) compared with the year-earlier period, plunging by more than half (51.4 percent) to 17. Overall deal value was down as well, diving 46.4 percent to $1.19 billion.
“With such a blistering pace for venture-backed exit activity in 2014, it was only a matter of time before we saw a drop in activity,” said Bobby Franklin, president and CEO of the Washington, D.C.-based National Venture Capital Association.
That drop was all-inclusive, too. Only the financial sector was spared, albeit partly: First-quarter deal volume increased 55 percent compared with Q1 2014 but total capital raised fell 35 percent to $1.77 billion, according to PwC data. The consumer sector sustained the largest loss, with total IPOs falling 83.3 percent (a six-fold decrease) to one. Technology debuts tumbled 61.5 percent to five, while energy companies only could muster one-third of last year’s total. Industrial IPOs remained identical to the Q1 2014 total (two) but deal value more than doubled, surging 139 percent to $599.2 million (the sector raised $250.6 million in IPOs during the same period last year). Consumer capital was nearly non-existent—the sector experienced a 93.1 percent slide in total deal volume, going from $1.54 billion in Q1 2014 to $105 million in the first three months of this year, PwC’s survey concludes.
The energy sector didn’t fare so well, either. Companies raised 48 percent less capital through IPOs in the most recent quarter than they did in the beginning of 2014. Healthcare deal value skidded 46.4 percent, going from $2.22 billion in Q1 2014 to $1.89 billion in the first three months of 2015. Financial services and technology companies also under-performed, with public financing tumbling 35 percent and 30.6 percent respectively.
While some under-achievement was bound to occur after a blockbuster year, analysts believe a seesawing S&P 500, an abundance of venture capital and private equity money, falling oil prices (energy companies were among the most active fundraisers last year), and a fourth-quarter push to go public all contributed to the slowdown. Exacerbating those woes was the seasonal stagnation that typically occurs in the first quarter, as companies wait for year-end figures before strategizing their funding plans.
“While we saw a decline from the vigorous pace of activity in 2014, 41 IPOs in the first quarter is generally in line with historical first-quarter IPO volume since 2010,” Henri Leveque, partner, U.S. Capital Markets for PwC, said of the overall public offering environment. “As long as the broader stock market remains stable in the face of mounting domestic and global uncertainty, it is likely we will continue to see a robust atmosphere for IPOs and follow-on offerings.”
Leveque’s optimism is well-founded: The broader market hit record highs in the quarter despite an uptick in volatility and private company backlog remains substantial. In addition, the Nasdaq composite and Russell 2000, both good yardsticks for younger, smaller companies conducting IPOs, are up 4 percent or more. Returns held up well, too—the average IPO gained 15 percent in Q1, mostly from a first-day pop of nearly 11 percent.
The underlying figures are not as rosy though. Nearly 35 percent of IPOs priced below their planned range, and the average deal size fell 47 percent from the previous quarter. Medical device companies delivered some of the worst performances of the quarter, with deal size averaging a mere $52 million and some first-day gains falling as much as 18.5 percent. Irish ophthalmic device firm Presbia plc had a particularly awful showing, scoring $42 million with an IPO that drove the share price down $1.85 on the first day of trading (Jan. 29). The company, which developed a surgically implanted lens to correct age-related vision loss, priced its 4.2 million shares at $10—slightly below its intended range of $11-$13. Investors have yet to break even on the stock; the share price fell to $8.15 during its public debut and has since fluctuated between $6.50 and $8.68.
Clinical-stage diagnostic outfit Check-Cap Ltd. was another under-performer, raising just $12 million from its IPO—$3 million less than its original estimate. But the Israeli firm also closed a $12 million private placement led by Chinese fund Fosun Pharma and existing investors, including GE Healthcare and Pontifax, raising a total of $24 million.
