Ernie Andberg has a little more free time on his hands these days.
The long-time “emerging medical device companies” equity analyst for Feltl & Co. in Minneapolis has not seen a lot of companies emerging lately.
In fact, they’ve been disappearing all together. Case in point: Medtronic Inc.’s (NYSE: MDT) deal last week to acquire ATS Medical Inc. in Plymouth, Minn. for $370 million.
“The pool is kind of thinning out,” Andberg said.
He also wouldn’t be surprised if the remaining local companies he covers, including Synovis Life Technologies Inc. (NASDAQ: SYNO), Cardiovascular Systems Inc. (NASDAQ: CSII) and Vital Images Inc. (NASDAQ: VTAL), also get bought out soon.
In Minnesota, publicly traded medical companies that are not named Medtronic in Fridley or St. Jude Medical Inc. (NYSE: STJ) are not doing so well on Wall Street. Many of them have yet to crack the $100 million mark, or even turn a profit, despite being around for several years.
Take ATS Medical. The company, which makes heart valves and therapies to treat atrial fibrillation, lost money every year for each of the last five years, dropping $28 million alone in 2006. Since 2001, ATS stock has dropped nearly 90 percent to less than $3 a share before the Medtronic deal.
Urologix Inc. (NASDAQ: ULGX), a Minneapolis-based maker of devices to treat urinary incontinence, has also been running red ink for several years. The company generated $12.8 million in revenue last year, down 40 percent from 2007. Its stock trades at less than $2 a share.
Rochester Medical Corp. (NASDAQ: ROCM), another urinary incontinence device maker based in Stewartville, Minn., generated less than $1 million in profit over that last two years combined, compared to $34.1 million in 2007. Rochester Medical shares trade at less than $12 a share, about 60 percent less than in early 2007.
Poor performance will lower a company’s valuation, making that company an attractive target for a potential buyer.
That’s especially true for cardiovascular-related companies as big medical device manufacturers like Medtronic use their significant cash hoards to snatch up bargains, Andberg said. Faced with slowing demand for pacemakers and ICDs, Medtronic is seeking to boost sales through relatively inexpensive acquisitions, he said.
Device companies developing or selling one product are especially vulnerable.
CSI, based in New Brighton, Minn., originally filed for an IPO in January, hoping to raise $86.3 million to help expand sales of its Diamondback 360 device, which removes plaque from arteries in the pelvis or leg. But a weak economy and volatile stock market have nearly wiped out investor demand for IPOs, prompting CSI to go public by acquiring the remaining assets of Replidyne Inc. of Colorado. Today, the stock trades at less than $5 a share, less than half of its price last summer.
EnteroMedics Inc. (NASDAQ: ETRM)of Roseville, Minn. has seen its shares sink because of clinical trial problems related to its Maestro technology, which uses electricity to treat obesity. EnteroMedics stock trades at less than $1 a share, compared to $10 in December 2007. The Food and Drug Administration has yet to approve the device.
It’s not surprising then that device companies who consistently introduce new products like ev3 Inc. (NASDAQ: VVV) in Plymouth, Minn. and Vascular Solutions Inc. (Nasdaq: VASC) in Maple Grove, Minn., are doing relatively well, though their stocks have fallen in recent years.
Thanks to its $780 million acquisition of FoxHollow Technologies Inc. in 2007, ev3, which makes devices to treat peripheral artery diseases, is perhaps the only local medical device company outside of Medtronic and St. Jude with any considerable weight. The company last year generated a profit of $41.9 million on sales of $449.1 million compared to a loss of $335.6 million on sales of $422.1 million in 2008.
Another local medical technology company that could hit big makes software, not devices. Virtual Radiologic Corp. (NASDAQ: VRAD), in Minnetonka, Minn., sells teleradiology services and software that remotely connects hospitals and clinics around the county to radiologists who analyze and interpret MRI and CT scans. The company has been growing rapidly: $120.7 million in revenue in 2009 compared to $86.2 million in 2007.
The most troubling problem facing Minnesota public med companies is the lack of new ones. Aside from AGA Medical Holdings Inc. (NASDAQ: AGAM) in Plymouth late last year, the state has not seen one medical company go public since Virtual Radiologic and EnteroMedics in 2007.
With the IPO market still stalled, there are no ready replacements when companies like ATS get bought out.
As a result, Minnesota med tech companies are increasingly falling into two camps: startups that may never see the light of day and giants like Medtronic and St. Jude, who are only too happy to go bargain hunting.
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Nice catch Adrian. I corrected the story. Thanks! Frank, I didn't count CSI because it went public through a reverse merger, not a traditional IPO. Kind of backdoor way into the markets. As for Kips Bay and Electromed, there are plenty of Minnesota med companies that filed IPOs but never went public. So I'll believe it when I see it.
Also, CSI went public in 2008, after VRAD and EnteroMedics. Currently Kips Bay and Electromed have filed to go public. Combined SOX requirements with poor capital markets and it is not surprising that there has not been lots of IPO activity. I'd expect to see that pick up as the environment improves.
"The state has not seen one medical company go public since Virtual Radiologic and EnteroMedics in 2007." What about AGA Medical? IPO in October of 2009.