Small Offerings, Big Impact: Demystifying Micro-IPOs in Biotech with David Sans, Head of Healthcare Investment Banking at EF Hutton

Are a few areas of biotech that I have not had enough exposure to. And for me, investment banking and the world of public offerings is one of them. So a lot of my clients have gone through a lot of different public offerings, but my involvement is usually before that. So it was a pleasure today to speak with David Sands, who is the head of healthcare investment banking at E.F. hutton. And he walks us through a couple of different types of IPOs, including micro IPOs, which are a really interesting option for some companies. He talks about which companies they might be good for, which companies they might not work for, and we generally talk about investment banking, what it's like to be an investment banker. He has a PhD. He's a scientist first and he came to investment banking later in his career. I learned so much from this conversation and I know you will too. So let's jump into it. Welcome to the Building Biotechs podcast. Over the years, I've helped over 90 biotech, life sciences and venture capital firms strategize and hire thousands of employees to scale companies that impact human health. We speak with those at the forefront of growing biotechs to learn their tactics on building these companies from the ground up. I'm your host, Karina Klingman. I hope you enjoy the show. David, thank you so much for coming on the show. I would love to know a little bit about your background. Can you walk me through your career? What did you want to be when you were 7? What are you now and how did you get there?

I was born in Barcelona, in a small part of Barcelona called Gracia. I'm a Maulet, these are the Catalans, born in Dacia and growing up I wanted to be in the pharmaceutical industry. I was fascinated with the small pills and the small syringes and these small drugs that were people were taking. And then a friend of my parents gift me for Christmas a box of chemical products so that you could do chemical experiments. Harmless. At home, I was fascinated with chemistry, with reactions. I always did very well in chemistry and algebra. I did very bad in other areas. I was a very bad student in things that I didn't really have a lot of interest. But I was very good in mathematics and life sciences. So growing up I always wanted to be in discovery of new drugs and development of new drugs and kind of being into the healthcare medicine field, but not seeing patients, but rather looking to develop drugs that can have impact in populations.

You are now in a very different area of biotech. Now you're on the finance side. Can you Walk us through how you shifted from your love of discovering things into the finance side.

I never thought for one moment when I was a child that I will end up doing a career in financial services. My father was a banker, but I really never had any interest in banking when I was a child. I had no interest in stocks. I had no interest in the stock market or anything. So it was not something that I planned. I was working with a biotech company here in New York City that was acquired by a pharma company. And at that time, the head of healthcare investment banking asked me, why don't you join us? And I thought, wow. So it was one of those dates that opens a door because I didn't go back to biotech. And that's how we started in biotech, in financial services.

And so you kind of just leapt. I mean, that is a big change. And I think the culture of biotech is very different than financial services as well. How did you find that when you did make that leap?

Yes, I had to take all the exams. I had to basically understand the world of financial services, which is not the world of staying focused on papers and publications and developing drugs and presenting. Science is a. Is a service to biotech companies and to investors. It's a service which is very, very different than fighting for science and demonstrating facts. So I had to learn on the ground. I am a big believer that you learn to build a plane when you are in the air flying and you have to. And you need everything to basically stay up in the air. So I really learned. I was not basically trained from out of the school into the formal process of getting into investment banking or financial services.

Yeah. Did you get your MBA before that or after?

I got my mba, I was sponsored by the company that brought me to the US as a scientist of national interest. And I was always interested in finance. So I always had a financial kind of education, but it was more of a. Of a sideline. It was not the core of my training.

Okay, interesting. So you were a little bit poised to make that jump because you did have a bit of that interest in that background. You're currently the head of healthcare investment banking at EF Hutton, and I know you've been championing micro IPOs. Can you explain how that might fit into the biotech funding picture?