Check-Cap’s IPO featured two option series. One allows investors to exercise their options at $6.90 per share, with one-third after a year and two-thirds after two years, but only if the stock owner continues to hold the shares for which he/she received the options. The company also issued Series A warrants that allow investors to purchase an ordinary share at an exercise price of $7.50, with the warrants becoming usable after 45 days and expiring after five years.
The infusion of IPO cash should help Check-Cap advance its ingestible imaging capsule for colorectal cancer screening. The capsule features X-ray technology adapted from radars used in Israeli Navy ships to capture 2-D and 3-D images of the colon, essentially providing an alternative to the colonoscopy, a more invasive diagnostic procedure. The product is designed to detect clinically significant polyps with a high degree of sensitivity, according to the company.
Check-Cap’s imaging device is not yet available for sale in the United States or European Union (EU), but the IPO and private placement could help the firm complete a 60-patient clinical trial, allowing it to register the capsule for EU marketing sometime this year. The company also hopes to kick off a U.S. clinical trial for the product next year as it aims for a stateside product launch in 2017.
So far, the company has raised nearly $50 million to support its capsule imaging device. GE Capital and GE Healthcare said in 2012 that their undisclosed investment in Check-Cap was part of a strategy to expand in colon cancer management solutions.
Avinger Inc. hit the middle of its IPO target range, selling 5 million shares at $13 each, raising a total of $65 million. The Redwood City, Calif.-based catheter company initially expected to hawk 4.6 million shares for $12-$14.
Avinger makes a family of catheters and an imaging console that enable surgeons to penetrate arterial blockages known as chronic total inclusions. Its latest product is Pantheris, an image-guided atherectomy device to treat peripheral arterial disease; the company expects a 510(k) submission during the second half of 2015. Its investors include the company’s founder/executive chairman John Simpson, who held 22.5 percent of the company before the IPO; others include Lucas Venture Group (11.6 percent), Black Diamond Ventures (6.9 percent) and Emergent Medical Partners (6.4 percent).
Salvaging an otherwise dismal device/diagnostics IPO cycle were Entellus Medical Inc. and Invitae Corp., both of which sold more shares than they initially anticipated. Entellus priced its offering at the top of its range ($17) and bumped up total shares offered to 4.6 million from 4.4 million, collecting $78 million.
Entellus likely will spend the cash on efforts to bolster use of its U.S. Food and Drug Administration-cleared balloon sinus dilation products, including the XprESS Multi-Sinus Dilation devices and PathAssist tools, on treat patients who cannot effectively manage chronic sinusitis with therapeutics.
In a U.S. Securities and Exchange Commission (SEC) filing, Entellus claims a multicenter, randomized controlled trial found standalone balloon sinus dilation with its products are as effective as endoscopic sinus surgery. The Plymouth, Minn.-based company said 76 percent of U.S. health insurers, including Medicare and Medicaid, cover standalone sinus dilation in a doctor’s office. More than 750,000 patients have been treated with Entellus XprESS products since their February 2010 launch.
Entellus investors include Essex Woodlands (26 percent pre-IPO stake), SV Life Sciences LLP (23.9 percent), Split Rock Partners LLC (21.1 percent) and Covidien Ventures (7.2 percent).
Genetic testing firm Invitae Corp. was the top fundraiser in the quarter, selling 6.35 million shares at $16 each to garner $102 million total. The San Francisco, Calif., company had expected to sell 5.35 million shares for $13-$15.
Invitae was founded as a spinoff from one of Silicon Valley’s most successful biotechnology companies, Redwood City-based Genomic Health. Genomic Health founder Randal Scott, who also served as CEO of that company, co-founded Invitae and took over as CEO in an effort to offer cheaper, faster genetic tests.
“As the price of DNA sequencing has declined, the amount of genetic information that can be generated per dollar has increased exponentially, enabling the generation, analysis and storage of more comprehensive genetic information than ever before,” the company said in its IPO filing with the SEC.
