Firm buys stake in iCardiac

It is payback time for shareholders at iCardiac Technologies Inc. California-based Norwest Venture Partners now owns a majority stake in the University of Rochester spinoff, allowing early investors to take an exit route or continue the ride.

Financial details of the control transaction, which closed Feb. 28, were not revealed. Norwest officials called it a growth equity investment. Norwest’s website states that with growth equity companies, the fund aims to invest $15 million to $50 million and as much as $100 million. These are fast-growing companies with strong market positions, significant revenue and net income traction.

“The company is growing rapidly; it’s extremely healthy,” said Ryan Harris M.D., a partner with Norwest, in speaking about iCardiac. “The ideal investment is that we invest behind great managers and great management teams in companies that grow, and our goal is to help them grow even further and faster, even strengthen the company.

“This is an example where we’re investing behind strength and hoping to facilitate even more.”

The deal comes less than a decade after the founding of iCardiac, a private firm that ranked No. 5 on the Rochester Top 100 list of fastest-growing private companies in 2013. The company signed an exclusive license agreement with UR’s Medical Center in May 2006 to commercialize technology that could determine cardiac toxicity of drugs.

Last year iCardiac had its third profitable year. It now has roughly 80 employees, up from 67 in 2013. The company works with seven of the 10 largest pharmaceutical companies—doing business with 50 to 60 customers at any given time. Revenues in fiscal 2013 grew 100 percent.

ICardiac has expanded its presence, working on large clinical trials globally through depots in China and Eastern and Western Europe.

CEO Mikael Totterman declined to disclose specifics for the current fiscal year, which ends in June, but said the firm is expected to report significant revenue growth. If iCardiac continues to do well, he said, the company could boost its employment to 300 to 500 people in a matter of four to six years.

“We’re definitely looking at continuing to grow significantly and probably also adding new service lines and new technology,” he said. “We love the clinical trials area; there’s a lot of opportunity to … take technologies that have been implemented in wireless or telecommunications or other software areas and apply them to clinical software areas and bring clinical trials to kind of the modern age.”

He added: “I think there’s significant room in the market for growth.”

Big plans
Besides strengthening its presence in Rochester, the monetary influx from Norwest will help to make iCardiac a stronger player in the total addressable cardiac safety market, which Totterman pegs at a little more than $1 billion worldwide. The amount of money spent on such studies today is $300 million to $400 million.

“We want to grow, obviously in terms of revenue and customers but also in terms of employees, our presence in Rochester, and this is kind of a platform to do that,” said Alexander Zapesochny, president and chief operating officer of iCardiac, of the Norwest deal.

Having Norwest as a partner involves more than just funding. ICardiac is working on a seminal project with the U.S. Food and Drug Administration and a cardiac safety research consortium to demonstrate that cardiac toxicity in drugs can be detected much earlier in the process than previously thought. Having Norwest as a partner to encourage and fund that study is important, Totterman said.

“We’re going to have results of that later in 2014,” Zapesochny said. “We’re very excited because it’s not just about iCardiac’s core lab; it’s about being able to make the process of screening for cardiac issues at a much earlier stage a reality.

“It’s something many of us in this industry have been pursuing for years, and now it looks like we really may have a tool and an avenue for proving how useful it would be to look (for) cardiotoxicity at an early stage.”

ICardiac this year also expects to launch new generations of cost-effective hardware with added precision and software controls. Becoming more competitive globally also is part of the plan. Norwest already has helped the company strengthen its intellectual property portfolio.

“In the process of doing due diligence in the market, they identified some very helpful pieces of intellectual property and actually worked with us to acquire (them),” Totterman noted.

Premier partner

Norwest, a global multi-stage fund, is widely known for making smart investments in a quiet fashion, industry reports show. It manages more than $3.7 billion in capital and has funded more than 500 companies since its inception. Norwest is currently investing out of a $1.2 billion fund.

Its portfolio companies include RetailMeNot Inc. and FireEye Inc.—both firms that went public. Last week Norwest led a $40 million investment in Shape Security, a California startup that sells technology to protect websites from attacks.

In 2013, Norwest was one of 10 venture capital firms in the world that returned more than $1 billion to limited partners, Totterman said. Its success was a factor as iCardiac considered prospective investors.

