January 8, 2001

Special Report: Mutual Funds Quarterly Review

T. Rowe Price's Hottest Fund Posts
Big Gains With a Physician Manager

By KEN BROWN
Staff Reporter of THE WALL STREET JOURNAL

CAMBRIDGE, Mass. -- The chief executive of Cubist Pharmaceuticals tries again to turn down the heat in the steamy conference room as rain hammers on the roof of the former warehouse where Cubist is based. It is late on a Friday afternoon in early November and the executive is being grilled by his ninth-largest shareholder.

But there is no talk of profit margins, earnings growth or product revenue. At Cubist, none of that exists.

Instead the investor, mutual-fund manager Kris Jenner, wants to know if the complicated skin-test trials for Cubist's anti-infection drug daptomycin are on schedule. What about the bacteremia study, Mr. Jenner asks Cubist CEO Scott Rocklage. Why aren't you trying to get dapto approved to treat endocarditis?

The two men try to divine the intentions of Food and Drug Administration regulators. They discuss rumors -- totally unfounded, says Mr. Rocklage -- of potentially risky side effects. Finally, near the end of the 90-minute meeting, the conversation veers off on mundane topics such as sales and marketing strategy.

Only later, just before he leaves for the airport, does Mr. Jenner mention Cubist's stock price to another company official. "If dapto doesn't succeed in its Phase 3 trials, the stock will be more than cut in half," Mr. Jenner says. On the other hand, he adds, "If dapto gains FDA approval and has commercial potential of $300 million to $400 million, Cubist will go up tenfold in the next three to five years. Pfizer and Merck are not going to go up tenfold."

Cubist, which probably won't have any appreciable revenue for nearly two years, saw its shares cut nearly in half from its high during the year as its stock followed the Nasdaq market downward. The company also got a slap on the wrist from the FDA for presenting "misleading" information about its still-unapproved drug. Even so, the company ended the year with a 50.65% stock gain.

A soaring or crumbling stock price is ultimately what matters to Mr. Jenner, manager of the T. Rowe Price Health Sciences Fund. The $900 million fund, which produced a return of 52.19% in 2000, was the best performer among T. Rowe Price Associates' 79 funds for the year and one of the better performers in its class. His portfolio holds many of the big-name drug and health-care stocks, but much of his time is spent searching for future winners among tiny companies like Cubist, whose immediate fate rests on one still-experimental drug.

More than profits and other operating fundamentals, that search requires understanding science, something the 38-year-old Mr. Jenner is qualified to do. He has a resume that breeds admiration, or jealousy: medical school at Johns Hopkins, which followed the equivalent of a doctorate in molecular biology while on a Marshall Scholarship at Oxford University in England. And, not to be mistaken for a science geek, Mr. Jenner also played quarterback for the University of Illinois.

Company executives -- who, like Cubist's Mr. Rocklage, are generally scientists themselves -- get visibly excited when they explain their latest discoveries to Mr. Jenner because they know that he knows what they are talking about. "He really understands the medical side of what we are trying to achieve," says Mr. Rocklage.

It has been quite a year for Mr. Jenner. He had taken over the health sciences fund at the start of the year and had ridden the euphoria of the first quarter, only to see some of his favorite young companies get crushed as investors fled anything that looked risky. At the same time, investors ran toward the safety of the big drug companies, which he also tracks for all of the T. Rowe Price funds.

In late November, Mr. Jenner gets a concentrated dose of industry doings by attending the Robertson Stephens Medical Conference in New York. It is a dawn-to-well-after-dusk series of meetings, impromptu chats and dinners with more than a dozen companies, all of which, so they say, are on the cusp of something huge.

Made popular by his ability to pump millions of dollars into any stock he likes, Mr. Jenner is pulled aside by analysts and executives at every turn. Not wanting to miss the next breakthrough, Mr. Jenner listens to everyone. His overall strategy is simple: Health-care spending can't go up forever. So funding for marginal products such as drugs that are only slightly better than existing products eventually will cease and only breakthrough drugs will succeed financially. "Society will not spend anymore," he says. "At one point, society will pay for products that have big payoffs."

Among the companies wanting time with Mr. Jenner is Deltagen, a Menlo Park, Calif., company that went public in August. Its product is a database that basically tells drug researchers what a particular gene does by removing that gene from mice and analyzing the results. Mr. Jenner owns the stock, though he thinks the database business is limited. Instead, he is interested in Deltagen's fledgling drug-discovery efforts. "I'm really buying for where I think the company could be two to three years from now," he says.

But Deltagen is now trading below its IPO price and Mr. Jenner is concerned about the company's burn rate of $30 million a year. Over beers and crab cakes at the Plaza Hotel's Oyster Bar, two blocks from the conference, Mr. Jenner jousts with Deltagen's top man, Bill Matthews. But the confident CEO won't give an inch.

