UBS is aggressively seeking out business in the biotech sector, risking its capital to win deals amid cut-throat competition.
So far this year UBS, which recently announced thousands of job cuts, has completed four bought biotech deals, taking risks few other banks are willing to take.
In a bought deal, a bank or group of banks guarantee to buy shares from a company at a pre-set discounted price, betting they can re-sell them overnight for a higher price.
While not uncommon in established sectors such as mining and finance, bought deals are rare in biotech, where a company's stock can plunge or soar based on difficult-to-predict clinical trial results.
Given the state of the market a lot of banks are uncomfortable participating in bought transactions because they don't know how to price them, said Sage Kelly, a managing director in the Swiss bank's healthcare investment banking group.
Which is not surprising. Even industry giants such as Swiss drugmaker Roche Holding AG (ROG.VX), can get it wrong.
Roche recently paid $46.8 billion, or $95 a share, to acquire the portion of biotech company Genentech it did not already own, betting that a clinical trial of Genentech's cancer drug Avastin would prove successful and expand the drug's sales.
It did not, and Roche's shares fell more than 10 percent.
UBS, however, is confident of its judgment. So far this year it has raised a combined $218 million for the biotech companies InterMune Inc (ITMN.O), Allos Therapeutics Inc (ALTH.O), Seattle Genetics Inc (SGEN.O) and Geron Corp (GERN.O).
The value of the deals is tiny relative to the bank's overall business. But it reflects a broader push by UBS into bought deals as it scrambles to stem its losses. Chief Executive Oswald Gruebel said earlier this month the bank will post a first-quarter loss of nearly 2 billion Swiss francs ($1.7 billion). [ID:nNLF479909]
In total, UBS has completed 10 bought deals this year, worth $2.6 billion, according to Dealogic, putting it at the top of the league table with a 24 percent market share.
BUILDING FOR THE FUTURE
For biotech companies that can get them, bought deals are an attractive financing option. True, the shares are sold at a discount -- usually between 10 and 15 percent, UBS says -- but the company receives its money regardless of what happens to the stock. If the price plummets, it is the bank that is left holding the shares.
Dozens of companies want to do these deals, said Clay Siegall, chief executive of Seattle Genetics, but there is risk for the banks so no one is really hustling to do them.
We think this is a phenomenal way to build and expand relationships, said Kelly. Clients tend to remember who was willing to put their capital at risk for them in challenging situations.
Not that UBS has much choice. It is scrambling just like everyone else, and is fighting even for small deals, much to the chagrin of boutique firms, which might normally have had the field to themselves.
How can they even bother to turn the lights on to do these deals? said John Borer, head of investment banking at Rodman & Renshaw, a boutique firm that specializes in biotechnology. It's like moving a small bag of soil with a wheelbarrow.
Kelly insists there is real money to be made on the deals. However, he conceded that the bank would not be doing them if the economy were stronger.
In a bull market, with investor appetite high, companies typically market their shares over a period of days, visiting investors in a process known as a roadshow. The danger for an issuer is that its stock price falls during the offer period.
In a bought deal, that risk is transferred to the bank.
To protect themselves, banks tend to do bought deals between the time the market closes on the day the deal is agreed, and the opening of the market the following day. That leaves minimal time for information about the deal to be leaked, or for news to emerge that could hit the stock.
We start from scratch and sell the deal overnight, Kelly said. They seem risky, but we feel comfortable doing them. The key is to ensure you only select the right companies so you don't get burned. (Reporting by Toni Clarke, editing by Dave Zimmerman)