August
2007 issue
Institutional Funding Flows To Health Care-
Private Placements Offer Attractive Financing Option And Are On The Rise
Private placements in health care
companies are attracting an increasing amount of capital, and a few
bankers in the business offered their viewpoints on current dynamics in this
market and preferred opportunities for these investments.
...
Temperature
Modulation Enhances Care--
A Look At Some Of The Coolest, And Hottest, New Therapeutic Technologies
Some health care companies are dedicated to improving care by using
temperature, to either apply
warming, cooling, extreme heat or extreme cold for specific therapeutic
purposes.
...
Public Equity
Not much happened in terms of IPO activity, other than a handful of
withdrawals and one pricing, but a few of these deals had interesting
twists.
...
Mergers & Acquisitions
Medical device deals dominated the health care M&A market, while the
pharmaceutical and long-term care sectors also made a strong showing.
...
Private Placements
For the month of July, public health care
companies announced a relatively average number of deals and
a fairly decent amount of total funding through private placement
transactions.
...
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Companies Mentioned in this issue:
August 2007
A
Ablation Frontiers p11
ACCBT Corporation p14
Accelerated Care Plus p11
Acologix p5
Acrobot p11
Actavis p9
Actavis Group hf. p8
Acumen Fund p12
Advocat p8
Aescap Ventures p11
Affinity Ventures p11
Agensys p10
Alchemia p11
Alcon p8
Alexza Pharmaceuticals p5
Alliance of Merger and Acquisition Advisors p2
Alpine Biomed p15
Alta Healthcare System p8
Alta Partners p10
Amedica p5
American Imaging Mgmt. p8
American Medical Association p15
Antares Pharma p14
Applied Neurosolutions p5
Apposite Capital p11
Aquapharm Biodiscovery p11
Archemix p5
Arnerich Massena p11
Arpida Ltd. p8
Arrow International p9
Assent Consulting p8
Asset Management Company p10
Assisted Lvg. Concepts p8
Atria Senior Living p8
Atrium Biotechnologies p8
ATS Medical p5
Azur Pharma Limited p8
B
Banc of America p5
Bayer Diagnostics p7
BB Biotech p10
Bear Stearns Health Innoventures p10
Beckman Coulter p7
Beecken Petty O’Keefe & Company p15
Behavioral Centers of America p11
Benchmark Medical p15
BioAlliance Pharma p13
Biogen p8
BioSante Pharmaceuticals p5
BioVex Group p11
BMO Capital Markets p14
BrainStorm Cell Therapeutics p14
Brandywine Senior Lvg. p8
Bryan, Garnier & Company p13
C
Camden Partners p6
Canyon Creek Devel. p8
Caprion Proteomics p8
Cardica p5
Cardinal Health p15
Cardium Therapeutics p1
CDP Capital p10
Cell Therapeutics p8
Cellumen p11
Ception Therapeutics p7
Chicago Growth Partners p10
Chrysalis Ventures p11
CIBC p5
Citigroup p5
Coastal Carolina Med. Ctr. p8
CODA Genomics p11
Computrition, Inc. p16
ComVest Group p11
ConnectivHealth p11
CoolSystems p6
Cougar Biotechnology p5
Coventry Health Care p8
Cowen & Co. p5
CPMG p10
Credit Agricole Private Equity p11
Credit Suisse p5
Crescent Capital p11
Cross Atlantic Partners p6
Cross Country Hlthcr. p8
CS First Boston p6
CSA Medical p6
CTI Life Sciences Fund p10
Cumberland Pharma p5
Cyntellect p11
Cytogen p5, p14
D
Dade Behring Holdings p7
DecisionView p11
Deerfield Management p13
Deutsche Bank p5
Deutsche Bk. p5
Diagnostic Products Corporation p7
Diamics p11
Diatos p11
DJO, Inc. p9
DOCS International p8
Draper Fisher Jurvetson p9
Drug Royalty Corp. p8
Dubuque Retirement Cmmty. p8
Duquesne Capital Management p10
Dyax p5
Dynatronics Corp. p8
Dynavax Technologies p13
E
Edheads p16
Encore Medical Corp. p9
Essex Woodlands Health Ventures p14
ev3, Inc. p8
Eyeonics p5
F
FazaClo p8
Flagship Global Health p14
FoxHollow Technologies p8
FrontPoint Partners p14
Fusion Antibodies p11
G
Galapagos NV p14
GBS Ventures p11
GE/NBC Universal’s Peacock Equity Fund p11
