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State of the Union: MedTech

Strong Fundamentals Driving Valuation Recovery
As we close the book on 2023 and move deeper into 2024, MedTech fundamentals remain overwhelmingly positive. Procedure volumes, utilization, pricing trends, and the pace of regulatory approvals and new product launches are improving from recent years. Meanwhile, macro dynamics (ex: supply chain issues, staffing delays, and high inflation) have stabilized, and following a strong end to 2023, healthy growth expectations have rolled into 2024. In tandem, company valuations have bounced back from recent lows. As of today, high growth SMID MedTech average forward EV/Revenue multiples have recovered from 4-5x in 2023 to 6-7x, reflecting improving sentiment and anticipation for a more conducive environment for growth on both the top and bottom line.

Where to From Here?
Given a solid operating environment and clear guidance now set across the sector, we hope to see a stable-to-improving valuation environment looking forward. We aren’t expecting an acute upswing in MedTech multiples (considering few catalysts for the sector over upcoming months), but we are keeping a close eye on trends that could put the sector back in relative favor over the course of the year and beyond – for example: stronger-than-expected growth from new product launch cycles (ex: pulsed field ablation, renal denervation, and automated diabetes management devices) or sensitivity and risk aversion to pharma policy-related risk into the upcoming election cycle. Reach out to our team to talk about evolving market dynamics and factors that might be particularly relevant for investors taking a look at your business.

Focus on Profitable Growth
Investor quality screens also continue to evaluate high growth SMID MedTech companies for Adjusted EBITDA and margin expansion trends, with attention given to companies at an inflection point. While organic growth remains important in value creation, profitability and cash flow have remained a central focus. Similar to the rest of the market, MedTech valuations were inversely correlated with real treasury rates. Therefore, as interest rates declined, investors focused more on revenue growth than profitability and valuations rose. However, under quantitative tightening, heightened focus on profitable growth and cash generation has raised the “quality screen” for MedTech companies as investors key in on continued top-line growth, alongside a steady focus by management teams to improve operating leverage through prudent growth and cost initiatives, leading to somewhat healthy margin expansion, cash flow, and value creation. As illustrated, high growth SMID MedTech companies are expected to generate improving Adj EBITDA growth and margins in coming years on firm underlying business fundamentals and prudent management execution.

Optimistic for an Improving Deal Environment
Our positive outlook for 2024 is reminiscent of past environments marked by dynamic dealmaking and capital raise activity. We anticipate that growth-focused tuck-in acquisitions will remain an important value creator this year, as cash rich companies look to meet rising growth expectations while executing operating leverage improvements and cash generation. As shown below, recent acquisitions of revenue-generating MedTech companies have closed at a premium.

Our team is engaging in a significantly greater number of IPO readiness discussions than in the past 1-2 years given a substantial backlog of scaled medtech businesses that could be well positioned to raise capital via the public market in the near-term.

Further, a look at the biotech financing environment (often a leading indicator for other sectors of healthcare) would suggest that demand for new issue deals is alive and well. Year-to-date, more money has been raised in biotech IPOs, follow-ons, and overnight transactions than across the entirety of 2023. And in cases where transactions followed on heels of strong clinical data, investors have been willing to ascribe high valuations (ex: CG Oncology, whose stock has held above $42 / share for over a month following its upsized IPO which initially priced at $19 / share in January). We see the potential for heightened biotech activity to usher in positive deal momentum for MedTech as the year goes on.

In Summary
2024 is shaping up to be a promising year. Positive sentiment, strong underlying fundamentals, and improving valuations lay the foundation for additional value creating events. As management teams focus on execution, it is important take the right proactive steps to benefit from potential capital market opportunities. Reach out to our team to talk more about your business and strategic positioning in this environment.

Gilmartin Group has extensive experience working with both private and public companies across the MedTech space. To find out more about how we strategically partner with our clients, please contact our team today.

Authored by: Vivian Cervantes, Managing Director and Steve Yeung, Associate Vice President

MolDX Proteomics Testing and CMS’s Proposal to Downregulate IVD’s

On Tuesday, February 27th, Gilmartin Managing Director, David Deuchler, hosted a webinar with Hannah Mamuszka (Founder & CEO, Alva10), Ipsita Smolinski (Founder & Managing Director, Capitol Street), and Isaac Ro (Partner, Catalio Capital Management). The panel discussed implications of FDA’s proposal to downregulate IVD’s from class III (high risk) to class II (moderate risk), FDA’s LDT proposal, and Palmettos MolDX on coverage for Proteomic diagnostic tests.

