Financial Forecasting During a Period of Macro-Economic Uncertainty

When investors evaluate investment opportunities, they look to management teams who accurately forecast and deliver results at or above guided levels. With macro-economic factors placing increasing pressure on financial results and expectations, it is as important as ever for companies to outline a plan they can confidently execute against. Generally, guidance metrics include top-line growth, gross margins, operating expenses, EBITDA, or net income as they allow the Street to evaluate company performance and benchmark across the industry. However, additional levels of detail and qualitative commentary may be necessary when there are mounting macro factors that may impact actual results.

In this blog, we will discuss a few items to help you think about forecasting and guiding Wall Street while navigating a challenging macro environment.

Modeling Internal Scenario-Based Forecasts – Plan the Work

It is important to have a deep understanding of the business and financial strategy to establish a plan to successfully execute against. A detailed financial forecast not only helps you track performance but provides the framework behind establishing guidance that is either achievable or beatable. It serves as a company’s internal roadmap and includes various levers responsible for top- and bottom-line performance. In addition to understanding the magnitude of each lever, it is imperative to know the drivers and how to track and demonstrate progress. That said, forecasts should always remain internal and never be referenced in conversations with analysts or investors.

Providing Achievable Public Guidance – Work the Plan

While internal forecasts influence guidance, additional factors that can impact expectations must be considered to provide a reasonable estimate, or range, for external communication. This is where performing a sensitivity analysis on your internal model can help incorporate a buffer into the guidance, which can be narrowed throughout the year (ideally). That said, while beating and raising top-line guidance was a sure way to drive value in the past, a detailed path to profitability and cash runway is becoming more valuable to investors’ decision criteria. This can include timelines as well as initiatives aimed at balancing growth vs. managing expenses, such as scaling operations and efficiently deploying capital. Companies that can message their ability to adapt to circumstances and execute according to plan will be deemed less risky when institutional investors are evaluating positions. Furthermore, many institutional investors are looking to defend investment theses in existing positions, so providing clear and achievable visibility into operations is important to retaining confidence. Not only is it important to achieve your plans internally, but you must also demonstrate your ability to “do what you said” externally.

Ensuring Consensus Reflects Guidance – Enforce the Goal

This is where effectively messaging future expectations is a key part of the strategy. Covering analysts rely on publicly disclosed guidance, in addition to actual financial results and market conditions, to update their estimates and ultimately the consensus for the company. In periods of uncertainty, analysts may put more weight on qualitative commentary to justify their expectations than the quantitative guidance alone. Since this sets the basis to be measured against going forward, it is imperative to deliver a message that accurately reflects the intended guidance.

Though companies are faced with similar macro factors, the key disclosures to instill investor confidence vary based on the business. It is crucial to understand what metrics are important to your investors and accurately reflect your performance. Gilmartin Group has deep experience and expertise in helping companies disclose key performance indicators that enable informed investment decisions and establish credibility among the Street.

For more information on forecasting, guidance, and consensus, please contact our team today.

Emma Poalillo, Vice President

 

 

 

Mid-Year 2022 Private Market Review (VC) and Fundraising Refresher

The past few years have been ones of immense strength and record activity for venture capital (VC). Following a monstrous and record-setting 2021, the first half of 2022 has been different of sorts. VC has not been sheltered from the barrage of uncertainty felt in broader markets due to macro concerns. The private market has begun to show signs of weakness despite many data points remaining historically high. As we enter the second half of the year, it is important to review how the landscape has changed over the past six months.

Mid-Year 2022 Review: Venture Capital  

Deal Volume Stumbles 

The onslaught of adverse economic headlines—inflation, rising interest rates, geopolitical turmoil, etc.—has contributed to the surge in volatility and slowdown in VC deals in 2022. During the first half of the year, global venture deal volume and average deal size (Seed through Series E) declined by ~6% YoY and ~12% YoY, respectively. While volume continued to grow during Q1 (albeit at a considerably slower pace), Q2 marked an inflection point as volume experienced a significant pullback, falling ~17% YoY.

U.S. Healthcare deal volume and average deal size (Seed though Series E) during the first half of the year declined ~37% YoY and ~0.5% YoY, respectively. The outsized pullback in volume has shown no signs of abating as volume in Q2 fell ~42% YoY (vs. -32% in 1Q22) and ~20% sequentially (vs. -30% in 1Q22). The weakness in volume has also been widespread, spanning across both early stage and later stage deals. Average deal size, however, has been relatively consistent ($42.7M in 1H2022 vs. $42.9M in 1H2021), but current data indicates that it may be trending lower moving into Q3.

Source: Preqin (as of July 2022)

The Silver Lining: An Unprecedented Level of Dry Powder 

Although deal activity has cooled, VC has continued to attract capital this year despite negative market volatility. Globally, VC firms have raised more than $100 billion through the first half of the year, down ~10% YoY but still elevated compared to pre-pandemic levels (average of ~$75B in the 1H from 2017-2019). The influx of capital and reduced level of deal activity has led to unprecedented amounts of dry powder waiting to be deployed. As of June 2022, VC dry powder globally was more than $500 billion, which is more than double the amount exiting 2019.