Genoptix Medical p5
Genstar Capital p8
GenVault p7
GeoVax Labs p14
GIMV p11
Gish Biomedical p8
GlaxoSmithKline p14
GlycoVaxyn p11
Golden Pond Healthcare p5
Goldman Sachs p4, p9
Great Point Partners p8
GrowthWorks Capital’s Working Opportunity Fund p11
H
H&Q Life Science Investments p10
Hambrecht & Quist Capital Management p10
Hamilton Pharmaceuticals p8
Haywood Securities p14
HBM BioVentures p10
Health Capital Consultants p2
Healthline p11
HepaLife Technologies p5
Hill-Rom Company p15
HLM Venture Partners p10
Hollister p12
Horizon Therapeutics p10
Human BioSystems p5
I
ICON plc p8
ImaRx p5
ImaRx Therapeutics p4
Immune Targeting Systems p11
Imperial Innovations p11
Index Ventures p11
InnerCool Therapies p1
Innovis Investments p10
Inspire Pharmaceuticals p14
Integrated Surgical Systems p8
Inverness Medical Innovations p11
ISTA Pharmaceuticals p5
J
JAFCO p10
JCAHO p15
JDS Pharmaceuticals p8
Jefferies p5
JEGC OCC Corp. p13
JHP Pharmaceuticals p8
JMP Securities p13
Johnson & Johnson p15
Johnson & Johnson Development Corporation p10
JPMorgan p12
K
KaloBios p11
KBL Healthcare Acq. III p5
Kimberly Clark p6
Kyphon p9
L
Lake Worth ASC p8
Lazard p5
Legacy at Lehigh p8
Lehman Bros. p5
Lehman Brothers p14
Lexicon Pharmaceuticals p5
Lifeblood Medical p7
Light Sciences Oncology p10
Linden LLC p11
Lombard Odier Hentsch & Cie p10
London Technology Fund p11
Lpath p5
LYNX Medical Systems p4
M
Magnetar Capital Master Fund p13
Manor Care p7
Masimo p5
Masimo Corporation p5
Maxim Group p5
MDY Healthcare p6
Meda AB p8
Medcool p7
Medex p15
Medivance p6
MedPointe p8
Medtronic p8, p9
Merck & Co. p4
Merrill Lynch Capital Healthcare p2
Merritt, Hawkins & Associates p16
Micromet p5
Midwest Physician Svcs. p8
Misys CPR p8
MIV Therapeutics p14
Monitor Ventures p11
Morgan Stanley p5, p14
Morgenthaler Ventures p10
MPM Capital p11
Mucos Emulsions GmbH p8
MVM Life Science Partners p11
N
NeoMend p11
Neuren Pharma p8
NeuroDerm p11
New England Journal of Medicine p6
New Markets Growth Fund p6
New River Management p11
New Science Ventures p11
Newsweek p1
NexGenix Pharmaceuticals p11
Nextech Venture p10
Nighthawk Radiology p8
NovaCardia p4
Novartis p8
Novartis Venture Fund p11
Novator p9
Novator eignarhaldsf. p8
Novatrix Biomedical p8
Noven Pharmaceutic. p8
Novo A/S p10
Novo Ventures p11
Novocell p10
Nuon Therapeutics p11
O
OccuLogix p13
One Equity Partners p12
Oppenheimer & Company p14
Option Care p8
Oragenics p5
OrbiMed Advisors p10
Orthovita p14
OVP Venture Partners p11
P
PA Early Stage Partners p11
Pacific Horizon Ventures p10
Panacea Fund p13
Pappas Ventures p10
Paramount BioSciences p11
Partisan Management p6
Petra Capital Partners p11
Physiotherapy Associates p15
Picis p4
Pinnacle Ventures p10
Piper Jaffray p5
PRA International p8
Precision Dynamics Corporation p12
Prospect Medical p8
Protiva Biotherapeutics p11
PURE Capital LLC p14
Putnam Associates p16
Q
QuadraMed Corp. p8
Quark Biotech p4
Quest Group International p5
QuickCool p6
QuickHealth p9
R
Raymond James & Associates p2
ReAble Therapeutics p9
Reata Pharmaceuticals p10
Redpoint Bio p5
Response Biomedical p14
RiverVest Venture p11
Roche p7
Rodman & Renshaw p14
S
Safeguard Scientifics p11
Sanderling Ventures p10
Sangamo BioSciences p13
Satiety p10
Scottsdale Healthcare p16
Serentis p11
Siemens AG p7, p8
Skilled Healthcare Gp. p8
Skylight Healthcare Systems p16
Skyline Partners p6
Skyline Ventures p10
Sofinnova p11
Sofinnova Partners p11
Solantic p9
Sonic Healthcare p8
Sontra Medical p14
Southridge Technology Group p14
Stryker Corp. p15
Sucampo p5
Sucampo Pharmaceuticals p5
Sunrise Medical Laborator p8
Sunrise Senior Living p7
Surgery Partners Hldg. p8
Swarraton Partners p11
Systems Medicine p8
T
Take Care Health p15
Talecris Biotherapeutics p5
TargeGen p10
Targeted Genetics p5
Tate & Lyle Ventures p11
Teleflex Incorporated p9