Moderator: David Deuchler, Managing Director, Gilmartin Group

Guest Speakers:

Hannah Mamuszka, Founder & CEO, Alva10
Ipsita Smolinksi, Founder & Managing Director, Capitol Street
Isaac Ro, Partner, Catalio Capital Management

Key Takeaways:

Background
On January 31, the FDA’ Center for Devices and Radiological Health (CDRH) announced the intention to initiate a reclassification process (see here) for most Class 3 (high risk) IVD’s to class 2 (moderate risk) for infectious disease and companion diagnostics. In doing so, the potential approval pathway moves to a 510K approval from a premarket approval (PMA) process. Importantly, in downregulating to a Class 2 device, the standard of “substantial equivalency” becomes the bar for approval. Additionally, the FDA proposed a rule in September 2023 to regulate LDTs as IVDs are regulated, with a final ruling planned for April. Lastly, we discuss Palmetto’s MolDX coverage change, which will now provide a reimbursement pathway for protein-based tests versus solely DNA and RNA prior. With our webinar participants, we delve into the regulatory and payor landscape and identify key potential implications of the aforementioned rules and proposals.

The logistics behind a potential final FDA rule on LDT regulation or IVD reclassification largely remain up in the air
While the panelists acknowledged the potential for a 510k approval vs. a premarket approval (PMA) process with the down classification of IVDs, the 510k process could still take multiple years and require millions of dollars for labs to develop. Additionally, for the LDT proposal, Ipsita Smolinksi highlighted lobbying groups, including the American Clinical Laboratory Association (ACLA), are particularly vocal on the proposed rule. She believes if the rule were to be finalized in April, there could be potential for a variety of different process delays, including potential lawsuits and congressional engagement (in addition to a potential government shutdown) that could slow implementation. The VALID and SALSA Act’s, which have stalled in congress, could see renewed legislative attention following FDA’s action and subsequent litigation. The question of realistic implementation was also a topic of conversation, in which the FDA would likely need to implement oversight to thousands of labs, many of which are non-profits, which would likely bring complication to the process.

Private payors are not as concerned with regulatory policy (including a potential down classification of IVDs) as they are most concerned with test utility
Our panelists believe that the potential downregulation of IVDs is likely to be a lengthy process once it commences and will impact ~50% of high-risk class III tests. On the payor side, Hannah Mamuszka at Alva10 commented on payors’ lack of understanding the difference between IVDs and LDTs (or class II and class III IVDs). Rather, they are more interested in the problem the test solves, who will have access to the test, and which clinician, physician, or institution will utilize it. Importantly, payors are primarily concerned with test utility, which includes logistics surrounding patient management and the clinical workflow, improved patient outcomes, and ideally, improved economics. In other words, Payers are largely focused on understanding the problem that a test solves and whether it makes sense for a patient population, rather than solely focusing on clinical validity.

In terms of a potential IVD reclassification, investors are looking for diagnostic companies that will benefit from regulation or can navigate the change
In our discussion, it appeared that investors prefer to invest in companies who understand the regulatory landscape. Specifically, Isaac Ro indicated that he looks to partner with companies who understand regulatory and have a developed plan. He spoke to his experience examining companies who either benefit from down regulation or those who need to raise capital to contend with a new set of regulatory rules. His advisement to companies has been to “duck under the wave or get ready for it”, as he believes that some companies will not be prepared to navigate the potential new change. For the companies that Isaac works with, many of them have been navigating a potential IVD reclassification and remain well-prepared.

Regulation and potential reimbursement should be top of mind for diagnostics companies in their test development efforts
Engaging with payors earlier in development plans can be advantageous for companies in understanding clinical and financial payor problems that need to be solved. Our panelists believe it is critical for diagnostic developers to involve themselves in conversations with payors, both CMS and private, to gather feedback on study plans and their perspective on utility. This engagement is not only important for payors, but for investors as well, as Isaac Ro noted that they typically look for companies who build their business model around this dynamic as there is higher probability for success. Additionally, clinical utility and prospective data is not only important from a regulatory perspective but holds significant value to investors as well. Generally, companies attempting to raise capital have largely been asked to present utility data, which is the reason why we see companies performing large studies. Isaac highlighted that many companies he has worked with understood the importance of data prior to the launch of their company, and he stressed the advantage of undertaking utility studies with prototype tests prior to a company launch.

Palmetto’s MolDX coverage of protein-based diagnostic tests provides proteomics companies with a clear reimbursement pathway
Palmetto’s MolDX change released in January now includes coverage of protein-based diagnostic tests, in which proteomics companies under certain CPT codes will be required to go through the same pathway as DNA and RNA tests. The MolDX process includes utilization of a tech assessment framework and obtaining a Diagnostics Exchange (DEX) Z code. As a reminder, labs with LDTs are required to register their tests for a specific Z code while adhering to Medicare Administrative Contractors (MACs) jurisdiction policies. Hannah Mamuszka noted that the new coverage may benefit proteomics companies who do not currently have reimbursement, as it will provide them with a clearer pathway to coverage. Proteomics companies may now also benefit from discussions with MolDX, where there exists a technically educated group who is willing to engage with companies on utility and risk conversations. On the other hand, the change may present a challenge for reimbursed proteomics companies who will be required to submit a tech assessment and risk losing coverage. Overall, panelists view the MolDX proteomic coverage as a mostly positive development in the long term that will create more transparency for companies despite some current unknowns.

Gilmartin Group has extensive experience working with both private and public companies across the Medtech, Biotech, Life Science Tools & Diagnostics, HCIT & Digital Health. To find out more about how we strategically partner with our clients, please contact our team today.

