Top Biotech Analysts Find Themselves a Hot Commodity
Top Wall Street biotech analysts are finding themselves in high demand, with staggering pay packages to go along with it, The Wall Street Journal reports.
The reason? A biotech boom, with more and more money changing hands. The Journal notes that investments banks such as Leerink Partners, Cantor Fitzgerald & Co, and Jefferies Group have recruited top biotech analysts from large banks with pay packages worth $3 million or more and three to four-year contracts. And banks such as Morgan Stanley and Citigroup have increased their analysts’ pay to competitive levels to keep their top analysts.
This compares to leading analysts’ pay packages in other industries of about $1 million per year.
Examples include Andrew Berens, who left Morgan Stanley for Leerink and Alethia Young, who left Credit Suisse Group to join Cantor Fitzgerald. Michael Yee left RBC Capital Markets last year to join Jefferies, reportedly for an annual compensation package of $4 million.
The Journal writes, “A rush of innovation in recent years, including the rise of immuno-oncology, cell therapy and RNA interference, has created a need for analysts capable of identifying the next hot trend. Biotech companies have been going public at earlier stages than in the past, sometimes without having a product or drug, suggesting top analysts may have more value than in some other industries. Still, analysts acknowledge their big salaries in large part are due to their potential impact on banking deals. While analysts can’t get paid directly from their firms’ banking work, having a well-known analyst helps win business by signaling to clients that the banks understand the sector, bankers say.”
Yigal Nochomovitz, an analyst with Citigroup, told The Journal that the current round of analyst hiring is “heavily driven by capital markets and the banking business. To attract business on financing side, banks must have high-quality analysts respected by the buy side … who will be fair, credible and insightful.”
In 2003, 10 of the country’s largest securities firm paid $1.4 billion to settle government allegations involving abuse of investors during a late 1990s stock bubble. Part of the fallout of that case was to split connections between research and banking. The Journal notes, “Banks say they continue to adhere to terms of the deal. Analysts face restrictions on their interactions with bankers and are precluded from sales pitches to clients, for example. But biotech is a sector in which smaller banks can win underwriting business, unlike those where bulge-bracket banks dominate, explaining why top-rated analysts can score big paydays from both incumbent banks and those with ambition to rise in the ranks.”
Last month, Cowen Research’s biotech team published a report that concluded that investors would have better luck ignoring—or even doing the complete opposite—of what equity analysts advise. The analysts evaluated 30 companies in the Nasdaq Biotechnology Index that at least 10 analysts covered during a four-year period and compared the stocks’ performance from 2015 through June 15, 2018 to their recommendations at the end of the previous year to get their results.
The Cowen report offered three possible explanations. First, that stock ratings are reactionary instead of predictive. Second, that “stock picking is not job #1,” and that “management access, collecting data points, maintaining models, and talking with investors take up time and distract from determining ratings.” And third, stock ratings reflect investor consensus, which generally underperforms.
Biotech is a notoriously volatile market, so it’s possible that some analysts’ crystal balls just work better than others. And the ones with the best crystal balls are the ones in greatest demand.