February 26, 2025

How Do You Build a Biotech’s Equity Research Coverage? (And Is There Such a Thing as Too Much Coverage?)

Having an equity analyst take up coverage of your biotech (including their rationale, a recommendation and price target) costs money – either directly or indirectly. This is because equity analysts can be paid $1+ million a year, including bonus, depending on their prestige and the bank they work for (an analyst friend of mine gave me a sliding scale of $500k-$5M).

In other words, they are not cheap.

Nevertheless, more coverage is generally considered a good thing because equity research is proprietary to each bank – meaning that they distribute solely to their respective client bases. The more banks you have doing this, the more likely you are to have your company’s investment profile and highlights spread far and wide – with the implication being that this should drive interest in buying (and holding) your stock.

Too much equity coverage can be a bad thing, however. A biotech’s relationships with individual equity analysts can sour when there isn’t time for them to ask a question on a data/earnings call, or when they are never granted time to take the executive team on a non-deal roadshow.

Nevertheless, you need to cultivate a following among equity analysts – “build a bench” is the phrase most often used – so that you aren’t left with insufficient coverage when one or more of them jumps ship and coverage at their prior bank ceases.

Here then are some of the key ways you can grow your research coverage.

Coverage from your IPO syndicate:

A biotech typically has 3-5 banks in its IPO syndicate. If you chose them wisely, you’ll come out of your IPO being covered by the 3-5 highest profile analysts most enthusiastic about your story.

Their coverage doesn’t come free, however. You’ll have paid your IPO syndicate 7% of your gross IPO proceeds, and it is from this pool of money that the cost of research is indirectly paid.

Coverage from your follow-on syndicate:

Research coverage can also be obtained through including new banks in your follow-on syndicate. Here, you’re more likely to be paying 6-6.5% of your gross proceeds to your banking syndicate, and any bank in this lineup will (again, indirectly) use part of its fee to pay one of its equity analysts to cover you.

If you don’t include at least one new bank in your follow-on syndicate, you won’t gain any new coverage. Given the finite number of raises a biotech has in its lifetime, this would be a wasted opportunity.

Coverage via a side-bar letter/arrangement:

Did you know you can actually directly pay a bank to cover you? Well, you can. That’s not to say that you can buy a positive recommendation or handsome price target – such things would infringe upon research’s independence – but you can buy coverage through a sidebar letter/arrangement with the bank of your choice.

Based on my clients’ experience, coverage can be purchased for between $250-500k with a boutique bank.

Sidebar letters were very common during the special purpose acquisition company (SPAC) era, when an otherwise underwhelming number of banks were involved in a transaction, leading to few covering analysts at the time such companies de-SPAC-ed.

Coverage at risk:

This is when an equity analyst starts publishing on you despite their institution having never been paid. They’re not doing this out of the goodness of their heart, however. Typically their motive is to initiate coverage in the hope of being included in a future financing syndicate (and hence getting paid at a later date).

Smaller banks frequently use this strategy, since it doesn’t take throwing them more than a few percentage points of a future deal to make this practice quite lucrative.

Coverage from your ATM manager:

You could earn research coverage from the bank you pick to be your ATM manager, but these days this is far less certain than it once was.

Banks now welcome the opportunity to run your ATM, but “view your relationship holistically” when opting to award you research coverage.

One well-known bank will guarantee you research coverage… as soon as it has made $1-1.5M in fees from your ATM usage.

Coverage because you’re just too important:

Not many biotechs can claim to be so important that banks simply have to cover them without being paid. But Moderna is an example of a biotech that ballooned in importance – thanks to its COVID contract under the U.S. government’s Operation Warp Speed – and garnered significant research following because banks simply had to have an opinion on the stock. These banks made money trading Moderna’s shares in the secondary market. Normally this “must cover” status is reserved for Big Pharma, which arguably Moderna quickly became (before then retreating).

Dealing with too much coverage

What happens if you find your number of covering banks swell to 15? Or 20? Or 25? At that point you have typically eclipsed any number you can keep happy through inclusion in future financings.

The fix for this problem comes in how you choose to allocate management’s time, because that is what becomes the bottleneck.

Does Jones Trading or Scotiabank deserve time with your CEO or CFO? Or can they be placated with time with your IRO? Might the weakest banks perhaps be put off covering you if they find they are shut out from one-on-one time with senior management as well as future financings?

It’s something to think about.

Remember – you have no requirement to speak to anyone (analysts included) if you don’t wish to cultivate a relationship. Your SEC filings are always sufficient disclosure for anyone to form a view on your company/stock. Giving anyone a piece of management’s time is always at your own discretion.