Many people think that we have armies of analysts for each industry, but this is not true. Most firms now have two analysts that may be supported by one or two research associates. With more than 350 publicly traded biotechnology companies for investors to choose from, the task of selecting the best investment opportunities with limited resources can be daunting.
I think of my job as having three major parts: research, marketing, and corporate finance. At various points, the time spent on each part can vary a great deal. One common thread is that there is never enough time. In this fast-paced business, you always feel that something is being neglected.
Research involves a number of activities, including company-specific research and industry research. When evaluating a company, you must look at the products they are developing, the technology that they use, the management team, and their business strategy. The first source of information is usually the company, but facts need to be verified by independent sources.
This is the area that is most closely related to scientific research, where scientific skills are readily useful. The type of information that you are evaluating may be in the form of scientific publications, abstracts, or company presentations. Keep in mind that the goal here is to eventually make money for investors, so no matter how scientifically elegant a project may be, you've got trouble ahead if the ultimate product is not clinically useful, is too costly, or is otherwise unsuitable for use in a patient population that is large enough. It is also important to have a broad scientific background. The technology that you are evaluating will not always be in your area of expertise. I was trained as a classical pharmacologist and this broad background has been useful in evaluating information from areas outside the cancer field, such as neuroscience, virology, and the like.
There is never enough time to evaluate these areas and you can't possibly do enough reading to quickly become an expert in an entirely new field. Therefore, it is important to develop good instincts and a strong network of scientific and medical colleagues on whom you can depend.
I also try to attend several scientific and medical meetings each year. The medical meetings tend to be more useful, since I can get a feel for the state of the art in the treatment of various diseases and what technology physicians are excited about. These meetings also give me a chance to speak with experts in various fields about technology that I am evaluating. When data from one of the companies that I follow is presented, I am always very interested in the questions asked by the experts in the audience.
In addition to evaluating the scientific feasibility of a company's products, you must also evaluate the market potential. How many patients have the disease? How are they treated now? Will the new product be useful in all patients or only in a small subset? Is the new product better than existing therapy? Will doctors use it? How much will it cost? Will insurance companies and HMOs pay for it? These are questions that most scientists are not used to asking, but they are crucial to evaluating a new product. It is important to think practically and to understand how physicians treat patients.
Okay, let's assume that the company has a potentially great product that looks like it is going to work; physicians think it will be useful, and it saves money so it will be reimbursed. Does management have a plan to get the product into the marketplace and the experience to execute that plan?
This is one of the more subjective parts of the job, but it is also very important. The managers of a biotech company have to play a lot of roles and they must communicate with a diverse audience. I try to rely on track records as much as possible and I follow a company's progress for awhile before making a "buy/don't buy" decision. This requires numerous meetings with management to define their goals, following up on progress over time. Are they overly optimistic about timelines and costs? Is there always an excuse for not achieving milestones? Or do they always meet their stated goals on or ahead of schedule? I must also admit that gut feelings play a role, but it is crucial to develop a trust in management.
Okay, so assume that the company has products in the pipeline and they've put together a great team. Now we need to look at whether investors funding this enterprise actually make money. For most biotechnology companies (with only about 6 exceptions) profits will be made in the future. Trying to project future earnings, much less to determine their value today, is a difficult task that involves some fortune-telling skills. Public companies rely on investments from the public in order to bring their products to market. This is a costly enterprise that requires $250 to $450 million and usually requires from 10 to 12 years for just one product. What is the company's plan for financing this development process? How will management balance investment in research and development of new products with making a profit for investors as soon as is feasible?
After all of this analysis has taken place and you have decided that the company is a winner, you must explain how you arrived at that conclusion to a diverse audience composed of some very naive laypeople, some very sophisticated institutional investors, and everyone in between. You must write a report that conveys the important points without losing the attention of people who don't have a lot of time to read through your pithy prose. You must tell the story of what the company does clearly and you must also explain why you feel that it is the right time to invest. Investors need to know what likely events will increase the value of the company and the stock price over the next 6 to 12 months. (This is a long time to an investor.)
