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2004 Could Be Payoff Year for Flush Healthcare Startups

2004 Could Be Payoff Year for Flush Healthcare Startups

By VITA REED

Could this be the year some of Orange County’s medical device, drug and other healthcare hopefuls go public or get snatched up by bigger players?

Some believe it’s possible.

“The exit market in 2004 looks more favorable than it has in some period of time,” said Ralph Sabin, a general partner in the Irvine office of Encino-based Pacific Venture Group, a healthcare and medical technology investor.

After several years of robust funding for local medical companies, many are sitting on piles of cash and have products in advanced stages of development. Some even have cleared the biggest hurdle: getting their offerings approved by the Food and Drug Administration.

That sets the stage for the inevitable: initial public offerings or acquisition by big-name device and drug companies.

Some examples of ripe OC companies: IntraLase Corp., an Irvine maker of lasers used in eye surgery that’s raised nearly $70 million in funding; Cogent Healthcare Inc., an Irvine provider of hospitalists, or doctors who work in hospitals, that’s raised about $35 million; and Lake Forest’s 3F Therapeutics Inc., which is developing a tissue heart valve used in bypass surgeries and has raised more than $30 million.

With the yearlong upswing on Wall Street, the outlook for public stock offerings by startups hasn’t looked this good since the bubble burst in 2000.

Nationally, “there is a building queue of companies that are filed with the SEC to go public,” said Arthur Klausner, general partner at Domain Associates LLC, a healthcare venture firm with offices in Princeton, N.J., and Laguna Niguel.

Biotechnology drug makers dominate the filings so far, according to Klausner.

“Although it’s my understanding that various medical device companies are in the process of drafting S-1 documentation,” he said.

An S-1 is a Securities and Exchange Commission filing that is the first step for a company that plans to sell shares to the public.

Novacept Inc., a Palo Alto-based maker of products to control excessive menstrual bleeding, is the only device maker to have filed for an offering so far this year. Cutera Inc., a Bay area maker of laser hair removal devices, also has filed, though the company’s products are classified as “medical equipment.”

“The investment bankers that we talk to all seem to be optimistic with respect to the resurgence of the IPO market in 2004,” Pacific Venture’s Sabin said.

One Pacific Venture portfolio company,Symbion Inc., a Nashville, Tenn.-based owner and operator of outpatient surgery centers,has filed to go public, Sabin said.

A resurgent stock market also bolsters the prospects that some OC healthcare hopefuls could get swooped up by the industry’s big players, which have seen their buying power rise with their stock prices.

In November, Medtronic Inc. of Minneapolis paid some $22 million for Vertelink Corp., an Irvine maker of rods used to hold the spine in place for patients with back problems.

Vertelink’s primary backer was the MedFocus Fund LLC, an Irvine-based incubator venture fund designed to speed development of new biomedical businesses.

Michael Henson, MedFocus Fund’s founder, said he believed the public offering market “may change somewhat, may open up slightly this year.”

“The prognosticators, and I’m certainly not one of those, are projecting that some medical technology companies will be able to execute a public offering,” he said.

But Henson and others offer caveats that could temper things for healthcare hopefuls this year.

One is that several recent biotechnology debuts,the stars of healthcare offerings,haven’t done as well as projected, Henson said.

One example: Acusphere Inc., a Boston-area biotech drug maker that raised more than $50 million in an October offering but now trades about 20% lower than its debut.

“Success stories” that are able to hold their prices for a three- to nine-month period may be needed to create interest and demand among venture capitalists looking to cash out, Henson said.





As for acquisitions, Henson said: “Generally, the acquisition market hasn’t been that active because some of the larger companies have had internal problems. And usually when they have internal problems, they don’t spend a lot of time trying to acquire companies.”

Barbara Lubash (photo), a managing partner at Newport Beach’s Versant Ventures, said her firm could see some portfolio companies go public this year or beyond.

“We can’t predict the future perfectly,we’re starting that period,” she said. “I would say over the next few years, there will be a number of exit activities, both acquisitions and IPOs.”

Versant’s first fund, which closed in 1999 and totaled $250 million, has 28 portfolio companies. One of those, Boulder, Colo.-based, Pharmion Corp., went public in November. Shares in the maker of hematology and cancer drugs were up nearly 40% last week from their debut.

But Lubash cautioned that most venture-backed healthcare companies still are longer-term investments than those in technology. As such, it’s normal for healthcare investments to take five to seven years, or longer, to go public or be acquired, she said.

And whether a company is ready to go public varies, according to Lubash.

“On the services side, in order to go public, the companies have to have substantial revenue, and, really, several quarters of predictable profits,” she said. “You have to be quite mature to have an opportunity for an IPO.”

Lubash cited Odyssey HealthCare Inc., a Dallas-based hospice care provider with a market value of $1 billion, and St. Louis-based Centene Corp., a Medicaid managed healthcare service provider, as fairly recent examples of venture-backed health services company offerings. Centene and Odyssey both went public in 2002.

“In general, the public markets are averse to pre-profit companies in services and healthcare IT,” Lubash said.

For biotech companies, Domain’s Klausner said having later stage clinical trial results in hand is key. The firm’s medical device investments tend to be acquisition candidates, he said.

“If they can go public, then that’s great,” Klausner said. “We look at (device IPOs) usually as a financing event, but then our ultimate liquidity from medical device companies is usually acquisition by one of the major players.”

Meanwhile, healthcare and life science venture capitalists are sitting on a stack of cash and are looking to invest it in more startups.

Domain recently closed a $500 million fund, Domain Partners VI LP for life science and healthcare investment, according to Klausner, who works out of Domain’s Princeton office.

Olav Bergheim, a veteran of Baxter International Inc.’s cardiovascular business, now Irvine-based Edwards Lifesciences Corp., is Domain’s Laguna Niguel-based venture partner.

Domain usually invests about half of its venture capital in drug makers, with 30% in medical device startups and the remaining 20% in what Klausner calls “other aspects” of healthcare, such as instruments, diagnostics and drug delivery systems,but not services.

“We’ve been very active, and we’re going to continue to be active. I would say that it seems to be picking up a little,” said Versant’s Lubash about the 2004 outlook for healthcare and life science venture capital funding.

Versant averages about one deal a month, according to Lubash.

“It was slow for a period of time in 2003, but I think it’s back to more normal levels now,” she said.

Versant is about halfway through its $400 million second venture fund and has invested in 18 portfolio companies from that fund so far, Lubash said.

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