Healthcare Investment Banking: The Best Place to Check In When Other Bankers are on Their Career Death Beds?

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healthcare investment bankingTony Soprano once said to his shrink after a particularly grueling session:

I came here today to tell you, in all seriousness, that I’m done.”

And maybe in this crazy economy you’re also done: you’re going to leave your current finance job to pursue sanity and stability.

So you’d better be thinking about healthcare investment banking.

“Healthcare?” you might say.  “I don’t know anyone in healthcare who owns giant mansions lined with gold.”

But that’s OK – these “Healthcare Regular Joes” are the ones who have it easier in a rough economy, and access to plenty of other perks.

Here’s what you’ll learn from our healthcare IB interviewee today:

  • How to tell your story and break into healthcare IB.
  • What majors and backgrounds are common among healthcare bankers.
  • Why deal flow is more stable than in other sectors, and the most common deal types.
  • The industry sectors within healthcare and how valuation metrics and multiples differ.
  • The all-important exit opportunities and where you can learn more about the sector.

Oh yeah, and as an added bonus you’ll get to advise companies that save lives rather than killing people and burning down villages as you normally do in finance.  This post includes valuation and financial analysis commentary by Larry Chen.

Anyway, let’s get started:

Healthcare Investment Banking: Got Biology?

Q: Let’s start with your background – did you go through the typical on-campus interview route?

A: Yes – but I was a Biology major at Cornell and I went in with my parents telling me that I should become a brain surgeon or cardiologist.

Like most biology majors, I tried research but didn’t want my only friends to be the test tubes I used every day.

So I figured that a more well-rounded skill set would help me escape that fate.

I looked into healthcare consulting (ex: Triage) and healthcare investment banking as a way to get broad exposure to the sector and apply what I’d learned as a biology student.

Q: So was the Biology degree helpful for getting in?

A: Nope, haha, at least not on the technical side (I had to learn the finance part myself with your program actually).

But it really helped me with storytelling for the interview – you have to connect the dots on your personal/professional history for the interviewer both on the resume, and in the physical interview.

And as you’ve written about before, it’s all about your story.

I went in there and said, “I’m interested in the field but want to do more than research – I want a broad skill set that I can apply to business, and I want to be able to advise healthcare companies on strategic decisions” (see: the why investment banking question / answer).

Q: So do you see a lot of Biology majors in the group?

A: I wouldn’t say “a lot” and it’s certainly not necessary to break in, but it doesn’t hurt either.

There are a fair number of bio majors, a few MDs (Medical Doctors, not Managing Directors), and even some med school dropouts in my group.

As with any industry group, demonstrated interest in the sector is huge for getting in so if you haven’t done something bio or healthcare-related, you need to show that in some other way.

The Anatomy of a Healthcare Group

Q: It sounds like you have quite a few science geeks in the group.

How technical are the sectors you cover? Does a PhD or MD or two help?

A: Hah, not really, at least not more than certifications and degrees help anywhere else. Here are the major sectors:

Pharmaceuticals: A few of the big companies here are Pfizer, Novartis, Sanofi-Aventis, Merck, and Roche.

Pharmaceutical companies focus on different types of drugs, different segments of the market (e.g. over-the-counter vs. prescriptions), or even different R&D models.

For example, Valeant (NYSE: VRX) focuses on dermatology and neurotic therapeutics. Using a “leveraged research and development model,” a firm such as Valeant often takes on already-developed products and focuses on sales and marketing.

Pharmaceutical companies are completely dependent on their pipelines: a new drug might take 10-15 years to go from R&D to pharmacy counters due to the clinical trials that are required.

And then the firm only has a patent on the drug for so many years before generics start coming in and driving down the price.

So pharmaceutical companies spend a fortune on R&D (and on acquiring smaller companies) so they can constantly replenish their pipelines.

A company’s operations might also hinge on whether the products are paid for through reimbursement or out-of-pocket.

Clinical trials also have a huge impact on companies’ stocks, and positive results can send share prices to new highs while negative results can send share prices to their doom.

Biotechnology: Much like technology companies, biotech firms frequently have little-to-no revenue, and are evaluated by projecting future paydays.

