We recently found an interesting on-line article by Eric Staeva-Vieira, PhD entitled “The Three Pillars of Biotechnology Equity Research,” and thought it would be of interest to PRN members and readers.
The following article can be found at the Biocareer Center Website.
“Before going into depth on the Three Pillars – which are what I believe are the foundations of a good biotechnology analyst – I thought it would be helpful to give you a brief introduction to equity research. If any of this jargon sounds unfamiliar, don’t worry. It was completely foreign to me when I first heard of equity research. I recommend going to investopedia.com for help with these terms. It has an extensive glossary and a tremendous number of interesting articles.
Equity research represents a profession in which individuals spend their days (and many nights) analyzing primarily public companies in order to assess their current and future value and investment risk profile. Some research analysts (sell-side analysts) work for brokerage firms or investment banks that buy and sell stocks for clients, who can be individual investors, hedge funds or large mutual funds. Sell-side analysts provide company analysis, in the form of research notes, to client investors to assist them in making sound investment decisions. Other research analysts (buy-side analysts) work for the investors. They are employees of the hedge fund or mutual fund and provide analysis for internal use by the portfolio managers who govern the day-to-day trading decisions for the firm.
I currently work as a sell-side analyst for a brokerage firm associated with an international investment bank. At its heart, brokerage firms are service organizations. They advise clients on investments and locate buyers when clients want to sell their shares (or company stock) or sellers when they want to buy shares. Some brokerage firms also serve as distribution channels for newly issued stocks, for instance shares sold as an Initial Public Offering (I.P.O.).
There are equity analysts for almost every conceivable industry (alternative energy, e-commerce, information technology, gaming, retail, etc.). I will focus on biotechnology since it is the one with which I’m most familiar. If you want a quick glimpse of all the types of industries out there, I recommend spending some time browsing Yahoo! Finance (http://finance.yahoo.com/) or Google Finance (http://finance.google.com/finance). Both do a good job categorizing the sectors and provide useful news links and company information (and it’s free).
There are a number of industry sectors in which biomedical scientists and engineers are employed as analysts, including:
* pharmaceuticals (covering companies like Pfizer, Merck and J&J)
* specialty pharmaceuticals (covering companies like Elan, Alkermes, and Nektar)
* medical devices (covering companies like Boston Scientific, Kyphon and Foxhollow)
* medical technologies (covering companies like Becton Dickenson, Baxter, and Beckman Coulter)
* life science products (covering companies like PerkinElmer, Affymetrix and Invitrogen)
All require different types of knowledge and experience, but have at their core science. For this reason, PhDs and MDs have been sought by Wall Street firms, both on the sell-side and buy-side, to make sense of the products (drugs and technologies) being developed and sold by these companies. A product like Avastin, sold as a treatment for certain cancers, has quite a different market than, say, Coca-Cola, which almost anyone in the world can recognize and has probably sampled.
Therefore, you should not be surprised to learn that the first Pillar of Biotechnology Equity Research is biomedical science. As opposed to a pharmaceutical company that develops products by applying chemical approaches to make small molecule drugs, the quintessential biotechnology company develops therapies by adapting proteins or nucleic acids. Of course, over the past few years the lines have blurred with pharmaceutical companies acquiring biotechnology and biotechnology companies developing small molecules, but for the most part the biotechnology sector still seeks to take advantage of the many protein targets that exist in the human body to correct what has gone wrong.
Therefore, a good understanding of molecular biology, immunology, neurology, virology, microbiology, genetics… You can kind of guess where I’m going with this. It doesn’t pay to be a sub-specialist. To be a good analyst you need to be a generalist, because you will be at task to look at a number of companies many of which are applying their technology to a broad range of indications, which may be Alzheimer’s Disease or Chronic Hepatitis C or Non-Hodgkin’s Lymphoma or Multiple Sclerosis. You will need to be adaptable to whatever direction the companies take and clients will expect you to know and educate them on the intricacies.
Now don’t fret that you just spent the last 5, 6, 8 or more years focusing on one gene in a simple model organism like drosophila (that’s what I did and many before and many after me did). What you should appreciate is that you possess the dedication to understand something, have the know-how to seek out information, and the analytical tools to assess what is the most likely outcome of a situation.
Another very important point that struck me when I began as an analyst in the biotechnology sector was how little my extensive knowledge in the basic sciences really played a part of the every day activities of a biotech analyst. Remember, as an equity analyst you are following the clinical developments occurring in public companies, i.e those which trade their shares in the open market. Most of these companies do not go public until they have an investigational drug in late stage clinical development (i.e. Phase 2, Phase 3 or beyond), as opposed to private biotechnology companies which may still be in early stages of investigation (preclinical animal models or still in Petri dishes). By Phase 3 clinical development, the basic science principles are more-or-less understood, as they have been shown to be effective in animal models and molecular activity have been observed in healthy volunteers. The clinical efficacy or therapeutic benefit, however, has not been extensively worked out. It is usually not until Phase 3 clinical development that we finally get results that will hopefully provide statistically significant data that also confirms the clinical benefit to the patient.
Now, I did some interesting things to fruit flies during my graduate career, but I never really made an assessment for clinical benefit or looked for compounding adverse events. When you are dealing with humans, though, both efficacy and safety are key to a good product profile. So, I spent much of my first year as an analyst educating myself in the medical sciences (like hematology, physiology and endocrinology) and the current treatment algorithms, or practices, doctors follow when they treating a patients for a particular ailment or disorder. I became aware of which adverse events were categorized as serious and which as common. It helps to understand how a treatment, whether systemically or locally delivered, will affect the entire organism. What are the potential side effects that may occur and when such adverse events occur in a clinical trial, how does that affect its product profile? And how will it compare to what is already on the market? How will these developments affect how the FDA will view the product when its marketing application comes under review?
The FDA has the final say as to whether a drug gets on the market, and has been the executioner to quite a few biotechnology companies. So, it helps to be well-versed in what the FDA is looking for in clinical trial design and results. The nice thing is that they make a lot of their thinking public on their web site in the form of Guidance documents (www.fda.gov/CDER/GUIDANCE). The bad news is that biotechnology changes rapidly and the FDA may not have time to draft guidance before a new drug comes up for review. Trying to predict how the FDA will vote has often been a game of chance, which is why the biotechnology sector remains a popular destination for the boldest of Wall Street investors.
I also recommend that you, if you haven’t already, take a biomedical statistics class. I spend much time reviewing clinical trial results where I’ve looked at countless numbers of Kaplan-Meier curves and pharmacokinetic plots looking for survival benefits or maximum plasma drug concentrations. If you know this already, then you are in good shape. Brush up on the FDA guidance and then focus on the other two Pillars (financial acuity and a strong personal character), which I’ll describe in subsequent articles.
The road may have curved to the left, but I hope my suggestions have offered you some indication of the path ahead and will make the trip a bit smoother. It’s hard to imagine that with all your PhD training there is still more to learn, but the reality is we never stop learning and jumping into something totally new like equity research requires that much more education. The upside is that the information you will need to understand will most likely be far more comprehensible than what was going on with that one gene you were studying in a simple organism, like drosophila.”