Frizzled to finance: one PhD’s path from a Drosophila lab to Wall Street

Abstract

An equity research analyst’s job is to determine whether the price of a stock is likely to go up or down. For science-based businesses, particularly biotechnology companies, a PhD in the life sciences can be very helpful in making this determination. I transitioned from a postdoc position to working in equity research. Here I present information on how I made the transition, an overview of the day-to-day activities of an analyst, and thoughts on how to prepare to look for a job in finance. There are significant positives to working on Wall Street, including exposure to cutting-edge clinical/translational research, access to some of the best scientists in the world, a dynamic work environment, and compensation that generally exceeds academic salaries. This comes at the cost of some independence and the satisfaction of being able to call oneself a scientist.

MY DECISION TO LEAVE THE LAB

When considering the possibility of leaving academia, I spent a lot of time thinking about why I pursued a PhD in the first place. The positive was never in question: I truly enjoyed the intellectual exercise of learning about molecular biology. In addition, I enjoyed being part of the scientific community and interacting with the intelligent and clever people who had chosen to pursue academic science. I also had to acknowledge the negatives: the highly competitive nature of the job, relatively low compensation, and potential for highly disparate career outcomes, even with a consistent commitment to hard work. The fate of a career could come down to politics (is there enough funding?), timing (is this research “hot” right now?), and just plain luck (many promising lines of research end up being dead ends). In addition, I was self-aware enough to realize that I was not a standout at the bench, as evidenced by a fellow grad student completing a simple experiment for me because I could not get it to work (many belated thanks, Haeryun!).

This led me to conclude that I would leave academia. I wanted to find a profession that made use of my time in the lab. I had a vague conception of the biotech industry. I knew people invested in biotech, and I thought that there must be a place for a person who can communicate complex scientific ideas to laypeople. I made a somewhat capricious and ill-informed decision: I wanted to be on the investment side of the biotech industry.

INVESTING IN BIOTECH: PRECONCEIVED NOTIONS

At that time, I did not know what exactly “the investment side of the biotech industry” meant. I first thought of venture capital, in which investors take an early-stage idea and build a company around it. Although venture capital is often the type of investment most proximal to the lab, there is a much larger industry based on investment in public companies. That industry is colloquially known as “Wall Street,” and that’s where I ended up.

THE STOCK MARKET

Ultimately, all investors in publically traded companies really want to know one thing: whether the price of the stock will go up or down.

To determine this, financial institutions employ research analysts who prepare reports about individual companies, assessing their business prospects and identifying them as a “buy” or a “sell.” Those reports are then sent out to external clients (third-party investors) or internal clients (the investment professionals at the analyst’s firm) with the goal of helping these clients make better-informed decisions. Firms that publish reports for external clients, such as investment banks, are often referred to as “sell side” institutions. Firms that invest capital based on the recommendations are on the “buy side.” Representative “buy side” institutions include mutual funds, investment advisors, and hedge funds.

This is where PhDs come in. In evaluating research-based businesses like biotech companies, financial firms often need research analysts able to make sense of the relevant science. In the end, a good analyst will need to have a handle on both the underlying science and the company’s business operations. There are many successful analysts who started in science and learned finance and vice versa.

DAY-TO-DAY WORK AS A BIOTECH ANALYST

One of the great aspects of about an analyst is that you get to think very broadly about all of the different aspects of a business. In some ways, an analyst can evaluate a biotech company in the same way one would evaluate companies in any sector. In biotech, a company makes money and grows by developing and commercializing drugs. At the most basic level, biotech companies sell widgets; it just so happens that the widgets are drugs based on years of scientific research. From an investor’s point of view, selling one kind of widget is not so different from selling any other kind.

In other ways, however, biotech companies are unique because the product is highly regulated by governments and paid for by third parties. If the company’s drug is in development, issues might include the following: Will clinical trials of the drug be successful? Will the Food and Drug Administration approve it? If the company’s drug has been approved, the issues are different: What is the target market? Are there competitive drugs? How much can the manufacturer charge for the drug? Will there be a generic version? These clinical, regulatory, and commercial issues can have profound effects on the value of a company. In trying to answer these questions, an analyst will often consult with experts: physicians on clinical issues, lawyers on intellectual property issues, former government staffers on regulatory issues, and so on. Analysts also have access to high-level company executives to keep abreast of the latest developments within a company and its future plans. It is not uncommon for me to have better access to management of biotech companies than my former colleagues and friends who work at those companies.

Much of the work done to determine the prospects for a business will be distilled down to numbers that estimate its future profits. The output of this work is a financial model, typically presented in three parts: the income statement, the balance sheet, and the cash flow statement. Working with these models is a big part of the job. For good or for ill, an analyst spends a lot of time looking at spreadsheets.

