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Feature Articles : Oct 1, 2011 ( )
Success in Biotech Depends on Timing
Being in the Right Place at the Right Time Benefits Both Individuals and Companies
Editor's Note: Biotechnology is all about the commercialization of basic science. Perhaps no one better illustrates the path from the research bench to the boardroom than Stelios Papadopoulos, Ph.D. As one of the very first academics to grasp biotechnology’s financial potential, Dr. Papadopoulos traded in his laboratory whitecoat for a business suit and rose to become one of Wall Street’s early biotech analyst stars.
As GEN prepared to celebrate its 30th anniversary, we asked Dr. Papadopoulos to recount his journey from academia into the world of corporate finance. We believe that his personal story mirrors, in many ways, the history and evolution of the biotechnology industry itself.
I walked down the hall on the sixth floor of the Medical Science Building at NYU Medical Center holding a cup of coffee in one hand, the other comfortably resting in my lab coat pocket. There was a spring to my step. The week before I had defended my Ph.D. thesis and that long period of self-doubt, also known as graduate school, had come to an end.
My stroll brought me to the tissue culture lab where I was planning to engage in a series of meaningless exchanges with colleagues. But no one was pipetting that day. Even that unmistakable odor of bacterial colonies thriving at 37°C was not evident in the room, almost as if no one had opened the incubator door for a long time.
As I turned left into the adjoining lab, it all became clear. All lab members were standing around having an animated conversation. One of them was pointing excitedly to the cork-board on the wall. But it was not a picture of a pet, a newborn, or a lab alumnus scaling Mt. Kilimanjaro. Instead, the source of excitement was a clipping from that day’s New York Times—October 15, 1980.
I listened carefully trying to decode the essence of the conversation. I heard words like genetic engineering, stocks (I thought viral stocks), and millions of dollars (self-explanatory). The message wasn’t clear to me at first, but later on I realized they were talking about the initial public offering (IPO) of Genentech. The details eluded me but the excitement of the scientists did not.
Right then and there the proverbial lightbulb flashed. This had to be a big idea, a unique marriage of business and science. I, too, was looking for something to do that could take me beyond laboratory science. Without much thought, I decided I would become the one who was going to explain science to business people and business to scientists. Whether or not I had the credentials or the knowledge was a separate issue. I knew that I had to do it and what I didn’t know I was going to learn.
That decision led me to a multiyear campaign that took me to business school at night (while I was a scientist by day) and a desire to identify and classify every bit of information relating to the emerging world of biotech. My first data breakthrough occurred when I came across one of the early issues of GEN and I saw the first-ever directory of biotech companies.
With my newly found Rosetta stone, I went about trying to make sense of the nascent sector. Soon, based on my own research, I had created an updated and expanded version of the GEN directory, which I mailed with a note to Mary Ann Liebert. She was appreciative and generously invited me to become a contributor to GEN.
As it turned out, my first formal entry into the biotech sector was an article I published in the March 1985 issue of GEN entitled: “Assessing University-Industry Ties in Biotechnology”; I was still a scientist at NYU Medical Center.
Finally, my determination paid off. After multiple futile attempts to get anybody on Wall Street to pay attention to me, I was offered a position at Donaldson, Lufkin & Jenrette (DLJ). In June 1985, almost five years after my eureka moment in the lab, I put on my new Brooks Brothers suit, took the subway to 140 Broadway, and rode the elevator to the 33rd floor. I was DLJ’s first biotech analyst.
In the 1980s there was no better place to be an equity analyst than DLJ. I would pinch myself every time I realized that I was standing alongside one of DLJ’s superstar analysts. So, with fear, humility, and determination I began to work on a comprehensive analysis of the biotechnology sector and launch coverage.
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.
Stelios Papadopoulos, Ph.D. (email@example.com), is chairman of Exelixis.
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