Authored by: Gabby Gabel, Analyst, Gilmartin Group

GLP-1s and MedTech—How to Respond & What’s Ahead

The efficacy and availability of GLP-1s have caused a dramatic and unprecedented sell-off across the MedTech sector. Understanding management teams are well versed in many of the street’s views and concerns already, our Gilmartin team composed a quick synopsis of major events (both recent and forward-looking) and our recommendations for companies.

Newsflow

At the American Diabetes Association (ADA) meeting in late June, Eli Lilly and Novo Nordisk presented data showing sustained weight loss with semaglutide therapies, sparking questions around their potential long-term impact on demand for diabetes products, namely CGM and pump therapies.
On July 20, Intuitive Surgical (ISRG) reported a slowdown in bariatric surgery volumes on its Q2 earnings call.
On Aug. 8, Novo Nordisk announced headline results from the SELECT cardiovascular outcomes trial, demonstrating a statistically significant and superior reduction in major adverse cardiovascular events (MACE) of 20% for people treated with semaglutide 2.4 mg compared to placebo. The strength of results vs. expectations raised conviction in the potential benefits of GLP-1 therapies for patients with health conditions spanning diabetes, sleep apnea, and cardiovascular diseases, while fueling concerns around the potential impact to interventional procedure volumes and broader MedTech end markets.
On Oct. 10, Novo Nordisk announced it had stopped its FLOW trial early due to the fact that results from an interim analysis met pre-specified criteria for stopping the trial early for efficacy. FLOW is intended to assess Ozempic in the prevention of progression of renal impairment and risk of renal and cardiovascular mortality in people with type 2 diabetes and chronic kidney disease (CKD).
- Dialysis and kidney transplant-exposed stocks (including Baxter, CareDx, DaVita, Fresenius, Natera, Outset Medical, and Transmedics), fell double-digits in response.

Market Reactions & Trading Commentary

Trading commentary from banks such as JP Morgan and Morgan Stanley (alongside public data) suggests that generalist long-only funds are reducing and exiting MedTech positions, with both MedTech and healthcare now underweight within many portfolios.
Oct. 10-13 may have represented capitulation as stock movement post FLOW news exceeded that of SELECT headline data in August.
MedTech valuations now sit at 10-year lows with stocks experiencing 10-30% multiple compression across subsectors and capitalizations.

The Path from Here

Final SELECT data, scheduled for presentation at AHA (Nov 11-13), is the next major focus for investors. We expect investors to remain cautious into the SELECT readout given the significant number of secondary endpoints that could carry derivative implications.
Meanwhile, rising rates and concerns around future year earnings and cash flow are driving investors to place a greater premium on profitability now (or certainly sooner than in prior periods).
Especially in the context of GLP-1 concerns on long-term MedTech growth achievability, many investors are hesitant to dig deeper into stocks and stories without a clear, and ideally risk-adjusted, path to profitability.

Gilmartin View & Recommendations

The magnitude of stock moves and liquidity are driving increasing short-term fear – but the primary investor concern is that there are future trials ahead and potential expanded indications (with few side effects) for GLP-1s. Investors are having a hard time developing a thesis for a recovery.
As a firm, our perspective is that the evolution of population health, patient disease states, and various medical device end markets in the presence of GLP-1s is far more nebulous than what can be reliably identified as a quantifiable headwind or tailwind. Said plainly – it’s hard to disprove the negative or quantify perceived existential threats.
We do believe it is important for most companies- first, internally– to develop an informed view of potential impact from GLP-1s. From there, strategize messaging and create a deliberate approach to address investor sentiment during Q3 reporting season and into 2024.

Specific Actions

Don’t play into the fear. Remain confident in the end market fundamentals of your business and specific disease states, but be proactive in addressing questions from investors.
Have an informed view of what the introduction of GLP-1s to your company’s end market(s) might mean, and be prepared to discuss what analytics have contributed to informing your view – KOL discussions, available data, commentary from medical societies, etc.
- These preparations should be both mechanistic/clinical and commercial.
- For example – if, biologically, GLP-1 mechanisms or weight loss has little bearing on incidence levels in the disease state addressed by your business, consider reminding investors that even in an eventuality where your TAM is some % smaller over time, your penetration into that end market remains in early stages (ideally, quantify this) with a massive opportunity remaining.
Be prepared to share commentary. Investors recognize the difference between tangible and perceived risks, but they will likely be dissatisfied with commentary that GLP-1s do not impact your business at all. Create talking points to address concerns and communicate that your company is closely following GLP-1 developments and potential market implications. At the same time, you are focused first and foremost on executing your ongoing business strategy.
- Our general advice is to leverage standard-cycle communications (e.g., quarterly prepared remarks or carefully crafted Q&A responses during public calls) rather than more reactive, “out-of-cycle” statements – however, this will also be company dependent.
Be deliberate in deciding whether it’s appropriate to weave this view proactively into your external talk track, including Q3 earnings commentary, investor presentations, and other public comments or in preparation for Q&A. There is no ‘one size fits all’ approach.
Drive fact-based answers and a thoughtful approach. Prepare to be pressed on the size of your end markets and asked about your company’s patient demographics, including how they have evolved in recent months and years, as well as expectations for the future.
Understand the audience in your investor conversations. It is now more important than ever. Healthcare portfolio analysts will be in the weeds on the topic vs. growth-oriented and generalist investors.
Profitability matters. If you have introduced a path to profitability, prioritize delivering on it. If you’re on track, reiterate it.

