Medical Device Daily Associate Managing Editor

After a nearly two-year drought, 2004 saw the resurgence of one of the most popular exit strategies in the med-tech sector the initial public offering (IPO). And 2005 is shaping up to potentially be another busy IPO year.

In the wake of the absence of IPOs in 2003, the traditional exit strategy for many start-up companies, a wave of deals by a handful of “strategic acquirers“ — Boston Scientific (Natick, Massachusetts), Guidant (Indianapolis), Johnson & Johnson (New Brunswick, New Jersey), Medtronic (Minneapolis) and St. Jude Medical (St. Paul, Minnesota), with Abbott Laboratories (Abbott Park, Illinois) as a recent addition to the list — had been the only light at the end of the investment tunnel other than continuing to try and attract additional private investment and sit tight.

The first med-tech company to break through the IPO ice in 2004 was Kinetic Concepts (KCI; San Antonio), whose early-January announcement of plans for a public offering was the first such action in the sector since 2002, a year that saw just four similar transactions. That company, which is focused on the development of advanced wound care systems and therapeutic surfaces, raised nearly $621 million.

The KCI offering only hinted at the rapid thaw that was to come, with more than 22 additional companies joining it at the med-tech IPO trough. All told, the total monetary value for IPOs that closed in 2004 reported on by Medical Device Daily was roughly $2.4 billion.

While the volume of IPOs was encouraging, the amount raised from them in the healthcare sector was somewhat disappointing. While the total of close to 50 public offerings in the sector in 2004 beat the prior three-year tally of 44, underwriters cut offering prices on nearly 60% of the issues to bring them to market, according to a year-end report on Renaissance Capital's (Greenwich, Connecticut) IPOhome.com site.

For all other sector IPOs combined, the rate of discounted offerings was 29.5% for the year. Renaissance calculates the discount by dividing the offering price by the midpoint in the original price range.

Nearly 30 medical IPOs hit the market below their original price ranges last year. In fact, according to Renaissance, 14 of the 15 IPOs with the largest discounted rates were healthcare companies, though many were biotech companies as opposed to medical device companies.

The bottom line is that while it was great to see the interest in early-stage healthcare IPOs, it was also somewhat dissatisfying that investors weren't willing to shoulder greater risk in the form of higher IPO prices.

Not all companies in the sector performed poorly, however. Indeed, some have enjoyed incredible returns since going public. Kinetic Concepts, for example, closed on Dec. 29 at $75.93 a share, a 151.3% increase from its initial $30 price.

Another company that has succeeded despite some set- backs is Syneron Medical (Yokneam, Israel), which makes aesthetic laser systems for removing hair and wrinkles. Despite pricing its offering at $12, below the initial range of $14 to $16, the stock has surged 151.5% to close on Dec. 29 at $30.18 per share.

According to Renaissance, in dollar terms medical deals raised a total of $3.6 billion, placing fourth among the categories compiled by the firm. Coming in first were the 42 financial-sector IPOs, which raised roughly $13.2 billion. That was followed by 47 technology IPOs worth $9.22 billion and 19 business services IPOs worth an estimated $4.4 billion.

This year is shaping up to be another busy one in the healthcare sector, with close to 15 medical IPOs awaiting acceptable market conditions. Several companies filed their IPO plans at year-end 2004. These include Adeza (Sunnyvale, California), which manufactures products for women's health. The company priced 3.75 million shares at $16 each with 562,500 shares slated for any over-allotments. Sound Surgical Systems (Louisville, Kentucky), a company developing ultrasonic-based medical devices for use in lipoplasty, recently filed for an IPO seeking to raise up to $23 million.

While the IPO news for 2005 appears to be encouraging, it still remains to be seen if the discounted pricing issue will be resolved or if underwriters and investors can expect more of the same as the new year unfolds.

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