MINNEAPOLIS – It is a challenging time to be out looking for funding if you are involved in the medical technology sector, but companies aren't the only ones having trouble raising money. Venture capitalists are also struggling to put together funding rounds in some instances, particularly trying to raise money from gun shy institutional investors who are the lifeblood of their business.
Speaking on this topic and the general state of the public and private device market at the 8th edition of the IBF Med-Tech Investing Conference here was a panel led by Eric Tardif, senior VP-corporate strategy at Gen Probe (San Diego). Tardif queried a panel of seasoned investment bankers on the probability of later, tougher funding deals in the foreseeable future in the med tech sector.
"I think the VCs are probably going through a lot of the same challenges that healthcare companies and the financing communities are going through," said Jeff Hoffman, managing director and head of West Coast Healthcare for the investment banking arm of J.P. Morgan Securities (New York). "I think the fundraising has been a challenge. Just as in the banking industry. I think you're going to see consolidation in the private equity and the venture community too because there's going to be less capital allocated to it, so it's going to be a smaller universe. It's challenging out there."
Kevin Davies, managing director, co-head of healthcare investment banking at RBC Capital Markets (Toronto), said that he doesn't think there will be a broad window of IPOs as an exit strategy anytime soon in the med-tech industry. He said he was "fairly positive that there will be some IPO activity in med-tech in the next couple of quarters, but it's going to be companies that are real businesses and have significant amounts of revenue." By significant revenue, he said he meant north of $75 million. He added that the possibility of an IPO resurgence depends on what happens in Washington with healthcare reform.
The days of early stage company IPOs are a thing of the past, according to Robert DeSutter, managing director and co-head of healthcare at Piper Jaffray (Minneapolis). "I don't see that kind of profile coming back, period," he said.
Hoffman said he doesn't see the IPO window really opening up until the economy turns around. "It's going to be more than two to three years at a minimum."
DeSutter said he believes that in the next 10 years, "you'll see large buyout groups displace the initial public offering in many instances."
Luke Sarsfield, managing director at Goldman Sachs (New York), noted that M&A activity "has fallen off a cliff," though he noted that the healthcare industry still "has been the most active by far" to continue to pursue that pathway.
Sarsfield said healthcare M&A has been utilized most notably of late by big companies looking to buy growth and technology, "and accessing it through startups and smaller companies." He said that while smaller companies are struggling to raise money, larger companies with good credit ratings have access to funds at "very attractive rates," which is helping to spur the mini buying spree for these bigger companies.
Hoffman noted that just as in housing, "it is a buyer's market," when it comes to M&A. He said he has seen "multiple, multiple big-cap companies walk away and be very disciplined to a lot of deals" if they think that the valuation the seller is requesting is too high. He noted that there's currently no real threat of an IPO and in the med-tech world, there are only a handful of really big companies with the means to make some of these deals.
His advice to a seller is to "think more reasonably about valuation."
In response to a query by Tardiff about potential new pockets of capital, Hoffman said companies shouldn't be shy about looking into getting some of the grants offered in the new federal stimulus package. "They're ways to offset trials and R&D costs," he said.
While not a new pocket of capital, DeSutter noted that venture-backed debt has become a much more popular tool of the private equity community. He said that it used to be a $2 million to $3 million tranche in a private company's capital structure, but it's now anywhere between $15 million and $18 million. "It's a very viable bridge or equity enhancer to a VC and I think that's here to stay."
Tardif asked the panel what a company needs to do to maximize its chances of raising money in this challenging financial environment.
Hoffman said it is critical to start looking for money up to a year before you need it, since it's going to take three to six months to get it and to "take more money than you think you need, not less."
Sarsfield said that capital is no longer viewed as a simple commodity. Instead, he suggested that a company ask itself the question, "What's the all in cost of that capital?"
He said this involves looking at the people that you will be working with and the board members that a company inherits with a fund-raise. "It's got to be more than just the spot economics of the trade and you have to look at it as a financial relationship that's as important as any strategic or corporate relationship."