In a recent story, “The Return of the IPO,” Fortune magazine proclaimed initial public offerings have roared back to life, noting successful IPOs by Tesla Motors (NSDQ:TSLA) and RealD (NYSE:RLD), a maker of 3D film technology.
But it’s a different story for medical device companies. Take the last two medical device companies from Minnesota to price IPOs. Earlier this month, Electromed Inc. (NSDQ:ELMD) of New Brighton said it raised $6.8 million at $4 per share, far short of the $13.8 million goal it set in May. Last fall, AGA Medical Holdings Inc. (NSDQ:AGAM) of Plymouth raised $199.4 million at $14.50 a share, considerably less than the $275 million at $19 to $21 a share it initially targeted.
The malaise is not limited to Minnesota. Irvine, Calif.based SurgiVision 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 a mere two months ago.
No single answer explains the relatively poor performance of medical device IPOs, but there a few possible reasons.
It’s a stock market thing
A weak economic recovery, stubborn unemployment rates and bond default fears surely play a role. But 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 August 30 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.” Medtronic that reported an 8 percent sales jump in fiscal 2010 and just a few months ago expected to duplicate that feat in 2011.
But not all companies in the healthcare space are ailing. 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.
It’s a medical device thing
The medical device industry faces trying times. The Food & Drug Administration is likely to make it much harder for companies to win regulatory approval. 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 start-ups to raise money from venture capital firms.
That’s bad news for start-ups going public with nothing to bring to market. 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 start-ups are once again attracting capital. During 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 Assn., 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, up 48.5 percent and 377 percent, respectively, over the previous year, according to documents filed with the Securities & Exchange Commission.
