Gilmartin ESG Newsletter | April 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

In late March, the SEC proposed a set of rules that would require companies to disclose certain climate-related information in their SEC filings. The proposed rules aim to require businesses to report quantitative metrics, such as greenhouse gas (GHG) emissions, and more general, qualitative information, such as climate-related risk oversight processes. As SEC Chair Gary Gensler argued, the proposal is “driven by the needs of investors and issuers” because there are no “clear rules of the road” for corporate climate disclosure. 

The SEC has based its proposal largely on existing voluntary frameworks, including the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol, recognizing that many companies have already issued sustainability reports aligned with these standards. Notably, the proposal includes a phase-in period for disclosure requirements based on a company’s filing status and size—Large Accelerated Filers are expected to make the earliest disclosures covering fiscal year 2023 data (filed in 2024). Companies will first be expected to report direct GHG emissions (Scope 1) and indirect emissions from sources such as electricity usage (Scope 2), while an additional year will be granted for companies to disclose all other indirect emissions (Scope 3). The SEC’s comment period is set to end at the end of May, and the proposal is expected to be made effective in December 2022.

THE HEALTHCARE VIEW

With proxy season underway, companies are facing an unprecedented number of ESG-related shareholder proposals. According to a recent report from shareholder advocacy group As You Sow, diversity-related proposals were aimed at a broader set of companies in 2022 compared to 2021, with an increasing number targeting healthcare companies. Danaher and Pfizer received proposals requesting more disclosure around workforce diversity, although both proposals were withdrawn after they reached agreements with As You Sow. Johnson & Johnson received two shareholder proposals requesting that the company conduct a third-party racial equity audit and publicly disclose the results. The company recommended against both proposals, arguing that they have Board and management oversight of their diversity efforts and provide sufficient disclosure through two annual reports with diversity-related information.  

A February 2022 report from global law firm Fenwick & West LLP analyzed ESG practices and trends for biotech companies, providing guidance about how to adapt to the changing ESG landscape. The report found that biotech companies were most inclined to disclose information related to social issues, such as diversity and human rights, compared to other ESG topics. Among other key takeaways, Fenwick found that current ESG reporting among biotech companies is limited and there is no consensus on where or what to report. That said, Fenwick’s report indicated that ESG is expected to grow in importance in the coming year amidst increasing pressure to include ESG-focused companies in investment portfolios, as well as standardization in ESG reporting. 

IN THE WEEDS

On the heels of the SEC’s climate disclosure proposal, the International Sustainability Standards Board (ISSB) issued their first draft standards for corporate sustainability disclosure. Established during the COP26 conference last November, ISSB is tasked with setting reporting standards to make sustainability information globally comparable and decision-useful for investors. The draft standards—which encompass both general and climate-specific sustainability disclosure requirements—are largely derived from the TCFD and Sustainability Accounting Standards Board (SASB) frameworks. Reflecting the sustainability reporting landscape’s recent consolidation, the Global Reporting Initiative (GRI) announced it would also coordinate with ISSB to make their reporting standards more compatible. 

A NOTE ON ESG INVESTING

In an interview with JUST Capital, State Street Global Advisors (SSGA) outgoing CEO Cyrus Taraporevala discussed how the firm incorporates ESG throughout its investing activities, rejecting the “binary” distinction between ESG and non-ESG information. Taraporevala highlighted how during portfolio company engagements, the asset stewardship team coordinates with the firm’s active portfolio managers to consider both financial and ESG-related matters. SSGA’s Global Head of Asset Stewardship, Benjamin Colton, remarked that while ESG data currently lacks consistency, he believes it “is improving, and one of the ways to continue to get more consistency is by having asset managers and asset owners be clear on what their expectations are.” Colton also observed that human capital management has increased in importance for companies this proxy season “because it really is a material issue for all companies.”

ONE BIG THING

On March 17th, the Gilmartin ESG team hosted a webinar with a panel of leaders from three healthcare companies to discuss key topics to consider during the ESG reporting process. Experts with finance, legal, and CSR backgrounds brought a diverse range of perspectives to the conversation. If you were unable to attend, you can read our recap or watch a replay of the conversation. 