Preqin defines “dry powder” as the amount of capital that has been committed to funds minus the amount that has been called by general partners for investments.      

U.S.-based VC firms have also fared slightly better coming off the launch ramp of 2021. During the first half of the year, U.S. VC firms raised ~$79 billion, down only 0.2% YoY. As of June 2022, U.S. VC firms had more than $280B in dry powder waiting to be deployed. This marks a record high as investors continue to sit on the sidelines.

Source: Preqin (as of July 2022)

What can we expect for the rest of the year?

It remains to be seen whether the drop in activity marks an adjustment from 2021’s record-breaking venture activity or the beginning of a more sustained downturn. Economic uncertainty due to the inflation, rising rates, supply-chain problems, and lingering COVID-related headwinds may continue to impact VC and public markets. On the other hand, record-setting amounts of dry powder have been amassed by VC funds and may continue to be deployed as investors gain more confidence and clarity.

For a company looking to raise capital during this turbulent time, it is important that you continue to meet with potential investors. Although there is a heightened sense of scrutiny with new investments, the relationship building process is as important as ever. VC firms are continuing to explore investments and meet with management teams given the seismic amount of capital on the sidelines.

Recap: Natural Progression of Venture Fundraising

In our previous dive into the basics of venture capital (VC) and private equity (PE), we wrote about the general structure and process of how both VC and PE firms invest. Here we take a deeper look into the natural progression of how the venture fundraising process works.

There are five key stages of venture capital, starting from the seed round and ending with the mezzanine/crossover round. As a company develops and matures, each succeeding fundraising round represents a milestone for a company. Each round, investors will evaluate the merits of a company and how successful it has been in achieving its targeted goals. The amount of money a company can demand usually also increases as a company begins to reduce risk. Here’s an overview of each major round during the venture fundraising process.

1. Seed Funding 

  • Seed funding is the first “official” equity funding stage.
  • Seed funding is the vehicle for a company to continue the progress made in the pre-seed stage by iterating on an idea or minimally viable product/service using funds from accredited investors.
  • Investors may continue to be owners and/or family and friends, but angel investors, incubators, and accelerators may also participate.

2. Series A

  • Series A funding revolves around a company’s revenue growth (i.e., proof of concept). At this stage, management teams will have to figure out how the company’s products and/or service will appeal to the targeted market.
  • Mostly, funding from this round helps a company conduct extensive market research, pay employees, launch the product/service, and develop a marketing strategy.
  • Investors involved come from more traditional and well-known VCs.
  • By this stage, it is also common for investors to take part in a somewhat more political process. Commonly, a single investor or a group of a few investors may serve as the lead in the round. Once a company has secured a lead, it may be easier to attract additional investors as well.

3. Series B 

  • Series B funding is about expansion, taking the company to the next level, past the development stage.
  • Series B funding becomes possible only when a company proves its market viability and is ready to expand on growth paths that have shown initial success.
  • Typically, before Series B funding rounds occurs, the company has to have shown strong achievements after its Series A round. Therefore, Series B is the ammunition for growth with a larger investment round.
  • Funding from this round is mostly used for business development, sales, advertising, technology, and talent acquisition. These investments provide the foundation for expanding market reach and meeting investor heightened levels of demand.
  • Investors involved continue to be mostly VCs.
  • Series B investors include many of the same participants in previous rounds.
  • However, a Series B round also opens the door to a new wave of additional investors (e.g., VCs specializing in later-stage investing).

4. Series C 

  • Series C funding centers on long-term growth, focusing on a company that has already proven its business model but needs more capital for expansion.
  • The proceeds from this financing round are most commonly used for entering new markets, research and development, or acquisitions of other companies.
  • Although not formally the last stage of the funding lifecycle, most companies will end their external equity fundraising with a Series C round.
  • Many investors from  previous financing rounds tend to participate, but this round of financing often attracts new investors as well.
  • Unlike the previous stages of financing in which most investors are VCs and angel investors, large financial institutions such as investment banks, hedge funds, and PE firms will begin to participate.
  • Participation from a wider range of investors is due to proven strengths of the business model and opportunity, and the perception that the company has been materially de-risked.

5. Mezzanine/Crossover

  • The mezzanine and/or crossover round is the final stage before a company goes public, typically occurring within 12 months prior to an IPO.
  • Mezzanine financing is typically known as bridge financing because it finances the growth of expanding companies prior to an IPO.
    • A crossover round is traditionally defined as a venture financing in which there is significant participation from investors that typically buy into publicly traded companies or IPOs, usually within the 12 months prior to their IPO.
  • Investors from previous financing rounds may continue to participate, but interest is more widely spread as investors are looking to benefit from the lower valuation than the IPO valuation.

Gilmartin Group partners with many healthcare innovators, both public and private, to build nuanced communications strategies and develop sustainable messaging that sets companies up to build credibility over time while clearly conveying the differentiated value they provide. To learn more about Gilmartin and how we strategically partner with our clients, contact our team today.

Stephen Yeung, Associate

 

Gilmartin ESG Newsletter | June 2022

Welcome to the latest edition of Gilmartin Group’s ESG newsletter. With a special focus on the healthcare sector, this newsletter sheds light on the latest trends in the rapidly evolving ESG space, covering developments with companies, investors, regulators, and policymakers.

