Buyouts, rather than initial public offerings, could be the story again this year, according to watchers of Orange County’s healthcare industry.
In 2007, the health sector accounted for what was arguably the most successful local IPO: device maker Masimo Corp.’s $233 million offering, including $48 million for the company. Shares of the company rose 23% in their first day of trading and had been climbing until they dropped earlier this month. The company counts a market value of about $2 billion, making it the best performing local stock of last year.
The health sector accounted for four of the six IPOs seen last year. Foothill Ranch-based nursing home operator Skilled Healthcare Group Inc. raised $297 million. Another nursing home operator Ensign Group Inc. had a $64 million IPO. And medical device maker SenoRx Inc. raised $44 million in its offering.
But there was plenty of buyout action last year and that could continue in 2008.
“I’m always of the opinion, especially over the last couple of years, that the M & A; markets are still very active in healthcare,” said Paul Kacik, a senior vice president and head of healthcare investment banking for Barrington Assoc- iates, which has offices in Newport Beach and Los Angeles.
Complying with Sarbanes-Oxley rules, among other things, is leading companies “to focus their efforts more toward M & A; rather than going through an IPO transaction,” Kacik said.
Money for merger and acquisition deals has been readily available in the marketplace, according to Kacik. He expects that to continue this year.
There could be a pullback when it comes to larger buyouts because of the credit crunch, Kacik said. Deals in the “middle market”,companies with $50 million to $1 billion in revenue,may not be heavily affected by credit issues.
“Obviously, lenders are more cautious about what deals they’re doing and how much leverage they’re willing to put on a company. But that really hasn’t stopped financial buyers from stepping up to the plate and paying decent purchase multiples for companies,” Kacik said.
As for buyers, Kacik said private equity firms would be pursuing mature companies that have solid sales, positive cash flow and already have products on the market, when it comes to the medical device sector.
“Whereas with the venture (capital) guy, he’ll take that regulatory product development risk in return for the potential for real huge upside gain,” Kacik said.
Others agree that more buyouts will play out this year.
“I absolutely see much more M & A; activity than IPO activity,” said Dennis McCarthy, a managing director for investment bank B. Riley & Co., which has an Orange County office.
Last month, Eyeonics Inc., an Aliso Viejo maker of replacement lenses for cataract patients, said it’s being bought by Bausch & Lomb Inc. for undisclosed terms.
The company is set to become part of Bausch & Lomb’s surgical business. The buy should close in the current quarter.
J. Andy Corley, who cofounded and ran Eyeonics as chief executive, is set to run Bausch & Lomb’s U.S. surgical business from Aliso Viejo.
The buy supplants Eyeonics’ plan to raise about $86 million in a public stock offering.
Wall Street Turbulence
Given Wall Street’s downturn, the buyout likely proved more appealing to Eyeonics and its investors, including Versant Ventures, which has offices in Newport Beach and Menlo Park.
William Link, a Versant managing director, was Eyeonics’ first investor and worked with Chief Executive Corley at Allergan Inc. of Irvine. Link serves as an Eyeonics director.
The company’s lead product is the Crystalens, an implantable lens designed to offer users “natural vision” after cataract surgery.
Some companies just aren’t feeling enough love from Wall Street to go public.
Devax Inc., a Lake Forest maker of drug-coated stents to treat vessel disease, said in mid-December that it was withdrawing its bid for an $85 million initial public offering.
Overall turbulence in the stock market, McCarthy said, “just makes the IPO market a much less predictable place for companies to go for capital.”
McCarthy said the health market tends to attract more strategic buyers seeking to fill in product lines. Such was the case with Siemens AG of Germany, he said. Siemens bought Dade Behring Holdings Inc., a rival of Fullerton medical testing company Beckman Coulter Inc., last year.
OC still has a decent crop of smaller and midsize healthcare companies, particularly in the device area, that could attract larger players.
Applied Medical Resources Corp., a privately held device maker in Rancho Santa Margarita that has roughly $100 million in sales annually, could go public. The company’s seen its sales and workforce surge in recent years.
“We do have the intention of being public at the right time and the right place, and that might possibly be in the foreseeable future,” Chief Executive Said Hilal said in late 2006.
