Medtech IPOs Rebounding Strongly, Poised for Growth in 2015

At long last, a glimmer of hope.

Medtech venture capitalists will likely remember 2014 as the Year of Redemption—the point at which funding finally freed itself from the dark recesses of the investment abyss. Mergers/acquisitions and initial public offerings (IPOs) rebounded considerably as the groundswell of investor interest in life sciences spilled over to the medical device and diagnostic sector.

Such regard prompted more than three dozen companies to file registration statements with the U.S. Securities and Exchange Commission last year—slightly more than triple the 12 that did so in 2013. Eighty percent of the IPOs either occurred or were filed in the first six months of 2014, with nine cropping up in April and May, and seven crammed into the final week of December.

Despite the large number of filings, only a smal fraction of device and diagnostics companies actually went public last year, though the ratio still was high enough to give long-suffering VCs hope for the future: Device IPOs tripled from a combined total of three in 2012 and 2013 to nine in 2014, while diagnostics/ tools public offerings more than doubled to seven, notching its best performance since 2005, according to a report from Silicon Valley Bank (SVB). 

The largest IPO in the first half belonged to spinal device manufacturer K2M Inc., which raised $120 million in May (technically, San Francisco, Calif.-based Castlight Health Inc. had a better debut, collecting $204 million in one of the year’s best showings, but the healthcare IT firm doesn’t really compete in the device or diagnostics sector). TriVascular Technologies Inc. came in a close second, amassing $101.4 million through the sale of 8 million shares at $12 each. The company is using the money to pay off a Boston Scientific Corp. loan and expand the marketing of its abdominal aortic aneurysm treatment device. Approved by the European Commission in 2010 and the U.S. Food and Drug Administration (FDA) in 2012, the TriVascular Ovation Prime Abdominal Stent Graft system has treated more than 3,000 clinical trial subjects in 25 countries, according to the 7-year-old firm.
Other notable first-half IPOs included stent developer Lombard Medical Inc. ($55 million), transfusion diagnostics provider Quotient Ltd. ($40 million) and neurostimulation device maker Mainstay Medical Ltd. ($25 million).   
 
Nevro Corp. led second half financing with its better-than-expected $126 million IPO in early November. The Menlo Park, Calif.-based startup sold 7 million shares at $18—considerably more than the 6.25 million shares it had projected and at a price above its anticipated $15-$17 per share range. Nevro plans to use the funds to commercialize its Senza spinal cord stimulation system (currently in U.S. clinical trials), which uses high-frequency electrical pulses to treat chronic back pain. Similarly, T2 Biosystems Inc. is dedicating a portion of its $57 million windfall to commercialize its diagnostic technology  that provides a faster, more accurate diagnosis of hospital pathogens.

Sientra Inc., meanwhile, is using its $75 million IPO to better position itself in the billion-dollar breast implant market. With $21.6 million in cash available (as of June 30, 2014), the Santa Barbara, Calif.-based company wasn’t in desperate need of funding, but the public backing enabled the firm to simultaneously boost profitability, raise its profile and provide an exit for venture capitalists.
ReWalk Robotics Ltd. and Intersect ENT Inc. might have scored similar victories had they not been victims of bad timing. Both scheduled IPOs in the summer, after investor enthusiasm cooled from the spring spate of new stock offerings and Federal Reserve Chair Janet Yellen’s “stretched” outlook on social and biotech valuations. Intersect had hoped to raise $80 million in its public debut, but netted only $55 million, having been forced to cut its per-share price to $11. Likewise, ReWalk initially priced its shares at $14 to $16 but wound up selling them at $12, raising $36 million—a modest sum, certainly, yet far short of the $57.5 million the robotic exoskeleton developer targeted in its SEC filing.

Despite the active IPO market (a total of 79 when biopharmaceutical companies are factored into the equation), both pre-money valuations and dollars raised at public offerings declined in 2014, the SVB report said. The median pre-money valuations in biopharma fell nearly 40 percent from 2012, to $129 million, and dollars raised remained flat.

