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December 2006 issue
Open Window For Health Care: IPO Pricings Outnumber 2005, Expected to
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Open Window For Health Care: IPO Pricings Outnumber 2005, Expected to Continue in 2007As of November 30, 2006, more initial public offerings had been completed by health care companies in 11 months than in all of last year. So far, 37 health care IPOs have been priced in 2006, just over the 35 in all of 2005. The extremes in aftermarket performance have reached higher highs, but no lower lows in 2006 than the previous year. We may not know exactly what the coming year holds for the health care IPO market, but the bankers who talked with us recently sounded fairly optimistic about the sectors they work in and gave us some ideas on where we are headed in 2007. Ongoing investor interest is expected in the health care service sectors, as well as in the health care technology sectors, including information technology, medical devices and also biotechnology, in spite of its challenges. Scott Cousino, Managing Director at Stifel Nicolaus (NYSE: SF), made the point that, "In spite of the IPO market being challenging for life sciences companies right now, some of the best-performing health care stocks priced this year have been biopharmas." At this point Acorda Therapeutics (NASDAQ: ACOR), a biopharma, has witnessed the greatest change in its stock price since the IPO at $6.00 per share, having climbed 227% to close at $19.63 per share on November 30. The next greatest increase was posted by another biopharma, OMRIX Biopharmaceuticals (NASDAQ: OMRI), which is up 196% since the IPO. Volcano Corporation (NASDAQ: VOLC), a medical device company, has seen its stock price increase by 122% since the IPO. Osiris Therapeutics (NASDAQ: OSIR), also a biopharma, came in fourth with an almost 93% gain, and China-based Mindray Medical (NYSE: MR) is holding fifth place with a nearly 78% gain. Regarding the biotechnology sector, Mr. Cousino sees "cyclical activity, but perhaps more extreme than the others." That’s not the only issue, because "there are so few buyers, and pricing is very hard to do," he said. One pharma company that Stifel Nicolaus has worked with that also just priced its IPO, Catalyst Pharmaceuticals (NASDAQ: CPRX), is hovering around the IPO price ($6.00) and "is more like a biotech," he said. Going forward, in the next year or two at least, he doesn’t expect the IPO market to slow down in health care. "There is a lot of potential for private health care companies to get early and mid-stage funding," he said, through the public market. Duncan Dashiff, Head of Health Care Investment Banking at SunTrust Robinson Humphrey, stated that in the past couple of years, "IPO deal flow has been unusually consistent in the biotechnology and biopharmaceutical sectors and has driven the bulk of IPO volume in the health care segment." But, he admonishes, "biotechnology can be a choppy space." Valuation is being driven in these sectors based not only on the science behind the company, but also the stage of development and the market opportunity being addressed. Mr. Dashiff also observed, "Over the last 24 months, the market’s receptiveness to IPOs from medical device and information technology companies has expanded significantly." Health care IT represents a growing market that Stifel Nicolaus will be targeting more heavily in the next five years. Dan Gulbrandson, Managing Director of Health Care Investment Banking at Piper Jaffray & Co., noted, "the health care IT market is very robust right now." Piper Jaffray was involved in two of the top three health care IPOs priced so far this year, based on aftermarket performance, Acorda Therapeutics and Volcano Corporation. Mr. Dashiff of SunTrust expects continued interest in public offerings from providers of information technology solutions within the health care industry. He pointed out, "The rate of spending growth in the health care information technology sector is outpacing other industries, and an IPO can be more than sufficient to capitalize these companies for a period of long-term growth." Within the medical device sector, hotter areas include cardiology, diabetes and other metabolic diseases, kidney and renal therapies and peripheral artery disease. Also characterizing the medical device sector, current trends in effect include a movement towards miniaturization, producing finer, closer and less invasive tools for surgeries, imaging and diagnostics. "Although this year the IPO market has not been a great place, we have seen a steady stream of medical device IPOs," Mr. Cousino stated, but there has been mixed aftermarket performance. Mr. Dashiff reminded us, "The good news is that with respect to medical device companies, as compared with last time we were at a healthy point in the cycle, the companies are generally of a more mature nature this time around in that they are addressing larger market opportunities and have more well-developed reimbursement strategies." The market has already responded positively to IPOs in the areas of telemedicine and remote monitoring, including such companies as DexCom (NASDAQ: DXCM), NightHawk Radiology (NASDAQ: NHWK) and Visicu (NASDAQ: EICU). SunTrust believes there are several companies in the areas of telemedicine and remote monitoring that represent hybrids between "med-tech" and IT that will ultimately prove to be very attractive IPO candidates. One company SunTrust Robinson Humphrey is currently working with, we’re told, is a hybrid, medical device and IT company. Mr. Dashiff expects we will see more in the future from medical technology, IT and other companies that represent a convergence of these sectors "for specific health care applications and play on themes that have already evidenced interest in the public markets." In the health care services sector, Mr. Dashiff observed, "The dilemma is that given the abundance of private equity capital and leverage available in the debt capital market, the IPO market may not be as appealing to privately-held services companies of scale. Although there is a nice supply and demand dynamic in the public market for health care services companies, a transaction with a private equity partner can be significantly more compelling in terms of valuation and near-term liquidity for existing shareholders." He believes the IPO market can still present an attractive alternative for health care services businesses, though, and, "there is a demand for health care services companies of scale to go public, like Brookdale Senior Living (NASDAQ: BKD), for example, which has been well-received since its IPO late last year." Areas where we may see market growth, Mr. Dashiff thinks, include consumer directed health care, disease management and retail health initiatives, which have received "abundant private equity backing, represent another area of convergence in health care and are creating some of the ‘new’ ideas in health care services." Also looking forward, Mr. Cousino said, "One possibility for the public market in 2007 is that we will see more Managed Medicare plans and Medicare Advantage plan providers pricing IPOs, including special needs and disease management plans." Aveta, a Medicare Advantage plan provider focused on the chronically ill, has already filed, and Mr. Cousino indicated there is more going on in this space behind the scenes. The market for this type of plan may be at a similar point in a cycle, he thinks, as when Medicaid plan providers such as Amerigroup (NYSE: AGP) and Centene (NYSE: CNC) were pricing IPOs, about five years ago. We can only wait and see. |
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