Many of these companies are trying to get acquired by larger pharmaceutical companies who need to find promising new drugs and technologies for their pipelines.

Scientific / Technical Instrumentation: These companies focus on developing equipment, storage facilities, and chemicals / powders for use by academic and commercial customers. Examples include Illumina and Thermo Fisher.

Companies in this area tend to be very diverse, covering a wide range of clients with reputation, product availability, and active sales channels determining their potential top-line growth.

These companies grow by targeting new markets, combining divisions, and coming up with new ways to deploy existing products.

Hospital Management Firms: These companies operate hospitals mostly regionally, and sometimes nationally. Companies that come to mind include Community Health Systems, HCA Holdings, and Vanguard Health Systems.

Key drivers include current illness levels, the seasons, and geographic presence.

Healthcare Services: Sometimes you’ll find these firms in Business Services or Information Technology. These firms manage records for hospitals or develop ways to track incoming patients.

A prime example includes Vangent, which was acquired by General Dynamics.

Health Insurance: Since these firms operate with premiums and benefits, they are often classified under FIG.

Healthcare REITs: These firms are really funds that acquire, build, and operate hospitals; they are often classified under real estate.

Q: Great overview. What about valuation in the sector?

We’ve gotten lots of questions from readers wondering how healthcare multiples and methodologies are different.

A: I hate to disappoint, but they’re not that different.

You still see multiples like P / E, EV / EBITDA, EV / Revenue, and so on being used in healthcare.

If you don’t believe me, take a look at these Fairness Opinions on the Pfizer / Wyeth deal and the Roche / Illumina deal.

Q: OK, I’m going to stop you right there because I think there are some valuation differences – but maybe not as much for huge companies.

Let’s say, for example, that you’re valuing a small pharmaceutical company with no revenue yet. How does that work?

A: That’s a good point, though at large banks we don’t work with those types of companies quite as much.

In that case, we would use a modified sum-of-the-parts analysis and attach a multiple to each phase of the company’s clinical trials.

So a Phase 1 pharmaceutical might be tagged with 4.0x or 5.0x, and you would assign increasing multiples as the probability of creating a marketable product goes up in each phase.

Then you would project revenue based on the estimated market size / number of patients and price for the drug, and value the company based on that.

Effectively you have to project revenue and expenses far into the future, which is always tricky, but if there are comparable drugs on the market then it’s a little easier to estimate.

For healthcare firms that don’t really work with clinical trials (ex: healthcare IT), you can use pure-play trading comparables and multiply your target’s EBITDA by the range of multiples.

It’s a pretty standard way to value a start-up or any other private company for that matter. You could even use a DCF analysis that works with far-into-the-future projections.

Q: Great, thanks for explaining that one. It sounds like there’s still a lot of guesswork involved, but that’s true of valuation with any early-stage company.

I noticed there are some methodologies we haven’t discussed much before in those two Fairness Opinions you pointed out – can you talk through those?

A: Sure. As I mentioned, you still use standard methodologies such as the DCF, public comps, precedent transactions, accretion / dilution, and LBO models (back-solving the latter two to determine valuation ranges).

For some industries such as hospital management, you’ll need to look at the number of beds, or the number of hospital locations (see page 5 of this merger agreement).

When it comes to benchmarking in this area, page 34 of this presentation has a good summary of the key metrics.

Some of the items listed sound like the ones you’d use for lodging – Average Length of Stay (ALOS) and Net Revenue per Adjusted Admission. Just don’t confuse staying in a hospital with staying in a resort…

The methodologies we haven’t discussed before include:

Pfizer / Wyeth: Morgan Stanley and Evercore

  • Leveraged Recapitalization: The value of a company’s stock following a substantial repurchase of shares using debt. You might compare this value to the merger consideration to see which one is higher.
  • Synergies Valuation: Premium Paid vs. Total Value of Annual Synergies. This tells us whether the price paid for the deal was really worth the value that’s “unlocked” as a result of the transaction (Think 1+1 = 3).
  • Illustrative Future Stock Price Analysis: Future stock prices derived based on present values of the same. You can probably do this on a napkin actually (see page 91 of the Pfizer / Wyeth filing). You just take the current or prior year multiples, apply them to the projected financial figures, and discount the implied future share prices.