For many companies, there are too many unknown variables to accurately quantify potential changes in market growth rates or patient behavior. We believe that investors understand that, but still expect you to opine on what drives the error bars around your business.

We recognize this is a lot to digest, and we are happy to talk further. Please contact our team today to discuss how we can be of strategic advisory.

Authored by: Marissa Bych, Principal, Gilmartin Group

Navigating SEC & FINRA Regulations in Healthcare

This past Tuesday, August 1^st, Gilmartin Managing Directors, Laurence Watts and Stephen Jasper hosted a webinar with Latham & Watkins Partners Colleen Smith and John Sikora. The panel explored all things FINRA and SEC-related, and best practices when confronted with inquiries. Below are key takeaways from this conversation.

Moderators:

Laurence Watts, Managing Director, Gilmartin Group
Stephen Jasper, Managing Director, Gilmartin Group

Guest Speakers:

Colleen Smith, Partner, Latham & Watkins
John Sikora, Partner, Latham & Watkins

Key Takeaways:

FINRA Inquiries Towards Biotech Companies are Routine
As a self-regulating organization (SRO) with authority over broker dealers and public markets, FINRA is tasked with assuring market integrity and being the main surveillance body under the SEC. They watch for member firms involved in suspicious trading, collect information from cooperative parties, and then defer to the SEC for further investigation if necessary. Newly public biotech companies are likely unaccustomed to being under regulation, but management should not panic if they receive a FINRA inquiry. Since biotech companies are largely event driven with stock prices that are heavily affected by company news announcements, FINRA inquiries are common.

FINRA Inquiries are Triggered by Large Stock Movements and Have a Standard Process
Large stock movement is not defined by specific percentages or a metric, but rather is associated with company specific news that causes the stock price to move. When FINRA begins their inquiry process, an initial request for more information regarding the specific news announcement will typically go to one person in the company (general counsel if available). This is an attempt to better understand the triggering event, who knew this information before it was announced, and retrieve relevant documents. The next steps in the process will be a name recognition request containing individuals or institutions that made coincident trades. FINRA will then decide whether to turn the inquiry to the SEC, who is the ultimate decision maker on pursuing a deeper investigation.

Establishing Efficient Company Policies are Critical for Preparation and Protection
When a company has an upcoming news announcement that will likely trigger a FINRA inquiry, it is within the company’s best interest to ensure the blackout period is in place. While this will not prevent the employees from purchasing shares outside of company knowledge, it will provide protection for the company in the case of inquiry. Chronology and tracking the necessary facts are also part of best practices. This includes taking detailed chronological notes of the relevant people involved, information exchanged, and conversations. Finally, to ensure insider trading rules are well known by employees, efficient and engaging training is critical to implement before employees begin work, and continually reestablish during their tenure.

Be Aware of Regulation FD when Making Disclosures
Regulation FD stands for Regulation Fair Disclosure, which is an SEC rule regarding how companies can disclose material information. While the definition of material information is largely within the context of each individual company, it is important to remember that information can be material even if it has not yet been disclosed. Material information for biotech companies is often data, conversations with regulators, or FDA related. Latham & Watkins cautions against using personal judgment to determine materiality and advises to take Regulation FD seriously, as penalties can lead to fines, injunctions, and reputational damage that can affect companies in their future years.

Authored by: Devon Chang, Analyst, Gilmartin Group

Market Perspectives of Digital Health and Health Technology

This past Wednesday, June 21st, Gilmartin’s Managing Director, Ryan Halsted, hosted a webinar with BTIG’s David Larsen (Senior Research Analyst, Digital Healthcare/HCIT) and Marie Thibault (Senior Research Analyst, Digital Healthcare/HCIT) and Needham’s Ryan MacDonald (Senior Research Analyst, Digital Healthcare/HCIT/Vertical SaaS). The panel explored market perspectives of the digital health and healthcare technology sectors and discussed views on technological innovation across the sector. Below are key takeaways from this conversation.

Moderator: Ryan Halsted, Managing Director, Gilmartin Group

Guest Speakers:

David Larsen, Senior Research Analyst, BTIG
Marie Thibault, Senior Research Analyst, BTIG
Ryan MacDonald, Senior Research Analyst, Needham

Key Takeaways:

The Street defines Digital Health as companies with solutions powered by technology to address the Triple Aim of healthcare
Digital health solutions aim to optimize the quality of care, reduce costs and improve patient health to deliver better medical outcomes and results. Serving end markets across the healthcare ecosystem, they cover a broad spectrum of solutions from wearables and remote patient monitoring devices to technologies that provide telehealth services, streamline healthcare operations and optimize drug development.