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 polices, practices, data, and disclosures, feel free to contact our team today. 

MATT BERNER

Managing Director, Head of ESG

PATRICK SMITH

Analyst, ESG

Impacts of Labor Dynamics on Hospital Finances and the Healthcare Industry

Labor—salaries and wages for physicians, nurses, and other healthcare professionals—has historically represented a significant portion of hospitals’ operating expenses. For HCA Healthcare, one of the largest healthcare systems in the US, the ratio of salaries and benefits expenses to revenues consistently approximated 46% from 2019-2021. By comparison, supplies as a percent of revenues approximated 16% over that time period, while other operating expenses ranged from 17-18.5% of revenues.

Clearly, labor represents an outsized portion of hospitals’ overall operating expenses. As such, the past two years of disruption in the labor market, particularly among healthcare professionals, has been reflected in hospitals’ financial conditions. In a report they published in October 2021, Premier concluded that hospitals and health systems in the US are paying $24 billion more per year for qualified clinical labor than before the COVID-19 pandemic began. Further, their analysis indicates that clinical labor costs are up by an average of 8% per patient per day, compared to 2019 (pre-COVID) baseline levels.

As the healthcare system continues to experience an influx of patients being treated for COVID-19, hospitals have found themselves competing for qualified labor, particularly nurses. In addition to the added cost for finding and recruiting nurses (often through agencies), hospitals have relied on existing staff to work overtime hours to care for the increased patient load. These dynamics bore out in Premier’s data as well; according to their report, overtime hours were up 52% (as of September of 2021) when compared to a pre-COVID baseline. Within the same comparison framework, use of agency and temporary labor increased 132% for full-time and 131% for part-time workers. Additionally, the use of contingency labor rose nearly 126%.

In addition to the increase in working hours, the rates for these positions are materially higher than standard arrangements – that is, overtime and agency staff typically add 50% or more to a standard hourly rate. Anecdotal commentary from public hospital companies has cited even higher multiples, further highlighting the extent to which labor dynamics impact overall finances for health systems.

In the early days of the pandemic, the federal government acted swiftly to provide support to health systems nationwide. The CARES Act and subsequent measures aided in shoring up hospital finances to mitigate the disruptive impacts of the pandemic. Now two years into the pandemic, US hospitals have experienced ebbing and flowing waves of COVID patients, while nurses and other healthcare professionals have remained dedicated to providing the necessary care. Through these experiences, hospital systems have learned to manage their operations to treat COVID and non-COVID patients simultaneously. By comparison, in the earlier days of the pandemic and in subsequent surges, hospitals often forewent (either by choice or mandate) ‘elective’ or ‘non-essential’ procedures to preserve capacity in their systems. Much of the conversation during those periods focused on preserving hospital beds. It soon became apparent that the capacity of care provided by nurses and other professionals was just as essential, if not more so, to maintain.

Today, nationwide COVID cases and hospitalizations are lower than they were during the Omicron peak earlier in 2022. However, hospitals across the country continue to admit and care for COVID patients every day, while nurses and other professionals are leaving the profession, due to burnout or other reasons. In October 2021, data from Morning Consult found that 18% of healthcare workers had quit their jobs during the COVID-19 pandemic. Among healthcare workers who kept their jobs during the pandemic, 31% considered leaving. Additionally, the report notes that 79% of healthcare professionals said the national worker shortage has affected them and their place of work.

As we cross the two-year anniversary of COVID-19’s declaration as a pandemic, the US healthcare workforce has experienced a broad disruption, upending operations of hospitals and health systems across the country. Hospitals have in turn developed and executed strategies to operate in this environment, including examining ways to reduce other costs to offset the impact of increased expenses for labor. As the COVID-19 pandemic continues and hospitals continue to experience wage inflation pressures, suppliers, medical technology and device companies, and staffing agencies are seeing the downstream effects across the industry.

Gilmartin diligently monitors and analyzes trends across the healthcare sector and macro environment, in order to better inform our clients of developments that may impact their companies directly or indirectly. Contact our team today to learn how our combined knowledge and experience can benefit you.

