By Karen Pihl-Carey
When a Broadway show receives rave reviews, theatergoers flock to the ticket booths and actors beg for auditions. They all want to be a part of a great performance.
It's not so different on Wall Street.
Lehman Brothers' biotech analysts played their roles through the 1990s, when interest waned and investors held tight to their money, and when many investment firms didn't think biotech was a big enough industry. Now, it seems, despite current market conditions, Lehman's analysts are figuratively in a Tony-winning play.
The investment firm has lead-managed seven of the top 10 strongest performing equity offerings from April 6, 2000, through the end of October 2001. It has the best average after-market performance and is the only investment bank with a positive after-market performance on its lead-managed offerings during that time.
"I was frankly shocked," said Rachel Leheny, senior biotech analyst at Lehman. "I couldn't believe it. We did a high volume because there were a lot of good opportunities, not for us to have the No. 1 market share. When the performance was that good, it was really surprising."
Looking at the firm's performance since April of 2000 is significant because that was when a team of analysts, including Leheny, Eric Roberts and Joseph Dougherty, among several others, began working at Lehman Brothers. In total, a dozen people left their offices at Warburg Dillon Read, now called UBS Warburg LLC, and arrived at 3 World Trade Center and their Lehman Brothers offices. The Sept. 11 terrorist attacks forced the group to relocate into rooms at the nearby Sheraton Hotel, and the new Lehman office at Times Square will be completed in January.
The weekend following the terrorist attacks, the group traveled to Roberts' farm in upstate New York to get away from the turmoil and regroup.
"We're all friends, we enjoy working together," said Roberts, managing director and co-head of the Global Healthcare Group at Lehman. "It's not the typical model of Wall Street, [which] has been much criticized in the last year, especially in the tech area, for bankers pushing deals on analysts just to make a fee. That's not our business model. Our model is bankers and analysts working together not only for the benefit of the corporate clients, but for the investors as well."
He attributes much of their success to this camaraderie. When biotech caught Wall Street's eye in 2000, many investment firms tried to come late to the party, Roberts said. But his group was there from the beginning.
"We had done good things for people in the lean times in the mid-1990s," Roberts told Financial Watch. "When the business came back, we got offered a very high percentage of the business because of our experience and relationships and reputation for having been there for the industry in the tough times."
Lehman lead-managed the most, a total of 16, transactions from April 2000 to October of this year.
"We had the highest volume, but typically banks that do the highest volume have medium market performance at best," Leheny said.
But that's not the case with Lehman. It ranked No. 1 in terms of after-market performance with a 4.95 percent average return.
"It's gotta be brains and not luck, right?" said Joseph Dougherty, senior biotech analyst at Lehman. "I think it's a bunch of things coming together. I think that we are fortunate enough to have a strong enough franchise that we can do the business that we want to do. We don't have to settle for leftovers."
Roberts agreed that Lehman gave the analysts the autonomy to be choosy.
"What made us able to manage this onslaught of investment banking business without saddling ourselves with poor performing transactions for companies that didn't meet investor expectations," he said, "was a very strong relationship between our banking and our research team and a common business model of trying to be the volume-leader in the sector, but the volume-leader of the highest quality companies."
Deutsche Banc Alex. Brown Inc. ranked second for after-market performance with an average return of ¿6.39 percent and a total of three lead-managed transactions. J.P. Morgan Chase ranked No. 14 with an average return of ¿44.76 percent, but it came in second to Lehman in terms of volume with 11 lead-managed transactions.
Among Lehman Brothers' top-performing offerings were two for Charles River Laboratories Inc., which raised $224 million in June of 2000 with its initial public offering and another $133 million in March of 2001 with a secondary offering. Not only are they Lehman's top offerings, but also they rank No. 1 and No. 2 in terms of after-market performance among a total of 88 offerings in the industry from April 6, 2000, to the end of October of this year. The first offering had a 110 percent return, while the second had a 76.84 percent return.
"Charles River was an interesting one," Leheny said. "There wasn't a lot of people who really stayed close to that one. It's taken a while to mature in the market, but investors just love it."
Ranking Nos. 5 and 6 in terms of after-market performance are the IPOs conducted by Lehman for Array Biopharma Inc. in November 2000, raising $48.8 million, and for Versicor Inc. in August 2000, raising $50.6 million. A secondary offering for InterMune Inc. in June 2001 raised $120 million, ranking it as No. 7.
Leheny said they looked at InterMune as a favor.
"They had been started as this little anti-infectives company with interferon to treat tuberculosis, which is marginally exciting," she said. "Then, this article in the New England Journal was published, and all of a sudden, it just exploded. It's things like that we've been very lucky with."
Lehman also led the secondary offerings for Telik Inc. in September of this year, raising $26 million, and for Charles River Laboratories Inc. in July for $232 million. They rank Nos. 9 and 10, respectively.
The Telik offering was interrupted by the events of Sept. 11, Dougherty said, but the analysts still managed to close the deal. Dougherty and Roberts said secondary offerings are doable, despite the market strain caused by the terrorist attacks. It may, however, be some time before the IPO market recuperates.
"Private companies are facing a more selective IPO market where medical technology and services companies are getting most of the current interest," Roberts said. "However, the pre-public, so-called mezzanine rounds of financing are taking the place of IPOs, with companies routinely raising $40 million to $50 million at valuations that exceed IPO valuations of three or four years ago."
For some of the top-ranking offerings, Lehman had a co-lead manager, which included Credit Suisse First Boston and Donaldson, Lufkin & Jenrette for the Charles River offerings, and Deutsche Banc Alex. Brown for Array's IPO.
S.G. Cowen Securities Corp. lead-managed the No. 3 top offering ranked by after-market performance, a secondary offering for ICOS Corp. that raised $166.5 million in December 2000. It also lead-managed the No. 8 top offering, a secondary for Transkaryotic Therapies Inc. that raised $88.4 million in June of this year.
Robertson Stephens and Salomon Smith Barney co-led the No. 4 top ranked offering that raised $90 million for Neurocrine Biosciences Inc. in December 2000.
Of Lehman's 16 lead-managed offerings, all but five were conducted in 2000.
Said Dougherty: "The sector went through a bubble last year, and while that certainly affected the volume of business, we tried to control our delirium. I think it's pretty easy to do just a couple of deals and have them do very well. But to be as big a part of the market as we were and to have things do so well, I think we're very proud of it."