State of the market for digital health reflects macro headwinds with companies offering strongest ROI proposition outperforming rest of the group
While the industry accelerated during the pandemic, the current macroeconomic environment has adversely impacted the sector consistent with the broader market. End market budgetary constraints and a focus on cost management have led to some decreased adoption for these solutions, however, budgets have proved more resilient than investors feared. Offerings that deliver direct ROI in cost savings or incremental revenue, along with a comprehensive suite of solutions rather than point solutions, have performed well despite these headwinds. With the spotlight on generative AI as key drivers of future growth, investors have been keen on understanding how this technology can be used within healthcare, but we are still in the early innings with limited use cases in the industry.

Inflection points, as we look ahead, include loosening budgetary constraints and regulatory changes
In addition to the stabilization of the market, the panelists are looking out for the shortening of elongated sales cycles, the impact of pressures with Medicare Advantage rates, RADV audit implications and legislative changes as it relates to digital devices and therapeutics.

Data and Analytics is leading innovation across the space in addition to novel patient and provider engagement solutions
Companies are leveraging the advancements of health data to pave the way with innovative technology platforms and devices to drive forward better patient care, engagement and outcomes. The panelists expressed excitement over healthcare navigator companies, precision medicine solutions, platforms that accelerate clinical trial enrollment and activities, offerings that can reduce costly hospital admissions, including health technologies at home, such as remote patient monitoring, testing and therapies.

Companies that are viewed by the Street as Health IT, versus pure technology, address the healthcare end market and have recurring revenue and a durable customer/utilization profile
Digital health companies that are at the cross-section of tech and healthcare are often faced asking where they fit within the framework of pure tech versus health IT. The panelists noted one way in which to think about this distinction is whether at its core, the company is operating as a tech-enabled healthcare business or as a software-as-a-service (SaaS) business. To determine categorically whether a company may be operating as a pure SaaS business, some of the characteristics investors may ask are (1) whether the company has a recurring revenue model, (2) how sticky the customer base is and whether utilization lasts greater than 12 months and (3) whether the gross margin profile is above 70%. As it relates to valuation, tech and Health IT companies are generally valued at an EV to Sales multiple whereas over time health IT companies tend to trade on an EBITDA basis. Moreover, SaaS investors often will turn to the Rule of 40 to measure a company’s value and understand its balance between growth and profitability.

Companies that are viewed by the Street as digital health, versus pure medtech, often apply technology within a care delivery model and therefore may have a higher degree of exposure to reimbursement than pure medtech companies
Given the difference between digital health versus pure medtech, another consideration for companies that are sitting at this cross-section is which investors would understand their story best. For these companies, health IT investors may not fully appreciate the nuances of medtech as it relates to risks associated with the business. As an example, if regulation around reimbursement is a hurdle, a tech investor may not closely understand the related implications to the business. Tech investors may care more about commercial and marketing activities while healthcare investors may be more focused on clinical data and roadmaps.

Common KPIs in digital health
Common KPIs in digital health highlighted by the panelists include the number of patient lives and contracts, average or total contract value, annual recurring revenue and net retention rate. They also suggested that management teams consider these metrics in the context of the quality and size of the total addressable market and the ability to capture that TAM.

Companies contemplating an IPO need to emphasize preparedness
The panel stressed the importance of public company readiness. As part of this preparation, management teams need to understand the dynamics of operating as a public company and set forth clear expectations to deliver against and to demonstrate execution. This includes key inflection points investors can follow. Establishing and maintaining credibility with the street is essential around messaging and communications. Finally, aim to beat and raise.

Gilmartin Group has extensive experience working with both private and public companies across digital health and health IT and the broader healthcare space. To find out more about how we strategically partner with our clients, please contact our team today.

Authored by: Ji-Yon Yi, Vice President, Gilmartin Group

Analyst Interactions with Biotechs

This past Tuesday, May 2nd, Gilmartin Group hosted a webinar with TD Cowen’s Joseph Thome, PhD (Managing Director) and Tyler Van Buren (Managing Director), moderated by Gilmartin Managing Directors, Laurence Watts and Stephen Jasper to discuss analyst interactions with biotechs. Below are the key takeaways from the dialogue.

Moderators:

Laurence Watts, Managing Director, Gilmartin Group
Stephen Jasper, Managing Director, Gilmartin Group

Guest Speakers:

Joseph Thome, Managing Director, Cowen
Tyler Van Buren, Managing Director, Cowen

Key Takeaways:

Standing Out to Analysts & Making Yourself Known
When establishing your company name and story, it’s important to have a strong management team with a record of credibility to “stand out” to analysts. It’s advised to be supportive of your story and company vision, but to be careful to not exaggerate or mislead the analysts. In addition, having novel, differentiated science relative to competitors, such that you’re either the sole player in the space or standing among a few other competitors is valuable. It’s preferable to be going after a large market—Cowen’s Managing Directors noted that what we’ve learned from early targeted oncology or orphan launches is that you’ll only get so much credit for going about small markets, especially in tough environments.

