TEXT: 415-425-4961

S2:E14 | #14 – Medtech IPOs w/ Matt Steere

UMN Matt | Medtech IPO

Matt Steere
Managing Director & Co-Head Healthcare Investment Banking, Medical Technologies & Diagnostics

Matt has extensive experience in public and private financings, buy-side and sell-side transactions and fairness opinions in the Healthcare sector. Before joining Canaccord in 2007, he worked in First Albany’s Healthcare Investment Banking Group. Matt was instrumental in building their Healthcare franchise into one of the most active boutique investment banks focused on the Life Sciences sector and was head of their West Coast Investment Banking efforts. Before this, he worked in the mergers and acquisitions group at Robertson Stephens, focusing on the Life Sciences practice and also worked at PaineWebber. Matt graduated with a Master of Business Administration from the University of Virginia and earned a BA from St. Lawrence University.

+1 415 229 0640

Listen to the podcast here

Medtech IPOs w/ Matt Steere

In episode fourteen, I interviewed Matt Steere, the Managing Director and Co-Head of the healthcare investment banking team at Canaccord Genuity. Matt has many years of experience in public and private finance buy-side and sell-side transactions and has been doing fairness opinions in the healthcare sector. Before joining Canaccord in 2007, he worked in First Albany’s Healthcare Investment Banking Group.

Matt was instrumental in building their healthcare franchise into one of the most active boutique investment banks focused on the Life Science sector. Matt was Head of the West Coast Investment Banking efforts as well. Before this, he worked in the mergers and acquisitions group at Robertson Stephens, focusing on the Life Science practice, and also worked at PaineWebber. Matt graduated with a Master’s of Business Administration from the University of Virginia and earned a BA from St. Lawrence University.

Matt Steere, I’m glad you could be on the show. It’s one of the episodes I’ve been looking forward to quite a bit because the practice that you lead at Canaccord is not only is it something that I’m in the midst of but for healthcare entrepreneurs and builders of these companies. If you can cross this gauntlet of being able to raise capital, the scale of business to the part where you’ve created a demand to even consider an initial public offering, or even maybe a sale of the business, it’s something very exciting that few people get to. Should you approach that, they get to meet with you and your team at Canaccord. Thanks for making the time. If you don’t mind, before we jump into it, tell us a little bit about your background and put it on a timeline for us. How did you get into investment banking?

Thanks for having me. I’m excited. This is my first show, so I’m especially excited. I’ve been in banking for many years now. I got into finance after going to business school in Virginia and did an internship that summer between my 1st and 2nd year. I was working 110 hours a week, and I loved it. I decided that’s what I wanted to do. I started out in New York, and migrated pretty quickly to healthcare, more specifically to MedTech, because I like the tangible nature of it with devices versus biotech. I’ve been at Canaccord for many years, based here in San Francisco. I lead our effort in the MedTech practice. A big piece of our business has been bringing companies public. It’s been a pretty active market for the last few years. I’m excited to talk to you about it and the opportunity there.

You’ve been in banking since about the year 2000. When you decided to go with the healthcare route, was the dot-com bubble still inflating or it popped and healthcare seems like a good place to be?

I was in healthcare even during the bubble. I got into banking at the tail end of the bubble. I joined a firm called Robertson Stephens, which was no longer around about a day before the NASDAQ peaked. It was funny timing, but I had migrated to the healthcare group there and they were doing a lot in biotech and MedTech. Even though it wasn’t tech, it was still a pretty exciting time.

Our audience is very smart. However, I find that a lot of people don’t know when they hear the term investment banking. It’s like, “What does that mean?” You’ve been kind enough to teach me over the years, but if you were to take this term investment banking and within the groups within your team, how should people think about it in general?

My adult children and my wife don’t even know what investment banking is after all these years, but it’s not so much about investing. It’s about helping companies to progress either through raising their capital privately, in public markets, or by finding a merger partner for them. It’s those three things that I spend most of my time on. We target exciting growth companies with interesting technology in the MedTech field. Those are the ones that are going to be attractive to institutional investors, private investors, and also the larger companies that might acquire them. I spend my time building relationships with companies like Providence Medical, but also with the universe of potential investors and buyers.

It always amazes me how you seem to have tabs on every company that’s promising within healthcare. I always enjoy our conversations and also like talking to Kyle Rose, who is one of the best research analysts in MedTech. What is Kyle’s role within the overall Canaccord firm and how does that compare to what you do in the investment banking team?