The companies that you "cover" include those for which you are actively writing reports and notes to investors, those for which you have a detailed financial model, and those for which you have made an investment recommendation. This recommendation is usually to buy, sell, or hold, or a variation thereof depending on your firm (different firms may use different terminology to avoid saying "sell"). A single analyst typically can cover from 10 to 15 companies on a regular basis, depending on the amount of support that he or she has.
All of this research leads into the second major aspect of the sell-side analyst job, which is to market these stocks to buyers. (Buy-side analysts work directly with portfolio managers and institutional investors to decide which stocks to buy.) Once you have these great investment ideas, you must communicate this enthusiasm to the investors so that they will buy (or sell) the stock.
The first line of communication is your firm's institutional sales-force. These people have specific client institutions, with whom they are in daily contact with buy, sell, and hold advice across all sectors. Your ideas are transferred to the sales-force via your written reports, morning notes (brief comments on the impact of specific news events on stocks), or other specific comments-a change in earnings estimates or something that has changed your opinion of the stock-on companies that you officially cover.
In addition to the written reports and notes, you must also talk to your sales-force. This takes place at a daily meeting at approximately 7:30 A.M. East Coast time (4:30 A.M. for West coast analysts calling in)-hence the term "The Morning Call". The meeting takes place so early so that the information that is relayed by the analysts becomes the subject of the sales-force's daily calls to their institutional accounts. This information must be relayed to the clients before the stock market opens at 9:30 A.M. (6:30 on the West coast) to allow clients to take action immediately. In addition to having the salesperson call the clients with news, it is also important for the analyst to call certain key clients directly. It is important for an institutional investor to get to know and trust the analyst who is providing the information on which the investor may risk a great deal of money.
Research on general trends in the industry is also important. What are the current areas of interest (or disinterest) for investors? What kinds of companies are paying off now? What characteristics do successful companies have in common? How do investors define the profile of the ideal company? (This changes frequently, depending on how well past investments are doing.) Is biotech a worthwhile investment and how do you chose the right companies? Written reports on industry trends and fundamentals are helpful for investors, but they also help you to formulate and articulate clear, concise opinions about your industry.
In addition to written reports, morning notes, and discussions with the sales-force and clients, it is important to visit certain clients on a regular basis. Face-to-face meetings help build the relationship and generate trust. Clients can also be a valuable source of information. A typical marketing meeting can be a valuable two-way exchange of information.
Corporate finance is the third portion of the job. The corporate finance group, also called bankers, helps client companies raise money, advises them on mergers and acquisitions, and provides crucial strategic advice. Depending on the firm, the analyst may or may not be heavily involved in certain corporate finance decisions.
Initial public offerings tend to require the most work. I like to meet with, and get to know, interesting private companies early. This allows me the time to make some judgments about management and to follow the company's progress even before they become banking clients. It also gives me and the bankers a chance to guide the company through the process of deciding on the right time to approach the public markets and to decide what their other alternatives might be.
Once a decision has been made to go forward with a public offering, I tend to participate heavily in the "due diligence" process. This involves numerous conference calls with collaborators, scientific founders, corporate partners, physicians, and others to evaluate the company. This process is somewhat akin to checking references. I also go through all of my typical research steps, including building a detailed financial model of the company.
After due diligence is completed, the company must write a prospectus, a document filed with the SEC that is given to potential investors. The business section of this document describes the company in detail and it is important that this section be clear and understandable. I like to take part at least in the initial stages of drafting this document. The next step is to prepare a 30-minute slide presentation that will be used to describe the company to potential investors around the world in a grueling ordeal called a road show.
During the road show the company will give this presentation numerous times in several key cities throughout the United States and Europe. Some of the presentations will be to groups of investors over breakfast or lunch. Other presentations will be one-on-one meetings with key investors. I like to have some input in the slide show, but I do not typically go on the road show. I do make follow-up calls to investors who meet with the company so that I can answer any questions and describe why I feel that the company is a good investment. Once the offering is completed, this company is added to my coverage list and I write a detailed research report.
Other activities related to corporate finance include follow-on offering for existing public companies and evaluating potential merger or acquisition candidates for our clients.
