[Updated: 2:40 pm PT] Not that long ago, biotech executives weren’t sure who to call on Wall Street, or whether anyone would answer the phone. In late 2008 and early 2009, nobody could say for sure who would still be around in a couple years to supply capital to aspiring drugmakers.
Partly inspired by all the recent election-year reflection, I decided to look back at what biotech executives were saying about the financial crisis during some of the darker moments in January 2009. It was a scary time for the industry. Check this comment from an interview with Richard Pops, the CEO of Alkermes (NASDAQ: ALKS) at the JP Morgan Healthcare Conference that year:
“This remodeling of Wall Street is remarkable,” Pops said at the time. “Citigroup, Goldman Sachs, Morgan Stanley, Merrill Lynch, they’ve all restructured. Then you go to the next tier down, and those firms are all gone. We are in an industry that originally was financed by firms that don’t exist anymore. Hambrecht & Quist, Montgomery Securities, Robertson Stephens—those mid-size firms focused only on innovation companies and had direct access to investors who want to invest in these things. That whole layer of banks is gone…The great fear now is to release great Phase IIb data and see that nobody cares.”
While finance is always somewhat terrifying for companies in this uncertain business of drug development, industry executives have reason to be optimistic about the current state of affairs on Wall Street. Even though the biotech industry lost about one-fourth of its companies, and the biotech IPO market has only recently started to show signs of life, the worst fears were never realized. Public market investors still respond positively when they see a legit drug emerge—ask shareholders of Onyx Pharmaceuticals (NASDAQ: ONXX), Regeneron Pharmaceuticals (NASDAQ: RGRN), and Seattle Genetics (NASDAQ: SGEN), to name a few. The NASDAQ Biotech Index is up 25 percent year-to-date, compared with an 11.5 percent gain in the broader NASDAQ Composite Index.
So, biotech survived the Great Recession. That’s not news. Nobody should write a profile in courage for any investment bank that underwrites the offerings of companies like those listed above.
But if you want to get a sense of how committed Wall Street is to biotech, it’s more instructive to look at who is sticking their necks out, and underwriting the recent crop of IPOs. These companies have promise, and a lot to prove. And the news, I’m happy to say, is pretty encouraging. A whole new class of investment banking firms has stepped up to compete for the business of helping biotech companies raise money.
To get a sense of who’s who in biotech investment banking in 2012, I looked around in the SEC filings to find out which firms underwrote those newly public companies. See the chart below for a list of who’s been active this year:
|Merrimack Pharmaceuticals||JP Morgan, Bank of America/Merrill Lynch, Cowen & Co., Oppenheimer|
|Chemocentryx||JP Morgan, Cowen & Co., Citigroup|
|Cempra||Stifel Nicolaus, Leerink Swann, Cowen & Co., Needham & Co.|
|Verastem||UBS, Leerink Swann, Lazard Capital Markets, Oppenheimer, Rodman & Renshaw|
|Supernus Pharmaceuticals||Citigroup, Piper Jaffray, Cowen & Co., Stifel Nicolaus|
|Durata Therapeutics||Bank of America/Merrill Lynch, RBC Capital Markets, Credit Suisse, Wedbush PacGrow Life Sciences|
|Hyperion Therapeutics||Leerink Swann, Cowen & Co., Needham & Co.|
|Tesaro||Citigroup, Morgan Stanley, Baird, Leerink Swann, BMO Capital Markets|
|Globus Medical||Bank of America/Merrill Lynch, Goldman Sachs, Piper Jaffray, Leerink Swann, Canaccord Genuity, William Blair, Oppenheimer|
|Regulus Therapeutics||Lazard Capital Markets, Cowen & Co., Needham & Co., BMO Capital Markets, Wedbush PacGrow Life Sciences|
|Intercept Pharmaceuticals||Bank of America Merrill Lynch, Needham & Co., BMO Capital Markets, Wedbush PacGrow Life Sciences, ThinkEquity|
|Kythera Biopharmaceuticals||JP Morgan, Goldman Sachs, Leerink Swann, Lazard Capital Markets|
|–Source: Securities and Exchange Commission|
As you can see, there are 21 different firms putting their names behind this year’s class of 12 biotech companies. The biggest names on the biggest offerings are familiar across all of finance—JP Morgan, Bank of America/Merrill Lynch. Lazard Capital Markets, Cowen & Company, Needham & Company, and BMO Capital Markets are a few of the more prolific biotech underwriters as well.
One biotech executive fresh off the IPO trail, Kleanthis Xanthopoulos of San Diego-based Regulus Therapeutics (NASDAQ: RGLS) says he’s encouraged by what he sees. Xanthopoulos, who started laying the groundwork for an IPO years ago, says he sees a fairly deep group of investment banks vying for biotech business. And even though Regulus doesn’t have a drug in clinical trials that many banks are looking for, he says there was still some stiff competition among banks who bid to be the company’s underwriter. JP Morgan, which didn’t underwrite the Regulus IPO, has clearly emerged as the biggest of the top-tier biotech investment banks, Xanthopoulos says.
