Applied Knocks Investor-Driven IPO [Orange County Business Journal (CA)]

HEALTHCARE: No proceeds for company; timing concerns

An investor's desire to cash out of a local medical device maker is fueling a filing for an initial public offering.

Rancho Santa Margarita-based Applied Medical Corp., the holding company for Applied Medical Resources Corp., filed with the Securities and Exchange Commission last week to raise $95 million in a public offering of 6.4 million shares of common stock.

Institutional Venture Partners, a latestage venture capital firm based in Menlo Park, owns about 20% of Applied and is the driver on the move to go public.

The venture capital firm invested in Applied's predecessors - Applied Vascular and Applied Urology - in 1988.

Applied director Peter Thomas was a general partner with IVP from 1985 to 2000.

IVP now "is compelling us to register shares of its Class A common stock for sale in order to provide liquidity to its limited partners by means of an initial public offering," Applied said in its filing.

"Doing so under the timing and in the manner demanded by IVP" isn't in the company's best interest, according to the filing. "Our board of directors believes that we will derive little benefit from being a public company and the public disclosure of sensitive financial and other information to our competitors may competitively disadvantage us."

Applied makes a range of medical devices, including ones used in laparoscopic surgeries as well as catheters, clamps, stents and guide wires. It competes with Johnson & Johnson of New Brunswick, N.J., and Covithen Ltd., which is based in Bermuda but operates from Massachusetts.

Founder. and Chief Executive Said Hilal told the Business Journal last year that remaining independent was important to Applied, which operates in an industry known for periodic waves of consolidation.

"We do not believe our business model is congruent or amenable to combining with large companies," said Hilal, who owns 25% of Applied and is set for a 37% stake after a public offering.

Hilal indicated last year that Applied might consider a public offering to finance future growth but not merely as "an exit strategy," he said.

All of the proceeds from the proposed offering are expected to go to investors.

Applied Medical declined further comment fortius story in the run-up to the offering.

IVP also declined a request to comment.

The filing comes amid a strong run for Applied. The company had revenue of $1-60 million and a profit of $25.9 million for the six months ended June 30. Sales were up 28% and profits rose 335% from the same period a year ago.

Applied said that its stock wouldn't be listed on a national stock exchange. A ticker symbol and offering date haven't been set.

The device maker also said in its filing it wouldn't be engaging analysts in a manner typical for public companies once an offering is completed.

"Our management does not intend to hold quarterly earnings calls or otherwise engage in conversations with stock market analysts," Applied said.

Applied has made its name as a niche player in an industry that's dominated by big companies such as Johnson & Johnson and Covithen. The rivalry's been spirited, with tangles in court on antitrust and patent matters.

Price Difference

Applied's recent strong run owes in part to its lower prices it offers hospitals, Hilal said.

"The economic duress many hospitals are going through these days" has helped drive Applied's sales, according to Hilal.

He said a combination of reduced reimbursements, Wall Street investment losses, and more patients who don't have health insurance or enough insurance were prompting some hospitals to seek out "reliable savings" on medical devices.

Hilal said his goal was to drive down prices on quality devices, similar to what's happened with cell phones, computers and cameras.

Applied's products are used in various surgeries, but the majority of its business is in the laparoscopic segment, which includes minimally invasive procedures done through small incisions. The market for those surgeries is about $2 billion annually, according to Hilal.

The company makes all of its devices in Rancho Santa Margarita. It employs about 2,250 workers, with most of them in Orange County.

It also has facilities in Irvine and is planning to build its European headquarters in the Netherlands.

Applied spends big on research and development. The company's filing showed that it invested $22 million there in the six months through June, accounting for about 14% of its revenue.

Johnson & Johnson spends about 11% of its $61.6 billion in revenue on research and development. Covithen spends about 4% of its $10 billion in annual revenue.

Plans for a public offering by Applied are the second for a local company since the end of 2007, when Ensign Group Inc., a Mission Viejo-based nursing home operator, went public and raised $64 million.

Tilly's Inc., an Irvine action sports retailer, filed plans for a $100 million IPO in July.

Smile Brands Group Inc. of Irvine filed for an offering in late 2009 but withdrew its plans in May 2010.

HIIaI: owns 25% now, due for 37% after offering

Rancho Santa Margarita HQ: most of 2,250 workers In Orange County