Yes, that's a very good question. When I started in the banking industry or 20 years ago, there were about 8,000 publicly traded biotech companies and there are only 3,000 today. So definitely there has been a massive attrition of biotech companies being listed. And there has been a tremendous growth of private equity. There are more investors now in the private financing than in the public financing. And if you think about yourself, when you think about your 401k, you usually don't buy shares of biotech companies. You want to allocate your investment across different industries, multiple funds, but very rarely you see individual investors going out to buy shares of a stock. And so there has been a huge attrition by the companies that want to raise money for phase two trials, early stage development. They don't find a lot of interest from private equity funds. There are a lot of bankers like ours that set up this system of micro IPOs. These are IPOs that will raise anywhere from 5 to 15 million. Some people think that these are different than the traditional IPOs. These are not different at all. These are the same as a traditional IPOs. However, they don't have as much repercussion in terms of media because they are small IPOs. But these IPOs follow the exact same steps as large IPO. We call it a small or micro because we are offering 2 million shares, maybe 1 million shares. We're offering very small amounts. But to answer your question, this is an area that is growing in interest and appetite because it's a little bit easier to launch these type of offerings. And what makes this micro IPO successful is to have what is called inside participation, what is called direct demand. In other words, if I have a biotech company that has raised 15, $20 million, we need these investors to also participate at the IPO anywhere from 30 to 70% of the demand. So if you go out with a $10 million offering, we really need the current investor to participate at least with 3 million to 7 million. If we don't have this inside participation, there's a lot of pressure to sell. And that's what we try to prevent. We prevent that shareholders start selling as soon as they go public, because that doesn't help the company. The company keeps the money. I mean, if we waste $10 million, that means they have funding to go into the phase two trial. But it doesn't help to support the stock because everybody wants liquidity. And what we try to do to support the stock is to have market makers to have other bankers who start buying plot of shares to sell to different funds. But also we like for shareholders not to sell right away, not to sell without any reason, not to liquidate. Investors should always liquidate whenever they want. The job of the CEO is always to bring new Investors to the stock. The work of the CEO is not to hijack shareholders. All the content is to engage new investors to buy the stock. And for that we do a lot of down the road shows and we put a lot of eyes into the stock. We want the public to know about this technology, about this biotech. And the job of the CEO is to sell shares to get more investors into the stock, not to hijack them. But if we don't have investors that want to be on the long term, then our stock will suffer. Our stock will see more sales than buyers. And that is always the pressure on these micro cap IPOs that at the beginning they may not perform as well as if we have a lot of inside support. And then we have to go through time for the company to get results and to come up with new data to get more investments to come into the stock.

What stage biotech is going to be most attracted to these and how much should they have raised before they think about perhaps a micro ipo?

The traditional stage will be a phase two trial where the company has demonstrated that has safety, has biological indication of activity and it is supportive for a phase two trial. And that is the kind of milestone, the tipping point because that is where you can see the stock really performing. So the idea will be a phase two ready type of company and that is the, the sweet spot. However, there are other areas. Think about metabolic diseases, think about Ozempic. If we have a client now that is in the stage of developing the next generation of Ozempic, a, a drug that reduces the body fat but increases your muscle. So this is the next generation of Ozempic. Ozempic, as we know, reduces body fat but also reduces muscle. And when you are off Ozempic, you end up with lower muscle mass. And when you start eating again, you increase your body mass but you have less muscle. So we want to have to the next generation. In this case, we don't have to wait for the phase two data. You have mouse data that shows preservation of muscle. You have the benefit of both actions. You want to reduce fat, you want to increase muscle mass. In these cases, where we have very compelling evidence from annual models, we feel very compelled to do a micro ipo. So it really depends. In general, we'll say a phase two ready company is ideal. However, if there is a lot of demand for metabolic diseases, that is a home run and this, this could be also a microcap that can be very successful and very supportive by the public.

Yeah, that's interesting. So we know Ozempic Works. Right. And so being able to show a similarity and have some really compelling data that's going to bring investors to the table. They're excited about this. So we have to have excited investors. It sounds like that's part of the recipe. So you either get that through, you're ready, you've had a good clinical, you know, phase two, and that's promising, or we've got some market impact and like Ozempic, is that it?

