The biggest London listing since 2013 – and the biggest for a healthcare company ever – is that of a debt-ridden medtech company active in a highly genericised space. Convatec’s £1.47bn ($1.8bn) IPO was priced at the lower end of the range, but many will be relieved that it went out at all.
Chief among that cohort will be Convatec’s private equity owners. Nordic Capital and Avista Capital Partners bought the group from Bristol-Myers Squibb in 2008 for $4.1bn; the IPO values the company at £4.4bn ($5.4bn). The proceeds will be used to pay down the vast debt pile that is keeping the company, profitable only on an operational level, from breaking even.
This IPO would be astonishing even in a bubble: in the current moribund environment it is little short of miraculous. A lot of listings planned for the first half of 2015 were pushed back or cancelled and companies that did get away are trading poorly. But perhaps things are finally starting to look up for medtech at least – witness Irhythm’s $107m float last week (Irhythm rocks the Nasdaq, October 21, 2016).
As well as the money raised by floating Convatec has scared up a new term loan debt financing of $1.8bn from a consortium of banks, plus a $200m revolving credit facility. Much of this will go towards refinancing its $3.5bn-plus of debt, with the group aiming for an average cost of borrowing of 3.5%.
The company generates a fair revenue: in the second quarter its sales, of devices including colostomy bags, catheters, wound dressings, endotracheal tubes, suction devices and products for faecal incontinence, topped $425m, permitting an operational profit of nearly $214m.
But as well as being unglamorous this segment is commoditised, with a few large players dominating and competing on price. Coloplast is probably Convatec’s closest peer. The Danish group has had a tough time of late, issuing a profit warning in January and another in June, partly owing to poor sales in the US after a now-settled Department of Justice investigation into aggressive sales practices.
|The wound management segment at a glance|
|Global sales ($m)||Market share|
|Johnson & Johnson||3,130||4,106||+4%||25.2%||24.8%||976|
|Smith & Nephew||1,266||1,714||+4%||10.2%||10.3%||448|
|Mölnlycke Health Care||600||864||+5%||4.8%||5.2%||263|
|Rest of market||1,184||1,428||+3%||9.5%||8.6%||244|
But another player in the wound care space provides a more illustrative comparison. Acelity, currently the second-largest wound management player, was bought by private equity in 2011 and is, like Convatec, seeing decent sales but no profit because of its debt. In August last year Acelity filed for a Nasdaq IPO that was expected to raise around $1bn (Acelity files to float, but is it secretly seeking a buyer?, August 28, 2015).
Nothing came of it.
So how come Convatec got out in London in a tough IPO market when Acelity could not drum up any interest on Nasdaq, which in mid-2015 was doing quite nicely for medtech floats?
It likely comes down to price. Convatec listed 34% of its shares at 225p each against an initially planned 225-275p, and was perhaps more willing to take what it could get rather than holding out for a higher price.
If the deal does allow it to push towards profit Convatec will be able to build its position in wound management through M&A. Current forecasts see its share of the market shrinking by 2022 – though not as fast as Acelity’s – and an influx of new technologies might give it a much-needed edge over rivals.