UMN Matt | Medtech IPO
Medtech IPO: If you have investors that have made good returns through this portion of the year, they’re going to be a little bit more wary about putting their capital at risk as we finish the last few months.

Kyle is one of our lead research analysts. He covers a few sectors, including orthopedics and spine. His role is basically to find companies that are already public, that he likes, that he has knowledge within that space, and to have an opinion on them. He provides that opinion to institutional investors. If he likes the company, it will have a buy rating. He will say, “This company has great prospects in the market.” We interact with him in very specific ways. If we’re involved in an IPO, one of the things that we vet internally is Kyle, if it’s in his space, is he supportive of a deal?

Generally, we don’t want to get involved with the company if he’s not supportive because we think a key part of being involved in IPO is to support those companies in the aftermarket, especially as a bank, like Canaccord, which is more of a mid-market growth-focused bank. We think it is especially important to support the companies that are sub $2 billion in market cap with strong research support.

When people refer to an equity capital markets person, what is that role and how does that interact with the investment banking team and the research group?

It’s probably a little bit different at each firm. At Canaccord, our equity capital markets team is the group that gets involved with equity financing. Let’s say, we’re working on an IPO for Providence Medical. Our equity capital markets team would be very involved if we were a book-runner in understanding the story, working as a liaison between banking and research to make sure that they’re connecting all the dots, making sure that we’re doing the right things, helping with some pre-marketing, test-the-water meetings.

At the end of the day, when you’re in the actual deal process, the equity capital markets team is the group that talks to the institutional investors and works with our salesforce to get the orders. They will organize the meetings and then get the orders for the actual book in an IPO or follow-on offering as well. It’s nuanced, but they’re a critical piece of the team, we also have people within that group that are healthcare-focused, specialists that deal with MedTech and biotech companies. We have other specialists on the ECM team that deal more on the technology side. Those are our two main areas of focus.

It is a nuanced, but very clear description. It’s the last question until we get into the market outlook because it’s an exciting time for capital markets, IPOs, and SPACs. You prepared some materials and I can’t wait to see them. The term you mentioned, joint book-runner or co-manager, at the highest level, what does all that mean? For the people like myself that have been embarrassed to ask in the past, please explain that to us.

When you choose banks to support you on an equity offering, whether it’s an IPO or follow-on, you generally will choose a group of banks called the syndicate. Within that syndicate, there are banks that are the book runners. It could either be one bank or multiple banks. Those are the banks that are very involved. They’re the ones that would be out setting meetings for you, interacting with the institutions on your behalf. They would be taking orders into the book.

The book runners are the most active piece of the book. Below that, there are different terminologies, but it would go passive book runners, lead managers, and then you have co-managers. There are all different flavors in terms of how many banks you have involved and what the makeup is, partially dependent on how big the deal is and how much money you’re raising. The co-managers are generally less involved.

A lot of times, those banks will be brought into a deal because they have strong research. Maybe not as involved in the actual nuts and bolts of the deal, but good aftermarket support. In Canaccord, candidly, we play both roles or all of those roles, depending on the deal. A lot of times, if you look at larger IPOs that are done in MedTech, there will be bulge bracket banks that are in the book runner position and then smaller banks that would sometimes book runner, lead manager, or co-managers. There are a lot of different flavors, but hopefully, that explains the basics.

A key part of being involved in an IPO is to support those companies in the aftermarket. Click To Tweet

I appreciate that backdrop. Tell us about the market. How are things?

This is our strategist and in his view of the market. Admittedly, Tony Dwyer has been bullish for a long time, but he’s been mostly right. His view is we’re definitely seeing some volatility here in general. I’m talking about the broad markets, not just in healthcare. He expects earnings to be extremely strong in this quarter. At the end of the day, stock prices are driven by earnings. Earnings are positive. We’re likely to see continued upward movement in the stock market. That’s what he’s anticipating for the rest of the year.

One thing that we have seen generally speaking at the end of 2022, if you have investors that have made good returns through this portion of the year, they’re going to be a little bit warier about putting their capital at risk as we finish because they’re a little bit concerned that if they have a bad month, they could ruin the positive returns they’ve already achieved. We’re seeing that a little bit, and we’re starting to see a little bit more volatility in MedTech specifically and some of those offerings, which we’ll get to.