By the end of the day, if you think about financial services, financial services means we have to provide the best advice or the best support to biotech companies, but also to investors. So we expect, and we envision that the next 10 years. The support in the banking system has to come from strategic thinking, has to come from not just doing IPOs and repeat and repeat, but being very strategic about what IPOs we should be doing. By putting a lot of thinking at the beginning, we have to be strategic thinkers first and foremost, because then we can identify these assets that can be successful. So we're helping the healthcare community, but we also have to help the investor. And for that purpose, we need to consolidate his expertise, his expertise in both banking services and biotech.

Just getting back to what even an IPO can do for a company. Right now we're seeing the return of some of these mega IPOs. We've had a couple of pretty good IPOs this fall or in the last couple of months. What makes that difference for you? Why would, for this potential next generation of Zempic, why would you consider a micro versus a traditional IPO for that company when there is such excitement?

The traditional IPO is basically the process of filing an S1 prospectus or an S1 if the company is a foreign issuer. Okay, so the process of an IPO is the same for a small or for a big IPO. So when we look for a mega IPO of 300 million, we are looking at companies that have a large offering. They have already raised 3,500 million dollars. They're already already on Series H, USB, Series C with a large investor base. And that is basically the process is exactly the same. It's just the amount of basically funding for the IPO that is much bigger and it goes from anywhere from 100 to 300 million. For the smaller IPOs, where we'll look at 5 to 15 is an IPO where we are not looking to launch a drug. We're looking to go through the four stages of development that don't require $300 million. So think about if you are building your first house and you're buying an apartment, maybe a studio in Manhattan, you probably need 300 to $500,000. Whereas if you are buying a six bedroom penthouse, you may need $20 million. Well, this is very similar in the sense that for early stage smaller companies, maybe with one or two products, you will not need to raise 300 million. You are very focused. You have one drug, you want to go through the stages of preclinical development and into the clinical. This doesn't take more than $7 million. Okay. So raising 300 million for a small biotech company is not necessary. So that is why we see IPOs on a very large range of offerings. For a small company, maybe two to 20 employees. I have done IPOs with one employee and a part time CFO and we raised $15 million for this company, was an Alzheimer's company and the stock went from $5 to $120. So what I like about these smaller IPOs is that with the smaller IPOs, you have a higher arbitrage. You can go from very small price of $5,120 with catalysts with events. On the flip side, with a very large IPO of 300 million, in that case, the arbitrage is smaller. The ability for these stocks to go from $100 to $300 in a small period of time is not that big. The performance will be there, but you may have to wait 10 years for that stock to go through the roof. The smaller IPOs have more risk and more reward. Have more risk because the stock can go down to $1 out of 5 to 1 or it can go from $1 to $120. You will not see that arbitrage, that variation in mega IPOs that makes a lot of sense.

Yeah. And I think too we're seeing kind of companies today versus in the late 2000 and tens. We're seeing companies think more strategically about endpoints and what could be an inflection point for their company. So if I'm reading this correctly, these companies that are raising smaller rounds to get to the next trial stage, they may be looking to license or partner. Before though, when we had the mega IPOs, we were looking to build out our own manufacturing plants and multiple sites and go all the way through to the patient. And that's definitely a different scope.

Exactly. Remember, the FDA is here to protect the public. And one thing that the FDA doesn't not want to see is that you don't have enough manufacturing capacity. So one thing that pharmaceutical companies or biotech companies need to demonstrate to the FDA before going public is that they can supply these drugs to the public. The FDA doesn't want you to go on a commercialization campaign where you can only supply 10% of the population. If you are projecting 100 patients, you have to show a manufacturing capacity for that population. If you are sure the FDA will come back and say, no, we don't give you approval. You don't have the manufacturing capacity to supply all the market. And this has happened with a lot of FDA approvals. They have denied the FDA approval because manufacturing was not ready. This has happened with a number of cell therapy companies that their manufacturing is very complex. It takes a lot of steps. And if the FDA perceives that they cannot supply the demand, they will not allow the companies to to be approved. And that is why in these larger IPOs, you are basically engaging $30 million $50 million into manufacturing to prove in several cycles that you can supply the demand. This is a very expensive process. You need a major expense on manufacturing, training people and demonstrating to the FDA that you're ready for commercialization. You have to build up this product, we have to build up the entire supply. And this is a financial effort that requires a lot of funding versus a small company, maybe with two employees, that only have to deliver drug to a tiny amount of mice that live in cages. So the scale of the complexity is an order of magnitude. That is why we have these disparities in IPO offering. A $10 million offering versus a $300 million offering.

