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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
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