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Is the IPO Market Back? BY ROBIN R. YOUNG CFA, JANUARY 12, 2004

Capital markets aren't rational. Otherwise, they'd have longer memories. A year ago, when Zimmer was trading at $40.01, DJ Orthopedics was at $3.66, Encore was at $3.20 and LifeCell was at $2.89, you couldn't buy an orthopedic or medical device IPO. Since then Zimmer is up 77%, DJO is up 605%, Encore is up 181% and LifeCell is up 135% (the overall HealthpointCapital Orthopedic Index is up 39%), industry valuations are now sitting at 5.3 x sales and 39.6 x earnings. And institutional buyers want more product, fresh product. They want IPOs and secondaries.

While public Orthopedic company stocks were rising in 2003, as the table illustrates above, there were no IPOs in either the medical device or orthopedic industry. If any investor wanted to buy a public stock to play in the tremendous growth and profitability of orthopedics, they had, essentially, 22 names to choose from.

That situation appears to be changing – and fast.

Among all industries, there are currently 63 IPOs in registration, nearly half (27) were filed in the last 60 days. Of the 22 stock orthopedic universe we track, 3 companies (14%) have announced registrations to sell shares (DJO, Encore and LifeCell) in just the last 30 days. Zimmer already issued its new shares as part of the Centerpulse acquisition. Who's next?

Institutional portfolio managers, who've made an outstanding return investing in orthopedic this past 12 months, are receptive. With the mantra "the trend is your friend" ringing in their ears, we predict many will allocate last year's profits to orthopedic IPOs and secondaries in 2004. Luckily, ortho revenue growth and strong cash flows are in place to bail them out if sentiment turns.

A strong IPO market means a strong venture capital market. We are already seeing that phenomenon develop. Speeches by such leading VC lights as St. Paul Fund's maven, David Stassen are explicitly saying this. He, like others in the industry, is flatly saying that he is looking for deals.

Sounds good to us and we're probably just being a little picky to say... where were you a year ago?

Anyway, we are glad the capital markets are coming around and let's make hay while the sun shines.