Hey there, just a quick break. I wanted to let you know that if you're listening to this podcast because you are exploring careers in biotech, which it turns out quite a few of our listeners actually are, you might be interested in the Biotech Career Coach podcast. It is brought to you by our sister company, the Collaboratory Career Hub, which is our career development community. If you would like actionable tips on job seeking and career development, that is the place for you. It is a companion podcast to our Career Coach column that we write monthly in Biospace. But we go a little more in depth and sometimes we have special workshops and all of that good stuff. So if that sounds interesting, click the link in the show Notes or search for the Biotech Career Coach on Apple Podcasts or wherever you get your podcasts back to the show. What in your experience makes a really successful versus a really weak offering?

So what makes a successful IPO is the support. In other words, when we see the market supporting that IPO is when we consider an IPO that is successful. Now let's qualify this. The support can come immediately after the IPO or can come months after the IPO has been closed. In other words, if we close the IPO today, we may see an increase of value, we may see the markets, investment start buying the stock on the open market and we see fluctuation and we see the stock going up. Everybody's happy and everybody believes in this stock. It could happen that after the ipo, investors start selling the stock. That is where bankers like ours and market makers have to come into a stabilized the stock have to come in to provide buyers and to tell investors. And we call these non deal roadshows where we tell funds, hey, do you remember IPO that we did last week? We want you to speak with the CEO, we want you to learn about the pipeline, the next catalyst to see if you want to start a position. And we do these on 30 minute calls with hundreds and hundreds of funds so that we can spread the word on the market that this company has a number of products, there is a competitive landscape, they can come in with new data. So our job is to make sure that we provide these aftermarket support that CEOs companies and their pipeline is fully disseminated to the market so that everybody has a chance to learn about this technology, learn about the opportunity and start the position. We talk to a lot of analysts in Wall street to start covering the stock. We talk to a lot of different funds, family offices to start positions on the stock. And that is a work of spreading the opportunity to a wider network of investors. And this is why we always like to have the support from the current investor when they sell. And they are free to sell at any time for any reason. They create a selling pressure. So what we want is investors that can be committed for the long term. We call them long term investors. These are the ideal investors for an ipo because these are the ones that will be supporting the stock, will be following the stock and believe that there is enough evidence to support for their position to remain for the years to come and knob to sell.

Yeah, that makes a lot of sense. I guess. I've worked with a lot of companies that have done a lot of roadshows and that never really clicked with me until you've explained it that way. Why that's so important because yeah, I'm not personally, I'm not investing in any specific single stocks. I rely on the funds that I'm a part of. I have ETFs, right? And I have a fund and I Don't think about that on a day to day basis. But I do want to have stock in companies that I care about and so that's how I select funds that do that. I never really put piece that together. I knew the roadshows happened and I knew why. But you just explained it really well. It's still an ongoing long term.

That is why when I think about financial services again I'm not the traditional banker I have. I didn't grow up in this industry, I was not trained by banks. But when I look at this industry I think for the next 10 years I really want to be more and more involved because this is exactly what happens. Investors like you and me, we don't look at these opportunities as appropriate for us. So I want to explore and push the limits of the financial services. When we look for innovation, we need to look for financial solutions for what we just experienced. That is I rely on somebody else to make decisions. I want to remain a passive investor, I want to buy ETFs, I want to buy multiple funds, I want to be removed from doing the work. So I keep thinking as, as a banker, as a financial service provider, how can we push to the next limit of appropriate pricing, appropriate revenue models and how to bring this company ecosystem of pharma and biotech opportunities to retail investors. Because ultimately if I don't have the support from a wide range of investors, my small IPOs will always be difficult to manage. And it is a big question, I don't have the solution. But for the next 10 years I envision that our banking services and me personally, I want to look for this next frontier on how to create new pricing model, new revenue models, how to be outcome based pricing. In other words, if I present to you the next Ozempic, I need to find a structure that because you like it, you already identified that the next generation Ozempic is something that sounds good and it has value but you are reluctant to buy the stock because you feel like no outpassing investor. I want somebody else to buy it. So I think from the banking service industry we need to find new solution because the solution that you need is not there. And the solution that you need is something that is an outcome based pricing, something that you can see the price based on the outcomes and that is absent, it is not there yet. And hopefully we will work into providing this type of offer.

