The second Pillar of Biotechnology Equity Research is financial acumen. Along with a good understanding of science, a biotechnology analyst needs to be able to dissect company’s financial statements and be able to translate business activities into financial consequences. At the end of the day, investor clients are looking to sell-side analysts to make sense of business activities (eg, how will the purchase of a manufacturing plant affect both the present company earnings and future product sales). For example, as an analyst, you will need to understand how the company will account for the purchase of the property, how will those costs be distributed throughout the lifetime of the company, and how will increased manufacturing capacity affect profits.

To prepare for the challenges of financial analysis, it is very important to brush up on that Accounting 101 you took in college or, if you did not take any accounting courses, you should think about signing up for one immediately. Though it hasn’t been a major deterrent in the past for sell-side shops when considering a PhD scientist for an associate position, it is becoming a prerequisite. The biotechnology sector is quickly maturing with increased merger and acquisition activity and more biotechnology companies transforming themselves into full-service pharmaceutical companies with vast R&D efforts and marketing/sales teams, all of which make valuing companies more challenging. In addition, becoming a sell-side analyst requires you to pass a series of four required exams (NASD #7, #63, #86 and #87; www.nasd.com/ RegistrationQualifications/ BrokerGuidanceResponsibility/ Qualifications/ NASDW_011051), which evaluate among other things your financial acumen.

If you are still in school, see if your institution permits you to attend some of the basic business courses, like accounting, financial analysis, and introductory corporate finance. If you are not associated with an academic institution, or your institution does not offer business classes, look to see if a local university/college offers any continuing education programs. In New York City, NYU and Columbia both offer very good continuing education programs with 10-12 week courses costing under $1000/ course. This may seem like a big expense, especially for someone on a scientist’s stipend, but it is a far cry from the $100,000+ tuition for business school. I can also recommend "How to read a financial report" by John Tracy, a well organized and straightforward instruction manual detailing the interconnectedness of a company’s income statement, balance sheet and statement of cash flows. After reading this book, you’ll never be frightened by the sight of financial statements again.

Others who are up for a challenge may consider the Chartered Financial Analyst program (www.cfainstitute.org/). The program consists of three very intensive exams taken over a 2-3 year period. This isn’t for the faint of heart and will require much preparation especially for those who have never taken any business courses. However, if successful, completion of the CFA program and meeting the 48 month work experience requirement will place you in a close knit community of professional financial analysts and portfolio managers.

Another place to start building your financial acumen is by reviewing individual company financial reports. All publicly-traded companies must file quarterly financial reports with the Security and Exchange Commission, which can be usually downloaded from the investor relations section of a company’s website. These reports include 10-q’s (unaudited quarterly reports), 10-k’s (audited annual reports, not be confused with the overly glossy annual reports distributed to investors) and proxy statements. The documents are packed full of useful information about a company, including its history, competitive risks and its financial statements. All company analysis usually begins with a review of the quarterly and annual reports. Thus, it is wise to begin to familiarize yourself with these documents. Choose two to three companies and read the most recent 10-q’s and 10-k’s. You’ll be amazed by how much you’ll learn about a company and its operations.

Understanding a company’s history and present operational performance is only part of responsibilities of an equity analyst. We are also charged with making predictions of future performance. Thus, an equity analyst must be able to incorporate future cash flows from revenues, in the case of biotechnology companies these include royalty payments and future drug sales. In addition, we must be able to apply reasonable assessments of future expenses, such as research and development costs, the cost of building and expanding a sales force, or the ramifications of a collaborative agreement. Once again, having strong knowledge of accounting and corporate finance will make the task much more manageable in the time required to respond to investor client inquiries, which can be a short as a few hours after a news event or quarterly earnings call takes place. Without such financial understanding, an equity analyst can not perform her/his job effectively and in this age of electronic trading, a missed call is missed opportunity of collecting a trading commission, which is the basis of an analyst’s salary nowadays.

Now I don’t want to scare you away from a career in equity research, and remember experience in financial statement analysis is not required (as of yet) to get a career on the Street, but you will better your chance of making a successful transition by having some base of knowledge. So do your homework, try to fit in a few classes, and start reading those 10-k’s. If you find the material dry and not exciting, then being an analyst may not be for you since financial analysis is the crux of our job as analysts. The clinical data and science may be cool, but investors want to know more about how that science turns into money, and in particular money in their pocket.