After originally being incorporated as Locus in 2010, Invitae launched in 2012 and offered its first test in 2013. The company currently runs tests for hereditary diseases with a focus on cancers that run through family bloodlines, charging $1,500 with a turnaround time of about three weeks, but founders hope to get the price under $1,000.
The success of Invitae’s public debut— clearly the lone star of the quarter—was somewhat tempered by the postponement of three IPOs in late March. Valeritas Inc., PolyPid Ltd. and Asante Solutions Inc. each yanked their respective offerings but did not disclose a reason for the decisions.
Bridgewater, N.J.-based Valeritas makes a disposable device that delivers basal-bolus insulin therapy for Type 2 diabetes. Founded in 2006, the firm booked $13 million in sales last year.
PolyPid’s IPO retraction is the second in four months for the early-stage drug delivery biotech; the move sparked speculation the firm was waiting for the biotech selloff to settle, thus putting its market valuation higher. The company makes a proprietary antibiotic coating for bone repair and has said it would like to wait for milestones in late 2015.
In a terse statement, the Petach Tikva, Israel-based firm said it would withdraw its plans for the $20 million IPO, which had been priced at a range of $10 to $12 per share. At that midpoint, PolyPid would have had a fully diluted market value of roughly $107 million. PolyPid earlier postponed its IPO in November, after announcing in October its plans to list on the Nasdaq.
“We were very confident with our ability to go public even with the market conditions,” Asaf Bar, chief business officer told The Wall Street Journal, adding the company will instead wait for pipeline milestones to occur in the second half of 2015 before attempting another IPO.
With any luck (or some free will), the current chill in medtech’s once-hot initial public offering (IPO) market will only be a hiccup—a slight wrinkle, so to speak, in the sector’s long march toward recovery. Hopefully, the market will course-correct itself this quarter and recapture last year’s magic, when initial public offerings mounted an impressive comeback from chronic frailty. Thirty-four device manufacturers went public in 2014, more than twice the number that did so the previous year, according to an analysis by United Kingdom-based market intelligence firm Evaluate Ltd. Those offerings also were more profitable: Companies raised a total of $2.2 billion last year, nearly triple the haul recorded in 2013.
Only time will tell whether the market will regain its mojo. But if the first three months of 2015 are any indication, medtech IPOs could be in danger of backsliding into the abyss. Initial findings from PricewaterhouseCoopers LLP show public debuts by healthcare firms fell significantly in the first quarter (ended March 31) compared with the year-earlier period, plunging by more than half (51.4 percent) to 17. Overall deal value was down as well, diving 46.4 percent to $1.19 billion.
“With such a blistering pace for venture-backed exit activity in 2014, it was only a matter of time before we saw a drop in activity,” said Bobby Franklin, president and CEO of the Washington, D.C.-based National Venture Capital Association.
That drop was all-inclusive, too. Only the financial sector was spared, albeit partly: First-quarter deal volume increased 55 percent compared with Q1 2014 but total capital raised fell 35 percent to $1.77 billion, according to PwC data. The consumer sector sustained the largest loss, with total IPOs falling 83.3 percent (a six-fold decrease) to one. Technology debuts tumbled 61.5 percent to five, while energy companies only could muster one-third of last year’s total. Industrial IPOs remained identical to the Q1 2014 total (two) but deal value more than doubled, surging 139 percent to $599.2 million (the sector raised $250.6 million in IPOs during the same period last year). Consumer capital was nearly non-existent—the sector experienced a 93.1 percent slide in total deal volume, going from $1.54 billion in Q1 2014 to $105 million in the first three months of this year, PwC’s survey concludes.
The energy sector didn’t fare so well, either. Companies raised 48 percent less capital through IPOs in the most recent quarter than they did in the beginning of 2014. Healthcare deal value skidded 46.4 percent, going from $2.22 billion in Q1 2014 to $1.89 billion in the first three months of 2015. Financial services and technology companies also under-performed, with public financing tumbling 35 percent and 30.6 percent respectively.