That's a really fascinating problem. I look forward to you solving it for me. When biotech founders approach you, what are some of the red flags that maybe suggest they're not ready to have an IPO.

So sometimes I get on calls with CEOs that they either don't have the business speech, they may be very good scientists. I have a lot of people that have a lot of skills on managing the pharmaceutical process. They have strong operational skills, but they lack the business aspect of what they do. They have difficulties translating their skills, their knowledge or know how with the business opportunity. That means understanding the competitors, understanding the pricing, understanding the market opportunity, understanding how they're going to make this niche into how they're going to penetrate, how clinicians and patients are going to use their drugs. So when I see a CEO that has bridged these three aspects, the science, the operations and access to the market, then it's a complete home run. Okay. And the next step is how are we going to deploy capital into these operations? So whenever a CEO is lacking one of these three pillars, then it makes it very difficult because you have to ask the CEO, can you put the marketing pitch or can you explain the risks of these clinical trials or do you know the papers or do you know the competition? When one of these pieces is absent is when we feel more relaxed and we feel more cautious about taking that idea.

You shared with me that you get a lot of outreach from people. They're in biotech, they have a PhD and they look at your job and they think that looks fun. What makes somebody suited for your job? And what would you tell people who are interested in pursuing a career like this?

It's not a traditional pathway. In other words, if you go, for instance, the Goldman Sachs and they just came up with these new data, they have 300,000 applicants and they only hire 1,200 people. So definitely the rate of success to enter into investment banking is ultra low. It's very difficult. Not a lot of people can get a job as an investment banker, There are very few. But everybody romanticizes the life of investment banking. And I think that a lot of people kind of don't understand that. A lot of people wake up at 5 o' clock in the morning. There is what we call the 5am Club. And there are many colleagues of mine that we go to bed whenever we can at 9 or 10, but we wake up at 4:35am, we get our personal things done in, in the morning and Then by, by 6 or 7 we can start our day. So first of all, it takes tremendous amount of discipline, tremendous amount of dedication, tremendous amount of knowledge of your ecosystem, in this case biotech. But if you come from another industry, for your own industry. And it takes a lot of hours and a lot of managing a lot of projects at the same time. So it's not that simple and it is not for everyone. I mean, if you look at the divorce rate and the top one discipline where you have a lot of divorces are basically this type of industry where you have to spend a lot of time in the office. So this is not for everyone. And I don't encourage everyone to look into this career path because it's, it really needs some type of person that can bring this effort to the, the work environment and also to bring a positive attitude because the new applicants have a romantic idea about banking and they perceive banking as a place to find happiness. Where banking is the place where you need to bring your own positive energy, make things happen. Because it takes a lot of work. So it is a very demanding type of job. And definitely it takes a, it takes a, a certain type of individual. It's not for everyone.

Yeah, I think there are some interesting TV shows that have come out somewhat recently and, and showed a little bit of the fast paced life there. But it does, they do romanticize a lot of it. So over the next 10 years, what are your big goals? What do you want to see in the industry and professionally?