The revenue generation required for commercial-stage device IPOs bolstered pre-money valuations, which exceeded those for biopharma in 2013 and 2014. And while diagnostics/tools funding activity increased last year, the sector predominantly recorded lower median pre-money valuations ($86 million) compared with device and biopharma, the report notes. It also lagged slightly behind the other sectors in dollars raised and is delivering a mixed post-IPO performance, which could affect IPO activity in 2015.

Jonathan Norris, however, isn’t convinced diagnostics and tooling firms’ sub-par performance will significantly impact IPO activity this year. He predicts an uptick in device public offerings and a substantial increase in diagnostics IPOs “as developments in personalized medicine and better diagnostic tools lead to commercial traction and exit opportunities,” he states in the SVB report. Norris expects biopharma IPOs to revert to 2013 levels this year.

Norris’ hunches bode well for the device and diagnostic/tooling firms currently preparing to step into the public spotlight: insulin pump maker Asante Solutions Inc., ($45 million IPO); cardiovascular imaging developer Infraredx Inc. ($55 million IPO); commercial-stage molecular diagnostics firm AltheaDx Inc. ($69 million IPO); Entellus Medical Inc., which sells a minimally invasive balloon sinus dilation treatment system to open obstructed sinus pathways ($69 million IPO); brain cooling device developer BeneChill Inc. ($14 million IPO); HTG Molecular Diagnostics Inc., a provider of instruments and reagents for molecular profiling applications ($60 million IPO); and peripheral vacular catheter manufacturer Avinger Inc. ($69 million IPO).

Last year’s flurry of public-stage funding was most profitable for the biopharmaceutical sector: Seventy-five percent of Series A financing occurred during pre-clinical or Phase I development, reflecting investors’ overall confidence in early science and drug development, the SVB report concludes. Device Series A funding remained stable, with most deals orchestrated by angel investors and falling within the $3 million- $8 million range (only three topped $20 million). Venture capitalists continued to favor later-stage device and diagnostics/tooling firms—31 percent of device companies that received funding last year were already in commercialization mode, while 50 percent of Series A diagnostics/tooling organizations were generating sales. Corporate investors remained gun-shy in 2014, though diagnostics/tooling firms garnered substantial interest from large biopharmaceutical firms.

“It is an incredibly exciting time for our industry,” Celgene Corporation CEO Robert J. Hugin said during a kickoff presentation at the J.P. Morgan Healthcare Conference in early January. “This is not hype and smoke and mirrors.”

Far from it. Biopharmaceutical investors were rewarded handsomely for their loyalty last year—there were three exits with 20x multiples on upfront payments in 2014, triple the number that matched those returns in the previous eight years, the SVB report notes.

Device backers benefitted as well. The sector reversed a three-year decline with 16 big exits in 2014, and posted increases in both upfront and total deal values. Norris, however, is skeptical of a repeat performance this year, as two major corporate shoppers—Medtronic Inc. and Covidien plc—join forces and move their combined headquarters overseas. “…the combined company could very well spend 2015 focused on internal integration instead of M&A activity,” Norris writes in the report.

The diagnostics/tooling space marked its best year since 2005—average exit time was 6.1 years from the close of Series A funding, but four deals wrapped up in less than four years and three of eight companies compensated their patrons before needing Series B funding. “It appears that the big promise of dx/tooling companies is finally being realized,” Norris deduces. “Many of these venture-backed companies are gaining significant commercial traction and coplating an M&A or IPO event.”

So are digital health firms. A total of 95 M&A deals worth more than $20 billion closed in 2014, with large health technology companies being the most active acquirers, a separate study from Rock Health indicates. Overall, the category of digital health raised $4.1 billion last year, more than the three prior years combined. Exits continued to rise last year, with notable departures from Castlight Health, Emergence Capital Partners-funded life sciences software company Veeva Systems and General Catalyst-supported healthcare access management firm Iprivata. Veeva, which flew largely under the radar, is the most capital-efficient VC-backed exit in recent history, ahead of WhatsApp and even Facebook, industry observers claim.

Rock Health analysts predict telemedicine, digital therapies and payer administration tools firms to chart significant growth this year as the industry works to improve patient care while reducing costs. “By leveraging technologies, both healthcare professionals and care treatments can be more widely distributed and accessible to those in need,” the Rock Health report states.