Jean Hynes: Dig Deep and Hold Your Position

0:00For Morgan Stanley, this is Hard Lessons, where iconic investors reveal the critical moments that have shaped who they are today.

0:08Jean Hynes:You'll hear about two out-of-consensus calls, one that was on the money and one that wasn't.

0:14Amy Ellis:I remember sitting there saying, I should have known this. I should have known that he was going to do something dramatic to create the long-term value.

0:22Jean Hynes:Today on the show, Jean Hines. After being a portfolio manager and industry analyst in healthcare and biotech at Wellington for decades, Jean became CEO in 2021. Her deep and thoughtful approach to research continues to inform her strategy today.

0:38Amy Ellis:You actually need to understand every medicine, every disease, how it's treated, and very importantly, how much value is in a new innovation. And if that innovation stumbles, there's going to be a lot of value destruction.

0:55Jean Hynes:Jean oversees Wellington's$1.3 trillion in assets under management, as well as nearly 3 ,000 employees across 19 offices in North America, Europe, and the Asia-Pacific region. She reveals the thinking behind two of her out-of-consensus calls with Amy Ellis, Global Head of Senior Relationship Management at Morgan Stanley. Jean, thank you so much.

1:16Amy Ellis:I'm so happy to be here, Amy.

1:17Jean Hynes:You've seen so much. You've accomplished so much. Their conversation took place at the Campbell, inside Grand Central Terminal. Listen in to find out how Jean turned a looming patent cliff into one of the decade's most successful calls, and why a stunning 90 % loss in value still shapes how she reads risk and earnings today.

1:40Jean Hynes:We've all had moments in our career where we've had to make decisions, and we didn't know how they were going to turn out. Now, here on Hard Lessons, we're here to explore those with you. Can you set the stage now for us on a bet that you made and how it worked out for you?

1:54Amy Ellis:So there was a company called Sharing Plow, a pharmaceutical company. It's probably most well-known for the drug Claritin, which is a staple in everyone's life. It's now over the counter. Claritin was coming off patent in 2002. And they also had this new, what I thought was an exciting cholesterol agent, Zetia, that was in development. And so that's where it gets a little tricky because you have very high margin drug going off patent. And then you have a new drug that you have to launch and invest in. And there's some uncertainty. You know that's certain. And then you have uncertainty about the trajectory.

2:33Amy Ellis:And will it really become a new standard of care of medicine for treating patients with high cholesterol?

2:39Jean Hynes:What gave you this confidence? What gave you this fortitude that this was the inflection point? This was the time to get involved?

2:45Amy Ellis:People probably know statins. There are millions and millions of people on statins. And statins are an amazing medicine. But they had a dose limit. Above that, you begin to have side effects that could be not only intolerable, but they can begin to break down the muscle. And so in the 1990s and maybe in the early 2000s, that medicine had reached how much it could really lower cholesterol. At the same time, there was lots of data that showed getting cholesterol even lower than these medicines could do it was very important. And then Zedia was a brand new mechanism. So the bet was that it would be complementary to the statins.

3:23Amy Ellis:It wasn't going to replace the statins. It would be easy to add on for people who really needed to get their cholesterol lower, who couldn't tolerate going up in doses of the statins. Okay. So how out of consensus were you? So I think I was out of consensus at many points in time. But I think the big call was that Zetia was going to be a successful drug and its profits, it would replace the profits of Claritin. That was the big call. And I think over that decade, that actually turned out to be true. But there was - You got it right. And I got it right over the long term. Like sharing plow probably was one of the best pharmaceutical investments in that decade.

4:03Amy Ellis:That's huge. But there was a lot of ups and downs in between. In 2002, Claritin's patent went off. And what happened in the years prior is that you began to have consolidation in the retail drugstore chains, moving from this independent pharmacies to CVS and Walgreens, like much more consolidated retail chain. You also had the emergence of pharmacy benefit managers. And so by the time Claritin went off patent, the retail drugstores and the PBMs were all incentivized to switch as fast as possible. You went from a scenario where drugs lost their patent and lost their sales over five years to losing their sales over one year.

4:48Amy Ellis:So I think it surprised me. It surprised the pharmaceutical companies. It surprised everyone in the market. So a ton of new learnings. A ton of new learnings during that time. And so what that meant was it wasn't going to be a perfect line of Clarity going off and Zedia going up. And then the question was, how does a company that's losing a 99 % gross margin drug still invest in this new launch? And that's where my earnings estimates were too high because we were all learning at the time. the company was trying to not lower its earnings estimates and so they were they were doing things that probably didn't benefit the launch of Zedio because they were trying to smooth it and reduce profits they were also launching Claritin over the counter I'll tell you a funny story is my you know it's one of my biggest investments and my husband comes home and he brings home private label Claritin.

5:51Amy Ellis:And I was like, you can't do that. You need to buy the branded. But it was a sign that actually branded Claritin was priced too high because they were trying to price it to save their profits.

6:02Jean Hynes:During that journey, what other things did you realize about long-term holdings of big companies?