IN THE SPOTLIGHT

Over the past few years, ESG has grown increasingly mainstream within the investment world. Sustainable funds in the U.S. attracted record amounts of asset flows in 2021. However, ESG investing is presently hitting the next phase of its evolution amidst not only a broader market decline, but also increased scrutiny on the investment industry’s approach to, and application of, ESG principles.  

On the buy side, ESG-focused asset managers are getting more pressure from clients and regulators to demonstrate the results of their strategies. In June, the SEC launched a probe to investigate Goldman Sachs Asset Management’s ESG funds. In May, German authorities raided the Frankfurt offices of Deutsche Bank’s asset management arm in response to greenwashing allegations.

Elon Musk is among a growing number of ESG critics who have emerged in recent months, pushing back against ESG ratings and indices. Musk unleashed a viral diatribe after S&P Dow Jones Indices announced Tesla has been removed from the popular S&P 500 ESG Index. Although S&P acknowledged Tesla’s mission to accelerate electric vehicle adoption and the energy transition, the firm said that Tesla has “fallen behind its peers when examined through a wider ESG lens.” For example, S&P pointed to the company’s handling of racial discrimination and workplace safety incidents as events that had a negative effect on Tesla’s S&P ESG score. 

In our view, the apparent backlash against ESG underscores a misperception that ESG ratings provide some type of binary assessment of whether a company is “good” or “bad.” Rather, ESG should be thought of as a framework to assist in understanding and assessing how companies are managing a broad range of environmental, social, and governance topics, and ESG ratings are merely one tool used to capture data and provide analysis. 

A LOOK INTO ESG RATINGS

GreenBiz Group’s Joel Makower wrote an excellent three-part series dissecting ESG ratings and exploring the recent pushback in depth. In an interview for the series, Jefferies’ Global Head of ESG, Aniket Shah, said, “The end goal of all of us who had entered the space was to integrate these ideas into our regulation, into our risk assessment and into the way we think about future opportunities of companies. We are getting close to that because the disclosures are getting better, thanks to the ESG movement.” Although ESG rating methodologies are being scrutinized today, Shah predicts that ESG “ceases to be a standalone concept in 2024” and perhaps even sooner.

We believe the confusion over ESG assessment criteria reveals the need for more standardization, and efforts on this front are already well underway. We consistently advise companies to focus their efforts on being the source of truth for ESG data they believe to be relevant to their business, rather than simply chasing improved scores from ESG ratings firms. By building trust with stakeholders through transparent and accurate reporting on ESG topics, we believe rating improvements will be a natural outcome over time.

THE HEALTHCARE VIEW

Abbott Laboratories’ baby formula recall, which wreaked havoc on the supply of baby formula in the U.S., highlights the importance of product quality and safety as an ESG issue. Product quality and safety consistently ranks as one of the most significant ESG issues for healthcare companies. According to the Sustainability Accounting Standards Board materiality map, product quality and safety is the only topic considered to be material for every sub-sector within the healthcare industry. In particular, product recalls are one of the foremost ESG risks that healthcare companies face. While the fallout from Abbott’s baby formula recall is in the headlines, prominent ESG ratings firm MSCI noted that Abbott has had to recall 340 products since 2011 and, according to MSCI’s assessment, is engaged in six ongoing controversies related to product quality and safety. The recent baby formula recall also accentuated other ESG topics for Abbott, such as supply chain management, regulatory compliance, and product access and affordability. The Abbott recall should serve as a reminder for healthcare companies that product quality and safety issues can have wide-ranging effects on how a company is perceived from an ESG perspective. 

IN THE WEEDS

In May, the International Sustainability Standards Board (ISSB) announced that it is coordinating with the Integrated Reporting Framework to encourage companies to combine sustainability disclosures with their financial reports. ISSB aims to make sustainability information more comparable and consistent by developing industry-specific reporting standards by the end of 2022. By incorporating the Integrated Reporting Framework into its standard setting project, ISSB will encourage companies to place sustainability information in their quarterly and annual financial reports, as opposed to standalone sustainability reports that are more common among public companies.

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A NOTE ON ESG INVESTING

Recognizing that ESG adoption has been slow among small cap companies, Franklin Templeton argued in a recent thought leadership piece that investors have a unique opportunity to positively influence small cap company ESG practices. ESG disclosure among small caps is lacking because they generally have fewer resources to dedicate to ESG practices and reporting than larger companies, and small caps often receive lower ESG scores because of this relative lack of disclosure. Noting that a company’s ESG practices are intrinsically linked to long-term performance, Franklin Templeton believes that ESG-focused small cap investors may have an opportunity to create additional shareholder value by actively engaging with small caps to improve their ESG performance and policies. 

ONE BIG THING

In an effort to combat greenwashing, the SEC proposed a new set of rules in May that target ESG investment practices. To crack down on misleading claims by some funds about how ESG is integrated in their investment processes, one proposal aims to enhance the Names Rule so that funds with ESG labels would be required to define their ESG investment strategy and allocate 80% of their assets in-line with that strategy. The other proposal aims to categorize various ESG investment strategies and require funds following these strategies to make specific disclosures. For example, funds that have an environmental focus would be required to calculate and disclose the greenhouse gas emissions associated with their portfolio. 

