US Mid-Market Equity House: Cowen

Canadian medical cannabis grower Tilray’s eye-catching Nasdaq debut in July legitimised cannabis as an institutional investment theme and proved a missed opportunity for Wall Street banks unable or unwilling to bank the emerging industry. But not for Cowen.

The New York-based mid-market investment bank was already well aware of the cannabis industry and its global potential, proving nimbler than rivals to lead what was easily the year’s hottest and most talked about IPO.

Cowen senior research analyst Vivien Azer was first to identify cannabis’s explosive growth potential in a ground-breaking initiation of research on the industry two years earlier. The view then, and now, was that the industry was a logical extension of a healthcare research practice.

“We are a research-driven firm,” said Larry Wieseneck, co-president at Cowen and a longtime Lehman Brothers/Barclays banker who joined Cowen in late 2017. “We unabashedly believe in the value of our intellectual content and it has to be combined with real muscle.”

Through a series of high-profile hires, Cowen has 10 analysts at managing director level in the healthcare group, covering everything from biotech to large pharma as well as diagnostics and medical devices. Overall, the bank covers more than 900 companies across seven verticals.

Rivals, particularly at bulge-bracket firms, complain that Cowen “overpays”, but that only underscores Cowen’s dedication to research.

With US Attorney General Jeff Sessions in January labelling cannabis a “dangerous drug” and “marijuana activity” a “serious crime”, on the one hand, and Canadian federal government legalising the green stuff in October, on the other, the July float needed careful planning.

Cowen outlined a very specific strategy to Tilray management.

The first step was a US$55m private placement in January to provide standalone funding and create a Canadian-domiciled corporate structure distinct from US private equity backer Privateer Holdings.

In March, Tilray confidentially filed documents with US regulators and began an extensive investor education campaign in preparation for the IPO that canvassed some 300 institutions globally.

“Every time we mentioned cannabis to most institutional investors they would begin to giggle and laugh,” said Tilray CFO Mark Castaneda. “They didn’t believe it was a real industry.”

Cowen followed with a 9m-share, all-primary offering in July that it priced at US$17, above the US$14–$16 marketing range, and that it allocated 75% to US institutions and the balance globally – all institutional investors.

Tilray landed the bulk of its working capital needs with a US$475m five-year CB in October that printed with a 5% coupon and conversion price of US$167.41 per share, a 15% premium at the time and nearly 10 times the IPO price.

Cannabis is but one part of the healthcare operation. Cowen bookran 16 healthcare IPOs that raised a total of US$1.9bn. The bank’s bookrunner share ranked it fourth in the sector (second by number of deals) ahead of many bulge-bracket firms. Include follow-ons and the bank logged 68 deals totalling a league table share of US$3.45bn to rank it 13th in the US combined equity league table.

Arguably, no client has been as emblematic of Cowen’s emergence as Bluebird Bio.

Building from a co-manager role on the IPO five years ago, Cowen capped a long-standing relationship with a bookrunner slot on Bluebird’s US$632.5m follow-on offering in July.

“If you work with the best companies and do a good job for them, they will come back to you,” said Grant Miller, Cowen’s head of capital markets.

Allogene Therapeutics, a clinical stage biotech, is among the next generation of drug developers. In October, Cowen helped the company raise a mammoth US$372m on its IPO, the largest-ever by a biotech in that stage of development.

That same month, Orchard Therapeutics secured US$200m on its IPO, even as investor sentiment was beginning to sour. A big reason for the successful outcome was a US$100m crossover private in August that Cowen helped place with a dozen institutions.

Wieseneck and Miller are both quick to acknowledge that healthcare is volatile.

Mandates such as financial payment processor I3 Verticals’ US$99.4m IPO in June and the US$163m spin-off IPO of Netgear’s home security arm Arlo Technologies in August are signposts of diversification.

Cowen is laying the groundwork for further expansion.

In November, the firm forged an exclusive agreement with energy-focused adviser Intrepid Financial Partners to provide capital market services for energy companies, tapping into Wieseneck’s deep base of relationships. Intrepid founder Skip McGee and Wieseneck worked together at Lehman Brothers and Barclays.

An agreement to purchase mid-market M&A adviser Quarton International, also struck in November, points to continued expansion.