6:09Amy Ellis:So I think what held me in the stock was the fact that they did change management. So we had a new CEO come in. His name is Fred Hassan. I had a lot of admiration for him. But I think my biggest lesson was that in 2003, when he came in, so I was like, so excited because I'm like, Fred, I have a lot of confidence in Fred. But what I didn't calculate, or I should have known that he would have wanted to invest. And in order to invest, what he did is cut the dividend. And he lowered the earnings so that he could invest. Now, I am on maternity leave, by the way, when this happened with my fourth child, who is at that point, I'm like five or six weeks old.

6:56Amy Ellis:And so not in the office, you do not want to have a stock that has a dividend cut.

7:01Jean Hynes:While on maternity leave. While on maternity leave.

7:03Amy Ellis:And it's your one of the biggest holdings of the firm. So for me, the lesson learned is I should have known that he was going to do something dramatic to create the long-term value.

7:14Jean Hynes:And so you said that always stayed with you. So you've never missed that since.

7:18Amy Ellis:I've never had another stock that had a dividend cut. I love it. I love it.

7:22Jean Hynes:I love it.

7:23Amy Ellis:So Jean, can you tell us how Shearing Plow journey ended? Yeah. So March 2009, Merck and Merck and Shearing Plow agree to merge. It was a partly cash and partly stock transaction. It was a big transaction. So interestingly, Merck bought Shearing Plow and actually Pfizer bought Wyeth. I own both Shearing Plow and Wyeth. And so the interesting thing was that, so I hold these stocks, I hold Shearing Plow and of course there was a pop, like that was good. But then the price of Merck went down so much. And actually the price of Pfizer went down so much. And I thought the acquisitions were actually quite good for Merck and for Pfizer.

8:07Amy Ellis:And so what I had to do is something I had never done before, is take a step back and say, if people begin to realize that these are actually really opportune and good value acquisitions for these companies, those stocks are going to go up. and I will never get the full value of the value creation of sharing plow. And so what I did within a month or two is recommend that we sell all of our sharing plow and buy Merck instead. And so in the end, it was sort of not only that, it was like, it was actually the stock part of it too. I had to get right. Cause I could have done, got all the analysis right.

8:44Amy Ellis:But if I hadn't done that move, which I had never had to even think about before, but because they were such large acquisitions and some of it was in stock, I had to figure out like what was the right thing to do to actually make sure I created all the value for our clients.

8:59Jean Hynes:And looking back, I mean, you had to think that was such a good move.

9:03Amy Ellis:This was a great acquisition for Merck.

9:05Jean Hynes:Yeah, yeah, yeah.

9:06Amy Ellis:And what came out of that was not only that Zetia and the cholesterol franchise became a good franchise, a good franchise. But in sharing Playa's pipeline ended up being Keytruda, which is now the largest drug in the world. It really changed Merck's future.

9:25Jean Hynes:Okay, so let's shift here a little bit and talk about an out-of-consensus call that didn't go so well. So giving you a little bit of history, Elan was a drug delivery company based in Ireland.

9:40Amy Ellis:And we did not own it, by the way. We had a very negative view of Elan during the 1990s. They had a very high earnings growth, but in my view, it was very low quality earnings growth. But then in the late 1990s, they bought a company called Athena Neurosciences. Now, we were the largest shareholder of Athena Neurosciences. We knew that company. They were developing drugs for multiple sclerosis and for Alzheimer's. They were based in South San Francisco. It was a very odd merger, a very odd acquisition that this sort of lowish quality drug delivery company would buy the South San Francisco, very exciting, high science company.

10:21Amy Ellis:And so we had a very positive attitude towards Athena, but all the issues about earnings quality were still happening with Elan. And so I was right. The earnings quality was really, really quite low. But then at the same time, the pipeline of Athena was beginning to merge. And so I'll tell you, there was a point in time where like, well, maybe that maybe the earnings of Elan is are well known, the low quality is well known enough. And so we began to buy Elan for really for the pipeline of Athena neurosciences that at some point people would realize what they had. And you'd have this massive uplift of quality and excitement about the future.

11:04Amy Ellis:There's two parts of Elan that, that were difficult. One was that last bit of low earnings quality came out after we bought it. And this is another lesson that I try never to repeat again. So when you have a profit and loss statement, you have revenues and you have cost of goods. You can't really hide those unless it's fraud. But you also have this other revenue line. And my lesson is that I didn't dig in deep enough to that line. And so there ended up being things that were non-recurring. And so it wasn't real earnings. And so the lesson for me is, you know, and I say this to all our young analysts,

11:48Jean Hynes:like you need to understand every line of the P &L, every single line, and you can't just put a

11:53Amy Ellis:plug in. So you have to really dig. And so that was another thing. I'm never going to let that happen again. That's fair.

12:00Jean Hynes:All right. So that was the first leg. That was the first leg.

12:02Amy Ellis:And then And then the excitement happens, Amy. The excitement happens. They bring this drug for multiple sclerosis to the market. And the first generation of multiple sclerosis drugs, they took patients out of wheelchairs. Like the doctors would say in the early 2000s, I don't have people in wheelchairs anymore. The first generation of drugs really changed the standard of care of medicine for multiple sclerosis patients. But at the same time, they were drugs that were difficult to take from a tolerability perspective. The way the drugs work, they cause people once a week to feel like they had the flu.