Monday, July 21, 1997
Analyst earnings projections
By Karen Bernstein
Estimating revenues from novel products isn't easy - there are no reliable comparison points on which to base an analysis. Sellside biotech analysts therefore can certainly be excused if their models for new product sales and market penetration aren't always on the mark.
However, it's hard not to notice that their initial estimates tend to be on the high side. If errors in models were truly random, one would expect to see as many excessively low estimates as excessively high estimates. But a sampling of analyst reports printed in BioCentury over the past quarter - limited to drugs on the market to avoid the added uncertainty of initial revenue and earnings estimates based on products for which no pricing or label were available - showed 19 downward revisions of revenues and earnings compared to only 5 revisions upward.
This misalignment between perception and reality has important implications for companies, because of its potential impact on investor behavior. In particular, when overly optimistic projections eventually collide with reality, the subsequent adjustment to investor expectations can send stock prices tumbling, contributing to the volatility of biotech shares, and adding to general investor distrust of the sector.
The tendency for sellside analyst revenue projections to be high isn't exactly a well-kept secret. As Raymond James analyst Jacqueline Siegel noted, "There's a part of me that doesn't understand why stocks behave the way they do when analysts lower their numbers, because analysts are widely viewed as being overly aggressive. So I don't understand why people listen to us, and I don't understand why these changes generate such a strong reaction."
But the fact is that they do, and going forward the issue for companies and analysts is whether the projections can ever be more accurate. To get at that question, BioCentury talked to analysts and companies about how they come up with numbers, what they have learned from new product introductions, and what they might do differently in the future.
In general, inflated numbers result from the vagaries of marketing science and the business of selling stock.