The Finance 101 of Funding the Life Science Mission – Building a Syndicate: The Good, Bad, and the Very Ugly

4 mins read

You’re already scared. You wonder, “Why is the word ‘syndicate’, a word normally associated with mobsters, in the title and how does it apply to my biotech?”

The syndicate can be tough but they won’t actually bust your knee caps. Here’s how you make a syndicate work for you.

What Exactly is a Syndicate in Finance?

When planning for any public equity offering, multiple banks must be chosen to do the deal. These are banks of differing sizes, approaches to marketing the offering, and different industry connections. The banks then have roles in the syndicate as book-runners or co-managers.

The Good

Book-runners will do the marketing of the deal, “building the book”. Their Equity Capital Markets (ECM) group has relationships with the institutional funds. It is the ECM group that will truly determine the success of your offering.

Banks want the role of “sole books”, meaning they want all of the book-running for themselves, and they will push hard for it. There is typically no benefit to your company from having a sole book-runner.

Two banks can provide more options due to their varied approaches. Using two will widen the marketing effort substantially. More than two banks in the book-runner role can be very messy and usually only seen in very large deals.

The lead book-runner is listed on the top left of the offering document and thus called “lead left”. Lead left manages stock stabilization and over allotment of 15% of the offering.

Co-managers are banks listed on the deal but don’t have much, if any, role in filling out the investor book. It is mainly a way to give relatively modest fees and publicity to supporting banks.

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The Bad

Every bank will tell you that your company’s success is its top priority. No, their top priority is precedent over other banks, which applies to both the positioning on the offering document and the relative fees. Top banks are fighting to be lead left.

The banks then jostle for positions with every bank wanting to move up. Top-tier banks will prefer to share book-making with other top-tier banks. However, second-tier banks have made tremendous inroads.

Speaking of fees…

The Ugly

A typical equity offering usually has a 6% fee to the banks. $6 million on a $100 million deal is a big payday. While many CFO’s will brag about getting the fee lowered, it’s a better strategy to pay it but make banks earn it. Of the fee, the book-runners will get roughly 70%-80%, with the remaining going to the co-managers.

Never fear though, a great CFO and great advisors will have prior experience to help negotiate the whole process of dealing with the banks.

David Johnston CFO, MBA, is the principal of dbj consulting, a consultancy of finance and strategy for the life sciences industry. He has his MBA from the University of Michigan. David Johnston also serves on the boards of multiple non-profits.

Read David Johnston’s full article to learn more about biotech financing here:

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