Alex Khan, Vice President

 

Recap of Webinar: Demystifying ESG Reporting for Healthcare Companies

On March 17, 2022, the Gilmartin ESG team hosted a webinar with a panel of leaders from three healthcare companies that have integrated ESG into their decision-making and reporting processes. If you were unable to attend, you can watch a replay of the conversation. Matt Berner, Managing Director of ESG Advisory at Gilmartin Group, and Patrick Smith, ESG Analyst at Gilmartin Group, interviewed Angie Wirick, CFO at AtriCure; Sara Scheuerlein, Associate General Counsel at Outset Medical; and Nathan Sanfaçon, Sr. Specialist, Corporate Social Responsibility at Illumina. The panelists are deeply involved in ESG programs and reporting processes at their companies, and their backgrounds as finance, legal, and CSR experts, respectively, enabled them to bring diverse perspectives to the discussion.

The conversation centered around a number of key topics for healthcare companies to consider during the ESG reporting process, such as issue prioritization, data collection, reporting standards and best practices, and overall ESG management and strategic oversight. We recommend watching the full webinar to capture all the insights the panel shared, but here are a few central points we wanted to highlight.

What made you conclude that now was the time to start working on your first ESG reports? 

“We noticed that ESG was coming up more frequently in the conversations we were having with our shareholders, and investors increasingly wanted to know how we were managing and addressing ESG issues,” said Angie Wirick, CFO at AtriCure. “That was really an important consideration for us, but equally as important, we have been committed to our patients for over two decades and were really excited about the opportunity to tell our story through the ESG report.”

Building off Angie’s comments, Sara Scheuerlein from Outset said that “there were several factors that drove the timing of our report.” After Outset went public in the fall of 2020, Sara noted that “investors were already reaching out to us for ESG information. We saw launching our first ESG report as a way to engage directly with investors on topics they wanted to see enhanced transparency around.” Sara also remarked that the report was an opportunity to highlight sustainability efforts the company already had underway, including the development of a new manufacturing site in Mexico where environmental sustainability was a key focus.

How did you identify and prioritize the ESG issues you addressed in your ESG reports?

AtriCure’s ESG report was “informed by multiple different frameworks that are used to evaluate corporate ESG performance, but was ultimately aligned with the Sustainability Accounting Standards Board (SASB) standards for the Medical Equipment & Supplies industry,” said Angie. AtriCure also conducted an in-depth review of the company’s scores with the major ESG ratings firms to identify issues with the highest impact on each score, although, as Angie stated, improving AtriCure’s ESG scores was not the primary consideration in preparing the ESG report. Noting that Outset took a similar approach to prioritizing ESG issues, Sara said that Outset’s report “included what we believed would be most impactful and material not only for our investors, but also for our other stakeholders—customers, patients, and employees.”

Since Illumina has gone through the ESG issue prioritization process several times, Nathan said the company has learned that the process is “truly never ending,” adding that “stakeholders’ perceptions and interests change rapidly, and 2021 and 2022 were great examples of that.” Nathan also said that “different stakeholders are going to be concerned with different issues, and they will have different perceptions about how you’re performing against those issues.” When asked about the ESG issues that Illumina believes are the most important in the healthcare industry, Nathan observed, “Something that always rises to the top for us is patient health. As companies focused on health, we need to keep humanity at the center of what we’re doing. Another piece of that is ensuring equitable access to our technology. The final piece is what we call ‘integrity,’ which means operating ethically, responsibly, building trust with key stakeholders, and being transparent to help foster that trust.”

How did you validate the data and manage the information that you disclosed in your ESG reports?

At AtriCure, Angie said the company “followed a process that’s very similar to how we tie out our financials for quarterly and annual SEC filings.” Sara noted that Outset also followed a process that was “not unlike what we do for our SEC filings” and that she paid careful attention to “consistency between the disclosures in our ESG report and the disclosures in our SEC filings.” Angie added that she “was very fortunate to partner with our Director of External Reporting, who was a co-lead on our ESG efforts. As a key contributor to this process, she paid very close attention throughout the drafting process and data collection as to what data was going into the report, the sources, and then the backup that we used to substantiate everything.” Angie also mentioned that data management was “an area where getting into the weeds myself was very beneficial. As we pieced together some of the SASB disclosure topics for the first time, it was a really great crash course for us in ESG.”

