Article preview reprinted from Start-Up - January, 2009
Find out how venture capitalists really have little choice but to consider making private investments in public equities a part of their regular diet.
PIPEs Flush with Opportunity
Prices for public equities are too low to ignore, and VCs clearly need to keep a portion of their capital invested in more liquid public equities. No doubt, public equities will provide them a clearer path toward paying out distributions to limited partners once the general partners set out to raise a new fund.
The public markets clearly remain a long-term investment, which suits the appetite of venture capitalists just fine. A review of the 19 private sales of public equities in device companies held in 2008 reveals that most of the investors in those rounds find themselves deep under water. Here's one way to look at the situation. If you tallied up the total dollars paid for a single share in each of the 19 companies, the total would be $64.23. Earlier this month—on January 9—those same shares would have sold for a total of $46.30, a 28% drop.
While medical device VCs clearly are moving more toward more public investments, it's a pattern that is more evident in the biopharma sector. Nearly all of the private sales of medical device companies went to undisclosed investors, most likely insiders who are picking up more of the company. The terms of these agreements might differ from those negotiated by venture capital firms, but the negotiated prices clearly reveal an opportunity for investors with an ear toward clinical success and the rising interest in certain markets.
For example, Cardima Inc., with a history of regulatory disappointments and financial troubles, secured $5 million in a May private sale of 8.5 million shares of stock at 50 cents per share. (See "AF Ablation: The Pulse of Innovation," Medtech Insight, September 2008.) The company—which saw its stock shoot up after releasing clinical data on its treatment for atrial fibrillation—now trades at $1.40 per share, presenting a potential value for investors who hold options on 1.3 million shares exercisable at 65 cents each.
Venture capitalists successfully picked out the only other two companies with share prices that gained strength since their public financings. ATS Medical Inc., a company developing heart valves and cryoablation technologies, secured $20 million from Essex Woodland Health Ventures, which paid $2.35 per share, a 7% discount. ATS shares were trading at $2.80 on January 9, 2009, a 20% increase. Essex Woodlands still holds options to buy more stock at $2.45. The deal was ATS's second go-around with a PIPE. Alta Partners acquired 20% of the company, paying $16.17 million ($1.65 per share) million in 2007.
MAKO Surgical Corp. hasn't delivered yet for the new investors who infused the company with $40 million (with the potential for $20 million more): Alta, Montreux Equity Partners and Skyline Ventures. They bought 6.45 million shares at $6.20, a price that represented a 9% discount. The deal closed in October. MAKO shares were trading at $6.57 on Jan. 9, a 6% increase over the price paid at the PIPE. Clearly investors are counting on the company's launch of the next version of its Tactile Guidance System, a robotic surgical tool, to change that.
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Companies mentioned in this article:
ATS Medical Inc.
Advanced Research Technologies Inc.
Bioheart Inc.
Cardima Inc.
Cardium Therapeutics Inc.
Cytomedix Inc.
Cytori Therapeutics Inc.
Derma Sciences Inc.
Electro-Optical Sciences Inc.
Exactech Inc.
MAKO Surgical Corp.
MonoGen Inc.
NxStage Medical Inc.
OccuLogix Inc.
Oculus Innovative Sciences Inc.
Patient Safety Technologies Inc.
SafeStitch Medical Inc.
SyntheMed Inc.
Urodynamix Technologies Ltd.
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