Determining Coverage
When determining what companies to cover, analysts look at a number of factors, but in the ideal scenario, the company would align with the analyst’s interests and scientific training. Scientific rigor is important, but there are common threads when analyzing companies no matter what the indication is and despite background, analysts can be put in front of any company and be able to provide value. In addressing the question of whether an analyst would cover a company whose deal the bank wasn’t involved in, Van Buren and Thome noted, from an institutional perspective, the company would have to be $1B or above in market cap, as analysts need to have enough flow and interest from investors to make it worthwhile in covering. If the companies aren’t coming from the banking or institutional side, it’s a hard pitch for the company to have an analyst potentially take up a coverage spot when they have a finite capacity.

Fostering Analyst Relationship with Companies Through the Lifespan of Coverage
Beginning—
The who/what/when/why of analyst coverage is dependent upon a number of factors, but timing, relevance and investor interest play a significant role. When engaging with private companies ahead of an IPO, most biotech analysts wait for the vetting to come through from the bankers. That being said, if analysts are trying to build a relationship with a company for the long-term, engagement should start well before the bankers reach out, with post-B round being ideal timing for beginning the relationship prior to syndicate decisions.

During—
In fostering a strong relationship with your covering analyst, an open and honest line of communication is key. When confronted with an error on an analyst report or a disagreement on analyst conclusions, it’s best to communicate quickly and clearly to remedy any discrepancies and clear up any confusion.

End—
Analysts cease coverage of a company if they are no longer relevant, if there’s a lack of interest on the investor side or if companies violate trust or have been misleading to analysts and investors. Every biotech company experiences a low, often during the execution period, where stock prices go down, but this is just a function of time. Unfortunately, investors’ time horizons are short, but analysts don’t necessarily drop coverage during that period. That being said, analysts are likely to drop coverage if there’s a lack of interest and some component of the story is broken from a credibility standpoint or from the fundamentals of the asset.

Biotech Earnings & Analyst Communications
While cadence and frequency of analyst communication depends on the news flow of each individual company, communication should be largely milestone-driven. Frequent calls and conversations are never frowned upon if the company management team has something new and meaningful to discuss. If your company story is changing frequently or if investors are asking differentiated questions, it’s recommended to touch base once a quarter to ensure the analyst is level set. In quieter periods where companies have 3-6 months without news flow or milestones, less frequent communications are advised to help companies and analysts to make the most of their time.

With regard to biotech earnings, companies shouldn’t feel obligated to host earnings calls every quarter. Earnings calls should be held if the company has a revenue-generating drug or if there’s a data readout that coincides with the quarter in question. From an investor standpoint, it’s much more preferable to host earnings calls only when there is something new or noteworthy to discuss. In short, don’t hold an earnings call solely because you did so last quarter.

Analysts & Embargo
When determining whether to bring an analyst under embargo, companies should focus on setting good expectation instead of jumping into the embargo process. Analysts prefer for companies to use embargos limitedly—with analysts engaging with investors 7 days a week, there’s never a fully convenient time to put an analyst under embargo. In these cases, analysts note that it’s almost less helpful to do so, as they already have established conclusions around what the data should look like and what the investors want the data to look like. Instead, it’s advised that companies set up time with the analysts to mention that they’ll be going into a blackout period ahead of the data and set expectations of what they’re looking at for the data set. This method helps companies behind the scenes as they prepare for what they’re going to show and what they’re going to emphasize. It’s important to note that analysts can digest information quickly, especially when they know the company story well and expectations are set thoughtfully.

TD Cowen Recent Acquisition:

TD, the second largest bank in Canada, closed the acquisition with Cowen at the beginning of March. TD Cowen is now the 6^th largest bank in North America. In addition to the $1.4 trillion safe balance sheet, TD Cowen is rated the number one safest bank, a particularly important factor in this environment. From the biotech research perspective, the Cowen heritage and culture that has been developed over decades will remain the same and it was a big part of the negotiations with management at TD and Cowen. TD Cowen has 7 senior biotech analysts and 10 total biotech covering analysts.

In conclusion, relationships with analysts should be governed by open and honest communication with strong expectations setting and thoughtful approaches to relationship fostering. Gilmartin Group has deep experience working with both private and public companies across Biotech and the larger healthcare space. For more information about how we strategically partner with our clients, please contact our team today.

Authored by: Rachna Udasi, Analyst, Gilmartin Group

Macro-Environment Effects on Investment Decision-Making in Life Science Tools & Diagnostics

This past Wednesday, April 26th, Gilmartin Group hosted a webinar with three sell side analysts, Dan Arias (Managing Director, Stifel), Dan Brennan (Managing Director, Cowen) and Mark Massaro (Managing Director, BTIG), moderated by Gilmartin Managing Director, David Deuchler, to discuss macro effects on investor sentiment in the sector. Below are the key takeaways from the dialogue.