As Nathan discussed, Illumina received Limited Assurance from a third party to verify some of the data in their report, such as GHG emissions data. Nathan said that “to have external validation and assurance really helps build trust in our data” and that receiving Limited Assurance helped Illumina “identify ways to improve our processes and shore up the accuracy of our data. It also helped define the boundary and scope for our data collection. Similar to our financial reporting processes, we want to make sure that our ESG data is as robust as our financials.”

What feedback have you received since publishing your ESG reports?

According to Sara, the reaction to Outset’s inaugural ESG report was very positive, especially because the company “is among a fairly small group of companies, in our industry at least, that have issued a report so close on the heels of becoming a public company. The fact that we prioritized getting something out there so quickly, and that it was comprehensive and thoughtful as opposed to checking the boxes, is being viewed as a really solid first step.” Angie remarked that AtriCure’s investors have said the report was “a great step for us at this stage of our lifecycle.” Angie was also “incredibly surprised by the number of employees who read the report and rallied around it, and then provided feedback as well.”

As Illumina nears the publication of their third ESG report, Nathan said that “expectations have definitely grown for us. After our first report, we heard ‘good job’ and ‘great to set this baseline,’ but then we heard ‘ok, what’s coming next?’ For example, we started reporting in-line with the Global Reporting Initiative (GRI) framework for the first report, but we had a lot of interest in SASB and Task Force on Climate-Related Financial Disclosures (TCFD) disclosures, which informed our next report. Nathan also noticed that, for Illumina, “the conversation has shifted to getting better at how we measure our social impact at a larger scale and how we can ensure we are increasing access and driving innovation and affordability.

At Gilmartin Group, our dedicated ESG team has extensive working knowledge of industry-leading ESG evaluation criteria. Recognizing that the ESG landscape is evolving rapidly, we frequently release relevant news, updates, and guidance to assist companies who want to take the next step on their ESG journeys. Contact our team today for guidance surrounding your ESG journey.

Patrick Smith, Analyst

How to Navigate Clinical Development Setbacks

Understanding the challenges biotech companies face when developing drugs is vital to assessing risk factors that might hinder a company’s clinical trial program. First, the probability of success is low; approximately 1 in 1,000 potential drugs graduate to human clinical trials after the preclinical testing phase in the United States and almost 9 of every 10 new drugs fail in the human testing phase. Besides challenging failure rates, the time and costs it takes a drug to reach the marketplace is another hurdle. New drug approvals take an average of 12 years from preclinical testing to approval and cost upwards of 1 billion dollars. Finally, one of the most common challenges a company may face during a clinical trial is a clinical hold.

FDA clinical holds have become significantly more common, doubling the historical average. Since 2010, oncology trials have accounted for about 50% of clinical holds, but we have seen a steady increase in the volume of cell and gene therapy, gene editing, and neurology holds in recent years. Typically, clinical holds last an average of 145 days, with an 85% resolution rate in less than a year. The probability of having a clinical hold lifted successfully is about 50-60%.

What to do when you receive notice from the FDA?

Is it a full or partial hold?

A complete clinical hold is the delay or suspension of all clinical work requested under the IND. In contrast, a partial clinical hold is a delay or suspension of only part of the requested clinical work. Clarifying whether dosing can continue without interruption in already-enrolled patients may be critical to preventing disruptions in data collection. A hold could also mean that no new participants may be recruited to the study.

Are clinical holds only due to adverse safety events?

The FDA can issue a clinical hold for concerns regarding chemistry, manufacturing, and controls (CMC), or issues regarding the management and control of the clinical study. A company must learn as much as it can from the FDA’s letter to inform the company’s messaging and “next steps” strategies.

What should your investor relations plan be?

After understanding the purpose behind a clinical hold, a company must assemble its senior management, investor relations, and legal team. The company should evaluate all public guidance and disclosure obligations around the clinical program. Then, assess if clinical timelines will be affected and strategize what the investor relations message should be. Next, develop consistent talking points across the company and a Q&A document applicable to investor calls and scientific meetings. Another issue to consider is what information the company should disclose if it has a quarterly or annual SEC filing or is slated to speak at an investor or medical conference. Lastly, reset guidance if necessary.