The SEC’s latest proposals come as companies continue to digest the potential compliance implications of the climate disclosure rules that were floated in March. Although eight countries, including the U.K. and France, have already implemented similar disclosure rules for public companies, a number of U.S. companies are pushing back on the SEC’s proposal. The Business Roundtable, whose members include the CEOs of large U.S. companies, published a comment letter urging major revisions to the proposal, stating that some of the requirements are overly burdensome and would increase liability for companies. BlackRock and Nasdaq also published comment letters urging the SEC to issue more flexible “comply or explain” disclosure rules, particularly for Scope 3 emissions calculations. 

QUESTIONS ON ESG?

Our dedicated ESG team has deep institutional knowledge and experience in ESG and healthcare, enabling us to assess, inform, and guide healthcare companies at every stage of their ESG journeys. If you are interested in learning more about how to navigate your own internal ESG policies, practices, data, and disclosures, feel free to contact our team today. 

MATT BERNER

Managing Director, Head of ESG

PATRICK SMITH

Analyst, ESG

Common Questions Entering a Bear Market

Coming off the heels of a record breaking 2021, the first half of 2022 has shaped up to be less than ideal. With no one key driver in our current climate, factors such as eastern unrest, high inflation and interest rates, supply chain complications, and labor challenges due to wage inflation have indicated a looming recession. So, what does that mean for private and public healthcare companies? After several of our team leaders, we address some of the common questions and concerns our clients—and those in the space—have been left wondering.

What are healthcare investors most focused on moving forward? 

  • Investors have put a significant emphasis on the ability of companies to deliver on their financial guidance without the need for additional capital.
  • Investors want to see clear messaging on the timeline for additional raises if necessary.
  • Remaining focused on operational performance and delivering better than expected financial results is one key way to drive new interest.

We have been watching our stock price plummet. How do we reverse this? 

  • Look to control the fundamentals of the business.
  • Focus on hitting your timeline and delivering upon milestones. Losing sight of the importance of these smaller accomplishments can have a detrimental impact on company credibility.
  • Search for alternate ways to drive success: partnerships, ways to maximize cash flow, efficiencies in operational expenses, etc.

We need to raise capital, but this is not the right time. What are some alternatives? 

  • Alter the conversation so as not to put a sole focus on raising capital, but pivot to preserving cash flow and growth. For example: tweak the presentation to represent a shift to cost containment versus revenue growth at any cost.
  • Execute on presented messaging by finding a pathway that emphasizes profitable growth and cash positions.
  • Look to operational expenses like traveling to in-person conferences. If asked to attend, consider if the entire management team needs to join, if those attending are investors that will bring the most value, or if they are even an ideal target.
  • Turn to advisors to drum up interest with investors through virtual meetings or 1x1s.

How do we navigate these unique times, simultaneously showing results, driving value, and differentiating ourselves in the market?  

  • Turn to alternative tools, like ESG reporting. ESG has become a staple to show growth and evolution of a company, which is a win-win for private market investors looking to drive value while transforming unsustainable business models into green ones. Underwriters have taken serious measures to assess climate risk, with firms unwilling to run the risk of mispricing their investments.
  • Be discerning with how and which investors or banks are being targeted. Choose those that cater to a company’s sector and size to maximize a successful partnership.
  • Find alternatives to conferences with unique ways to get a company’s name and brand out. Examples could be KOL days, appearance on an expert panel, making introductions to smaller firms and family offices, or unique marketing activities.
  • Look to be strategic in how you are raising capital. Viable options include grants, partnerships, non-dilutive capital options, or licensing deals with productive co-partners.

Though everyone is weathering the same storm, not all strategies are universally applicable. It is important to understand the nuanced strategies, cash positions, and pathways a company can take to have productive, fruitful conversations with investors and achieve success beyond this bear market. No matter what size, stage, or sector, Gilmartin Group partners with healthcare pioneers, both public and private, to build corporate strategies and develop clear messaging that positions them to build credibility over time while highlighting the value they provide.

If you would like to discuss how Gilmartin Group can best help position you emerge from the current bear market, please contact us today.

Brynna O’Leary, Analyst

 

The Return of In-Person Meetings

As COVID-19 became widespread in early 2020, global gatherings came to a complete standstill, emptying sports stadiums, airports, and restaurants. Investor events were no exception, with many investment bank conferences and industry gatherings being outright cancelled or postponed during this time. Many executive teams concerned over the disruption of the pandemic on the market and their ability to access investors and the Street turned to Zoom for relief. Now, two years later, in-person events are making a return, leaving many asking, “What is the future of investor communications?”