Roche / Illumina: Greenhill and Citi

  • Trading Comparables: In addition to P / E, they’re also using PEG (P / E divided by Annual EPS Growth). The idea there is to look at more than just the simple P / E ratio to see whether a stock is overvalued or undervalued – you also factor in the company’s earnings growth, since higher-growth companies also trade at higher multiples.
  • Premiums Paid: This is helpful to see if the acquirer is trying to lowball the target, because you see the premiums that all other buyers have paid for public sellers in recent deals.

Q: OK, that’s helpful – but just to clarify, these methodologies are not specific to healthcare, right?

A: That’s right, you see these methods across lots of industries – I’m just pointing them out here because you haven’t discussed them on the site as much.

And something like the Synergies Valuation can be really important when a big healthcare company is acquiring a smaller one and hoping to boost its pipeline in the process.

I didn’t discuss LBO analysis above because that provides a floor on the valuation – the seller would never agree to sell for the value implied by an LBO model unless they’re selling to a private equity firm.

And as with all valuation methodologies, you pay the most attention to ranges; no one says, “Aha! The DCF said the company is worth exactly $23.51, therefore we will do this deal!”

You use these methods to frame the discussion and negotiate for higher/lower prices, not to argue for one specific number.

Healthcare Diagnostics: Deals and Defensive Plays?

Q: Great, thanks for that overview of valuation.

People often say that healthcare is counter-cyclical and that it’s a great place to be when everything else is doing poorly – is that true?

A: Generally that’s true, at least if you’re looking at larger companies. If you created an index of healthcare stocks, it wouldn’t move too much with the market; the only similar sector is defense.

Go to Finviz.com and look at the Betas of healthcare stocks, and you’ll see that many of them are below 1.0… because people are always getting sick and in need of medical treatment, regardless of the economy.

This doesn’t apply as much to small-cap pharmaceutical and biotech startups – those are always risky and prone to failure because of the nature of clinical trials.

Q: So what deal types are most common? Do you focus more on M&A or capital markets?

A: It’s a pretty even mix here – healthcare companies are active across M&A and equity and debt financings.

Remember that it’s a broad sector, covering everything from pharmaceuticals to medical devices to services to sometimes healthcare REITs.

Companies in each of those sectors have different needs depending on where they are in the lifecycle and how they’re planning to expand.

Q: And I’m guessing that government regulations play a big role in M&A deals in the sector?

What else drives deal activity?

A: M&A deal flow is affected by legislative reforms that raise the cost of doing business (just like other sectors). Even the degree of regulation can be a factor in determining whether or not a deal will close.

Drug testing – and how far along a company is on tests and phases – determines acquisition prices for smaller companies and whether or not deals get done at all.

Capital market deal flow is much more cyclical. You might expect a company to raise capital in order to:

  1. Develop some transaction firepower
  2. Retire debt
  3. Engage in general corporate uses

For the biotech sector, financings for companies of all sizes are much more common – the volume of deals more than makes up for the size differences.

Q: Awesome. What about geography? Do focus on healthcare investment banking in any cities or regions?

A: It’s not quite as limited to one office as you see with other groups (e.g. energy in Houston) but in the US, most groups are based in New York or San Francisco.

I’ve also seen bankers travel to New Jersey quite a bit because many healthcare companies are based there (e.g. Johnson & Johnson and Merck).

Q: See? That Tony Soprano reference in the beginning did serve a purpose.

A: Yup, you got me on that one.

Checking In and Checking Out

Q: OK, so moving on… What other advice can you offer if you want to learn more about healthcare and the deals going on there?

A: To start with, I would read BioCentury if you’re interested in the biotechnology space.

You can also subscribe to Dealogic’s Deal Alerts and pay attention to the healthcare-related ones. So if you didn’t happen to catch a deal right in the healthcare section of the WSJ or FT, you can still get the news in your inbox.

The key is to be consistent in following ONE topic – the depth of your knowledge will be clearly reflected in your interviews.

When it comes to networking, you can look at Valuation in the Life Sciences on LinkedIn.