“When you find the right partner, it’s about industry expertise, it’s about partnership and it’s about management style. The fact that (the iCardiac team) felt most comfortable with their partners at NVP made it easier for us to get comfortable,” said Brian Model, New York City-based managing partner at Stonehenge Growth Equity Partners, an early investor in iCardiac.

Also, he said, often when large investors come to a company the size of iCardiac, there is pressure to relocate, which is absent in this case.

“We invested in iCardiac when they had no revenue, and to see them achieve this level of success—that now there’s outside capital from outside the region coming to Rochester and continuing to grow the business and add jobs in Rochester—and that will spur more innovation,” Model said. “Hopefully NVP and iCardiac’s success will have other investors from outside the region saying, ‘Hey, I wonder what’s happening in Rochester?’”

Norwest’s due diligence on iCardiac was a positive experience, Norwest partner Harris said, and the more his firm dug, the more positive things it learned.

“The customers were ecstatic about iCardiac,” he said. “Many times they specifically said, ‘Hey, when you come and invest in the company, are you going to change the company culture, because we like the notion of a flexible, small-company culture that basically meets our needs as they change and really adapts to our needs, rather than a big company?’”

Added Harris: “The diligence just rang true and rang very positive.”

Norwest focuses on establishing long-term relationships. It typically invests behind strong management teams, offering assistance when needed and staying out of the way, letting companies manage as independently as possible, Harris said.

No to IPO
ICardiac’s deal with Norwest is an example of a global trend. Companies are choosing private-equity investors instead of raising money by going public. While an initial public offering was one way to return capital to investors, iCardiac did not consider that route.

“It’s become one of those things that is harder to do, and you really have to be very, very large,” Totterman said. “So we weren’t really very seriously looking at the going-public route. And the other thing—which is great, and I love American capitalism for that—is this whole area of growth equity has to a large degree replaced … small or medium-size IPOs.”

So the company decided to explore opportunities in the large investor realm instead. It also was an opportunity to help original shareholders realize a return as the company approached its seven-year mark in 2013.

“On top of that we’ve experienced very rapid growth over the last couple of years, and from our perspective we were looking to understand how do we make sure we’re able to actually meet the continuing demand of customers, especially as we continue to grow globally,” Zapesochny said.

Norwest’s health care team, which includes Harris and Vice President Robert Mittendorf M.D., also made it attractive. Both executives are expected to join the Rochester company’s board.

“What Norwest does is they understand the financials and financial strategies very well, but they truly understand the underlying technology, the markets, the partners and the channels,” Totterman said. “So what really set them apart was … they can actually provide us with the type of support that we’re looking to get to take the company to the next level.”

It was relatively easy to invest in iCardiac, Harris said.

“This is an example where we scoured the industry and we found the company that was the world leader in cardiac safety from a scientific standpoint, but also had what’s just as important to us, a unique company culture where they truly care about people, where people are covering each other’s back …, and how that translates is into a fanatical devotion to customer service,” he said.

Successful outcome
Both Totterman and Zapesochny are intent on not losing sight of this dedication to customers. While both want iCardiac to reach new heights, they expect the firm to maintain its balance of scientific superiority and customer service.

“We’ve got a really good customer service culture, and huge accolades to the team for being very customer-centric. Sometimes as you grow it’s harder to do that,” Totterman said. “We have to continue to make sure that we’re staying laser-focused on really taking care of our customers.”

He and Zapesochony also view Norwest’s arrival as a chance to attract talent and offer better career growth opportunities to iCardiac’s staff.

“For the employee base in Rochester this is really good news, because it means we’re going to be that much stronger, that much more in terms of level of resources, in order to continue to grow,” Zapesochny said.

For some investors, such as Model, it is time to bid adieu to iCardiac. Stonehenge, which invested roughly $750,000, will exit the firm. Model declined to disclose the level of return but said Stonehenge is receiving several times the capital it invested.

“This is an above-average return for us in the amount of dollars we’re getting back,” he said. “Exits have slowed down through the downturn.”

Model and iCardiac’s co-founders, who took risks to back the idea in 2006, are bullish about the company’s ability to compete and expand.

“It’s that spirit of never giving up and continuing to always look to the future to get the next thing done, and when you’re in an environment like that, it’s a joy to come to work and work with the team,” Totterman said. “I’m very optimistic about what the future will bring.”

3/7/14 (c) 2014 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email [email protected].