What was intended to be a temporary fix evolved into a new practice we expect to stick around long after the pandemic resolves. Below are some of the many benefits to virtual events:

  • Flexibility and inclusivity. Company executives and shareholders can meet essentially without geographic restrictions. Corporate duties and personal obligations that may have previously impeded one from attending a multi-day conference now has the option to tune into the event for an hour or two at a time. Management teams are more accessible to investors; meanwhile, companies can maximize their exposure to investors near and far.
  • Cost-effectiveness. Online meetings eliminate costs associated with venues, travel, and accommodations.
  • Analytics. With virtual conferences comes sophisticated analytical software that can more easily track attendees and engagement in real time.

Considering these benefits, why would we ever go back to in-person meetings? A 2017 study found that face-to-face requests are 34 times more effective than email requests. In-person gatherings offer more than what Zoom can capture on screen. Below are some of the reasons why in-person interactions may outweigh virtual ones:

  • Long-lasting relationships. The power of small talk cannot be understated when building trust in a genuine and meaningful business relationship. Casual conversations in between meetings and during lunch breaks allow people to showcase their personality, which is often invisible behind the camera.
  • Effective communication. In-person attendance requires the full attention of its participations, resulting in limited distractions. Non-verbal communication such as body language and social cues facilitate a smoother conversation that may be otherwise be interrupted by a faulty internet connection at home.
  • Increased engagement. In-person attendance requires the full attention of its participations, resulting in limited distractions. It is tempting to multi-task during virtual meetings when email and ping notifications are cluttering the screen.

Despite the many benefits of in-person interactions, the pandemic introduced new challenges related to safety and health concerns. We recommend developing an in-depth plan inclusive of local and conference guidelines to ensure the safety of you and conference attendees. Take note of local travel restrictions, mask and vaccine protocols, and COVID-19 testing requirements.

The pandemic has changed how we navigate meetings and conferences, resulting in the virtual versus in-person dilemma and a new need for balance. We believe the future of investor relations is a hybrid model that integrates both virtual and in-person elements to reap the benefits of both. The hybrid solution offers participants the flexibility to build and sustain relationships according to their unique needs.

If you want to develop a strategy for developing a hybrid solution that makes sense for your team, we can help. Contact us today.

Laine Morgan, Analyst

The Un-stealthing Process for Early-Stage Private Companies

For early-stage private healthcare companies, the process of un-stealthing is thematically similar to the process of becoming a publicly traded company; namely, the company has to prepare for increased scrutiny from external parties. Therefore, when making the decision to un-stealth, when and how to do so should be decided in the context of several important considerations. 

Considerations

First, is your company ready to share its clinical and regulatory progress? The public eye, particularly investors, will be acutely focused on the current profile of the company and the progress they expect to make. Of course, early-stage private companies are not always ready to share granular timelines for clinical and regulatory milestones. For this reason, it is critical to develop a refined messaging strategy that remains sensitive to the inherent uncertainties of early-stage companies while simultaneously building the foundation for credible disclosure.

Second, does the company have the team in place to manage external communications? Most early-stage companies are laser focused on internal development, and rightfully so. However, the un-stealthing process will invite regular engagement with media, banking partners, and interested investors. While aligning on messaging is important, it is even more important to have the people in place to deliver the message effectively. 

And lastly, does the timing of your un-stealthing offer strategic value to your company? In other words, how does increased disclosure support future business development or financing goals? Timelines for a financing will often be set against the backdrop of positive news flow and encouraging macroeconomic conditions. Un-stealthing can provide further support toward a financing event, given later financing rounds often require a broader audience from the financial community. For this reason, it is important to align the two activities properly. This is arguably the most important consideration, addressing the “why” behind the decision to un-stealth.  

Preparation 

Once these considerations are carefully examined, the next step is a detailed preparation of strategy and materials as the company opens its doors to the public. 

Preparation starts with proper messaging. Communicating the value proposition of your company and laying out the milestones you expect to achieve requires careful consideration of the competitive landscape and an accurate projection of how ongoing activities will develop. The goal should be to lay out messaging that conveys excitement about what you bring to the market, without placing company representatives in a difficult position if developments do not go as planned. 

Subsequent materials should flow through from these key points to ensure consistency in communications to external parties. The materials key to engaging the financial community include the company’s corporate deck, website, and press releases, to name a few. An emphasis should be placed on clear and concise materials that engage investors and leave lasting impressions.

Finally, companies should plan out a comprehensive calendar of events and activities. Investor conferences, trade shows, and IR planned events are excellent venues for conveying the company message and engaging with those essential to the future development of the company.  A specific event may be leveraged to serve as the company’s debut, allowing the company to control their narrative from the very beginning. A target audience and a financing strategy should inform when to engage and what events to partake in. 

Gilmartin Group partners with many healthcare innovators, both public and private, to build nuanced communications strategies, developing sustainable messaging that sets companies up to build credibility over time while clearly conveying the differentiated value they provide. We partner with leading public relations and graphics firms to help companies build a website and corporate deck that reflects their objectives in a clear and concise manner. And most importantly, we act as a strategic advisor in contemplating the decision to un-stealth. Contact us today.

Noah Corin, Analyst

How to Leverage Your IR Calendar for Success

The IR calendar is a vital tool used by any investor relations professional. One of the most important aspects of IR is making sure that your management team is regularly in front of investors without limiting their ability to run their business. Ultimately, it is a delicate balance. The IR calendar allows the IR team, management, the company’s board, and other relevant stakeholders to look at the program holistically and understand where management should be spending their time with investors throughout the year.

