4 Mid-Market Banks Powering Advancements In Healthcare

Investment banks generate handsome revenues by advising and facilitating the financing of innovative biotech and life sciences companies. Most research and development stage biotechs produce no revenue, causing them to regularly return to investors for additional capital. With drug development price tags ranging from several hundred million to $2.5 billion, bankers fiercely compete to get a piece of the hefty fees when it's time to raise more money. 

Household names like Citigroup, Goldman Sachs, JP Morgan Chase, and Morgan Stanley handle the biggest, most promising IPOs and financing rounds. Below this tier, several middle market investment banks tailor their offerings to micro, small, and mid-cap life sciences companies.

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The table below highlights seven of these publicly traded firms. While these may not be familiar names, healthcare investors would be smart to get to know these growing financial businesses with a footprint in the medical space.

These banks operate a variety of businesses, but investment banking generally provides a healthy portion of top-line revenues. What follows highlights those banks with market caps between $250 million and $750 million.

B. Riley continues to be acquisitive

B. Riley (RILY 6.14%) is a diversified financial services company offering capital raising and financial advisory services to businesses and individuals. B. Riley completed three acquisitions since the start of 2017, including the $160 million purchase of FBR & Co., an investment bank that boasts healthcare expertise. Additionally, FBR provided capabilities for At-The-Market (ATM) offerings which have become a regular mechanism for biotechs to raise money. According to PlacementTracker, a leading source for data and analysis on private placements, B.Riley led 17 ATMs in Q2 2019, totaling nearly $1.9 billion in committed capital. In 2018, B. Riley acquired a majority ownership stake in National Securities (NHLD), a brokerage that helps fund many early stage biotechs.

Investors are catching on to B. Riley's growth story, driving up shares more than 70% year-to-date. Long-term investors have been rewarded with the stock appreciating nearly 210% over the past five years. If B. Riley continues to make smart, strategic acquisitions, the stock should appreciate in lockstep. 

Healthcare is in Cowen's DNA

Cowen (COWN) is a brokerage and investment bank with two-thirds of its investment banking revenue from the healthcare space. Second-quarter investment banking revenues totaled $104.3 million, a 30% increase from the same period in 2018. PlacementTracker listed Cowen as the most active publicly listed placement agent, leading more than $1.1 billion in investments across 17 deals in the second quarter. Cowen, like the other banks, is diversified with several businesses driving revenue. Additionally, Cowen's investment management division oversees funds that buy royalties of marketed drugs and invests in private healthcare companies.

Cowen's stock has had its ups and downs this year. Currently, it is up about 15% for the year but swelled up to 35% in July. This added volatility and lack of dividend compared to the other firms discussed may make conservative investors more reluctant to own Cowen.

Oppenheimer: A multinational brokerage and bank with a unique capital structure

Investing in Oppenheimer (OPY 4.72%) provides exposure to a mid-market bank and its dividend but does not provide voting rights because nearly all its voting stock, or Class B shares, is entirely owned (97.5%) by Chairman and CEO Albert G. Lowenthal. That said, the Class A shares receive the dividend and allow you to invest in a company with private client, asset management, and capital markets which includes investment banking. While investment banking revenue is not broken out by sector, half of the 64 transactions completed in 2019 listed on Oppenheimer's website were in healthcare. In 2018, 51 of 111 deals were related to healthcare.

Oppenheimer's stock slightly edged the S&P 500 by 1%, achieving a 20% return in 2019. Over the past two years, the return exceeds 75%. If the markets stay healthy, Oppenheimer should be able to continue its streak.

Ladenburg Thalmann provides a range of offerings 

The investment banking team at Ladenburg Thalmann Financial Services (LTS) kept busy in Q2, raising more than $322 million for 13 companies. This translated into fees of $11.5 million, essentially flat from the prior year. However, for the first six months of 2019, investment banking revenues of $21.4 million declined 24% from the prior year's period. Ladenburg lists 25 healthcare deals on its website with several under $5 million in value. Smaller deals means smaller fees. Investment banking generated less than 5% of total revenues, so it is hardly a driver for stock performance. 

Ladenburg's performance has been lacking. This year it's flat. The one-year and two-year charts show a 20% decline while the stock fell nearly 50% over the past five years. I urge caution before buying this stock, and make sure you're comfortable with its brokerage and asset management divisions that are responsible for more than 80% of total revenues.

These mid-market banks play a necessary role in the ecosystem to fund the scientists, physicians, and entrepreneurs seeking to discover and develop new medical advancements. Of these four, Cowen and Oppenheimer remain the most active and best positioned in healthcare. B. Riley is interesting to watch, particularly if more strategic acquisitions are announced. Ladenburg needs a catalyst to revive its stock and warrant further evaluation.