“Some of the names have changed and the rankings may have changed, but there are plenty of hungry banks out there,” Xanthopoulos says.
Regulus is an unusual case in many respects. It was started five years ago as a joint venture of two public biotech companies—Alnylam Pharmaceuticals (NASDAQ: ALNY) and Isis Pharmaceuticals (NASDAQ: ISIS)—to concentrate on the leading edge of microRNA drug development. With an assist from those two companies, Regulus never needed to raise venture capital. It built its business by assembling a network of Big Pharma partners who agreed to support the Regulus IPO by buying 80 percent of its shares. Xanthopoulos had already led one company (Anadys Pharmaceuticals) through the IPO process once before. One of his board members, Stelios Papadopoulos, is a famed biotech investment banker. And Regulus’s chief operating officer, Garry Menzel, used to be the global head of life sciences for Credit Suisse and Goldman Sachs. So unlike most companies, Regulus didn’t need to show investors proof from clinical trials, it didn’t need to pay off any antsy venture capitalists, and it didn’t really need to appeal to a vast sea of generalist investors who have never heard of microRNA.
Even though the Regulus story is unusual, the fact it was able to go public at all has to send at least a slight message of encouragement to anyone who cares about innovation in life sciences. This company can’t point to a billion-dollar molecule in the making for 2015 or 2016. At this point, it only has an experienced management team, a big new idea in biology, some top scientific advisors, and a network of deep-pocketed partners. It’s really all about enticing investors to believe in what you might call a “blue sky” future.
“This is a company that resembles the true biotechs of the 1980s or ‘90s, with a big idea and lots of potential,” Xanthopoulos says.
What that means on Wall Street is that anybody looking to serve as Regulus’ underwriter has to assume more than the usual amount of risk. The underwriters know they have to work their tails off building up anticipation for four or five months, all for a relatively small percentage commission on a $45 million offering. The whole thing could go up in smoke because of some unforeseen safety issue in clinical trials, making the bank look like foolish at best, fraudulent at worst. As Xanthopoulos notes, banks can earn bigger fees in a couple of days of work on a private investment in a public equity (PIPE) deal, or an at-the-market financing in an already-liquid stock.
That means anybody willing to work hard on an IPO like that of Regulus has to be willing to double down on biotech for the long-term. They also have to be well versed in leading edge science, and staffed with PhDs who understand its story and can explain it to generalist investors at big mutual funds. And they have to have a strong stomach. The only rational reason to underwrite Regulus would be the belief that it will turn into a valuable client for the long haul, raising more and more money, and spinning off more and more fees.
Regulus, which started laying the groundwork for an IPO well over a year before it filed its S-1 prospectus to the SEC, did an internal analysis of the banking landscape, ranking banks based on a handful of factors, before settling on Lazard Capital Markets, Cowen & Company, Needham & Company, BMO Capital Markets, and Wedbush PacGrow Life Sciences, Xanthopoulos says. Essentially, Regulus wanted banks that understood its science, could explain it, had good analysts who would follow the company through ups and downs, and had institutional commitment to biotech. He also said he values banks that are “hungry,” and don’t treat his company like a decimal point in some vast financial sea. “We want to go to battle with people who believe that an IPO means a lot to their bottom line,” he says.
The whole exercise of evaluating banks and building relationships over the past couple years left Xanthopoulos with some impressions—quantitative and qualitative—of how things stack up today in biotech investment banking.
Here’s who he considers members of the current Tier 1 of biotech banks, and Tier 2. The top tier is reserved for the biggest banks with the best reputations and the best access to deep-pocketed clients at mutual funds and hedge funds. They are the ones who are supposed to pick only the cream of the crop among IPO candidates. They are also presumably staffed with PhDs who can dig deep into the science, and have long-term institutional commitment to the field. Tier 2 tends to be more growth-oriented and a better fit for small companies. Regulus chose in its case to avoid Tier 1, in some cases because of excessive fee demands, or in other cases, a lack of perceived long-term commitment.
Here’s how Xanthopoulos sees the rankings today among biotech bankers:
JP Morgan (the undisputed champion)
Bank of America/Merrill Lynch
Credit Suisse (a recent addition which is gaining strength, Xanthopoulos says)
Lazard Capital Markets
Cowen & Company
BMO Capital Markets
Wedbush PacGrow Life Sciences
Needham & Company
RBC Capital Markets
Jefferies & Co.
Tier 3 [Updated: 2:40 pm PT, to delete Rodman & Renshaw and ThinkEquity]
Oppenheimer & Co.
Roth Capital Partners
If you have your own sense of who belongs (or doesn’t) in the various tiers, I’d love to hear your thoughts in the comment section below.
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