Key Events to Include on Your Calendar

There are a few aspects of the IR calendar that are relevant for all companies: earnings reporting dates, press releases, industry events, investor conferences, and Board of Director meetings. As we have previously discussed, companies with larger market caps are more likely to be covered by more sell-side analysts than their smaller counterparts, and, in-turn, will likely be invited to more investor conferences. As such, management will likely draw a large investor audience. Smaller companies, on the other hand, are less likely to have broader sell-side coverage and won’t be invited to as many conferences. This is where it is up to the IR team to be creative in its approach to filling up the IR calendar. One option could be a conference in which the company pays the investor conference provider to participate. Another option could be asking your sell-side analyst to host a Key Opinion Leader (KOL) call in order to highlight a specific product or product line. This will drive investor awareness to your company’s story by allowing an independent voice to opine on use and efficacy of your company’s offerings.

Timing is Everything 

After you add earnings dates, investor conferences, and Board meetings to the calendar, it is useful to look at timeframes in which the company can participate in a non-deal roadshow. A good timeframe is typically after the company reports its earnings results and before the close of the quarter and/or in conjunction with key company events, like a new product launch or FDA clearance of a new drug. Additionally, it is beneficial to look at companies that are covering banking industry conferences for the year. If your company is invited to participate in a covering bank’s conference in March, a non-deal roadshow with the same bank in April might not be the best idea, as the same investors would likely be targeted by that bank. Instead, see if the covering bank has the ability to host a non-deal roadshow in August or September, so that if the bank targets the same investors, they will have had a chance to do more research on the company and take a position in the stock.

A regular news flow is important for all companies. However, releasing news too frequently or too infrequently may have negative effects on your company. Issuing news too frequently can dilute your messaging, so that when you do have news that will move the needle, investors won’t pay attention. Conversely, if you release news too infrequently, investors won’t pay any attention to the company, and those who were on the fence about taking a position might be discouraged by the lack of news. The IR calendar allows the IR team and management to think strategically about timing and frequency of issuing press releases. It is often a good idea to issue a press release prior to an investor conference in order to leverage the news in conversation with both existing and potential shareholders.

Another way to keep a steady news flow is to issue press releases outside of the regular earnings cycle. For example, if you report your quarter in early May, it might be beneficial to wait a month before issuing news so that your company’s name is in front of investors outside of the busy earnings season.  Additionally, if your company plans on hosting an analyst or R&D day throughout the year, use the IR calendar to find the best time to attract the best audience possible.

Conclusion

In all, you can add just about anything to the IR calendar, even if at first it has a note of Date TBD, Target Event, or Potential Press Release. In fact, it is beneficial to add these target events to the calendar as it reminds management what is on the horizon so that they can plan accordingly.

In recent years, the IR calendar has become even more flexible as many meetings have become virtual. We have discussed this in a past blog post, Revisiting Your IR Calendar. At Gilmartin, we have created countless IR calendars for companies of all sizes. If you would like to learn more about how to leverage your IR calendar for success, contact us today.

Jack Droogan, Analyst

 

How Public and Private Biotech Companies Should Utilize PR

Recently, the Gilmartin biotech team hosted a webinar with Berry and Company, discussing how public and private biotechnology companies should utilize public relations (PR). If you were unable to attend, you can watch a replay of the conversation. Gilmartin Group’s managing director Laurence Watts and principal biotech Stephen Jasper interviewed Berry and Company’s Bill Berry, Adam Daley, and Jenna Urban about the value of PR and how it differs from investor relations (IR). Berry is the founder of Berry and Company. He currently serves as a principal, bringing over 30 years of experience in the industry and holding specialties in media relations, business and medical writing, corporate positioning, and crisis communications. Daley is the head of social media services at Berry, working with the company for just over ten years. Finally, Urban serves as a vice president at Berry, working with the company for about seven years, focusing on traditional media. We recommend watching the entire webinar to capture all of the insights the Berry team shared, but here are a few central points we wanted to highlight.

There is some confusion between IR and PR among biotech executives. At times, and with certain accounts, our service offerings can appear to have some overlap, but as a PR agency, how would you define the difference?

In most of our engagements, Berry stated that they work with a separate IR team, and it is a very collaborative relationship. There is some overlap, but not a lot. With investor relations, the goal is to work with investors. On the PR side, we’re talking to a broader audience. The language, tone, and techniques one can use while talking to clinicians or patients are very different from the approaches you use with investors. In terms of social media, Berry ensures creative ideas and initiatives will appease investors as well. Furthermore, when posting content on social media, no one can guarantee that only investors will see it. The tone of each post must fit the entire potential landscape – which can include patients, clinicians, and even investors. The benefit here is learning what approaches and tones work best for specific audiences.

Why does Berry not do IR like some supposedly “full service” agencies?