Moderator: David Deuchler, Managing Director, Gilmartin Group

Guest Speakers:

Mark Massaro, Managing Director, BTIG
Dan Arias, Managing Director, Stifel
Dan Brennan, Managing Director, Cowen

Key Takeaways:

The size and global exposure of a company determines how much they are impacted by different macro factors.
The companies that operate globally and have exposure to industrial chemicals are seeing more disruption from China. To a lesser degree this year, the war in Russia and Ukraine is pressuring growth for some companies, as seen by Illumina’s first quarter earnings report. Biotech funding, which fueled growth for bioprocessing parts of the LSTDx world for the last decade, is now experiencing pressure among their divisions that service biotech, and we’re already seeing this with Danaher’s earnings report. Interest rates are also a concern, and we expect the smaller companies that are burning cash to bear the brunt of this macro factor.

Get cash while you can, not just when you need it.
Interest rates and the increasing cost of capital are making it more challenging for companies with negative cash flow to maintain a healthy balance sheet. This in turn makes it more challenging for investors to provide them with capital. Essentially, companies may find it easier to raise money long before they are close to running out. The panelists advised raising money when you can and not just when you need it, even in a down-round scenario.

The next class of IPOs will be prized unicorns, or at least have a well-defined, large market opportunity.
Our panelists deliberated on the composition of the next group of companies to go public in LSTDx. Potential criteria that would attract smart money include $100 million in revenues, a clear path to profitability in 3-5 years, or a large TAM or SAM. Regardless of the size of the addressable market or revenue amount, having a massive undefined number as an addressable market will no longer fly. In a more risk averse environment, companies will need not only need to have a large addressable market, but a clearly defined one. They’ll also need to demonstrate their ability to take share in that market by having a better mouse trap.

In conclusion, the macro factors weighing on Life Science Tools and Diagnostics companies in the present market environment include interest rates, China trade relations, and to a lesser degree, Russia’s war. Which of these factors impacts what company and to what degree largely depends on their size, stage, and global exposure. The webinar panelists believe that capital markets will come back around, and when they do, companies will no longer be able to win over investors simply by stating they have a $12B TAM.

Gilmartin Group has deep experience working with both private and public companies across Life Science Tools and Diagnostic and the larger healthcare space. For more information about how we strategically partner with our clients, please contact our team today.

Authored by: Nina Deka, Vice President, Gilmartin Group

Navigating Today’s Liquidity Environment

On Tuesday, April 18th, Gilmartin hosted its inaugural Private Company Showcase, highlighting innovative private companies across various healthcare verticals. To kick off the day of presentations and fireside chats, Gilmartin Group Managing Director, Vivian Cervantes, moderated a panel focused on navigating today’s liquidity environment. The panel featured insights from notable thought leaders in the space with contributions from Greg Garfield, Senior Managing Director at KCK group, Bruno Stembaum, Managing Director at Bank of America, and Hutch Corbett, Managing Partner at Armentum Partners.

Moderator: Vivian Cervantes, Managing Director, Gilmartin Group

Guest Speakers:

Greg Garfield, Senior Managing Director, KCK Group
Bruno Stembaum, Managing Director, Healthcare, Bank of America
Hutch Corbett, Managing Partner, Armentum Partners

Key Takeaways:

The market for deal-making remains open, yet macro uncertainties and sentiment continue to dampen activities, with a shift to selectivity in investments

Compared to the height of deal activity in 2021, investors have become increasingly selective on new investment ideas. Investors today are slower and more considerate when making an investment decision. In general, funds continue to focus on their current portfolio companies needs, how they deliver on milestones and efficiently scale the business. Despite current selectivity, the deal-making market remains open, with companies encouraged to be more proactive and prepare for financing activities with 12-18 months of cash runway vs previous 6-9 months.

“Marking Milestones” mindset replaces “Growth at all Costs”

Investors mindset has shifted to sustainable or quality growth, as they evaluate investment opportunities that well-manage the typical tension between investments to be made to drive to a target milestone, with a focus on capital efficiency. Prudently managing the cash burn while executing on key initiatives and milestones will help a company stand out as an attractive investment opportunity. If a company needs to spend, it is important to prioritize what will be most impactful.

Cash burn, execution and keeping an eye on profitability targets

Given the heightened focus on fundamentals and financial discipline, the line of sight towards cashflow breakeven has become even more important. For management teams, it is vital that they understand and clearly communicate how they plan to get to that inflection point of their business, in addition to other catalysts. Investors generally want to see the capital they invest fuel the commercial activities geared towards growing the business organically. If the company effectively uses the invested capital by showing a track record of execution upon their communicated plans for growing the business, their credibility increases among investors.

Flexible evaluation of financing structures and valuation

In the current environment, there may be opportunities for both debt and equity structures. Prior to the IPO slowdown, MedTech companies were going public with an average of $30 million to $50 million of debt on their balance sheet (approximately 1x revenue). Given the preference for new equity capital to be deployed into the business vs repay existing debt, evaluate opportunities for debt refinancing. In terms of valuation, IPO valuations of 8x to 10x 2-year forward revenue may revert to historical averages of 4x to 6x 1-year forward revenue. While such multiple compression may be difficult, a potential silver lining to a down round is the completion of a financing that realistically gives the company resources to step-up to upcoming value milestones.