"Have there been times in your life when you were nervous? Mr. Jenner asks. In the Liverpool football pool, says Mr. Matthews, who grew up in that industrial English city. "Maybe when you asked your wife to marry you," Mr. Jenner asks. "She asked me," Mr. Matthews replies.

Mr. Jenner gets to the point. "I am very nervous about your ability to take this technology that is exciting and in demand and leverage that into a sustainable value proposition," he tells the executive. "How much money do you think you need to implement this strategy," he asks, adding, "This is not a healthy capital market, in case you haven't noticed."

Mr. Matthews is undeterred, pulling out his laptop to show off his product. But while the company does have $160 million in the bank, Mr. Jenner worries that the lockup for its IPO expires in January, meaning that big shareholders will be permitted to sell their shares, the prospect of which could weigh heavily on the stock price of a young company. Mr. Jenner says he won't be adding to his position any time soon, but he still admires Mr. Matthews's tenacity. "He could talk a hungry dog off a meat wagon," Mr. Jenner says.

Later, Mr. Jenner is buttonholed by officials of Isis Pharmaceuticals, a stock he sold out from the fund shortly after he started as an analyst. The company makes a pitch to lure him back. Mr. Jenner remains unconvinced, but he knows not to get too confident in his judgment.

Later, he says, "I've been skeptical" of the stock. "Up to this point that has been the appropriate view, but you can't get too comfortable."

Being among the first to find companies that make the breakthrough products is paramount to Mr. Jenner. He has what he calls a "two-plus-two" strategy, arguing that the most value is created, meaning the stock goes up the most, in the two years before and the two years after a breakthrough drug is approved. That is what he is looking for with Cubist and Deltagen, and though he is a fan of both companies, T. Rowe Price's overall stake in them is less than $30 million, a sliver of the firm's fund assets.

Mr. Jenner banged on the door at T. Rowe Price nearly four years ago, midway through his surgical residency at Johns Hopkins in Baltimore. He had been interested in the stock market since 1987, when, in a small detour on the rigid path to becoming a doctor, he joined a summer training program at J.P. Morgan. Investment banking didn't interest him, but a trip to the floor of the New York Stock Exchange was a thrill. "It was like taking a youngster to the baseball park and saying this is where Babe Ruth stood," he says.

He started an investment club with two friends and, 10 years later, went across town and walked into the one of the biggest mutual-fund companies in the country, seeking a job. He got one as a junior analyst covering biotech stocks. Soon he was managing the health-care portions of several of the firm's big stock funds. In what has been a meteoric rise at a generally conservative firm, he took over the Health Sciences fund at the start of 2000 and now oversees health-care stocks with a value to the firm of about $2.5 billion.

Now, Mr. Jenner is a man in demand. Assets of his fund have tripled during the year, he is responsible for analyzing nearly all the health-care stocks in all of T. Rowe Price's portfolios. And the firm's marketing department loves him, sending him to New York for the firm's annual press briefing and twice to Tokyo for the launch of a biotech fund for Japanese investors.

"It is very clear to me my life has changed," says Mr. Jenner, who has two young daughters and whose wife, Susan Cummings, is a pediatric cardiologist. "When I was just starting, I was like the cow out in the pasture chewing its cud. It was a blissful existence."

There is pressure within T. Rowe Price to put the fund on the map. Health-care funds are the second-most popular sector funds industrywide, but T. Rowe's fund has failed to build a big following. Its first manager focused on small companies when the big drug makers were soaring; his successor shifted to those companies when biotechs were starting to skyrocket. T. Rowe Price would like nothing more than for its health-care fund to rival its technology offering, which is the biggest in its field.

Mr. Jenner might be a little less stressed if his rookie year had been a little less extreme. "I've only been a portfolio manager for a year but this was a very substantial year to take the reins," he said.

Mr. Jenner's biggest problem in 2000 was the classic dilemma of balancing risk and reward, an issue that is particularly difficult with sector funds, where competing fund managers can be hyperaggressive in an effort to get to the top of the performance charts. His early-year moves into biotech stocks boosted returns, but his failure to tone down the fund's risk left him lagging behind some big competitors late in the year, despite the fact that his stakes in the big pharmaceutical names such as Pfizer and Merck dwarf those of his biotech holdings. "What I'm striving for is above-average returns with below-average risk," he says. "What has occurred this year is above-average returns with above-average risk."

Ultimately, Mr. Jenner gives himself a B grade for the year, something he rarely earned in school, because he failed to scale back on biotech stocks at the right time. "I would have given myself an A if I had changed the composition of the fund more around Labor Day," he said. "Retrospective analysis is a beautiful tool."

Write to Ken Brown at ken.brown@wsj.com¹

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