SOME OF THE DOWNSIDES TO WORKING ON WALL STREET

To me, the lab and Wall Street are interesting inverses of one another. In both, one does a lot of reading and thinking about biological sciences, but beyond that, there are significant differences. In the lab, I found the work sometimes repetitive and unrewarding, but I took great pride in the fact that I was attempting to increase the world’s body of scientific knowledge. In my current position, I lack that specific sense of satisfaction, but the everyday work is much more dynamic, fast paced, and exciting.

As with most jobs, the work environment significantly affects one’s quality of life. Wall Street tends to attract high-intensity people. There can be significant pressure to deliver results in a hurry. Unlike the lab, where freedom is often a significant perquisite, one cannot dictate one’s schedule. It is very important to understand that not all Wall Street firms are the same. I have had a wide range of experiences (some very good) at my workplaces, and I would advise anyone to investigate a firm’s culture before accepting a position.

ADVICE FOR THOSE STILL INTERESTED IN FINANCE

I have walked you through some of my experiences in becoming a Wall Street analyst. In retrospect, given how little I knew when I started, I am a little surprised that I was able to make the transition. If I were interviewing the 2005 me today, I would probably dismiss him for not caring enough to learn even the most basic things about the job.

For those who have had their interest piqued, I have a few additional thoughts that should be helpful in searching for an analyst position.

• Pursue it only if you are genuinely interested in companies and markets. Your pitch to an employer cannot be, “I’m a smart person with scientific expertise, I want out of academia, and I heard this is a place where I can make some money.” You need to convince them that you want to be an analyst, not that you do not want to be a postdoc.

• Look into a specific company. A surprising number of people interview for analyst jobs without ever having looked closely at the workings of an actual company. Learn what you can about an individual business and go into an interview ready to explain why an investor should buy or sell the stock of that company. One piece of practical advice: sell side analyst recommendations and the holdings of large investors are often public information. Before you go in and pitch a company as a sell, it is probably worth knowing whether the analyst has it rated a buy or whether the investor owns a significant stake in the company. People often respect a well-reasoned argument for why they are wrong about a stock, but it does invite a potentially contentious conversation.

I suggest picking a company, specifically one that is developing a drug based on some basic science with which you are familiar. Then think about how the business operates, and ask the questions an analyst might. Nearly all companies have the basic information you will need to get started in the Investors section of their website.

• Familiarize yourself with the concept of valuation. Valuation is the art/science of determining what a company is worth. It is not as simple as calculating how much of a drug a company sells. Other contributing factors might include the probability of success on future products and how quickly a company can grow.

It is important to realize that the market is forward looking. Investors are, in essence, speculating on what might happen. Your instinct as a scientist is likely going to be that you will want to wait for additional incremental pieces of data to prove your hypothesis before taking action. However, by the time news is made public, the stock price will have already changed to incorporate those data. This is the concept of the efficient market. So an analyst cannot wait to react to data to make a recommendation. This might take some scientists out of their comfort zones.

• Learn as much as you can about financial models. Each quarter, companies post a press release reporting their financial results. The book How to Read a Financial Report by Tracy and Tracy (2014) is a useful reference for thinking about what the published numbers mean and how they fit together. Once you have the basics down, the next step is to create a working spreadsheet for a company’s financials. The most important part of the exercise is to then use the spreadsheet to project what a company’s financial statement might look like in the future. As mentioned earlier, the job of an analyst is to predict what will happen, not to report what has already happened.

WHERE TO START

I started as a junior equity research associate at an investment bank, drafting research reports on biotech companies for third-party investors. I have since moved on to a more senior position as a research analyst at an investment advisor, where my recommendations are used to make my firm’s investment decisions. In my case, this was a reasonable path, given my initial lack of financial experience. The sell side was a great place to learn about the industry without the intense pressure that can come with a buy side position, where your company might invest millions or even billions of dollars based on your work. That said, some investors want to hire junior people and train them in-house, keeping them free of biases that sometimes come with working at an investment bank. There really is no set path.

When looking for a job opening, one can search job sites for the term “equity research.” Although my experience has been almost exclusively in the biotechnology sector, there are other areas in healthcare in which an advanced degree in the life sciences is applicable. These include pharmaceuticals, medical devices, and life science tools (yes, the company that makes your PCR machine is publicly traded, and there are analysts working to determine whether it is a good investment).

Often, posted jobs will specify a requirement for an advanced degree, generally a PhD or an MD. Often, some background in finance is also suggested. In my experience, some will forgo the latter requirement for a candidate with a strong academic background who has demonstrated a genuine interest in the markets.