Be ready

It is hard to predict when the market will turn, but when it does, it is expected to turn quickly. Therefore, be ready. There were many healthcare IPOs that were put on hold beginning late 2021, with a goal of going public when the window reopens. Management teams in this position must be prepared further in advance and be able to clearly communicate their financing needs and goals.

In conclusion, companies should proactively manage their financing needs, evaluating opportunities for both debt and equity, with a focus on capital efficiency. Given ongoing multiple compression and expectations for a return to historic average multiples, valuations may continue to face pressure, and companies should plan accordingly for a more efficient capital allocation. Ultimately, there is a lot of capital waiting on the sidelines, ready to be deployed.

To register to watch a replay of the webinar, please visit the Gilmartin Group Private Company Showcase website here.

Gilmartin Group has deep experience working with both private and public companies across the healthcare space. For more information about how we strategically partner with our clients, please contact our team today.

Co-Authored by: Jack Droogan, Associate, Gilmartin Group and Steve Yeung, Associate Vice President Gilmartin Group

Navigating IR: What Healthcare Executives Need to Know

Last Wednesday, April 5th, Gilmartin Founder & CEO, Lynn Lewis, moderated a panel at Biocom California’s CFO Breakfast & Networking Event in San Francisco. Joining for the discussion were John Craighead, PhD, CFO & Head of Corporate Development for Elpiscience, Celia Economides, CFO of Gritstone Bio and Jason Mills, Executive Vice President of Strategy at Penumbra. The panel covered topics relevant to both private companies navigating the institutional investor landscape as well as issues facing publicly traded companies in today’s environment. This was part of the Biocom California’s CFO Series, which is a program intended for chief and senior finance executives within the life sciences industry. Below are our key takeaways from the panel.

Moderator: Lynn Lewis, Founder & CEO, Gilmartin Group

Guest Speakers:

John Craighead, Ph.D., CFO and Head of Corporate Development, Elpiscience Biopharmaceuticals
Celia Economides, CFO, Gristone Bio
Jason Mills, EVP, Strategy, Penumbra

Key Takeaways:

Wall Street is undergoing change.

There is an increasing reliance on management teams to be more direct. This indicates an onus on the company to communicate with the sell side and to provide clear direction, in turn holding more influence on research published. The talent landscape on Wall Street is also shifting to young professionals as turnover among more experienced professionals increases.

An effective IR strategy is crucial.

Companies that develop and maintain deep relationships with the investor and analyst communities will establish credibility, trust, and ultimately differentiate themselves from their peers. Allocating focus to investors who are excited about the story, for example, is a key differentiator. Investors who understand the opportunity will become company advocates, generating additional interest among the buy-side community. This dynamic creates responsibility for executive teams to aggressively manage their schedules, refine messaging, and conduct thoughtful outreach. It also highlights the importance of listening to investor feedback.

Gilmartin Group has deep experience building and executing comprehensive Investor Relations strategies for both private and public companies across the healthcare space. To learn more about how we can support your company, please contact our team today.

Guiding expectations while not disclosing sensitive information is a balance.

In today’s risk-averse climate, it’s essential to establish realistic goals and carefully consider which metrics to disclose. Less is more from a quantitative perspective. At the same time, being very specific in the earnings script will help guide conversations with analysts and investors in quarters to follow, allowing for direct conversation while being RegFD compliant.

Preparing to go public.

Private companies should start to build analyst and investor relationships as early as two years before the company plans to IPO. Attending the right industry and banking conferences will increase the company’s exposure and generate more interest among analysts and investors. At this stage, it’s important to engage with an advisor like Gilmartin who can make recommendations in line with the company’s long-term vision. Having a cohesive story combined with a clear pathway marked by milestones and capital raises provides confidence in management’s ability to execute.

Generating interest in the absence of a catalyst is delicate.

Science moves slowly, and investors want to see catalysts; strong relationships with long-term shareholders can mitigate the short-term pressures. Investors with a longer-term horizon will be more prepared to hold while the longer-term catalysts play out. At this stage, the “less is more” philosophy remains intact. Investors will try and gather enough information to track capital needs and will map clinical milestones, as an example, over the cash burn curve to know when an investment can be made at a discount. And if a metric like patients enrolled is disclosed, it will become the company’s responsibility to disclose that metric on an on-going basis. As companies wait for longer-term catalysts to have an impact, they can also supplement their strategy validation process by leveraging data published by their peers.

In conclusion, the Wall Street landscape of responsibilities is shifting, and companies can differentiate themselves with the right investor relations strategy. That means walking the line between being too broad and disclosing too much information, at the same time as managing buy side and sell side relationships.

Gilmartin Group has deep experience working with both private and public companies across the healthcare space. For more information about how we strategically partner with our clients, please contact our team today.

Co-Authored by: Webb Campbell, Associate, Gilmartin Group, Max Forgan, Associate, Gilmartin Group & Tamsin Stringer, Analyst, Gilmartin Group

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