Tenet Healthcare p8
The Blackstone Group p9
The Carlyle Group p7
The Cleveland Clinic p16
The Medicines Co. p8
TheraGenetics p11
Three Arch Partners p10
Tikvah Therapeutics p11
TissueLink Medical p11
TLC Vision Corporation p13
TLT Medical Ltd. p8
TotalMed Systems p4
Trans1 p5
TransMedics p7
Triathlon Medical Ventures p11
Truffle Ventures p11
Tudor Capital p11
U
UBS p5
UBS Investment Bank p5
V
VantagePoint Venture Partners p10
Vein Associates of America p14
Venrock p10
Via Pharmaceuticals p14
Viridian Growth Fund p11
Vista Health Plans p8
Vivo Ventures p11
W
W.R. Grace & Co. p12
Wachovia p5
Walgreen Co. p8, p15
Warburg Pincus p14
Water Street Healthcare Partners p12
WaveLight AG p8
WellPoint p8
Welsh, Carson, Anderson & Stowe p9
Westly Group p9
Westminster Securities p14
WHO p15
WuXi PharmaTech p5
Z
ZARS, Inc. p7
Ziqitza Healthcare Limited p12 |
Institutional Funding Flows To Health Care--
Private Placements Offer Attractive Financing Option And Are On The Rise
Email Editor
The last few years of data
on private investments in public entities, or “PIPE deals” as they are
often called, indicate that the market for these deals is booming. The
strength of the national economy, the lush amounts of funding available
through institutional investors like pension funds and equity firms, and
the attractiveness of health care as an investment are all forces that
have contributed to a swelling wave of private placement activity. Nearly
as much private equity funding was raised by public health care companies
during the first half of 2007 as in all of 2005.
The PIPEs that were publicly announced from January 1 to June 30, 2007
totaled approximately $4.1 billion, representing an increase of 117%,
compared with the first half of 2005, and an increase of 17.3%, compared
with the first six months of 2006. Also in the past few years, the average
deal size has been on the rise, from $14.7 million for the year 2005, to
$20.2 million in 2006, to $29.7 million in the first six months of 2007.
Looking at the monthly totals, there have been three individual months in
the past two and a half years that health care companies have secured more
than $900 million through private placements: February 2007, with $1.3
billion; June 2007, with $967 million; and August 2005, with $926 million.
So does any of this suggest we are at a peak, or approaching one, for
health care PIPE deals? None of the bankers we talked with seemed to
believe that’s the case, but they did offer insightful perspectives on the
current deal-making environment for health care private placements.
Burk Lindsey, who is on the Health Care Investment Banking team at
Raymond James & Associates, identified some of the factors influencing
recent private placement activity. “Growth in the private placement market
has been facilitated by growth in the number and type of investors seeking
to put money to work, an increase in the amount of capital they have to
invest, and additional structuring flexibility, given the profiles of some
of the new investment pools.” Mr. Lindsey also referred to the fact that
new investors are entering this arena, including firms that have not
targeted health care in the past. “Although the same traditional players
continue to target health care, a more diversified group of investment
funds are now looking at middle market health care transactions. Private
equity firms and hedge funds, among others, have become more active. Their
appetite—and the volume that appetite is driving—has made pricing more
efficient,” for conventional private placements, PIPEs and registered
direct offerings. In addition, we learned that a loosening of restrictions
regarding the shelf registration filing requirements for well-known
seasoned issuers (“WKSIs,” in SEC parlance) has created new flexibility
for issuers.