While some under-achievement was bound to occur after a blockbuster year, analysts believe a seesawing S&P 500, an abundance of venture capital and private equity money, falling oil prices (energy companies were among the most active fundraisers last year), and a fourth-quarter push to go public all contributed to the slowdown. Exacerbating those woes was the seasonal stagnation that typically occurs in the first quarter, as companies wait for year-end figures before strategizing their funding plans.
“While we saw a decline from the vigorous pace of activity in 2014, 41 IPOs in the first quarter is generally in line with historical first-quarter IPO volume since 2010,” Henri Leveque, partner, U.S. Capital Markets for PwC, said of the overall public offering environment. “As long as the broader stock market remains stable in the face of mounting domestic and global uncertainty, it is likely we will continue to see a robust atmosphere for IPOs and follow-on offerings.”
Leveque’s optimism is well-founded: The broader market hit record highs in the quarter despite an uptick in volatility and private company backlog remains substantial. In addition, the Nasdaq composite and Russell 2000, both good yardsticks for younger, smaller companies conducting IPOs, are up 4 percent or more. Returns held up well, too—the average IPO gained 15 percent in Q1, mostly from a first-day pop of nearly 11 percent.
The underlying figures are not as rosy though. Nearly 35 percent of IPOs priced below their planned range, and the average deal size fell 47 percent from the previous quarter. Medical device companies delivered some of the worst performances of the quarter, with deal size averaging a mere $52 million and some first-day gains falling as much as 18.5 percent. Irish ophthalmic device firm Presbia plc had a particularly awful showing, scoring $42 million with an IPO that drove the share price down $1.85 on the first day of trading (Jan. 29). The company, which developed a surgically implanted lens to correct age-related vision loss, priced its 4.2 million shares at $10—slightly below its intended range of $11-$13. Investors have yet to break even on the stock; the share price fell to $8.15 during its public debut and has since fluctuated between $6.50 and $8.68.
Clinical-stage diagnostic outfit Check-Cap Ltd. was another under-performer, raising just $12 million from its IPO—$3 million less than its original estimate. But the Israeli firm also closed a $12 million private placement led by Chinese fund Fosun Pharma and existing investors, including GE Healthcare and Pontifax, raising a total of $24 million.
Check-Cap’s IPO featured two option series. One allows investors to exercise their options at $6.90 per share, with one-third after a year and two-thirds after two years, but only if the stock owner continues to hold the shares for which he/she received the options. The company also issued Series A warrants that allow investors to purchase an ordinary share at an exercise price of $7.50, with the warrants becoming usable after 45 days and expiring after five years.
The infusion of IPO cash should help Check-Cap advance its ingestible imaging capsule for colorectal cancer screening. The capsule features X-ray technology adapted from radars used in Israeli Navy ships to capture 2-D and 3-D images of the colon, essentially providing an alternative to the colonoscopy, a more invasive diagnostic procedure. The product is designed to detect clinically significant polyps with a high degree of sensitivity, according to the company.
Check-Cap’s imaging device is not yet available for sale in the United States or European Union (EU), but the IPO and private placement could help the firm complete a 60-patient clinical trial, allowing it to register the capsule for EU marketing sometime this year. The company also hopes to kick off a U.S. clinical trial for the product next year as it aims for a stateside product launch in 2017.
So far, the company has raised nearly $50 million to support its capsule imaging device. GE Capital and GE Healthcare said in 2012 that their undisclosed investment in Check-Cap was part of a strategy to expand in colon cancer management solutions.
Avinger Inc. hit the middle of its IPO target range, selling 5 million shares at $13 each, raising a total of $65 million. The Redwood City, Calif.-based catheter company initially expected to hawk 4.6 million shares for $12-$14.
