One day in the summer of 1979, Debra Joseph Diamond got a call from an institutional salesman for Rotan Mosle Inc., a regional brokerage firm based in Houston. Diamond, a small, dark-haired woman who was then only 26, was a vice-president and investment analyst with T. Rowe Price's group of mutual funds in Baltimore. Her job was to find health-care and medical-services firms for possible inclusion in TRP's New Horizons Fund portfolio, the group's small-company growth-stock entry in the mutual-fund market.
The Rotan Mosle salesman knew all this, and was calling to urge Diamond to follow up on a little-known stock being touted by a broker in his firm's New York City office. The company he was pushing was Key Pharmaceuticals Inc., a Miamibased enterprise with sales at the time of $13.5 million.
Reading up on the company, Diamond discovered that most of Key's sales reflected the success of a product called Theo-Dur, a treatment system for asthma. In the treatment of asthma with the drug theophylline, the range between potentially toxic overmedication and ineffective undermedication is narrow. TheoDur allows even, sustained release of the drug over a 12-hour period. Introduced in 1976, it had sold well.
Now Key was rolling out a Band-Aid-like nitroglycerin patch called Nitro-Dur for patients suffering from angina pectoris. Angina patients typically take nitroglycerin in pill form, which reduces its effectiveness, or in ointment form, applied to the skin. Nitro-Dur simplifies the latter process -- a patient can put a patch on the skin every 24 hours and forget about it -- and it apparently acts as a sort of prophylactic, relieving the anxiety that patients anticipating pain normally undergo.
In late summer 1979, Diamond went to New York, where along with some other analysts she had lunch with Key's management. Impressed with their presentation, she visited Key at its Miami headquarters. There, the president and chairman fielded her barrage of questions about strategy, finance, and products, and she took a tour of the facilities.
The company, she felt, was looking good. Key had evidently found a unique niche in the marketplace, with both of its major products promising to serve a large clientele. She thought well of the company's management and its research and development teams. Although Key was young, its president, Michael Jaharis Jr., had many years of experience with Miles Laboratory Inc., and understood the importance of marketing. His company stood on sound financial footing and was already profitable. And it didn't have any other institutional investors. These were all characteristics Diamond liked to see in a prospective purchase.
Back in Baltimore, Diamond worked with a calculator to determine whether Key, based on her projections, could achieve the 17% to 18% growth rate New Horizons's analysts use as a benchmark in evaluating possible acquisitions. Key passed with flying colors. In fact, it looked as if the company would grow 80% the next year.
Diamond's last step was to take advantage of contacts in the medical world made through her husband, a physician. She queried a cardiologist, a pulmonary specialist, and a pharmacologist at Baltimore's Johns Hopkins Hospital. She also called a dermatologist at Cleveland's University Hospital, and a director of pharmaceutical purchases for a chain of drugstores. Since Key's Theo-Dur met the professionals' approval and passed New Horizons's investment requirements, she recommended that the firm's investment advisory committee approve the stock for purchase. The committee was a little wary. The stock then cost about $10 a share, a price that was an astronomical 43 times earnings. Nevertheless, they agreed with Diamond about the company's prospects. By October, New Horizons owned 68,134 shares (including splits up to September 8, 1982) of Key Pharmaceuticals. For her part, Diamond was confident T. Rowe Price had just bought itself a gem.
Finding companies like Key Pharmaceuticals can be like looking for gold in a muddy stream. The process is time-consuming, the payoff is uncertain, and it is often hard to distinguish between real metal and less lucrative flashes in the pan. Most individual investors, moreover, have neither the time nor the resources to analyze companies as extensively as do pros like Diamond and her colleagues at T. Rowe Price.
Still, the work done by securities analysts provides a kind of touchstone by which one's own efforts can be measured. There is nothing stopping an individual from investigating one or two investment prospects as thoroughly as a professional investigates dozens. And in growth-stock investing as' in anything else, it never hurts to know how the experts go about their business.
Like a lot of individual investors, the analysts at TRP's New Horizons Fund get their tips from brokers, colleagues, and business contacts.
* During the dead equity market last spring, one of the fund's directors urged assistant vice-president and analyst Roger B. McNamee to look at Equatorial Communications Co. Equatorial had developed a satellite network for sending data through a two-foot-wide dish rather than through the standard three-meter dish, and the director happened to own a radio station that was a subcarrier in part of the system. When McNamee heard from a friend in the venture-capital business that the company looked good, he investigated, and eventually the fund bought the stock.
* Philip J. Rauch, a vice-president and analyst covering technology stocks for New Horizons, met with the management of a computer graphics company called Intergraph Corp. at a trade confer ence while the company was still private In 1981 after Intergraph had gone public New Horizons bought the stock at $10. Soon after it took off. After some ups and downs it was the fund's seventh-largest holding as of July of this year.
* Tim Ebright, vice-president and analyst handling the media and consumerservices sectors, discovered LIN Broadcasting Corp. in 1981 through an institutional database service provided by William O'Neil & Co. Ebright, a relative newcomer to the broadcasting and publishing fields at the time, screened the database for companies that fit certain criteria, and among those that fell out was LIN, a small, New York City-based television and radio broadcasting company. Ebright checked it out, and New Horizons bought that, too.