We also talked with Bob Cimasi, the president of Health Capital
Consultants, LLC, (HCC) and a certified member of the Alliance of
Merger and Acquisition Advisors, who has been in the health care
corporate finance business since 1983 and focuses on deals in the health
care services sectors. In Mr. Cimasi’s opinion, “Health care services
companies are a realistic target for growth financings right now, as the
population ages and technology advances.” He, too, has noticed that more
investment banks and boutique firms are becoming more frequent players in
the health care private equity arena, but voiced some concern, saying,
“I’m curious to see how many of these new players will be able to sustain
their businesses in the long run.” As far as Health Capital Consultants is
concerned, Mr. Cimasi surmises that, “This year will end with a bang, not
just for the industry, but also for our firm.” During the next few years,
he expects to see ongoing changes in the market, as facilities and other
health care companies try to ramp up their capital structures. “Right now,
we are working on a few more solid deals in the services sectors,” he
divulged, although at this point the companies HCC is working with are not
being disclosed. Headquartered in St. Louis, Missouri, Health Capital
Consultants works with health care companies that are in the middle market
or slightly larger.
Clare Bailhe, managing director and the head of Healthcare Leveraged Loans
at Merrill Lynch Capital Healthcare, also offered some input. She
commented that, “One reason health care remains a top industry for PIPEs
is that PIPE investing is excellent for a smaller public company looking
to raise approximately $75 million to $150 million in capital,” and a fair
number of health care and medical device companies fit this mold. Among
the reasons health care attracts a high level of interest from private
equity investors, Ms. Bailhe cited, “continued strong demographics,
including an aging population,” and that, “people are living longer,
particularly those with chronic diseases—diabetics, COPD, etc.—requiring
significant levels of care over very prolonged periods of time.” Within
health care, she noted, “Several sectors remain highly fragmented, and
others have long product life cycles, attracting PE interest.” From the
health care company’s perspective, “PIPEs are a fairly flexible financing
alternative with greater confidentiality and liquidity than a traditional
private placement security,” Ms. Bailhe observed, “which is often best for
a publicly traded company,” instead of a public offering. Mr. Cimasi
suggested that in addition, the perception that a company can work
together with a private equity firm makes for an extremely attractive
opportunity for many companies, because such deals generally do not
require the company to restructure and assimilate as it would in the case
of an acquisition.
Ms. Bailhe identified certain areas of health care where a strong demand
exists for PIPE and other private equity investments. She indicated that
in any sector, companies working to reduce costs or increase the
efficiency of health care would be of interest, but cited specifically,
“business processing services; electronic health records—a saturated but
very fragmented sector with minimal commonality; billing, collection and
coding companies—which attract many PE groups who only want to invest in
“health care-lite” companies,” meaning those companies with little direct
reimbursement or regulatory risk such as those oriented toward financial
and business services. In addition, Ms. Bailhe also pointed out,
“radiation and oncology—not many players are specializing in this sector;
disease management—a huge area with many young companies and no clear
leader; and diagnostic testing, not diagnostic imaging companies, but
medical device and tools companies,” that help clinicians to make
diagnoses early and cost effectively.
Among the primary forces driving the increase in private offerings by
public health care companies, according to Mr. Cimasi, “There is an
abundance of capital in the market right now. Most of the investors
getting involved are savvy about health care. These and other factors are
motivating companies to seek out private placements, which allow for a
more flexible and often less costly transaction that a public offering.”
He expounded, “Public offerings are typically costlier that a private
deal, especially after Sarbanes-Oxley. Besides, public offerings follow a
rigid structure, whereas in a private equity deal, there is the
opportunity to really focus on the specific circumstances and needs
surrounding a given company. As a result, I think private placement
deal-making has become more sophisticated in recent years.” In some cases,
milestone provisions are utilized, but as Mr. Lindsey noted, “Milestone
provisions are much more prevalent in the medical device, biotech and
pharmaceutical sectors,” than in health care services. “Health care as an
industry is currently undergoing substantial regulatory, political and
other changes, which is also driving deal volume,” Mr. Cimasi continued,
“Private equity firms are reacting by getting more involved now, becoming
part of the structure of health care services business so they will
benefit later.”