With the general overview, I’m looking at the graph. The VIX, is that a measure of volatility? Where is that now relative to maybe historical averages?

The VIX is right at the historical average. We’ve seen an uptick earlier in 2022. It’s come down more lately. The volatility we’ve seen is more as it relates to offerings within the market. Specific to MedTech, some of the recent deals have not performed as well. For some of the high-flying companies, the valuations have compressed a little bit. We’ll dive in a little bit more to MedTech. This is a chart that we’ve kept for a few years. We think it’s instructive for a paradigm shift within MedTech. This chart on the top is a smaller cap, but we’re calling small cap $250 million to $2 billion MedTech companies, and where that aggregate group has traded on TEB to LTM revenue multiple over the ten-year period. The historic average is about 4.7 times.

Since mid-‘18, these numbers overall have been well above the historic averages. We hit an all-time high of 7.61 one time. I want to emphasize that this is a basket of companies. This isn’t 1 or 2 companies. The basket of companies is creating this TEB to revenue multiple. This dip here was COVID, and this dip is for the volatility that I was talking about. It started to recover a little bit and we’re still again well above historical levels, but it’s interesting to note that essentially since this period in 2018, we’ve been in this new paradigm. It’s something that has surprised a lot of people, myself included.

If we look at a theoretical company where their last twelve months of revenue is $100 million, historically, they’d have an enterprise value of $470 million something, but that same company in this environment where there’s such a premium for growth has an enterprise value of $761 million.

It was about $700 million, but this was the peak, $761 million. That’s a good way to think about it. One of the things that we talk about a lot is one of the reasons for that as we look at IPOs as a leading indicator. This is the number of Life Sciences IPO since 2010, almost $700 million and only about 10% of those deals were in MedTech. The vast majority of these deals are in biotech. There is this scarcity value. There are fewer MedTech opportunities out there because there are fewer good companies that are ready to go public.

If you look at the performance of these deals on average, it’s almost two X. If you’re an institutional investor and let’s say you invest in Life Science companies, if a MedTech story comes, you’re going to pay attention to it because you have the opportunity to get two X returns and you’re only going to see 1 out of every 10 deals coming as a MedTech company. That’s a dynamic that has continued. These numbers, if you look, this is ten years. You look back, 5 or 3 years. It’s a pretty similar dynamic.

UMN Matt | Medtech IPO
Medtech IPO: If we’re not funding these early-stage opportunities, are we ever even going to have a market out here?

A lot of the audience are early-stage MedTech founders. David Cash of Medvest Capital, who sits on our board, was our early-stage venture capital investor. His fund can invest across all stages, but primarily the first check-in. The dynamic that he’s seen is there’s been so much allocation of capital and venture as an asset class to growth equity, commercial-stage, and later-stage development of MedTech companies.

If you’re able to finance maybe the first few years to a point where you have regulatory clearance, products, and patents, there are a number of options for good companies for that financing. It seems like then, if you can continue to scale and be a candidate for an IPO, there’s a scarcity. It makes me wonder if the lack of early-stage venture in MedTech is pulling this down. It would stand to reason that this scarcity probably doesn’t lift and could even get worse.

If you think about how long it takes a MedTech company from starting the company to being ready to go public, it’s usually somewhere between 6 and 10 years, the average. If you think about the company going public here, a lot of them were doing their initial financing back here, and the market was tough. I remember one of my worries about our business was, in general, if we’re not funding these early-stage opportunities, are we ever going to have a market even going to have a market out here?

Strangely, a lot of these companies showed their flexibility and willingness to figure out ways to get financed through nontraditional means, a lot of family offices, and a lot high net worth individuals. It worked out, but it’s a good point. I’m still curious if there will be another shoe to drop. Although, in the market, it seems like we have a good backlog of very interesting MedTech companies that should be able to see this play out at least for a few more years as we sit here.

That certainly was our experience. The first few years, it’s family office and high net worth individuals because even early-stage MedTech, they write risky checks, but there has to be something there and it’s in software. One of the things that helped MedTech founders is the availability of venture debt, which maybe there was a handful of players years ago.

Now as debt funds have been able to attract quite a bit of capital, it’s a nice way to take a relatively small, early-stage check and extend it to maybe another couple of years of development. This is great. The key point here is there’s a scarcity of MedTech IPOs and Life Science investors. They get double the return, so they take a hard look at the good ones.