Imagine 10 years ago if we were sitting now and this was 2014 instead of 2024. I would have missed Covid, I would have missed the three wars going on, I would have missed inflation. So it is very clear to me that you can think about the 10 next 10 years, but we cannot predict what we don't know. Okay? We cannot predict what will be unpredictable. But we can say today is that there is an obvious push for artificial intelligence. We all are using generative AI. We're all using all the skills, all the technology that we can to make our job better. So number one, I think AI will be fully integrated in what we do in the financial services, in the biotech. So we already see biotech companies adopting AI to accelerate the discovery and push basically a 10 year development program down to 5. And we see a lot of advantages. So definitely having more AI dominating this space. We see it as a major accelerator and we also see these integration of data into the healthcare and banking. So definitely, number one, AI integration of data, managing data will change a lot and it will accelerate. We see in the next 10 years how we're going to have more focus on opportunities. Traditionally banking has been a system where we have biotech companies coming to us, advisors coming to us and the deal Flow comes from outside, inside. Okay? I think that because of AI, we may see a reversal of this process where bankers are not waiting for opportunities to come to us, but that we may shut down the incoming flow and we may reverse the process where we go and look for the technologies that we want to be involved with. And I think this will happen more and more. If you think about the amount of conferences that we see, every year is overwhelming. I just came back from Barcelona. Esmo had the biggest conference. And when I went to see the posters, you have to think that there we had 2,500 posters in like four days. So every day I have to look through hundreds of hundreds of posters. They will take these posters down and put around the 600 of poster. I cannot do that. I mean, I would need three years to review all these posters. So it's very clear to me that we need to change the paradigm of these conferences where as a conference attendee, I can no longer go receive a book of 700 pages with 2,500 abstracts and try to come out of this conference with something useful. I need something else. And it's not about printing a book. It's not about putting together a conference. It's not about hanging this poster. It's about something else. And it is about digesting all this data to points that are meaning. So I think that this focus on changing this paradigm will be the base, the biggest transformation in the next 10 years. And last but not least, this issue about the healthcare banking services. We need a different paradigm. We cannot work just with pricing deals, okay? We need to come up with new tools. We need to come up with new methods of engaging investors based on outcomes. The same way that we moved away from fee per service in medicine and we have accepted that we can now go to see a doctor and pay the fee. We need to go to see a doctor and pay for outcomes. I want to get better. We have to do the same thing with financial services. We can no longer just be sitting here and expect the public to pay just to participate in the IPOs. Okay? We need to strive into a model where investors can get value, where we can develop models based on outcomes. And I'm very passionate of this transformation. I don't have the solution, but definitely we're working to find these models where investors can invest based on outcomes, not based on price.

So you have a few small goals over the next 10 years. Really inspiring stuff, though. That is all very exciting to me. I love to know what my guests are reading. Just because you're All a bunch of really smart people and I need book recommendations. What's a great book you can recommend for me?

I come from Barcelona and I just came across this British writer called Matthew Tree. He wrote about Barcelona and I think this is a very good book for non Catalans to read because one thing that I find is that a lot of people want to rent an apartment in Barcelona because the weather is good, completely absent of the culture, completely absence of the local people. So I think that more and more people will gravitate towards understanding what does it mean to go and travel to anywhere in the world. Because if you think about traveling industry, we have become very unconscious, very irresponsible and we sometimes make decisions don't make any sense. We go to Barcelona thinking I want a cheap apartment or a cheap food or nice weather and we completely disconnect ourselves. We make capital ends invisible in a way. And I think that this type of books from Matthew 3 opens up a new window of explaining what does it mean to go to a place? What does it mean to go and rent an apartment in Barcelona and imagine your life for the next two years or three years. It really hits to the issue of understanding where you're going to live or where you want to go in a way that is written by somebody that really understands local culture.

I love that. I'm going to read it. I am planning a trip to Spain including Barcelona and I excited to read that. For people who want to reach out to you, is LinkedIn the best way? Where else can they get in touch with you?

LinkedIn is perfect. I don't always respond, but LinkedIn is the right place to connect.

Yes, we're going to link that in the show notes for anyone who wants to reach out to David and also E.F. hutton and you may want to reach out if you are considering a micro IPO or any type of IPO for that matter and you're in our industry. Thank you so much. This was really informative. I learned a lot personally and I think a lot of people will have a new epiphany about what it really means to have a public offering and how it might be the right or not the right thing for their company right now.