Tripling of medtech IPO yield points to changing industry

Analysis

It was already obvious that 2014 was a remarkable year in terms of medtech company flotations, but only after a full-year analysis does it become clear just how much the sector’s attitude to IPOs has changed.

34 device makers floated on Western exchanges in 2014, more than twice as many as in 2013 (see tables below). And the total raised via IPOs has increased even more markedly: 2014’s total of $2.2bn is nearly triple the $742m seen the year before. That said, just five companies floated in the fourth quarter; the end of the year is often slow, but it is possible that the window is starting to swing closed already.

A look at the quarterly data compiled by EvaluateMedtech and EP Vantage shows that the last period was the only one in which, on average, companies on average did not have to cut offering prices to get their IPOs off the ground.

But it is the second quarter that stands out in terms of the sums raised. At $1.1bn, this period saw more than twice as much raked in as the next closest, and the average was the highest too, at $81m. This is largely due to the UK company Exova, which provides testing services to the pharmaceutical industry, whose £220m ($368m) was the biggest of the year. Since then, though, its stock has fallen 27%.

Perhaps as a consequence of the number of deals and enormous total raised, Q2 saw the worst performance for day-one trading, with shares sinking an average of 5% even after the companies took an average 15% haircut. This was the only quarter in which the first-day change was negative, on average.

Ups and downs

The worst day-one performer was the diagnostics company Capnia, which raised $11m on Nasdaq in November but then dropped 40%. It was down 77% from its float price at the end of the year.

Capnia’s was only the second-worst fall to the end of the year. The orthopaedics group Amedica, which raised $20m in February, had dropped 86% by December 31, 2014.

2014 medtech IPOs on Western exchanges 
Number of IPOs Total raised Avg raised Avg discount/ premium Avg chg on 1st day Avg 2014 chg since float
Q1 7 $345m $49m  (21%) 4%  (20%)
Q2 14  $1,129m  $81m  (15%)  (5%)  (5%)
Q3 8 $436m $55m  (19%) 26% 33%
Q4 5 $287m $57m 1% 23%  (0%)
FY total 34 $2,197m

As for more cheerful tidings, the first-day winner was Second Sight Medical Products, maker of an ocular prosthesis to treat severe retinitis pigmentosa. The share price more than doubled in the first day in mid-November giving a 122% rise.

The overall winner, though, is the diagnostics specialist Quotient, which closed 2014 up 125% eight months after floating.

Mixed bunch

The five companies to float since EP Vantage’s last roundup of medtech IPOs are a mixed bunch. The standout is Nevro, leader on both amount raised and share price change to the end of the year. The company’s technology uses ultrasound to treat back and leg pain.

The last three months might have seen the fewest IPOs of any quarter, but with Nevro’s market value more than doubling at the end of the year it was responsible for one considerable success.

Medtech IPOs on Western stock exchanges in Q4 2014
Company Area Date Amount raised Price Discount/ premium Chg on 1st day 2014 chg since float (to Dec 31)
Great Basin In vitro diagnostics Oct 9, 2014 $9m $7 8% (16%) (65%)
Sientra General and plastic surgery Oct 29, 2014 $86m $15 0% 12% 12%
Nevro Neurology Nov 6, 2014 $145m $18 13% 40% 115%
Capnia In vitro diagnostics Nov 13, 2014 $11m $6.50 (13%) (40%) (77%)
Second Sight Medical Products Ophthalmics Nov 19, 2014 $36m $9 0% 122% 14%
Q4 average $57m 1% 23% 0%

Individual IPOs are interesting enough, but it is the overall change to the medtech industry when they are taken as a whole that is the more compelling story.

In medtech IPOs are increasingly seen as source of funding, and a step on the route to a trade sale rather than a second-choice substitute for one.

2014 was an astonishing year for mergers, and buyers are not afraid of regarding public companies as takeover targets. This gives early and mid-stage medtech groups – and their investors, most of whom will still want an exit in the shape of a buyout – the confidence that a float will raise cash without ruling out an eventual sale.

The question is whether this trend will continue. It is of note that there were no European IPOs in the entire second half of the year, mostly owing to the rampaging performance of Nasdaq. Does this mean that the European medtech IPO market, never robust, has already withered and died?

And what of US investors’ appetite? 2015 will show whether last year was a one-off reaction to the rather dismal sector-wide situation in 2013, or whether this is a new normal, with IPOs and the interrelated large-scale mergers continuing to alter the landscape.

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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