IPOs Mean Diminishing Returns For Medtech VCs

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Includes: GKOS, IRMD, LENS, OPGN
by: EP Vantage

If the amounts raised through medtech companies' IPOs remained steady over the last two six-month periods, the returns for the venture investors that backed the groups before they floated have shown much greater variation.

In the second half of 2014, VCs quadrupled their money, on average, when the US-based companies in which they had invested went public, whereas in the first half of this year the average return was 48% (see table). Medical device companies have had great difficulty drumming up venture funding over the last few years, and if this trend persists, the funding climate for early-stage companies may become even more hostile.

Investors in biotech saw returns of 210% on average from companies that went public in the first half of 2015 (Biotech bull market boosts IPO bumps, July 9, 2015). These are the kind of figures that are likely to make VCs even less likely to risk a punt on medtech companies.

Medtech IPO returns for investors
Period Average IPO bump Average share price change to June 30
H1 2014 73% 1%
H2 2014 302% 53%
H1 2015 48% 4%

Much of the medtech boom in H2 2014 can be attributed to a single outlier: iRadimed (NASDAQ:IRMD). The infusion pump maker attracted very little in the way of venture financing - a single round 10 years ago worth $1.5m - and thus, while its IPO was small, it provided investors with a return of over 3000%. Without the iRadimed float, the H2 bump was a 46% average.

iRadimed seems to have a pretty healthy business. It is the only company that makes non-magnetic drug pumps, meaning that they may be used to deliver anaesthesia or other medication even when a patient is undergoing an MRI scan. According to analysts from Roth Capital Partners, iRadimed is the fastest-growing medtech company it covers, with a predicted top line annual growth rate of 41% and an operating margin in the mid-to-upper 20% range.

With this in mind, it seems odd that the group attracted so little early cash. The few investors that did get in on the ground floor have been richly rewarded.

Eyes right

The best investment among the companies that floated in 2015 so far has been the most recent: Glaukos (NYSE:GKOS), which was also near the top of the chart of the most raised (Medtech floats remain steady in 2015, July 2, 2015). Its NYSE listing provided a bump of 176% despite the group having received a respectable $110m in venture cash since 2002 over the course of six rounds.

And Presbia (NASDAQ:LENS), another single-product ophthalmics company, takes the second place. Where Glaukos makes a tiny stent to relieve ocular pressure in glaucoma patients, Presbia offers a technology for longsightedness. Most people are happy to wear reading glasses to correct their vision, but as people remain active into older age, Presbia believes its implantable lens will find a ready market, similar to that for laser eye surgery.

A bump of 171% greeted Presbia's backers when it floated in January, but things have not been so rosy from there; its share price had slid 18% at the half-year point.

The wooden spoon goes to genomics group OpGen (NASDAQ:OPGN), which despite attracting a total of $58m in investment from experienced funds such as Versant Ventures floated at half the price of its pre-IPO shares. With the stock sinking 38% since its Nasdaq debut in early May, its performance has been roundly disappointing.

The positive from the first half of this year is that more companies provided a return to their venture investors than disappointed them. But, since floating, only half the companies have seen their stock rise. Medtech is always biotech's poor relation when it comes to VCs, and on this showing, in future it could find itself poorer still.

First half of 2015 US medtech IPO performance
IPO Date Company Area Amount raised ($m) Offering price ($) Average share price pre-IPO ($) Bump up at IPO Share price change to June 30
June 25, 2015 Glaukos* Ophthalmics 108 18.00 6.53 176% 61%
January 29, 2015 Presbia Ophthalmics 42 10.00 3.69 171% -18%
January 29, 2015 Entellus Medical Ear, nose & throat 78 17.00 7.12 139% 52%
March 20, 2015 SteadyMed Therapeutics Drug delivery 40 8.50 5.99 42% -37%
February 19, 2015 Check-Cap Endoscopy 12 6.00 4.65 29% -42%
April 9, 2015 Carbylan Therapeutics Drug delivery 65 5.00 4.38 14% 43%
January 30, 2015 Avinger Cardiology 65 13.00 22.06 -41% -1%
June 15, 2015 Invuity General & plastic surgery 48 12.00 21.56 -44% 18%
May 5, 2015 OpGen In vitro diagnostics 17 6.00 12.73 -53% -38%
Average 48% 4%
*NYSE listing; all others Nasdaq

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

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