This is a little more on the MedTech IPOs. This chart is essentially all the MedTech ideas in 2010. We looked at the revenue of these companies at the time they went public. Trailing revenue at the time of the IPO, and we bucketed the companies by the revenue. This means sixteen companies went public with less than $10 million in revenue at the time of deal 12 or between 10 and 25, etc.

We looked at the same corresponding companies and looked at what their promised growth was at the time of the deal. The early-stage companies, surprisingly, they need to promise higher growth because they’re going off a smaller base and getting valuations that are a little more forward-looking. As you get out to this group, you see an average of 37% or 32%.

It brings us to the rule of thumb that we use, which is if you’re a MedTech company and you want to go public, if you have $25 million of revenue and you’re growing the top line over 25%, that’s a good candidate in this market. This market has now been going on for many years. That’s the profile. The last thing, which is intuitive or expected, is we looked at how these companies performed within each bucket.

At the end of the day, stock prices are driven by earnings. Click To Tweet

These are all average performances. If the company went public at X price, we’re looking, “Where is their price? What is the return on that initial IPO price?” The early-stage deals are flat on average, essentially, when you get even $10 million to $25 million over 100% in each group here and maybe also predictably the later stage companies, the most predictable ones that perform the best of 346%.

This is something that’s intuitive. When we first put this together, we were pleased to see that it was playing out the way we would have anticipated. It helps us to guide companies as they start to think about an IPO. How risky do they want to be? Do they want to try to do something on that early end or do they want to wait until they’re much more into the sweet spot or the middle of the fairway?

The first thing that jumps off the page is why is the performance for the $50 million to $100 million in trailing revenue significantly less, but as a company that’s running Providence at $25 million to $50 million, I imagine when you’re guiding expectations, it is easier with the amount of capital you’re likely to be able to raise in the IPO to put that money to work and grow 30% off a $30 million business than a $75 million business. Does that have anything to do with it, or am I thinking about it wrong?

That could have something to do with it. I think about this as even though this is a significant timeframe, these are still relatively small numbers. Within this group, there are twelve companies. If you have one that ends up having some issues and has a strongly negative return, it will affect these. I think about it more holistically like, “This group has been very positive on averaging.” In general, if you get out there and execute, you’re going to have a good stock performance.

It’s more just that all these companies are up over 100%. What’s the time horizon for this average stock performance?

It’s not a perfect analysis in that regard because this is every company from when they went public to where they are as the latest essentially. You could have a company that went public in 2002 that is up to 10%, but it’s been a long time, so that’s not exactly a good return. We didn’t do the IRR on this, but it’s still in terms of understanding the general trends. We think it’s helpful.

At worst, if you went public in 2010, the company doubled its value in ten years more or less.

The way I think about this is why are more companies and more private company investors thinking about the IPO market versus historically, there was a strong preference for private investors to say, “We don’t want to deal with going public. There’s too much volatility and execution risks. They would rather just sell and get a good return.” What we’ve seen in the market is companies can go public at decent multiples then if they execute. They can expand these multiples. These are averages here, on forwarding multiples, but we’ll show later and we showed in the initial chart, that there are a lot of companies trading well in excess of that.

If you’re a private company or a private investor, you now look at an IPO and say, “If we go public,” and IPO is confident about the team being able to execute, “We could trade at a premium to what the M&A multiple stores in the market. We could do a secondary offering or distribute our shares and get a better return.” That dynamic is interesting. It’s flipped traditional logic on its head, and it’s been playing out for several many quarters in over three years. People are starting to understand this and investors that may previously have never considered an IPO are much more open to it.

UMN Matt | Medtech IPO
Medtech IPO: If you’re a Medtech company that wants to go public, a good candidate in this market would be to have 25 million of revenue and grow the top line by over 25%.

There’s been a lot of discussion on this. I’ve heard CEOs of strategics and they have strong balance sheets. They’re looking to put capital to work organically but when public companies are trading at such a premium to maybe the strategic valuations, if a strategics getting training 4 times revenue and the target is 10 times, do they suddenly get priced out of M&A? When do strategics decide that they’re going to have to pay higher multiples because these companies that they’re passing on possibly earlier in the life cycle with access to so much capital public markets? In effect, they are creating much bigger competitive potential competitors or even more expensive takeover targets?