Who should be notified?

Sponsors will need a communications strategy to communicate with sites, partners, review boards, and other interested parties who need a clinical hold notification. Additionally, timely disclosure of clinical holds to investors may be required for public companies, depending on the circumstances. If a public disclosure is necessary, drafting the disclosure can be challenging due to the uncertainty and potential development delays that a clinical hold can cause.

Additional Considerations 

Before a public disclosure, a clinical hold may be considered material non-public information under federal securities laws. Therefore, companies should consider closing their trading windows or restricting individuals from trading their stock. In addition, keep in mind that once a clinical hold is in place, most investors will pull offerings or pending transactions. Therefore, the company should concentrate its efforts on the response to the FDA, making sure to address all outstanding concerns completely. After submitting the company’s response, the FDA has 30 days to respond with comments or questions, which kicks off another 30-day cycle. So being clear and complete the first time around is advantageous to getting the company’s clinical hold resolved quickly.

The Gilmartin team has years of experience advising public and private biotechs through challenging events. Contact our team for more information on building a successful and strategic investor relations program.

Silinda Neou, Associate Vice President

 

 

Recap of Webinar: Debt Financing for Emerging Biotechs

Recently, the Gilmartin biotech team hosted a webinar with Silicon Valley Bank (SVB), discussing debt financing for emerging biotech companies. 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 SVB’s managing directors Kate Walsh and Shawn Perry about the current world of debt financing and if biotechs need to partake. Both Walsh and Perry are part of the Life Sciences and Healthcare department at SVB. Walsh holds a focus in biopharma and tools and diagnostics, and Perry is the head of credit solutions. We recommend watching the full webinar to capture all of the insights Walsh and Perry shared, but here are a few central points we wanted to highlight.

At what stage would SVB lend debt to an early-stage biotech company?

SVB works with companies at all stages of development. Perry explained that when focusing specifically on early-stage companies, SVB will entertain debt facilities once a potential client completes its Series A round. At this point, the company can start to think about how they can benefit the potential client. SVB analyzes how they can complement the client’s overall capital strategy.

What are “good use” cases for debt at a biotech?

More often than not, SVB works with debt facilities for a biotech company that has recently closed a Series A, B, or C round. Such companies seek debt financing to provide additional runway to their pipeline when they encounter inevitable delays in clinical trials. Perry noted, “It can be nice to have a debt facility that can give you 3-6 months of additional runway.” In addition, SVB helps companies fund any capital expenditures, including funds for manufacturing and singular or multiple asset acquisitions.

Does a reputational angle accompany debt financing–do only “bad” biotechs raise money for debt? 

“No,” said Walsh. She would argue that the strongest biotech companies are using debt capital to lower their blended cost of capital. She then took the opportunity to emphasize that debt should be complementary to a company’s equity strategy. It should never be competing with it, and it is prudent for a biotech to take on the right amount of leverage to prepare its business properly. Walsh and Perry speculated that any negativity that accompanies debt financing would be a product of misuse. Walsh continued, “Over-leveraging can impede you from raising equity rounds. Many companies are board-specific when taking on debt at the early stages.” She noted that many venture capitalists are enthusiastic about taking on debt and use it at any given opportunity, while others use it selectively.

At the end of the day, it’s a conversation each biotech must have with its board to understand their views and how they plan to implement debt. Perry dove deeper into this explanation, stating, “The negative instances occur when companies take up too much debt.” He specified that SVB is challenged to determine how they might best benefit the biotech company and avoid leveraging too quickly when this occurs.

What are the prerequisites for lending?

With prerequisites, SVB’s goal is to complement a biotech’s equity round by positioning themselves to “generally come in alongside an equity financing or shortly thereafter,” stated Perry. He explained that, often, biotech companies do not seek debt financing until they actively need revenue support. This, however, would be the most challenging time for SVB to step in. Walsh and Perry urged listeners to think about “taking on debt when you don’t think you need it.” Debt should be viewed as an “insurance policy” to give a company additional time before running into more significant financial deficits. Perry continued, “We are always looking at the syndicates of these companies as well. There are phenomenal companies in the space that are bootstrapped by family offices, but that said, those are generally not the types of syndicates who borrow from SVB.”

