Finance/Funding
NEWS
Published online: 5 February 2004, doi:10.1038/bioent793
Boutiques reborn in 2003
The biotech sector saw a surge in VC investment last year, and the role of specialized banks might help the trend continue.
The biotechnology sector received over $2 billion from venture capitalists (VC) in the second half of 2003, more than any other industry. But perhaps the most significant trend of the year was the reemergence of small investment banks (called boutique firms) that might widen the initial public offering (IPO) window, thereby allowing VCs to exit existing investments and pour more money into startups.
According to PricewaterhouseCoopers' MoneyTree survey,biotech firms raised $3.4 billion in venture capital in 2003, which represents nearly 20% of all investments for that year, second only to the software industry ($3.6 billion). This was the largest amount of venture capital raised by the biotech sector since the boom of 2000 ($4.3 billion), and a 13% increase over 2002 totals. "Biotech remained one of just two sectors that was stronger in 2003 than in 2002. The other was semiconductors," says Kenneth Andersen, managing editor of Dow Jones Newsletters (New York), including VentureWire Lifescience. Andersen points to two financings of over $100 million in 2003 as another feather in biotech's cap (see Table 1).
Four boutique banks participated in six of last year's seven IPOs, and more were involved in follow-on offerings.
A trend that continued in 2003 was VCs' increased interest in late-stage companies, including those that are already public1. A MoneyTree survey press release says the 26% allocation into late-stage investments by VCs was the highest "in at least 20 years" and investments in early-stage and expansion companies declined.
IPOs are the release valve to allow VCs to invest more into startups, and seven biotech firms completed IPOs in the last quarter of 2003 after an 18-month drought2. Jesse Reyes, vice president of Thomson Venture Economics (New York), stated that VCs' portfolios "are still bulging with existing companies" and he expects "later-stage investing to retain this degree of prominence for the next year or longer."
But this timeline could be shortened thanks to the reemergence of boutique firms—the banks that used to fight with large investment banks (called bulge bracket banks) to lead private biotech companies into the public sector. Four boutique banks participated in six of last year's seven IPOs, and more were involved in follow-on offerings (see Table 2).
Although there is some debate whether the current crop of boutique banks will survive (see Box 1), there is no doubt that their emergence will benefit biotech by "fill[ing] a void from the demise of the banks that used to serve the market," says George Montgomery, head of the health services unit of boutique firm Montgomery and Co. (Santa Monica, CA, USA).
"The reason for boutiques to even exist is that the bigger banks were aimed at much larger transactions and bigger markets," says Bill Kridel, founder and managing director of boutique firm Ferghana Partners Group (New York and London). "[The large banks] didn't have the skill...to understand the clinical development, the science rationale and some of the industrial issues like manufacturing that the specialist organizations have."
Kridel says boutique bankers take the time to visit with the VCs. "Ninety-five percent of venture transactions are too small for the Wall St. houses to bother with—the ones for $40 million or less," he says. "And if Morgan Stanley tries to do private placement, they don't know enough investors."
Michael Lytton, a general partner with the VC firm Oxford Bioscience Partners (Cambridge, MA, USA), agrees with Kridel. Lytton says the boutiques are more flexible in their criteria for IPOs, so it is easier for VCs to collaborate with them than with the large banks. Lytton says boutiques have another advantage over the bulge banks because "they can provide more analysts to cover biotech companies," which is especially important for small firms to increase their visibility to individual investors.
In addition, Lytton says the large banks are unlikely to be interested in early-stage biotech companies that do not have a product in phase 2 or phase 3 clinical trials—the current standard that banks maintain for biotech companies to complete an IPO. Therefore, he says the boutiques are the best scenario to help biotech companies complete both an IPO and secondary public offerings.
The more biotech firms that can complete an IPO, then the more VC funds will open up to early-stage private companies that need cash. If the boutiques can survive, then biotechs of all stages will surely benefit.
References
- Bouchie, A. Private funding heads to startups focused on products. Bioentrepreneur, 29 January 2003, DOI:10.1038/bioent715.
- Bouchie, A. Companies jostle for public markets. Nat. Biotechnol.21, 1413–1414 (2003). | Article | PubMed | ISI | ChemPort |