Q: Great, thanks. Moving back to the Tony Soprano point, let’s say it’s time for you to make a quick “exit” – what are your options?

A: Besides the usual business school route (depending on your performance/overall standing), you can work at a healthcare firm or move to a buy-side firm (private equity, hedge funds, asset management) with a healthcare theme – all pretty much common sense.

Some people argue that you get pigeonholed into healthcare-related opportunities, but keep in mind that you use standard accounting and valuation methodologies here.

To me, being in healthcare means you’ll have plenty of practice on transactions, which translates to a stronger applicant profile. Remember that you’re a banker first and a specialist second.

So while recruiters might funnel you into healthcare-related exits, you can do plenty of other things – I don’t think it’s as niche as FIG, real estate, or energy.

Q: Thanks so much for your time, this was really helpful.

A: I’m glad to help out. If you have any further questions, feel free to leave them in the comments section below!

About the Author

has worked in investment banking for several years covering the industrial sector. In addition to being an avid mentor for his alma mater, he volunteers for the Association of Latino Professionals in Finance and Accounting. In his spare time, he enjoys fencing and attends networking events in New York. He graduated from Stanford with a BA in Economics.

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40 Comments to “Healthcare Investment Banking: The Best Place to Check In When Other Bankers are on Their Career Death Beds?”

Comments

  1. Adam says

    How about medical device? Valuation et. al. different depending on type? I mean, you wouldn’t approach valuing an internal device (e.g. pacemaker) maker the same as a diagnostic device (like MRI machines) one no?

    Also, how about drug modelling? I mean, there are folks that try to model the likely success of a drug through its development stages; do healthcare bankers ever bother with this?

    • says

      The same multiples are used. You may use different metrics for analyzing their operations, but valuation is the same. While internal devices and diagnostic devices are very different, they are still more similar than, say… a pacemaker and an oil well.

      Drug modeling is beyond the scope of banking because it requires knowledge of clinical trials and more of the technical / scientific side of healthcare.

  2. morange says

    If i were to use a DCF for a pre-clinical stage company, how far into the future would you be looking at? 10 years? Any plan of initiating a pre-clinical healthcare specific modeling course in the near future?

    more generally, any plan on launching a private company modeling course?

    • says

      See HCBanker’s response. :) Pre-clinical healthcare modeling is too niche an area, so probably no plans for a modeling course there. Private companies – maybe, but more likely as an addition to an existing course instead.

    • HCbanker says

      Many biotech DCFs will go out 20 years. If industry experts agree that a drug can become the new standard of care (SOC) for an indication, it will supplant competing products and generate revenues up until the day its key patents (typically composition of matter or method of use) expire. At this point, generic competition floods the market the and the revenues of the product in question begin to decay significantly.

      Pre-revenue biotechs are also often valued using a DCF. The revenue stream may begin five years from present day, but it is discounted back. You also have to take into account things such as probability of success adjustments and new data. A drug may be in trials for multiple indications, and some analysts may only believe that the drug will achieve meaningful revenue in one. If new data comes out proving that the drug could be successful in the other indication, analysts who valued the drug based on only one indication before will slap on additional value.

      • morange says

        This really helps. Thanks!

        Along the same line, when you say discount back the revenue, so not only are we discounting the FCF, but also the revenue from the beginning? Are we talking about double discounting here? Sorry i just cannot wrap my mind around the concept here…

        Although intuitively it makes more sense to me to just apply a probability model(e.g. the binomial tree or something of that kind) and multiply the final probability by the NPV of the FCF…

        another thing you mentioned as well, as the expiration of the key patents in the current branded drugs is drawing close, and we know the generics flood the market at a much faster rate than the introduction of the new drugs, do you expect a flat spending/growth on drug spending in the near term? Wouldn’t that discourage big pharm guys’ from developing new drugs? I think the entire industry growth will suffer in the near term as a result. Maybe a legit reason to short Merck now..

        just my 2 cents here

        • says

          It wouldn’t make much sense to discount both the revenue and the cash flow… so no, I don’t think you would apply double discounting.

          You may adjust the NPV by the success probability but the discounting probably wouldn’t go beyond that.

