Medical Device Daily Executive Editor
DANA POINT, California – Even the most casual observer can sense that there's an abundance of activity in the healthcare sector these days insofar as initial public offerings (IPOs) and mergers and acquisitions are concerned. So, how do the pros view it?
"I've never seen the level of dialogue [about IPO and M&A activity] that I'm seeing now," said Luke Sarsfield III, vice president in the investment banking division of Goldman, Sachs & Co. (New York).
Sarsfield led a breakfast roundtable discussion on the subject of IPOs and M&As during last week's annual meeting of the Advanced Medical Technology Association (AdvaMed; Washington) at the St. Regis Monarch Beach Resort & Spa in this seaside Orange County community.
Noting the preponderance of deals being done by the larger players in the sector, he cited the increase in the number of firms getting to the range of $2 billion to $7 billion a year in revenues. "It's tough to work at the middle level" these days, he said.
Roundtable participant Stuart Randle of GI Dynamics (Watertown, Massachusetts) observed that from the venture capital perspective, "if [a company] has an interesting technology, there is more venture capital money available than they know what to do with."
However, he added that "there's not enough capital available to companies at the very early stage of development."
Sarsfield said of the public funding market that it "has been a little more exciting of late." He added: "We had a 'nuclear winter' in 2001-2003, so we now are seeing some of the backlog from that period filter its way through the pipeline," particularly on the new-issues side. "Investors are quite focused on the opportunities in new issues," he said, calling it "a more normalized new-issue market."
Noting that "growth stocks matter to the public investor," he said, "Message One is that predictable growth in a company's core businesses is very important."
Referring to comments that had been made a day earlier at the AdvaMed meeting, he noted the belief that there are two types of companies – those that are being operated for growth and those that are for sale. But, he added: "some are in a grey area, and having a dual-track strategy [of both growth and eventual sale] is good."
Fiscal performance is key, Sarsfield said. "I've never seen investors be more focused on quarterly results," he added. "They want to know 'What does the next quarter look like?'"
And, he said, "If you hit it [analysts' expectations}, they'll reward you for it." But "if you miss it, watch out."
Investors, he said, "are much more risk-adverse than in the past."
In the M&A area, Sarsfield observed that "a lot of the macro-merger activity is past." There may be "one more big deal in the cardio space," he said, "maybe one or two more such deals in orthopedics."
The view of the big players, he said, is that "we're consolidated."
That, Sarsfield said, "is good from the small-company perspective. What we'll see is a 'string of pearls' strategy being adopted by potential buyers."
He cited two basic reasons for increased merger activity:
- "Renewed confidence" at the CEO level in the overall economic outlook.
- The availability of "cheap cash" with which to do deals, with companies able to finance their M&A activity "quite cheaply."
The key question for acquisition CEOs, he said, is "What technology do I need to add in order to protect my business?"
From the investment perspective, he cited urology as a med-tech space that is getting "renewed emphasis and focus." Sarsfield noted that investors "are waking up to the fact that urology benefits from the same demographics as orthopedics, just 10 years later."
He also sees "more focus on the ophthalmology space as an attractive niche" for investors, and characterized the dental implant market as "a rocket ship ready to soar."
As for device/drug convergence, a buzzword at many med-tech investor gatherings, Sarsfield's view is that the segment is going to be "slow to emerge," but that "we're seeing more partnering between biotech and device companies."
He noted the differences between financing available for device firms vs. the difficulty biotech firms are having in finding such funding. "Device companies generally have products approved and some form of reimbursement in place, compared to biotech, where their products often still are in early trials and have only a 50/50 shot at even getting to the next phase of trials."