They are different professions – IR and PR require different skill sets. IR deals with analysts, broker networks, and the overall complexities of investing. They stated that it is a matter of what kind of communication you prefer. They prefer to engage with patients and work with clinicians to increase disease awareness and highlight the unmet need. The Berry representatives noted one of their essential roles is to help scientists explain their science. This won’t always resonate with investors, but it will resonate with patients and clinicians who might use the products down the line. Those target audiences often require very different messages. Overall, the company strives to speak with patients and clinicians firsthand. They stated, “It reminds us why we do the work that we do, you know, to get important information out there that patients and clinicians could find useful and help them make good healthcare decisions.”

When companies employ PR and IR, how do you think responsibilities are best split?

The communications do divide neatly. We will often support with messaging and provide help with presentations. If it is a data announcement, the IR team will take the lead. Berry will take the lead on releases that deal with subjects such as Rare Disease Day. They work with IR teams a lot on developing corporate decks because that is something that has applications across the board. Daley chimed in to add that there are many ways that social media efforts complement IR teams. He stated, “We’ve seen many Key Opinion Leader (KOL) events lately, where companies will bring in a KOL to talk to investors. We then use social media to get the word out. That is probably the key piece here, no matter who’s working on the press release. As long as we’re all connected and discussing the messaging beforehand, it usually is a successful collaboration.” In IR, investors are the primary target; you need to keep your investors engaged so your development program will resonate with patients or clinicians in the early stages. During this pivotal time, Berry will initiate collaboration with the IR team to build out capabilities and services slowly and expand to other audiences.

How should biotechs think about social media and how can you help in this regard? 

Biotech and pharma leaders should look at social media as an opportunity. The group noted that there was a time when companies “were sort of afraid of it in 2014. The FDA put out guidance for the industry on how to use social media, and we saw a massive shift around that time when everyone changed from ‘I need to convince clients that they should be there’ to ‘we need to be there, which platform should we use?'” Social media is about your thought leadership, your disease awareness opportunities, and building your company’s influence, which is where Berry would jump in.

Social media is like a microphone. Companies are talking directly to your stakeholders – patient advocacy groups, investors, the media and clinicians are all at your fingertips. The key is to be targeted. Before you even pick a platform, you must step back and say, “Who are we trying to engage with specifically? What organizations will make a list? You are not trying to reach millions of people; we would never recommend a client go viral. The goal is to find a handful of the most critical stakeholders and determine what platform they often use. Once you pick your platform, you build your content to engage your target audience. Often, leaders in biotech and pharma do not realize how powerful their existing networks are already; they can have 50 or 100 connections on LinkedIn, all of which belong to their target audiences. They also noted that many people do not have the time to sit down and become good at posting regularly, and that is where an agency like Berry steps in. Berry will take on the responsibility, provide guidance, and manage the logistics.

Throughout the webinar, Berry and Company emphasized how it works with companies of all stages. However, they do welcome collaboration with IR companies to provide clients with well-rounded care. The company noted the lines between the work of PR and IR companies are clear but again emphasized collaboration works well with proper communication and mutual understanding. Social media is incredibly relevant in today’s society, and Berry and Company is always ready to take the lead and utilize pre-existing or new connections to help spread a company’s message.

To hear the full conversation, be sure to watch the replay. If you have questions about how we strategically partner with our clients, contact the Gilmartin team today.

Rachel Mahler, Analyst

MedTech Research Coverage: Who Covers Whom?

While it may be easy to feel content with coverage from your group of supportive sell-side analysts, it is important to consider how this list will evolve throughout the lifespan of your company. For some public issuers, this will happen naturally, but others may need to take a more active approach to keep their sell-side analyst coverage in-line with their industry peers.

Sell-side analysts study publicly traded companies, looking at the historical and current performance, product pipeline, business strategy, and many more factors to predict future performance and make a recommendation on how to classify or trade a stock. Most importantly, these recommendations are considered to be independent, due to the fact that sell-side analysts do not have access to material non-public information, and they do not own the stock. Based on the conclusions from their research, analysts will present a recommendation in a research report, which includes an analysis and an expert opinion about company fundamentals, a financial model with forecasted results, a stock price target, and a stock rating (typically Buy, Hold, or Sell).

Having sell-side coverage can be extremely beneficial to attract investor interest to your stock and company. Whether it is through sell-side research reports, investment bank conferences, non-deal roadshows, or general conversations on Wall Street, sell-side coverage can add value for every public company.

In previous blog posts, we have discussed “How Many Sell-Side Analysts Should Your Company Have?” and “Attracting Analyst Coverage” to discuss these benefits and how to expand your sell-side coverage. Today, we will dig deeper into the data to explore the coverage universe across medical technology stocks, based on market capitalization (or market cap).

To get a better idea why analyst coverage varies across market cap, let’s first discuss a few factors that could make a company attractive to a sell-side analyst.

  • Number of years as a public company
  • Industry/sector
  • Stock exchange (US vs foreign)
  • Trading volume (or liquidity)
  • Valuation
  • M&A
  • Banking relationship

To summarize, a long-standing public company in an attractive industry/sector, listed on a US stock exchange, will generally have the largest investor following and therefore warrant a large sell-side coverage. These companies will also have interacted with the most investment banks throughout their lifespan by attending industry and investment bank conferences and completing stock offerings and/or debt financings. On the other hand, a newly public company with a low trading volume (also referred to as low liquidity) may not require coverage from a dozen sell-side analysts.

