Amid Outset Medical’s $242m IPO, Warburg’s stake is valued at ~6x investment

Warburg Pincus’ decade-long investment in a business looking to redefine kidney dialysis care is proving a home run for the private equity firm. 

Following Outset Medical’s $242 million IPO on Tuesday, Warburg’s stake is now worth approximately 6x its initial investment in the maker of portable dialysis machines, a source with knowledge of the matter told PE Hub. 

To date, Warburg’s internal rate of return is approximately 30 percent, the source said. 

Warburg, which didn’t sell any shares in the IPO, still owns approximately 20 percent of the company post-IPO and remains its largest investor. 

Pricing at $27 per share above its anticipated range, Outset shares opened trading on the Nasdaq at $52 a piece Tuesday – hitting a nearly $2.5 billion market cap. Shares finished at $60.03 on Wednesday. 

Prior to its IPO, the San Jose, California-based company had raised nearly $450 million, with its latest $125 million Series E equity financing round led by D1 Capital Partners. Other investors include Fidelity, Partner Fund Management, Perceptive Advisors and T Rowe Price. 

Warburg’s investment dates to 2010, when it agreed to invest up to $50 million in the company then known as Home Dialysis Plus. The firm has participated in subsequent funding rounds, with its total investment to date amounting to approximately $90 million, the source said. 

Market disruption 

Outset, founded in 2003, turned a corner a few years ago when it achieved the nod from regulators for a commercially viable device known as Tablo. 

Tablo requires nothing more than an electric outlet and tap water for use. Its features include wireless connectivity to remotely monitor treatment progress, a touchscreen and a built-in water filtration system, plus wheels that provide mobility.  

The product was initially FDA-cleared for use in chronic- and acute- care settings, and has already seen massive demand from hospitals and government entities. In April, its product was cleared for use in the home.

As the acute-care market continues to see rapid growth, hospitals with this technology can reduce costs by taking dialysis treatment in house and moreover follow their patients into the home. 

Not only does Tablo align with the growing preference of home-based care, the pandemic has underscored another bottleneck in which Outset can tackle. Hospitals during the peak of the covid crisis have had a difficult time serving patients with renal failure in ICUs, as most traditional dialysis systems are separated and connected to backend infrastructure, the source explained. 

With Outset’s Tablo, providers can roll the machine into an ICU. 

Tablo shares the market with NxStage System, which industry giant Fresenius snapped up for $2 billion in February 2019.

Public market activity 

Outset Medical plays into the backdrop of other high-growth medtech players seeing runs on the public markets as of late.

That includes Warburg-backed Silk Road, a maker of medical technology that helps prevent strokes, as well as peers such as Inari Medical and Shockwave Medical. 

Silk Road shares are up more than 70 percent year-to-date. 

Another Warburg-backed company to keep tabs on is Alignment Healthcare, which is expected to weigh a potential IPO in 2021, people familiar with the matter told PE Hub. 

In 2017, Warburg injected $115 million into Alignment, a risk-bearing managed-care provider, joining General Atlantic as an investor.

Elsewhere, the buyout firm has been a participant in the summer’s SPAC craze.  

Warburg’s SOC Medical, an acute care telemedicine company, agreed to merge with Healthcare Merger Corp in July. The transaction, poised to close in the fourth quarter, implies an initial $720 million valuation for SOC Medical with Warburg set to remain its largest shareholder. 

Action Item: Check out Outset Medical’s S-1 filing for more info