The Medtech IPO Window Swings Shut

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Includes: AAAP, AROS, AVGR, CBYL, CFMS, ENTL, NTRA, NVCR, PEN
by: EP Vantage

If merger activity is beginning to wind down in the medtech sector, so too are stock market flotations. The second half of 2015 saw just seven device makers going public, and the decline along quarterly lines is clear: from a peak of 12 IPOs in the second quarter of 2014 to just two in the final period of last year.

That said, the second half saw the four biggest IPOs of the year, two of which even got away at a premium to their announced range. Perhaps investors in the public markets are thinking along the same lines as venture capitalists: go big or go home.

This is the obvious conclusion from the fact that the IPOs in the fourth quarter of 2015 raised the highest average total since EvaluateMedTech began tracking stock market floats in 2013. But this is a crude measure based on only two offerings in that period, and one was NovoCure's (NASDAQ:NVCR) $165m Nasdaq float.

The UK-based, Nasdaq-listed NovoCure is developing an unusual technology called tumour treating fields - low-intensity alternating electric fields that the company says disrupt cell division. This is FDA-approved for glioblastoma and in mid-stage development for other solid tumours.

So, as with VC cash in 2015, innovative therapy for cancer can attract big money (Huge medtech venture rounds mean start-ups starve, January 19, 2016). But NovoCure was forced to float at a lower price than it had initially intended, taking a 6% haircut. And its share price has slid since then.

Testing times

Still, NovoCure comes second to the genetic abnormalities testing company Natera, (NASDAQ:NTRA) which closed the largest IPO of the past three years when it scored $180m in July. Its flagship technology is Panorama, which can diagnose foetal abnormalities including trisomies 13, 18 and 21 and sex chromosome triploidy by testing not the foetus's blood but the pregnant woman's.

This arena has been the subject of huge excitement since a group with a similar technology, Ariosa Diagnostics (Pending:AROS), was taken out by Roche (OTCQX:RHHBY) at the end of 2014. With IPOs increasingly regarded as financing events rather than exits in themselves, Natera's venture investors are doubtless keen on a similar outcome.

Top 10 medtech IPOs of 2015
Company Amount raised ($m) Offering price Discount/ premium 2015 YE chg since float
Natera 180 $18.00 13% -40%
NovoCure 165 $22.00 -6% -34%
ConforMIS (NASDAQ:CFMS) 135 $15.00 0% 15%
Penumbra (NYSE:PEN) 120 $30.00 13% 79%
Biocartis 109 €11.50 7% 15%
Glaukos (NYSE:GKOS) 108 $18.00 9% 37%
Advanced Accelerator Applications (NASDAQ:AAAP) 92 $16.00 0% 95%
Entellus Medical (NASDAQ:ENTL) 78 $17.00 6% -1%
Avinger (NASDAQ:AVGR) 65 $13.00 0% 75%
Carbylan Therapeutics (NASDAQ:CBYL) 65 $5.00 0% -28%
Average across top 10 IPOs 112 - 4% 21%
Average across all 19 IPOs 74 - -3% -4%
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Given that both Natera and NovoCure have seen their shares slip, perhaps the real winner of 2015 is Penumbra, a neurovascular device developer. Not only did the California group manage to raise $120m at an impressive 13% premium to its announced range, its shares have soared nearly 80% since it listed in September.

Both Advanced Accelerator Applications, which develops cancer diagnostics and radiopharmaceuticals, and Avinger, which like Penumbra makes catheter-based technologies for treating vascular diseases, also boasted hefty share price rises of 95% and 75% respectively.

Safety in numbers

While investors might be flocking to large IPOs, the quarterly totals raised have remained largely steady for the last 18 months or so. The number of offerings, however, has dwindled in a smooth, uninterrupted decline, suggesting that the good times are over for companies wishing to float.

Medtech IPOs since 2013
IPO count Total raised ($m) Average ($m) Avg discount/premium
Q1 2013 2 58.4 29.2 -5%
Q2 2013 3 79.5 26.5 -16%
Q3 2013 1 121.9 121.9 20%
Q4 2013 5 381.9 76.4 -2%
Q1 2014 6 242.7 40.5 -18%
Q2 2014 12 677.4 56.5 -12%
Q3 2014 8 401.2 50.1 -19%
Q4 2014 6 259.0 43.2 5%
Q1 2015 6 267.8 44.6 -10%
Q2 2015 6 396.9 66.1 -1%
Q3 2015 5 479.9 96.0 2%
Q4 2015 2 257.4 128.7 -3%
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This is reminiscent of the trend for VCs to pile into fewer, larger rounds, and possibly with much the same motives. Both kinds of investors want to back companies close to - or past - the revenue-generating stage, to maximise the chance of a return in short order.

Also at play is the downturn in megamergers. As the large medtech groups pause from buying to digest their prior acquisitions, the opportunity for mid-size public companies to be purchased diminishes, and hence, there is less incentive to float.

Many investors would point out that promising companies can still raise big money; in other words, investors are becoming more discerning. But there can be no argument that the opportunity for medtech companies to go public is slipping away.

To contact the writer of this story email Elizabeth Cairns in London at elizabethc@epvantage.com or follow @LizEPVantage on Twitter.

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