Let’s take a look at the data from 140 public companies in the Medical Technology sector (source: FactSet).

Before discussing the data, it is important to note that being on the low end is not necessarily a bad thing. Every company is different, and every sell-side analyst and investment bank has a slightly different approach and justification for adding a company to their coverage list. That said, it is always helpful to know how you compare against your peers.

Large Cap (>$10B)

Across the large cap companies in MedTech, the average of 20 sell-side analyst coverage is well beyond that of the other cap sizes. This is simply because companies this size can be recognized throughout the world. With hundreds of thousands to millions of shares traded per day, there is nearly an unlimited demand of information from investors worldwide. Due to these few factors alone, any number of sell-side analysts can easily justify covering the stock if the remaining factors meet the criteria.

At this stage, companies often attract a large number of boutique research firms whose coverage is not tied to investment banking. In these cases, companies have little to no say as to whether the firm picks up coverage but can determine how much they interact with these analysts.

Mid Cap ($2B-$10B)

Within mid cap companies, the natural progression of sell-side coverage from micro-, to small-, to mid-cap becomes clearer. Generally, the increase is tied to improved financial performance, requests from investment bank clients to pick up coverage, or an industry analyst that was not originally involved with the company taking another look at the company. You may also begin to see a few boutique research firms pick up coverage in this window.

Small Cap ($300M-$2B) & Micro Cap (<$300M)

Throughout the small- and micro-cap ranges, it’s common to see a much smaller group of covering analysts and coverage tends be more directly correlated with valuation, banking relationships, and trading volumes.

Among these cap sizes you will often encounter “paid for” research from independent research firms. While adding this coverage can accomplish the same goal of increasing investor awareness, some investors may discount the research due to the nature of the business relationship. Nonetheless, this is another option for companies and management teams to consider.

At Gilmartin, we interact regularly with sell-side analysts and investment banks to help our clients get the best representation possible. If you would like to learn more about sell-side coverage and how to build relationships that grow your coverage, we are here to help! Contact us today.

Hunter Cabi, Associate

Understanding Short Interest for Recent IPO’s

It is no secret that newly listed companies face a host of issues that many established public companies do not face. Whether it be a lack of executional credibility or liquidity issues caused by the lock-up period, management teams are often fighting an uphill battle during the early days of being a newly public company. Regrettably, these issues can manifest themselves into short positions. Understanding the true impact of short positions gives management teams an accurate view to build a plan of action to combat a short thesis.

When a recently listed company is evaluating a short position, it is essential to evaluate the position as a percent of float rather than a percent of shares outstanding. As is common with newly listed companies, a large percent of shares outstanding will not be regularly traded in the open market. This is especially true in the early days following a company’s IPO before the lock-up expires. When you put your position in the context of daily volume, as a percent of float/outstanding share, you get a more accurate view of the active short position.

Interpreting the Short Position

  • <5%: Should be of no concern
  • 5%-10%: A developing view the stock will underperform
    • Possible Drivers: Competitive products will limit upside and/or sentiment, expectations set by management are too high, whispers exist that create noise or challenges for new buyers
  • >10%: A reasonably well-defined short thesis exists
    • Drivers: Market participants have a view the stock will significantly underperform peers due to a lack of buyers

How to Resolve the Situation

The threshold for management teams to start actively managing communications around their short position is typically ~8%. At this level, it is essential to recognize there could be a building position on the horizon; management teams should actively work to mitigate that risk. The best and often easiest way to combat a building short position is to execute on your publicly stated goals, which should drive stronger financial performance. It can also be helpful to discuss short views and negative feedback with sell-side analysts to understand what they and the buy-side sees as “headwinds” to investment.  A typical thesis might suggest one of the following explanations: guidance is too high, a lack of confidence in new product expectations, developing competitive landscape dynamics, cash burn issues, dilution concerns, etc. There are times when negative sentiment surrounding a company will lead to elevated short interest but not at a material level; it is only a cause for concern when short interest starts to become a considerable amount of shares outstanding or float. Understanding the perception of your company by outsiders is crucial to addressing the underlying problem.

The flip side of a low float for short investors is that it is very difficult to exit the position if needed. The shorts could be taking liquidity risk with their position, just as large holders do. If short interest is more than five days to cover (i.e., short interest ratio is days to cover), it will take the shorts some time to close out their position at 10-20% of daily volume. When liquidity is low and short interest is high, the short fundamental view will be compounded by the low liquidity of the short position. Shorts need to be right, especially when liquidity is low, so that the selling volume is available for them to cover their positions. If the shorts are wrong, there is not only no selling volume to cover other buyers in the market, but also the potential for a “short squeeze.” This will drive stock higher, mostly due to the lack of liquidity from sellers.

A low float is an unfortunate reality most recent IPOs experience, which usually introduces many company-specific issues. Understanding a company’s float in comparison to active short positions is crucial when thinking about external messaging, liquidity considerations, and business execution. Gilmartin Group can help you navigate floats and determine the smartest moves for your company. Contact us today.

Webb Campbell, Associate