PART ONE: The changing role of Consensus
The new MiFID II rules are expected to change the nature and role of consensus data and its usefulness to investors by shrinking the sell-side. Consensus is essentially an average of the sell-side’s estimation of a company’s forward figures for revenues, earnings etc., but with fewer analysts following companies and providing consensus data, how will this impact its usefulness as a predictor of performance?
In addition, traditional consensus aggregators, including Bloomberg, Thomson Reuters, FactSet, and Zacks, do little to clean up the inputs they get from analysts by excluding out-of-date points or beneficially weighting analysts who have covered stocks for a long time and who have a good track record of having accurate figures, or excluding analyst numbers that have historically poor prediction results. If they now also have to pay for access to the underlying data, will they become of less value due to the likely reduced number of data inputs?
While large caps may welcome a reduction in the number of poor quality analysts who follow their stock and disrupt consensus with poor quality numbers, but for smaller profitable companies, having fewer analysts covering them may mean that the whole value and role of consensus may be questioned.
The last thing a company wants is for its consensus numbers to shock the market on results day, particularly on the downside. So, should European biotech and healthcare companies be concerned and what can they do about it?
While we believe that this is an issue, there are steps companies can take to mitigate the risks:
- Ensure that your analysts are close to your story, fully understand your investment thesis and catalysts for stock price appreciation and have full access to senior management.
- Make sure your web presence is professional, current and user friendly, with consensus numbers and up to date presentations and factsheets to allow the buy side and sell side to understand what you do, how you are going to grow, who your current investors are, how much cash you have in the bank and what are the catalysts for stock price appreciation.
- Make sure your consensus numbers are as accurate and representative as possible, and once you feel they are reliable, make sure investors can find them.
From the IR Society’s recent survey, we know that 85% of European IR departments collate their own consensus and that only 14% use aggregators. However, only 34% of companies in the survey actually published their consensus results on their own websites.
As sell side coverage shrinks and consensus aggregators data becomes of less value, IR teams should continue compiling their own consensus in-house and really think about getting the quality of the consensus data up, by excluding out-of-date estimates, excluding poor analysts estimates based on reviews of historic accuracy, and reaching out to the buy-side to get their more prediction friendly numbers included in in-house consensus models. Run this for a while and if the numbers are more accurate and helpful, publish them on your website!
MiFID II means IR departments within biotech and pharma companies will have to work a lot harder, forging more win/win relationships with both the sell-side and directly with the buy-side (which can help with better investor targeting), such relationships can only help you create a better company profile for all the players in the market.