It may be a bit counterintuitive to wonder if there is any downside to the
current availability of abundant capital for private investments, but we
had to ask, and what we found out is that the increase in the amount of
capital targeting health care has predictably led to declining return
expectations. Mr. Lindsey told us that over the past several years,
institutional investors have lowered their expectations in terms of
returns. “Mid- to later-stage private investors used to be able to price
their capital to return 20-25%, and in some cases more. That’s not
possible today for attractive opportunities. The competition in today’s
environment and the pricing efficiency that competition is creating has
driven returns expectations down meaningfully—which, of course, is good
news for issuers.”
As for the jitters currently coursing through the debt markets, Mr. Cimasi
said, “These are unlikely to deter the efforts of private equity players
trying to acquire stakes in companies, or whole companies. The current
debt rates are not keeping the good deals from closing. Actually, the cost
of debt may be overrated in terms of being a determinant for getting deals
done.” Referring to the end of July, Ms. Bailhe stated that, “These past
two weeks have wreaked havoc on certain of the credit markets, but
particularly the larger market deals. The health care industry with its
numerous sectors offers investors plenty of attractive opportunities
during all economic cycles, so I believe private investment in private
health care companies and private investment in public companies will only
continue to grow over time.”
Mr. Cimasi also observed that recently, driven by certain harbingers for
change, “There has been more focus on the quality of deals, and to some
extent, how to craft these deals creatively. Investors want more
sustainably-structured deals, with better risk-protection built into the
terms.” He pointed out that controversy is stirring for a variety of
reasons, including the release of Michael Moore’s “Sicko” film, which
brings into focus many aspects of the American health care system that
require attention and healing. “Health care is the most highly regulated
industry in the United States today, and it is also full of change,”
according to Mr. Cimasi, “and right now, reimbursement issues, charity
requirements and the extent to which physicians may own stakes in
hospitals are all concerns for people in the business.” In parallel, Mr.
Lindsey stated, “Regulatory and reimbursement risks are a constant in
health care investing. But there are new risks as well—risks unique to
evolving and highly liquid financing markets.”
For example, with investors seeking to put so much capital to work, and
the number of quality opportunities not always keeping pace, he said that,
“in some instances we’re seeing valuations driven to levels not supported
by the fundamentals and growth profiles of the target businesses.” Mr.
Lindsey continued, “This dynamic can create an interesting dilemma for
both issuers and traditional health care investors,” in part because the
most aggressive investors may have nontraditional profiles and investment
criteria. “The investor candidates willing to provide the most attractive
terms may or may not be long-term fundamental, buy-and-hold investors and
they may or may not have experience in the health care sector or
historical perspective regarding funding and regulatory cycles,” he
explained. “And traditional industry investors, wary of sector turns that
can be rapid—and in some cases severe—are at times opting out of highly
competitive situations, citing valuation as too significant a hurdle.”
So, are we near a funding cycle peak? “I don’t attempt to call peaks and
troughs in market cycles,” Mr. Lindsey demurred, “but it is difficult to
imagine a forward environment more favorable than the one we’re in now. At
the same time it’s difficult to point to one or two fundamental factors as
the ones most likely to cause the market to turn near-term or weaken
dramatically. We will continue to experience ebbs and flows in the
appetite of private health care investors,” he said, also noting that,
“there has been a positive and perhaps permanent fundamental shift in the
number of investors targeting the sector and the financing flexibility
their structures and profiles create.”
Ms. Bailhe concurred that PIPEs and general PE investing in private
companies remains very active, stating, “I do not believe we are at a peak
for this investing. While PE appetite has experienced ebbs and flows over
the years, the downturns are generally not severe. In my opinion, today’s
investing [environment] is similar to the mid-to-late 1990s, as far as
investor appetite for health care investing.”
Mr. Cimasi agreed. “Looking at private placements in health care, I do not
think we are at a peak for these kinds of deals, and we are not likely to
reach a peak any time this year.” But 2007 could very well end with more
total annual private placement funding than we’ve seen in some time.
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