          Can’t speak to the last question in-depth, but in general most people don’t have high expectations for pharma near-term because of what you said. If you look at research many of these companies are betting on emerging markets to make up for the issues with generics and generally more mature markets in the developed world.

        • HCbanker says

          As Brian said, there is no “double discounting” here. You’re simply assuming the revenue stream for the drug starts later and discounting cash flows as you would normally. And there are definitely cash flows associated with the drug before it is launched and begins to generate revenue. Significant R&D and SG&A are committed to both clinical development and pre-launch activities for the drug.

          I’ve never used a tree model in a biotech DCF. I’ve simply slapped on a POS % to the NPV.

          To answer your last question, no. Every new drug launched with patent protection is a company’s window of opportunity to generate big bucks before patent expiry and/or superior products that address the same indication take over. That is why every drug maker that wishes to survive must have a robust pipeline of promising candidates on deck to offset the sudden decline in revenues in other drugs. Think of the pipeline as a conveyor belt that must constantly be restocked as new products are launched. This is the state of affairs, and all drug makers operate in accordance with it.

  3. rohan says

    I loved the way the interviewer started by asking question about whether a biology degree is important or not and whether one requires a PHD or MD lol , sort of expected it lol

  4. Emile says

    Hi M&I,

    I have a couple of off-topic questions:

    1) Is it possible to break into equity research in Singapore without the knowledge of any Asian language?

    2) How important are languages for equity research roles (I would guess they are pretty important since you have to contact executives etc.)?

    Thanks.

    P.S. Love the site :)

    • M&I - Nicole says

      1. Yes but can be challenging
      2. Important because you have to contact executives at the firms you are covering. In HK, you’d struggle in ER if you don’t speak Mandarin because most companies ER analysts cover here are Chinese companies. There are still some peeps who don’t speak the local language in ER but not a lot; they are usually more senior and probably deal w executives who speak English fluently. It might be slightly easier in Singapore since most of the companies you cover are in SEA and the executives there would speak English though having local language skills, I believe, would help

  5. Bryan says

    Wow, this was a great post and right up my alley. I would be curious how HCBanker spun his resume, if he talked about his breaking into banking course, if he was able to spin his research work, or if he had any relevant finance experience or education. Also, any info on what bank he ended up in?

    • says

      Interviewees usually don’t disclose where they work since they’re still in the industry. Spinning your resume – play up any business or investing experience, especially if it’s at all related to healthcare or biology. I did not do this interview (Luis did) so can’t speak to his background directly, but I don’t think he had much relevant finance work experience. Maybe some “business” experience in other fields, but not anything like IB/PE.

  6. Heidi says

    Great post as usual. I am going to intern in one of the bulge brackets this summer and got placed into their Healthcare group. But I actually have no background in biology or healthcare -related fields. Do you think it will be a disadvantage? Do you have any advice on how to prepare for the internship or how to push up my knowledge in Healthcare?

    • M&I - Nicole says

      No, not necessarily cause you’ve been placed into that group already. I’d advise you to chill out and enjoy yourself as much as you can before the internship commences. Focus on getting along w peeps in the team, contributing and learning as much as you can when you’re there. You’re set and congrats.

  7. Bob says

    Great article. I’m particularly interested as I’m current working as a health economic analyst modeling drug costs and am thinking long term if I should move into finance.

    Would experience in a niche pharma consultancy doing pharmacoeconomic modeling (excel monkey really, looking at long term drug costs/benefits from clinical trials and the like to prove cost effectiveness of drugs) being a background to move into this area? I’m assuming that its the kinda move that would require going to a decent biz school as no finance background as such.

    Also any knowledge on HC banking in europe?

    • M&I - Nicole says

      Yes, your experience can be useful to healthcare IB roles. Getting into a target bschool an certainly help you build your credibility but it is not guaranteed that you will get into banking with the degree.

      HC banking in Europe – Readers may be able to offer you better insights

    • says

      Fairly common – (some) healthcare companies have very predictable cash flows, so if it’s something like a hospital or healthcare services firm you’ll see a lot of LBOs. Not as common with pharma or biotech since they’re riskier and there’s less cash flow visibility.