Generally, SVB has a longer track record with venture capitalists and crossover or investor firms. With its borrowers, SVB always aims to dive deep into the company’s financial demands, identifying its IP and defense level. If the IP appears weak, SVB will typically opt to take a different angle and look at the biotech’s liquidity position, its syndicate or competitive landscape. Perry stated that SVB must examine these aspects to contemplate a debt facility.

Are loans typically paid back out of future equity financing? Is this mandated?

SVB does not explicitly mandate companies to pay back loans. Typically, they are repaid through future financings. An exception to this would be an acquisition. Here, as money is required, it is typical for a biotech to pay off the loan at the time of the acquisition. However, Perry noted he has biotech clients in which SVB holds an ongoing relationship where they feel comfortable letting the acquirer assume the debt, but that is a rarity. With future equity financing, that’s a point where SVB will take a fresh look at a company’s debt facility and look into providing incremental debt on top of their existing loans. This will ensure that a company uses equity proceeds to further its business, not repay debt.

Throughout the webinar, SVB established the importance of each biotech company understanding its own financial goals and restraints, establishing clear communication with its board of directors, and acting proactively to seek out debt before running into financial hardship. SVB strives to offer appropriate amounts of debt to suit each company’s individual needs. Based on the discussion, it is clear that SVB wants to see its clients succeed. As stated above, “The strongest biotech companies are using debt capital to lower their blended cost of capital.” Debt can be immensely beneficial when used at the right time, in the right way.

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

Ins and Outs of “Down Rounds”

What is a “down round” and why would a company settle for these financing terms?

To fully comprehend the circumstances that might lead to a down round, one first needs to grasp how private companies grow. Typically, they will raise capital through equity financing events (known as rounds), in which shares of the company are sold at a negotiated price. The cash infusion from investors helps support growth. If the business matures accordingly, every time the company needs to raise money, it should inherently be worth more, and therefore be accompanied by a higher valuation.

A down round refers to the process in which a company sells shares at a price that is lower than an earlier financing round. In other words, when the pre-money valuation of a given round is less than the post-money valuation of a previous round. A down round implies that the lead investor, or the entity negotiating the term sheet, does not consider the company as valuable as it was in the past.

For Example: 

In January 2020 Acme Inc. raised $2M at a $5M pre-money valuation, making the post money valuation $7M. (The initial value of the company is $5M, but after receiving $2M in cash from investors, it’s now worth $7M).

Then in January 2022, Acme Inc. needed more cash to fund the business’ growth, so it returned  to investors to raise another $1M. However, the $2M Acme raised previously didn’t create more than $2M of inherent value, so investors tried to negotiate a $6M pre-money valuation.

The 2020 $7M post-money vs. the 2022 $6M pre-money gives this round the distinctive “down round” label. The term sheet dictates that the company is not as valuable as it once was.

While there are many reasons why the dreaded “down round” might become a reality for burgeoning young companies, sometimes they can be seemingly impossible to avoid. It could be the market conditions, the valuation in a previous round was too high, or that the company has not hit key milestones since its last fundraise. In any event, a down round may signal that growth is slowing, which can seriously impact the company’s long-term viability.

Generally, the company and incumbent investors want to avoid a down round and view it as a last resort. It can trigger anti-dilution provisions and voting rights among preferred shareholders and as stated above, may imply that the business is not doing well.

So, while there are some instances in which a down round becomes inevitable, there are a few ways to avoid reaching this decision at the negotiation table.