It’s an interesting dynamic. I remember right after COVID hit, we were having meetings with business development folks on Zoom. There were multiple people that I spoke to in that role who wasn’t happy that we were in a pandemic, but they were relieved that these multiples were likely to compress back to historical norms. The reason being is hard. As you said, for a large company, that’s trading at some multiple to justify paying 2 or 3 times that multiple for a target company in the public markets. What we’ve seen is right after that dip, the market went back to where it was and then some. We’re in this long-term, dynamic where public companies are trading its high multiples and it’s hard for these buyers to get their arms around that.

In certain examples, we have seen where companies that were getting ready to go public had filed publicly. Everybody knew that they were ready to go have been acquired prior to getting public because of this dynamic. If they go public, there’s a good chance that their multiple goes up significantly. We were on a deal as an example for a company called preventives in the monitoring space. Boston Scientific ended up buying them right before they went public. That was the reason. We’re starting to see more of that. It’s all driven by this dynamic in the market, high-growth MedTech companies trading for historically high valuations. That definitely is a challenge for the buyers in the market in all different sectors.

You mentioned the time. A lot of these companies, by the time they go public, they’ve been taking ten years, often VCs, the life of their fund is ten years. They are looking to invest a particular fund that they’ve raised over 5 years and then see assets in the second 5. In your discussions with management teams and subsequently board members, are you seeing VCs think differently about IPO versus maybe a trade sale to a strategic? If so, what’s the change been?

These investors are much more open to an IPO as a more viable path to an exit. If you talked to me years ago, I remember so many investors when an IPO option would come up, they would say, “An IPO isn’t liquidity. It doesn’t get us liquidity.” These days, it gets you very close to liquidity. You can get public stock trades up significantly. There’s tons of volume in these companies.

Some have done secondary offerings to get liquidity, with Silk Road as an example. Others have just allowed these investors to distribute at attractive outcomes. That dynamic has changed. It made the IPO market much more appealing vis-a-vis the historical view that M&A is the way to go and IPO. It’s not real liquidity. It’s challenging because execution is a huge risk and who knows how you’re going to trade? These days more often than not, these companies are trading well.

When companies complete a successful IPO, they execute and then decide to bring more capital into the business through a second offering. What’s the average number of quarters of execution that you would advise, or that you’ve observed on average where companies would then do that offering and get maybe venture investors some liquidity?

There’s a little bit of a difference there. A follow-on offering is one where you raised primary shares for the company like you do an IPO. You raise $100 million, the stock doubles, and then you say, “We want to build our war chest.” You may go out and raise another $100 million for the company on your balance sheet. That’s a follow-on. Those have been done again much more quickly than we’ve seen in these historical cases because the stocks have performed so well.

The company says, “I’ve raised money at 20 and now my stocks at 40, the prudent thing to do to shore up the balance sheet even more.” The other piece or offering that maybe you were talking about is a secondary offering where you have a deal where you may raise some primary proceeds, but you’re also doing a deal where you’re selling shares for current shareholders. That doesn’t get any capital into the company.

Once you're public, you want new investors to be able to come in, find shares, and be able to take a position. Click To Tweet

You’re allowing your current investors to sell in a more orderly fashion. If they distribute their shares, you don’t know as a management team where their shares are going. If you do a secondary offering, you have banks involved and they can place them on with institutions that you’re generally going to be happier with. That’s probably a longer discussion, but all of those types of offerings have happened much more quickly because we’ve seen stocks move so much more quickly in a positive direction, post-deal.

Thank you for that distinction. It makes a lot of sense because if a VC’s reticence was that lack of liquidity and execution risk, but after doing the IPO, the banks that advise you on the offering knew that it was oversubscribed. There’s a lot of demand. It had some belief that they could then do this orderly, private secondary. It would seem to address some of those risks. Is there any lockup period for something like a secondary private offering?

Normally when you do an IPO, it’s very typical to have a 180-day lockup to 6 months. If they choose, the underwriters can release the company from the lockup to do an offering sooner than that. So again, if the stock performs well and they know there’s demand out there, the company can talk to the underwriters and they’re going to be more than happy to oblige because it’s a transaction. It’s good for the company, the investors, and the banks.

You guys do good work. In that case, 180 days, there’s no lockup period. The underwriter doesn’t have to make a decision. Are you seeing people doing secondary 2 or 3 months after the IPO, or is it coming up towards the six-month window?

