At that time there were about 30 publicly traded companies with an aggregate market cap of about $3 billion, 25% of which was attributed to Genentech. I laid out a plan. First, I would assemble all available industry data, and then I would visit each one of the 30 or so companies that constituted the broader coverage universe that I intended to embrace. By September 1985 I began focusing on the companies. Having decided to go through them on an alphabetical basis, I started with Advanced Genetic Sciences (AGSI).
I read all about the company, every reference in the press, every news release, every 10-K or 10-Q, every note to the financials, and then constructed my own financial model. Given the thoroughness of the work and my inexperience, the preparation took me two weeks. But it was all worthwhile. I had my introductory meeting where I impressed, or so I thought, company management with the depth of my knowledge and the extent of my preparation. I returned with good notes and went about organizing my findings in a useful and informative manner.
With AGSI behind me, I started preparing for Amgen and Applied Biosystems. I was to visit them, during a trip to the west coast, along with Cetus, Chiron, and Genentech. During the preparation for my inaugural trip I did a simple calculation.
At the rate I was going through the list I would have needed more than a year to prepare and visit each company. Given that it would take an additional two to three months to put it all together and produce my launch report, the six months allotted to me for the task was not sufficient.
Plan B was put in place immediately. I would only spend time with those companies I planned to recommend with Buy ratings. Still, the effort consumed more time than I expected and my target launch date of January 1986 was pushed back. By year-end 1985 I had settled on what was going to be my first Buy recommendation.
The company was Integrated Genetics, which had its IPO in July 1983 at $13 per share. However, in the summer of 1985 it was trading in the $3-4 range without necessarily any great disappointments in the science or the business operations of the company. I had built a valuation model that clearly showed a target price of $16–17 against a 1985 year-end closing price of 5 ¼.
Integrated Genetics looked like a screaming Buy to me. All that was fine, except that my procrastination was accompanied by a steady rise in the stock. By mid-March 1986, as I was about to launch, the stock had reached about $10 a share. Unbeknownst to me the 1986 market window for biotech stocks was about to open.
I will never forget the conversation with my boss, Frank LeCates, head of equity research at DLJ, when I sat with the Investment Selection Committee to get clearance to proceed with the recommendation. He had read the draft of my report and before I began explaining my investment thesis, he asked me a simple question: “Are you sure you want to recommend a stock that has gone up 300% in six months?”
With the bravado that they told me I needed to survive on Wall Street, I looked him straight in the eye and said: “This stock has legs. My model says that the fair price is $16–17.” He paused and looked at me. In retrospect, I am sure he was trying to ascertain just how stupid I was and he was probably regretting that he ever hired me. As if in resignation, he took a puff on his cigar and said: “Fine. Go ahead with it.”
The meeting was over. I walked out of the room satisfied with myself, not realizing that I was being dropped into the ocean without knowing how to swim. My superiors hoped that the experience would teach me something valuable and make me a better analyst. Of course, they were absolutely sure the recommendation was not going to work.
But they were wrong. I launched coverage on March 21, 1986, with the stock at 10 3/8. For the next few weeks the stock did not even stop to take a breath and on April 17 it had gone above 17 intraday before closing at 16 3/8.
I changed my recommendation to Hold in the middle of the day on a price basis. It seemed so simple! Profits were to be taken from Integrated Genetics and plowed into the next idea—Amgen.
The company had its IPO in June 1983 at $18 a share (considering the 48:1 aggregate stock split that would be $.375 in today’s capitalization). After some difficult times in 1984–85 the stock was enjoying renewed interest from investors and was going up during early April. I was in a near panic as the stock reached almost 27 on April 16, fearing that all my work would have been for naught if I were not to recommend the stock.
But over the next few days, the stock took a quick slide and I came in on April 22 to recommend it at 22 3/8. The stock was choppy for a while and lost a dollar or two but by early May it was up to 27 and even higher by June. In the meantime, as if Integrated Genetics was conspiring to make me look smart, the stock started a downward slide the day after my change of recommendation and never recovered until it was acquired by Genzyme in August 1989.
An Aberrant Bunch
As far as the sales force was concerned, I was a genius. For the investment community, this group of biotech companies spending money in the pursuit of high science and recording no sales and earnings were clearly an aberrant bunch. Perhaps, it would take someone of unusual background and approach to tackle them. For sure, as attested by my Ph.D. and my ability to pronounce polysyllabic words, I got the science. My brief record with Integrated Genetics had most of them convinced that I was a stock picker as well.
And so it went. After Amgen became Biogen, which I recommended on the basis that Jim Vincent, who had arrived in October 1985, was about to perform a much needed turnaround. Everything was working in my favor.
In an ironic twist of fate, in June 1986, a year after my start at DLJ, I got a call from a recruiter who was trying to lure me to Drexel Burnham Lambert. Fresh from extraordinary profits in the high-yield bond business, Drexel wanted to diversify its business and had concluded that biotech was going to be the industry of the future. Much to my surprise, they had become convinced that I was the analyst they needed to have as part of that effort.
After two months of deliberations, I finally agreed to go to Drexel for what at the time seemed like an irresponsibly excessive financial package. In 15 months I had managed to evolve from obscurity into a highly sought after analyst. Lucky for me, as the market began hurriedly moving away from biotech stocks in the summer of 1986, I was moving to Drexel, where I was to have a new beginning. I had enough sense to realize that my stock-picking skills were average but my timing was impeccable.