  8. Dmitry says

    Thanks for a great insight into the industry, but can you tell me what banks tend to dominate this industry? Any important players in middle market or boutiques? Thanks in advance!

  9. Harold says

    Hello,

    I interned at a Healthcare Group in a BB and got a great experience and return offer. The work, however, was not very quantitative and very few analysts got to do intense modeling, despite learning tons about the industry.

    Given I want to break into PE eventually, do you recommend switching to another more quantitative group (Sponsors/LevFin, M&A, FIG) for the modeling experience or staying in the Healthcare Group and aiming for MM Healthcare PE opportunities? I guess it’s an industry knowledge vs modeling experience question and what MM PE firms are looking for.

    Appreciate your advice.

    • says

      You could still probably move into PE from that group even without much intensive modeling, as long as you can learn it on your own, but yes, it would be better to move into LevFin or M&A if you want to really improve your odds of getting into PE. FIG and Sponsors less so (see the articles we’ve done on those). MM PE shops still do care about modeling skills, but maybe a bit less so than the mega-funds; it’s in VC where traditional modeling becomes much less important.

      • Harold says

        Great, thanks for the detailed response Brian! So I guess if I’m more interested in MM PE or VC it’s fine if I’m not in a very modeling intensive group as long as I pick up financial modeling and know the healthcare industry inside out.

        One other question: When would you start networking with alumni in PE – before you start in IBD, during your first year, or wait to close a few deals? Also, would you reach out to alumni first and only then to headhunters when you’re ready to recruit? Thanks again for your advice.

        • says

          Yes.

          Networking with alumni: I would start during your first year because recruiting takes place earlier and earlier these days. It’s worth contacting both alumni and headhunters. Having more deals to speak to will help you, but as long as you have at least a few in progress that can be OK.

  10. Elliot says

    I am intereted in healthcare group but I heard that in most BBs the healthcare group is a sweat house. Is it true? Why?

  11. Sam says

    Hi,

    I currently work for a $3 billion HIT company – consulting to hopsitals on process improvement, IT implementation and government regulations. My only background in finance would be from my undergrad degree (public finance + economics)at a top ten school.

    I am eger to break into to finance(particularly IBD)but without any previous internship experience I am wondering if there is any chance of this being possible? Even if I go to a top business school, will banks even look at me without any previous finance experience? Is there anything I can do pre-business school to make myself more competitive?

    • M&I - Nicole says

      You have a shot, but your odds are not that great versus people who have completed real IB internships. Banks will still look at your previous experience even if you went to a top business school, though being in a target MBA in your case will probably boost your chances quite significantly if you know how to spin your story and craft your application. If you plan on staying in your company, do an MBA (in a target) and break into finance, I’d focus on taking on projects relevant to finance and valuation if you have a choice.

  12. Phi says

    Hi,

    Are there any more useful resources other than Dealogic and BioCentury, like any trade journals one should read? Many thanks!

  13. Ervin Mixa says

    Hi, just a question regarding top players in the field. Some big names I’ve heard are Piper Jaffray and UBS. I’ve failed to find a list of other major players, it’d be helpful if you could come up with a rough top 5. Also, if you happen to know, do they all compete in the same market place or some are more focused on capital markets, others on M&A advisory, LBO etc?

    • M&I - Nicole says

      Goldman, Morgan Stanley, Credit Suisse, Deutsche Bank, JPMorgan

      I’d suggest you visit their sites re their business – they should have all the details

  14. RV says

    I’m a rising senior at NYU CAS (majoring in Economics, double minoring in math and chemistry). I was pre-med for a long time in college and finished all the requirements. My overlapping interests in Finance and Healthcare make this an attractive job for myself, but I have no IB internships b/c I spent most of my summers working at labs, volunteering etc. What is your advice for someone with my background? I am currently working at a start-up in financial tech.

    • M&I - Nicole says

      I’d network with your alumni (great network at NYU I believe) and try to get an internship in finance

  15. HCbanker-hopeful says

    Could you provide a list of the top healthcare boutiques? I know that Piper Jaffray is pretty big in this space…. but is that it? Feel free to include specific industry groups of the BBs, in addition to MMs and boutique healthcare IBs.

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