I don’t have that data handy, but there’s been a handful of deals that have happened before the lockup too, before those six months. The other dynamic that we’ve seen is a lot of the IPOs that have come out in the last years have played this window. Companies have raised way more than they initially anticipated because there was so much demand for the deal. They were up-sized, so they did it at a higher price and in some cases sold more shares than they planned to.

If you’re going out to raise $100 million and you end up raising $215 million, you’re not going to need to go and raise more money in a follow-on for quite some time, if ever, frankly. That has happened in many cases in companies like Pulmonic and Inari. They have raised more than they much more than they initially targeted. That has limited the number of follow-ons. We’ve seen some secondary offerings where it was to get liquidity for certain shareholders that had been in the companies for a long time.

It would be too early for a newly public company to do share buybacks. Investors probably wouldn’t like that or is that something that’s common?

That’s pretty rare. They generally want more liquidity. That’s not the way to do that. It’s the opposite. This is something in terms of the markets. This is a select group of MedTech IPOs in the last years and some of the things I would highlight. Overall the average return here is 194%. It’s positive returns. These are all revenue stage companies, trending towards the right-hand side of that chart that I had in terms of the buckets companies. We’ve seen that there’s been a little bit of volatility in this market. If you look back here, you only have a couple of deals that price below their offering range, and then the last two deals both price below the range.

The aftermarket performance if you look here, the last two deals are down on average 22.5%, and 3 of the last 5 deals are down. That’s been pretty unusual if you look back at all these other companies. We’ve definitely seen some softness. We weren’t involved in either of these two most deals. Tendo is a pretty good profile. It is $30 million in revenue. We used 30% as a benchmark until the data comes out. It’s a pretty interesting space. Minerva has a decent profile and probably, a smaller market opportunity.

UMN Matt | Medtech IPO
Medtech IPO: The market is taking a breather. It will probably be soft for ManTech IPO through the rest of the year and have a renewed appetite starting in 2022, assuming there’s no big macro event.

In general, the market is taking a breather and we would expect the market to be probably soft for MedTech IPO through the rest of 2022. We believe that there will be a renewed appetite starting in 2022, assuming there’s no big macro event. One other thing that I thought was relevant is the orthopedic/fine companies that have come out. In general, they’ve performed well. Paragon is a deal that we were involved in. It has done well over 30%. That’s a very nice company with $130 million in revenue. Treace is another one that has done well at 36%.

Biomentors is doing well. That’s a little bit more mature company. It didn’t price as well as some of the other ones and then SI-BONE which has now been out for few years, but It’s a good relevant company to think about. Providence is an innovative spine company that is growing fast and is not a full-line spine company. Those are the ones that the market likes to see and views as more growth companies versus a traditional spine company. That’s important for investors.

It’s interesting that Sentinel just priced. Can you think of anything that happened? You said you weren’t involved in it. Was there some news?

It was down right away on the first day. There was a dynamic where MedTech investors had said, “We want to be on the five-line right now.” The one thing I would call out as they have gross margins of 22.5%, they have a capital equipment model that would be disposable and their disposables are not the typical high gross margin product right now. They have a Gen2 coming out that’s going to be much more attractive, but it’s not a big piece of their business yet.

It’s more that investors were just saying, “We’re not that excited to put more MedTech in our portfolio now,” despite some of the things that we looked at earlier. That was a broad statement by investors saying, “We’re full.” I would expect companies to be very reticent to try to go out for the rest of2022. In 2023, things will start to pick up again.

The orthopedic comps with Paragon and Treace are both training ups since the IPO, both relatively recent, it’s unique looking at the mean and the median of the EBITDA margin. Both of those names had positive EBITDA margins at the time of the IPO and great gross margins. If you think about the road shows and anything you know about these deals, were investors hoping that they would put more to work and be willing to fuel growth even at negative EBITDA?

It’s been a strength. We were involved with Paragon. Investors liked the fact that they’re investing heavily in R&D and commercialization. They’ve got enough revenue that they should be starting to leverage their expenses. It was a positive for them because their top-line growth is still pretty attractive. They’re going to grow 25% in 2023, post-COVID. They had some COVID headwinds. They’re able to grow the top line nicely and still be slightly profitable. That was a great combination. I’m less familiar with Treace, but I suspect it was similar, although a smaller revenue mask for them.