Avinger makes a family of catheters and an imaging console that enable surgeons to penetrate arterial blockages known as chronic total inclusions. Its latest product is Pantheris, an image-guided atherectomy device to treat peripheral arterial disease; the company expects a 510(k) submission during the second half of 2015. Its investors include the company’s founder/executive chairman John Simpson, who held 22.5 percent of the company before the IPO; others include Lucas Venture Group (11.6 percent), Black Diamond Ventures (6.9 percent) and Emergent Medical Partners (6.4 percent).
Salvaging an otherwise dismal device/diagnostics IPO cycle were Entellus Medical Inc. and Invitae Corp., both of which sold more shares than they initially anticipated. Entellus priced its offering at the top of its range ($17) and bumped up total shares offered to 4.6 million from 4.4 million, collecting $78 million.
Entellus likely will spend the cash on efforts to bolster use of its U.S. Food and Drug Administration-cleared balloon sinus dilation products, including the XprESS Multi-Sinus Dilation devices and PathAssist tools, on treat patients who cannot effectively manage chronic sinusitis with therapeutics.
In a U.S. Securities and Exchange Commission (SEC) filing, Entellus claims a multicenter, randomized controlled trial found standalone balloon sinus dilation with its products are as effective as endoscopic sinus surgery. The Plymouth, Minn.-based company said 76 percent of U.S. health insurers, including Medicare and Medicaid, cover standalone sinus dilation in a doctor’s office. More than 750,000 patients have been treated with Entellus XprESS products since their February 2010 launch.
Entellus investors include Essex Woodlands (26 percent pre-IPO stake), SV Life Sciences LLP (23.9 percent), Split Rock Partners LLC (21.1 percent) and Covidien Ventures (7.2 percent).
Genetic testing firm Invitae Corp. was the top fundraiser in the quarter, selling 6.35 million shares at $16 each to garner $102 million total. The San Francisco, Calif., company had expected to sell 5.35 million shares for $13-$15.
Invitae was founded as a spinoff from one of Silicon Valley’s most successful biotechnology companies, Redwood City-based Genomic Health. Genomic Health founder Randal Scott, who also served as CEO of that company, co-founded Invitae and took over as CEO in an effort to offer cheaper, faster genetic tests.
“As the price of DNA sequencing has declined, the amount of genetic information that can be generated per dollar has increased exponentially, enabling the generation, analysis and storage of more comprehensive genetic information than ever before,” the company said in its IPO filing with the SEC.
After originally being incorporated as Locus in 2010, Invitae launched in 2012 and offered its first test in 2013. The company currently runs tests for hereditary diseases with a focus on cancers that run through family bloodlines, charging $1,500 with a turnaround time of about three weeks, but founders hope to get the price under $1,000.
The success of Invitae’s public debut— clearly the lone star of the quarter—was somewhat tempered by the postponement of three IPOs in late March. Valeritas Inc., PolyPid Ltd. and Asante Solutions Inc. each yanked their respective offerings but did not disclose a reason for the decisions.
Bridgewater, N.J.-based Valeritas makes a disposable device that delivers basal-bolus insulin therapy for Type 2 diabetes. Founded in 2006, the firm booked $13 million in sales last year.
PolyPid’s IPO retraction is the second in four months for the early-stage drug delivery biotech; the move sparked speculation the firm was waiting for the biotech selloff to settle, thus putting its market valuation higher. The company makes a proprietary antibiotic coating for bone repair and has said it would like to wait for milestones in late 2015.
In a terse statement, the Petach Tikva, Israel-based firm said it would withdraw its plans for the $20 million IPO, which had been priced at a range of $10 to $12 per share. At that midpoint, PolyPid would have had a fully diluted market value of roughly $107 million. PolyPid earlier postponed its IPO in November, after announcing in October its plans to list on the Nasdaq.
“We were very confident with our ability to go public even with the market conditions,” Asaf Bar, chief business officer told The Wall Street Journal, adding the company will instead wait for pipeline milestones to occur in the second half of 2015 before attempting another IPO.