May 23, 2012

Deal Journal Australia

Can U.S. Biotechs Inject Life to Australian IPO Market?

Equity capital markets bankers staring glumly at the US$217 million balance raised via Australian IPOs so far this year could soon have a new crop of clients: U.S. biotech companies and device-makers.
 
Californian sleep apnea device-maker Ventus Medical is currently raising A$40 million as part of its IPO while Minnesota’s Osprey Medical joined the Australian Securities Exchange on May 2, and – unlike Facebook — has held onto its offer price of 40 cents a share.
 
Others including San Diego-based stent-maker Reva Medical and GI Dynamics haven’t been able to hold on to their initial valuations, and are now trading between 20% and 41% lower than their offer price. But heart failure treatment device-maker Heartware International has more than quadrupled in value since it listed in November 2008.
 
Reva listed in December 2010 after its Chairman and Chief Executive Officer Bob Stockman recognized Australia’s proactive approach to investing in U.S. medical technology companies thanks to his role on the Heartware board.
 
Following Reva’s footsteps – owing to the advice of board members from Medtronic and Domain Associates—Massachusetts-based GI Dynamics listed Down Under in September 2011.
 
“The success of Reva’s IPO is a telltale for other companies which are non-starters in the U.S. because they’re pre-clinical trial and pre-revenue earning,” Mr. Stockman said. “There’s definitely a bridge from California to Sydney and American innovation-based companies see this as a great avenue. If local markets are tight for IPOs and Australian investors are willing to take a little more risk, why not?”
 
Reva’s strategic investors include Boston Scientific and Medtronic, and its market-leading competitor is Abbott Laboratories.
 
“Abbott is marketing the advantage of the technology to the clinical community, I think Reva will be the second-comer, but we’ll be a significant share player once we arrive,” said Mr Stockman, adding that Boston Scientific owns an option to negotiate distribution rights which will pay Reva a 50% royalty.
 
He added that Reva will consider a dual listing if it decides to accelerate its strategy of launching a clinical trial in the U.S. which and also to sate interested American institutions which are unable to invest in Australian-listed companies due to mandate or liquidity restrictions.
 
New York-headquartered hedge fund Elliott Management, Hong Kong hedge fund Senrigan Capital and Australia’s NAOS Asset Management are institutions currently on Reva’s register.
 
GI Dynamics – in which Johnson & Johnson is invested — is developing devices to treat diabetes and obesity and has facilities in Australia, the U.K., Germany, Holland, Austria and Chile. GI Dynamics expects to hear from the U.S. Food and Drug Administration by the quarter ended Sept. 30 regarding the design of clinical trials which are required prior to possible approval.
 
“At the moment we’re in good shape from a cash standpoint but depending on the FDA conversation, that may or may not require us to raise additional capital,” GI Dynamics Chief Executive Stu Randle said.
 
GI Dynamics has fallen 20% to 88 cents a share from an initial price of A$1.10 a share, but its earliest investor Advanced Technology Ventures believes an Australian listing was the right move.
 
Palo Alto-based ATV General Partner Mike Carusi said the IPOs of GI Dynamics and Reva Medical could be the beginning of a trend.
 
He explained that medical device companies are turning their initial strategy focus to markets like Europe and Australia on the basis that the path to commercialization in the U.S. can be unpredictable and expensive.
 
And it doesn’t help that the current U.S. markets aren’t welcoming of early stage opportunities.
 
“Investors want to see fast-growing companies with revenues between US$50 million and US$100 million, which is a headwind,” Mr. Carusi said. “In the U.S., there’s also more of a short-term ‘buy and flip’ mentality which doesn’t suit the volatile earnings of these companies but in Australia, there’s a bit more of a ‘buy and hold’ mentality.”
 
“Two of our investee companies GluMetrics and Neurovista are conducting clinical trials in Australia right now…it’s early days but over time, an Australian IPO is something we would consider,” Mr. Carusi said.
 
ATV has invested more than US$1.6 billion in early-stage private companies and Mr. Carusi reckons Australia could be fertile ground to hunt on both for ATV as well as any global venture capital funds with international mandates.
 
“It’s something I plan to continue to explore, medical device and biotechnology activity here is definitely interesting,” he said.