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Forget Wall Street, Buyouts Dominate Med Device Makers

For medical device startups, the exit sign has been clearly marked for the past few years: acquisition.

Big companies have snatched up at least 10 Orange County medical device makers since mid-2004. By contrast, just one has gone public in that time. IntraLase Corp., an Irvine maker of laser devices for eye surgery, raised $86 million in a 2004 offering.

(One other, Fountain Valley’s Sutura Inc., went public by combining with a shell company traded on the low-profile Pink Sheets exchange last year.)

Device makers “are finding it more difficult or less desirable to go public,” said Roger Zickfeld, a managing director at Los Angeles-based B. Riley & Co., an investment bank with a Newport Beach office.

Recent offerings haven’t fared well, said Dennis McCarthy, another B. Riley managing director.

“The trend may be influenced by the fact that (stock) buyers have lost money on prior deals,” McCarthy said. “So they are less likely to want to do another one.”

Take Alphatec Holdings Inc., a device maker in Carlsbad. Its shares are down some 35% since their June debut.

Others haven’t done much better.

Restore Medical Inc., a St. Paul, Minn.-based maker of treatments for snoring and sleep apnea, and BioMimetic Therapeutics Inc., a Franklin, Tenn.-based maker of drugs and devices to promote bone growth, both are trading well below their May opening prices.

“If you made an investment and now you’re down,let’s call it 30%,you’d be wary about the next one,” McCarthy said. “You have a finite universe of buyers. And the last several (device IPOs) have gone down in value.”


IPO Hopefuls

A couple of local device makers plan to test the waters.

SenoRx Inc., an Aliso Viejo-based maker of breast biopsy devices, and Irvine-based Alsius Corp., which makes catheters and a monitoring station to cool the body after injury, filed offering plans in spring.

Neither has set a date for their offerings.

Buyouts have been more common.

The most recent medical device company sale came in May when Johnson & Johnson’s Ethicon Endo-Surgery unit spent an estimated $100 million for Vascular Control Systems Inc., a San Juan Capistrano maker of treatments for uterus lumps and a device to cut blood loss during surgery.

J & J; is moving the business from OC to one of Ethicon’s facilities by year’s end.

Vascular raised about $23 million in venture funding in seven years. Investors included Johnson & Johnson’s venture arm.

The county saw three deals early this year.

Japan’s Terumo Corp. bought MicroVention Inc., an Aliso Viejo-based maker of catheter-based devices for treating cerebral aneurysms, or a ballooning blood vessel in the brain, in February.

The price wasn’t disclosed. MicroVention raised about $53 million in venture funding since its 1997 inception.

Ev3 Inc. of Plymouth, Minn., wrapped up its $115 million acquisition of Micro Therapeutics Inc. in Irvine in February.

Micro Therapeutics makes devices to tackle blood vessel disease. Ev3 had been the company’s majority shareholder.

Also in February, Moog Inc. of East Aurora, N.Y., spent $75 million for Curlin Medical Inc., a low-profile Huntington Beach maker of medical infusion pumps.

Moog is running Curlin, whose pumps are used to deliver a controlled flow of medicine to a patient in a hospital or outpatient setting, as a division within its industrial group.

ATS Medical Inc., based near Minneapolis, joined the buying in January. It spent $58 million for 3F Therapeutics Inc. of Lake Forest.

3F is a contender in the emerging market for replacement heart valves that don’t require major surgery.

Also in January, Innovation Sports Inc., a Foothill Ranch maker of knee braces, was sold to Iceland’s Ossur HF for $38.4 million.

Ossur, a maker of prosthetic devices, has its North American headquarters in Aliso Viejo.

Venture investors can sway whether a company sells or goes public, Zickfeld said.

“They’ve noticed that perhaps an acquisition is easier and faster than an IPO, certainly to get liquidity,” he said. “With an IPO, your stock is going to be tied up for a while. With an acquisition, you might get cash right away.”

Venture investors also like acquisitions because they structure their investments to include preferred stock, Zickfeld said.

“When there is an IPO, they typically have to convert their preferred shares to common and they lose those preferences,” he said.

Sometimes a smaller company is worth more to a particular buyer than it would be in a public offering, McCarthy said.

He cited Becton, Dickinson and Co.’s $235 million deal for GeneOhm Sciences Inc., a San Diego-based maker of infection tests with only about $5 million in yearly sales.

“Becton, Dickinson could take that product and give it to its sales force and start making money on it instantly,” McCarthy said. “The ramp of (GeneOhm’s) growth as a stand-alone company presumably would have been much slower than the steep ramp of revenues and profits that a Becton, Dickinson would get.”


Busy 2005

2005 was a “banner year” for medical device buyouts, Thomas Gunderson, an analyst with Minneapolis-based US Bancorp Piper Jaffray, told Associated Press in January.

Last year’s flurry of activity reflected a five-year harvest cycle in which technologies mature, making a company desirable for acquisition, Gunderson said.

At the same time, big medical companies were seeing slowing growth in sales of drug-coated stents, defibrillators, orthopedics and other products, said John Calcagnini, a medical device analyst for CIBC World Markets.

They needed to find ways to grow, he said.

OC saw its share of 2005 deals.

In September, Quinton Cardiology Systems of Bothell, Wash., acquired Cardiac Science Inc., an Irvine-based maker of heart defibrillation machines. The combined company retained the Cardiac Science name and moved corporate offices to Bothell.

Genyx Medical Inc., an Aliso Viejo maker of urinary incontinence fighters, was sold for $60 million in early 2005 to C.R. Bard Inc. of Murray Hill, N.Y.

The company was started with a sale in mind, according to Genyx founder Thomas Berryman.

“It was highly unlikely that this was going to be an IPO company,” he said.

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