By J. Casey McGlynn, Chairman, Life Sciences Group

A spate of recently announced acquisitions and IPO registrations of medical device companies signals a renewal in viable exit strategies for investors in venture-backed companies.

While the level of M&A and IPO activity in recent months does not approach the volume of transactions we were experiencing a few years ago, it does give renewed hope to the medical device industry at a time when many investors and executives have been questioning the strength and long-term prospects of this sector.

The recent activity included:

  • On July 8, Abbott Laboratories announced an agreement to acquire Perclose, Inc. for $680 million worth of Abbot stock, or $54 per Perclose share. The acquisition price reflects a price-to-sales multiple of 15.0.
  • On August 27, Medtronic announced the proposed acquisition of Xomed Surgical Products for approximately $800 million worth of Medtronic stock, or $60 per Xomed share. The price-to-sales multiple of this acquisition is 7.7.
  • On August 30, Guidant Corp. announced plans to acquire CardioThoracic Systems, Inc. for approximately $313 million worth of Guidant stock, or $19.50 per CTS share. The price-to-sales multiple for this transaction is 13.5.

In addition, for the first time in more than a year, there are medical device companies in registration for their initial public offerings. They include:

  • Aspect Medical Systems of Natick, Mass., which filed to sell up to $40 million worth of stock. Aspect has developed a method of noninvasive monitoring of anesthesia to provide clinicians with a direct way of measuring of the effects of anethestics on the brain.
  • Oratec Interventions of Menlo Park, Calif., which filed to sell 2.5 million shares to be priced between $15 and $17 a share. Oratec has developed devices that use controlled thermal energy to treat spine and joint disorders. It has two products on the market that use heat to shrink and repair damaged or stretched soft tissue.
  • Vascular Solutions, Inc., of Minneapolis, Minn., filed to sell 2.7 million shares to be priced between $11 and $13 per share. Vascular Solutions developed and is marketing a device to seal puncture sites following catheterization such as angiography, angioplasty and stenting. The product combines a simple balloon catheter with a proprietary procoagulant, or blood clotting mixture.

In our opinion, the underlying message of these recent announcements is that exit strategies still exist for companies that identify and address real needs in the marketplace and then successfully gain regulatory approval and insurance reimbursement for their products. Companies built on this model will be prime targets for hungry acquirers or have strong prospects for public offerings.

Significantly, all three of the recently announced mergers were structured as tax-free poolings of interest. The Financial Accounting Standards Board has long been critical of this method of merger accounting and has made plans to eliminate it by 2001. Industry observers predict that if FASB's decision is not reversed, it could speed up M&A activity in many industries, including life sciences, prior to the cut-off date, and then result in a slowdown in such transactions afterward.