One of the discussions that come up often is, “What percentage of the company that percent sold?” It seems like the mean and the median is all about 27%. Can you explain what that means?

We would think of that as 20% to 30% as the right range. That’s the amount of dilution for your investors. You’re essentially selling 25% of the business to new investors in order to get public. That’s how I think about it. You definitely want to sell enough shares that you can have enough institutions participate in the deal. That equates to liquidity at the end of the day, because once you’re public, you want new investors to be able to come in, find shares, and be able to take a position.

A company focused on innovative products is the one both the big and the midsize players are going to continue to be interested in going forward. Click To Tweet

The average deal size is about $130 million. Have you seen companies that you thought maybe they should have sold more of the company but there was dilution sensitivity, and then it ended up hurting them because there wasn’t enough float to get the right investor base?

Historically, that was definitely something that we saw a lot of. These $124 million and $234 million are big numbers for MedTech IPOs. In some of the deals I mentioned, like Pulmonic, their initial target was $100 million and they raised $218 million. Outset Medical was targeting $125 million. They raised $278 million. Acutus was targeting about $100 million and raised $180 million.

Inari is similar, at $180 million. It was almost the opposite. These companies had so much demand, and they decided, “We would rather shore up our balance sheets, so we don’t have to worry about financing again ever. We’ve got a war chest that we can invest properly in the business and also look at M&A opportunities as they arise.”

If you’re an investor at $5 million, it’s private, and it prices at $10 million, you probably don’t care of 25% dilution. This is helpful.

I’ve got some SPAC information here. I’m not going to spend much time on it other than to say the SPAC market was gangbusters earlier in 2022. You see these blue charts were proceeds for SPACs and they fell off a cliff in April 2022. The dynamic is that a lot of the SPAC deals have been announced on average. Those stocks are trading below the $10 share price.

It’s difficult to get pipe investors to participate in those deals. We’ve got a bunch of SPACs that are in the market, looking for qualifying transactions, and not a lot of appetite for new investors to come in and support those deals. It’s challenging. The other piece of that as it relates to healthcare is of the SPACs that have announced deals about 10% on healthcare.

It’s not a huge piece of marketing. Of those deals, a very small percentage have been MedTech deals. It’s more biotech companies. The last thing I would say is that shareholder redemptions have increased. The orange is the second half of 2021. Now you’ve got 30%. Over 30% of these companies have 80% to 100% redemptions. That just means the investors are not pleased. The SPACs are trading below 10%, so people are running for the hills rather than wanting to participate.

This is a little bit of data on some of the high-growth MedTech names. This isn’t just a handful of companies and others, but there are a lot of MedTech companies that are trading at very aggressive valuations. These companies, on average, 13.7% to 14.3% times in 2022 revenue. It’s been a paradigm shift. This isn’t like, “It’s happened for six months.” There’s a handful of companies that the broad swath. If you’re growing the top line fast, the average growth here is 25% to 28%. You’ve got the opportunity to trade it at these multiples. We’re going to see that continue.

This is not every MedTech IPO, but the ones that are growing in that growth rate of 27 in the high 30s, if you can fit this profile, which not everyone does, but the companies that are able to sustain those types of growth rates are getting over 12 or 13 times forward revenue as a valuation. That’s unbelievable.

We could have put more companies into this. These are not all orthopedic names by any stretch, but that’s where we got OrthoBiologics, OrthoPediatrics, Treace, or Paragon 28. There’s a good group and a decent representation within the ortho world as well. This is the spine universe. It’s a mixed bag here, but the companies that are growing fast like Out Tech, SI-BONE, and Globus also are being valued as growth companies. Several years ago, spine was in a tough position where they wouldn’t have seen these. It’s changed. On the M&A front, I’ll end on that.

In the interest of time, if you look at selected spine M&A transactions, I still think that the deals that are getting done and attractive valuations are the ones that are differentiated. We’re not seeing a lot of the full-line spine companies getting acquired for big numbers. K2M was an exception to that, and they did a great job playing up the complex spine piece of their business. Being a company that’s focused on innovative products, the ones that both the big and the midsize players are going to continue to be interested in going forward.

This has been extremely helpful. I always enjoy our discussions. Thanks for being a guest on the show.

It was my pleasure and I look forward to staying in touch.

Important Links

Leave a Reply

Your email address will not be published. Required fields are marked *