There has been much talk lately about corporate retaliation against analysts. Sell-side analysts say they get pushed to the end of the line during the Q&A and have a tough time getting their calls returned when they are negative on a stock. Conversely, some IR professionals and CEOs feel the sell side is guilty of threatening to downgrade a stock if its investment-banking arm isn’t chosen to finance a deal.
Garo Armen has lived both sides. The former sell-side analyst turned CEO has been both poacher and gamekeeper during his career. As head of a small-cap biotech company called Antigenics, Armen made history last year when he successfully got Piper Jaffray fined by the National Association of Securities Dealers (NASD) for dropping coverage of his company.
When Armen told Piper in January 2001 that he planned to select UBS Warburg to head a $60 mn secondary offering, Piper threatened to drop coverage of Antigenics if it was not chosen as the lead underwriter. Armen stuck with UBS and Piper carried out its threat. Everybody knows such practices go on and most would shrug them off as part of the wacky ways of Wall Street. But Armen went after the bankers – and his efforts paid off.
In a groundbreaking judgment last June, the NASD fined Piper Jaffray $250,000 and Scott Beardsley, the firm’s managing director, $50,000. At the time, Mary Schapiro, the NASD’s president of regulatory policy and oversight, was quoted as saying: ‘Brokerage firms and their executives cannot use threats regarding research activities as a way to obtain investment banking business.’ In settling the case, Piper neither admitted nor denied wrongdoing.
Crossing the line
‘[Piper Jaffray] had crossed the line very arrogantly and blatantly with no regard for anybody else in the process,’ says Armen. ‘There was no choice in the matter – it had to be pursued. This was not a question of vengeance. There are those who always do what’s right and there are those who always do what’s wrong, and there is a huge population between the two who will go where the tide is. This is an at-risk population but there is no question in my mind that you can influence those individuals to do the right things.’
According to Armen, his temerity did not lead to further sell-side retaliation. ‘By and large, the reaction has been positive,’ he says. ‘We have been very successful in our subsequent transactions with Wall Street.’ There have been some polite and cautious criticisms from the Street, but these came from ‘individuals who have behaved in a questionable manner themselves,’ reports Armen. ‘Their soft criticism has been for self-protective reasons more than anything else.’
Armen denies any subversive instincts and stresses that he has nothing but deep respect for the sell side. ‘For all its shortcomings, Wall Street is the most successful formula we have today for taking an idea from its embryonic stage in academia and developing it commercially,’ he asserts.
But even the best methods can still be corrupted. ‘It’s very important that people in power do not abuse it,’ Armen says. He is hopeful that new regulations laid out in Sarbanes-Oxley and the global settlement with major Wall Street firms will curb the behavior that led to Piper’s action. ‘With the beautiful system of balances we have in western societies, the pendulum has swung back a little bit to the side of morality,’ he adds.
In fact, regulators worldwide are setting up internal controls that will essentially reinforce Chinese walls between investment banking and research, and strengthen external disclosures aimed at notifying investors of any potential conflicts of interest. The ultimate goal of these rules is to prevent analysts from being unduly influenced by investment banking and to provide retail investors with information on the relationship (if any) between the firm and the company the analyst is rating (see Wall Street under reconstruction, July 2003, page 30).
Corporate experimenting
Piper clearly underestimated Armen. In some ways it’s not surprising; his quiet persona doesn’t really fit with his cutthroat business sense. In addition to founding Antigenics, Armen has been behind the comeback of several ailing companies and was recently named chairman of Irish biotech company Elan, the accident-prone Irish pharmaceuticals company that recently came close to meltdown.
A scientist by training, Armen became an analyst in 1981. But to some extent he pined for the rigors of scientific research during his days as an analyst. ‘I missed its absoluteness and mystery,’ he remembers. ‘Most of the progress we have made in society is because of advances in science.’
Armen spent eight years on the sell side and then decided to set up his own money management firm specializing in healthcare and biotechnology investments. But he eventually got bored of portfolio management’s lack of intellectual stimulus. ‘After a while, you know how it works and you get a little impatient wondering what’s at the end of it all,’ he says. ‘You may make money. Fine, but what’s next? Money is not the end game, or shouldn’t be anyway.’
In 1992, Armen became the architect behind the merger of Immunex and Lederle Oncology, a division of American Cyanamid Corp. Then cancer researcher Pramod Srivastava approached him for help with what Armen now calls ‘a better mousetrap’.
‘At the time, I was not looking for extra jobs, let alone looking to set up or run a company,’ he says. But the scientist, the businessman and indeed the good citizen in him were each pushing to pursue this opportunity. ‘The technology was so compelling that not pursuing it would have been morally irresponsible based on what we knew at the time,’ he adds.
Srivastava’s pitch clearly made a big impression on every level. ‘His scientific rationale was as tight as I had ever seen at any company or academic center,’ recalls Armen. The perfect mousetrap essentially involved heat shock proteins, which trigger the immune system to pursue cancer tumors. The clarity of the concept, says Armen, made it a ‘moral obligation’ to set up Antigenics.
Cash and trust
Armen’s view of investor relations is similar to his opinion of the Street – he wants long-term partners. ‘Shareholders are a very, very important part of our success because they are people who provide us with enormous resources,’ he says. ‘They provide us with cash and trust and one needs to respect that and not be arrogant.’
Investor relations is about being accessible to investors and being willing to explain your business to them, according to Armen. ‘I am prepared to look at things and explain them in a way that allows [investors] to understand them,’ he adds.
Ultimately, investors want a company with a high growth rate and profitability but that’s a story not many small-cap biotech companies can tell. Armen decided the best way to sell Antigenics’ story was to put it in the context of risk versus reward and explain that the finance and science were tight. With this strategy, he asserts, ‘You couldn’t guarantee success, but you could certainly enhance the probability of it.’
The key to successful investor relations is understanding the various audiences you are communicating with, Armen claims. ‘In doing what we do, we always serve a constituency with subgroups: shareholders, employees, patients, doctors, nurses, the public at large and the press,’ he says. ‘Being on the receiving end as an analyst prepared me to understand the concerns of investors, the public at large and the media because I spent a lot of time trying to put things in context for these constituents.’
Word on the Street
Armen’s scientific approach to the world is apparent in his attitude toward Wall Street, where he sees bad chemistry running the show. ‘The manic-depressive cycles of the Street have taught me that you can’t rely on perception being the driving force for things,’ he says. ‘Even though you have to pay attention to perception because it plays a very critical role in your ability to run a company or make an investment decision, over the long term it’s not the most important thing.’
As someone who has been on both sides of investor relations, Armen has a unique perspective on what drives shareholder value; and he thinks the best way for investors to make money in today’s market is to stay in for the long haul. ‘The only successful, sustainable formulas for investing have been developed by people like Warren Buffet and John Templeton,’ he notes. ‘They’re based on long-term investing.’
As head of Antigenics, Armen is confident he is now in the right business. ‘Wall Street has financed business development from the industrial revolution to the technology revolution, and we are now transitioning from the gestation phase to the growth phase of the bio-revolution,’ he says. He sees the uncertainties of this process as a way to keep us sharp ‘so we can survive in this rapidly changing environment.’
