Medical Device IPOs Could Be Lifeline For VC Exits

The healthiest industry to emerge in this year?s down-and-out IPO market is, ironically, healthcare. Despite being seen as a defensive investment, new filings from medical device companies flooded in during the market?s unofficial summer hiatus. If they manage to price in such a tight market, these venture-backed companies are poised to become top performers for the year.

As a group, the makers of disposable medical devices could raise as much as $391 million. Of the four filings, DJ Orthopedics Inc., Alliance Medical Corp., Digirad Corp., are venture-backed, Given Imaging Ltd. is not.

The strength heath care companies have shown this year, and thus the flood of new filings, is largely due to valuations, said Robert Gold, group head of healthcare and consumer staples, at Standard & Poor?s.

“It?s a value market in general, and when you look at the screens lots of the new names are diabetes, orthopedics, sports medicine [companies]. The valuations for these companies are favorable,” Gold said. “Generally, this isn?t a market picked clean by brokerage house analysts, and there?s more opportunity for growth.”

Taking medical camera manufacturing to a new level is San Diego-based Digirad (Proposed NNM:DRAD). Targeting nuclear medicine, which uses radioactive materials in the diagnosis and treatment of disease, the company has created what it calls the first solid-state digital gamma camera. UBS Warburg and First Union Securities underwrite the $69 million deal.

Digirad achieved a $93.3 million valuation, according to the VentureXpert database, when it received a $10.3 million second infusion of venture capital last year. Founded in 1985, the company?s backers include Alex. Brown & Sons, FS Private Investments, JAFCO America Ventures, Johnson & Johnson Development Corp., Kingsbury Associates, Merrill Lynch Capital Partners, Mitsui & Co., Sorrento Associates Inc. and Vector Fund Management. Digirad saw its last infusion of cash, $2.1 million, in February.

Shooting from a different angle, Given Imaging (Proposed NNM:GIVN) has created a groundbreaking use of a video camera contained in an ingestable capsule. Approved for use by the FDA just last month, the Israel-based company has wasted no time in taking a first-to-market approach. Looking to raise $80.5 million by selling 5 million shares, the deal is lead managed by Lehman Brothers, supported by Credit Suisse First Boston, Robertson Stephens and Fidelity Capital Markets.

DJ Orthopedics (Proposed NNM:DJOI) secured Goldman Sachs as its sole underwriter in its $172.5 million deal, the largest out of the group, and scaled larger than the $114.8 million valuation the company was given in early June, when it received $10 million in venture funding, according to VentureXpert.

The Vista, Calif.-based company specializes in sports medicine, designing and manufacturing devices that repair and rehabilitate soft tissue and bone. Founded in 1978, venture backers include First Union Capital Partners, JP Morgan Partners and TCW Capital. Proceeds from the IPO are targeted largely at reducing debt.

Alliance Medical (Proposed NNM:ALMC), founded in 1988, filed to raise $69 million, using UBS Warburg and U.S. Bancorp Piper Jaffray to underwrite the deal. The company is a reprocessor of disposable medical devices, a service that includes collecting, cleaning, function testing, reconditioning, sterilizing and repackaging. Last valued at $30.2 million when it received an $8 million round in July 2000, Alliance received its last venture cash infusion in February 2001, worth $11 million. Venture backers included Affinity Capital Management, Coral Ventures, Delphi Ventures, Patricof & Co. and Valley Ventures.

“Health care is a pretty defensive industry. And it?s a bear market,” said Gold. However, “medical devices as a group have had a spotty performance. The small to mid cap [companies] are doing much better [than large cap companies].”

Contact Colleen Marie O?