Having hired and trained scores of analysts over the past 15 years, I would say that there is no single trait or skill set necessary for success. In fact, I will admit that being the oldest biotech analyst on the Street does not mean that I have all the answers or that the learning process is over.
Before describing the various important characteristics of being an effective analyst, I'll start with the critically important things I've learned. Arnie Snider taught me that there is a difference between companies and stocks. Biotech companies are about people, technology platforms, business and financial strategies, and products; stocks are pieces of paper. An analyst's primary job is to recommend stocks that go up in value and to avoid stocks that go down in value.
It is also critical to recognize that in the investment business, we live in a relative world as opposed to an absolute world. By this, I mean that institutional investors are supremely performance-oriented and they are graded on the basis of the performance of their funds relative to the market's overall performance. If an analyst's recommendation is up 25% when the S&P 500 has appreciated 30% that means the stock has underperformed the market. I teach our analysts and investment bankers that we are actually in the paper business-we analyze it, we trade it, we issue it. Consultants analyze companies and strategies, but securities analysts are stock pickers.
The next step in the process is communication-both verbal and written. When an analyst has found a stock that he or she believes is undervalued (the stock price does not reflect the company's value), the key is to market the idea to both the firm's salesmen and directly to institutional clients. If an investment idea can't be packaged and communicated succinctly, the idea will not rise above the competitive noise level of other analysts at other investment firms pitching their ideas.
Beyond these big-picture issues, the skill set for a biotech analyst includes honesty, professionalism, a strong work ethic, a competitive spirit, being inquisitive and skeptical, having a solid accounting and finance background (i.e., an M.B.A.), having a strong knowledge of science and technology, paying attention to detail, and having strong financial modeling skills.
A Typical Day
The brokerage business begins with the morning research meeting. Analysts stand in front of the salespeople and traders and make a 2 to 5-minute sales pitch focusing on the reasons to buy or sell a particular stock. Then, salespeople and analysts hit the phones, marketing the idea to institutional clients on the "buy side"-specifically, portfolio managers and analysts.
Nearly every day analysts speak with companies, either in phone conferences with the top management contacts or in one-on-one meetings with these executives in the office or during site visits at company headquarters. These contacts with company managements become the source of future comments for the morning meeting. News items by companies that emerge during the day are analyzed and comments to the sales force are directed to institutional clients. Finally, considerable time is spent in writing formal research reports.
A typical day spent out of the office involves one of three activities: site visits at companies to meet with key senior management; attending industry conferences and/or scientific meetings; and marketing to institutional clients in group meetings (e.g., at breakfast, lunch and/or dinner) or in one-on-one meetings. Herein lies, in my opinion, the most enjoyable (and potentially the most stressful) part of the job.
As I write, I am on a marketing trip. I flew to San Diego last night and had a group dinner (which ended at 11:00 P.M.); I was on the morning research call at 5:00 A.M. (Pacific Time); after three one-on-one meetings in San Diego, (1-hour meetings), my West Coast sales representative and I drove to Los Angeles. We had three one-on-one meetings, one of them with a client who called me stupid for not having upgraded my recommendation on a stock at 10 that I had lowered my rating on 4 weeks ago at 16. (The stock was up 2 points today to 14.)
I currently am on a flight to Portland, Oregon, for a dinner meeting and two one-on-one meetings tomorrow morning; then I will catch a flight to Seattle for a group lunch followed by three one-on-one meetings and a late night flight (with a tight connection through Denver) to arrive in Chicago (our home base) at 1:00 A.M. Then, the morning call, two conference calls, and a day off (maybe) on the weekend. So, an analyst must possess endurance and a thick skin.
From the financial reward perspective, it is not uncommon for industry-specific analysts (biotech, medical devices, health care services, and so forth) to start with a combination salary/bonus of $100,000 to $150,000. From there, it's a matter of how much revenue you generate for the firm. In one way or another, analysts and bankers are rewarded based on the money they bring into the firm, which can mean some pretty big bucks. A good stock picker has the opportunity to double or triple her initial salary, based on time at the firm and performance.
Where I Hope To Go From Here
I joined Kidder, Peabody & Co. in October 1983; I loved the firm and I made lasting friendships with colleagues and clients. I was honored by becoming a partner within 2 years and achieving the Number 1 ranking on the Institutional Investor All-Star Team.
I co-founded Vector Securities International, Inc., in 1988 with two remarkable partners, colleagues, and friends-Ted Berghorst, an investment banker, and Jim Foght, Ph.D., a former pharmaceutical executive turned investment banker. Together we have formed the Later Stage Equity Funds I and II with a total of $230 million under management, designed for private negotiated investments in life sciences companies. In addition, we co-founded Deerfield Partners, a $400 million health care hedge fund run by Arnie Snider in New York City. Vector Securities International has been involved in more than 200 transactions and has raised roughly $3 billion in capital for the life sciences industry.
I spent the first 6 years being an analyst and running the research department as director of research. This worked as long as Vector was a small organization. As the company grew, the research department expanded to 20 professionals. I had to decide if I wanted to oversee the management of the research department or go back full-time as an analyst. By the end of 1994, I chose to be an analyst and we hired the person who had run research at Drexel and was CEO of County NatWest Securities.
My current responsibilities as executive vice president and biotech analyst include participating on the operating committee and the board of directors. The operating committee meets weekly for a couple of hours to oversee and review the firm's operations. I am also a partner in the Later-Stage Equity Fund. We just closed the second fund in this family with $180 million, and Genentech as the lead special partner. I had followed Genentech for years as an analyst; I no longer cover them as an analyst, but they are showing their faith in Vector by investing a substantial amount. We spent the last quarter of 1993, all of 1994, and part of 1995 raising $51 million for Fund I, providing investors with a performance that is up 90%. This paid off-it took us only 4 months to raise $180 million for Fund II.
All of this sounds great. But I am a biotech analyst; I am only as good as my last recommendation. I am competing with biotech analysts at other Wall Street firms for the attention and brokerage business on the buy-side; I am competing for the time and attention of our sales force. My stock picking over the past 12 months has included inconsistent big winners and several losers. Year-to-date, the biotech stocks are off 3% while the S&P 500 has appreciated 23%. Our salespeople are angry with me and our clients are dissatisfied with my performance.
The brokerage business is a tough game. There is a reason that I am the oldest biotech analyst (chronologically 43) and I have survived the longest-14 years. I still go to sleep tired every night and wake up scared every morning. But I live in and thrive on the brokerage business. I am an optimist, looking for important drugs that may cure diseases and create untold wealth for investors. I am also an opportunist, willing to change my investment rating on a stock when my experience and judgment dictate. I will retire as an analyst someday.
