Reimbursement pressures, regulatory hassles and a looming presidential election did not slow the pace of healthcare-related initial public offerings in 2007, and the new year holds promise for more to come.
There have been 38 IPOs in the healthcare industry worth some $3.35 billion in the past 12 months, and there are 36 more deals on deck that could raise more than $4 billion next year, according to a research report from Stamford, Conn.-based information company Thomson Financial. While the healthcare industry has not returned to its record-high level of 65 IPOs worth $5.8 billion in 2000, it has maintained a somewhat steady environment for the past few years, according to Matt Toole, a research director at Thomson. In 2006, there were 36 deals valued at about $3.38 billion, compared with 31 deals worth $1.9 billion in 2005 and 46 transactions valued at $3.5 billion in 2004.
Investors are attracted to the healthcare sectors tendency to be noncyclical, meaning that even when the economy is hurting, there will be always be a need for healthcare services. In a way, they say healthcare is recession-proof.
I think the reason for the interest is investors realize healthcare has been and will continue to be a strong performer in the market, said Ben Rooks, vice president of healthcare investment banking at William Blair in Chicago. Healthcare stocks have done well for two reasons, Rooks explained. (Its) the largest sector of the largest economy in the history of the world, and its only going in one direction as we get older, he added. Its noncyclical; right now it looks like there is a credit issue or oil prices go up. Healthcare is not particularly discretionary.
In 2007, healthcare equipment and supplies accounted for 16 IPOs worth $1.9 billion, representing 57.2% of the market share, while pharmaceuticals had 25.9% of the market share with 15 deals worth $867.4 million. Together, healthcare providers and services and biotechnology accounted for the remainder, with three and four IPOs respectively. A year ago, pharmaceutical companies led the pack with 12 IPOs worth $1.6 billion, representing 48.9% of the market share, as healthcare equipment and supplies had 12 IPOs valued at $748 million, representing 22% of the market share. Biotechnology, meanwhile, had 11 deals worth $557 million as healthcare providers and services trailed with one IPO worth $421 million. Healthcare IPO activity in 2007 has also been strong abroad, according to Jason Nogueira, an analyst with T. Rowe Price in Baltimore. Nogueira said he spent much of 2007 working on healthcare transactions in Brazil and China. In the U.S., Nogueira cited an unstable economy as one reason why investors will turn to the healthcare industry. During times of economic uncertainty, Nogueira explained, there is likely to be more interest in goods and services such as food and healthcare, rather than, say, homes and boats.
People still spend on healthcare in a recession, Nogueira said. There is a little bit of a safe-haven mentality and that allows you to do IPOs. Thats probably a theme. There is an investor appetite to own stuff in this group; they feel it will do well in a recession, he added. You gravitate to safer things.
Lester Knight is founder and managing partner at RoundTable Healthcare Partners, a Lake Forest, Ill.-based private equity firm that manages about $1.1 billion in equity capital and specializes in medical devices, products and pharmaceuticals. He also said healthcare is an attractive segment when the stock market is unpredictable.
Typically healthcare is counter-cyclical. When the consumer markets start to slow down, healthcare continues to be less affected by that, Knight said. As money goes away from the more traditionalhousing and anything industrialhealthcare will do better.