  1. Tighten the Belt: If burn rate is the primary driver for raising capital, as opposed to strategic growth, lowering operating costs can help postpone the need for outside money. While it’s not necessarily a long-term solution, it can help stave off the need for an immediate cash infusion until the company is in a better negotiating position.
  2. Consider a “Bridge” Note: Early-stage investors are no stranger to a bridge note, or in other words, short term debt financing. Typically, this will come in the form of a “convertible note”, which will ultimately convert into discounted shares during the next equity raise. Of course, there are things to consider with the debt terms, like valuation cap, but it allows a company to kick the can down the road. Just make sure that this isn’t a “bridge to nowhere” and that the company remains on the path to success.
  3. Keep Valuations in Line: One common reason for a down-round is an already overvalued company. While founders and CEOs want the highest valuation possible during any given fundraise, if an early round is significantly overpriced, it will be challenging to come back later seeking an even higher valuation. Make sure valuations are in line with the market and based on comparable revenue multiples or other metrics.
  4. Observe the Cardinal Rule: a company should start fundraising before it even needs capital in the first place. Nothing weakens a negotiating position like desperation. With this in mind, calculate the burn rate and work backwards when determining the timing of a fundraise. It is always better to be too early than to come to the brink of collapse.

For more information about how we strategically partner with our clients, contact our team today.

Louisa Smith, Associate Vice President

Gilmartin ESG Newsletter | February 2022

Welcome to the latest edition of Gilmartin Group’s ESG newsletter and our first update for 2022. 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

Hologic started the new year with a number of ESG developments. ESG was a key focus of Hologic’s presentation at the J.P. Morgan Healthcare Conference, where CEO Steve MacMillan described how the company’s growth has enabled them to fund initiatives like the Hologic Global Women’s Health Index. MacMillan was also interviewed for William Blair’s inaugural “ESG Conversations” series, where WB’s Medical Technology and Diagnostics Equity Research team asked how focusing on ESG improves Hologic’s business. MacMillan said that investing in ESG initiatives like the Women’s Health Index helps “broaden access to healthcare and reach more patients, which in turn drives more revenue and profit, kicking off another cycle of investment.” MacMillan added that ESG efforts help the company attract and retain talent amid a highly competitive labor market. Hologic recently published its 2021 Sustainability Report, titled “A Global Force for Good,” detailing ESG achievements in 2021. Since the launch of Hologic’s first sustainability report in 2020, we have noted steady improvements in the company’s ESG scores from several ratings firms, and we continue to closely monitor Hologic’s activity in the ESG space.

Illumina is another healthcare company that has increasingly gained attention for ESG leadership in recent years. In November 2021, Illumina hosted its first ESG investor event, utilizing a presentation and fireside chat format to share more about the company’s ESG program and how its ESG strategy is linked to long-term value creation. ESG investor events have emerged as a leading practice for companies wishing to periodically engage with investors, analysts, and other interested parties on ESG topics.

THE HEALTHCARE VIEW

In the first report published by the Federated Hermes Innovation Lab, the investment manager examined the role that the biotechnology industry plays in accelerating the transition to a more just and self-sufficient society. The report acknowledged the potential for biotechnology to address many of humanity’s greatest challenges, as aligned to the United Nations’ Sustainable Development Goals (SDGs). Federated Hermes emphasized, “It is small- and medium-sized biotechnology companies that are at the forefront of sustainable health and wealth creation,” particularly because these companies develop a wide array of innovative products ranging from gene therapies to sustainable alternatives to petrochemicals. Noting that the biotech industry is criticized for disproportionately funding treatments that affect Western populations, Federated Hermes believes that health equity and access are key ESG focus areas for biotech companies to address, along with workforce diversity and product lifecycle management.

IN THE WEEDS

As we wrote in our last newsletter, the International Sustainability Standards Board (ISSB) officially launched in November. Since then, Emmanuel Faber, the former CEO of Danone and outspoken corporate sustainability advocate, was appointed as the organization’s first Chair. In an interview with The Economist, Faber called for “an end to the alphabet soup” of different ESG standards and frameworks and said that ISSB’s standards “would be used as a baseline to meet investors’ needs.” Moreover, Faber said that standardized sustainability disclosures should be viewed as an opportunity for companies to differentiate themselves and that investing in ESG expertise gives companies “a chance to get an even more efficient cost of capital.”

ISSB’s first ESG reporting standards, expected to be published by the end of 2022, will likely be consistent with the widely used standards from the Sustainability Accounting Standards Board (SASB).

A NOTE ON ESG INVESTING

State Street Global Advisors (SSGA) CEO Cyrus Taraporevala, who plans to retire later this year, recently published his annual letter outlining the firm’s proxy voting agenda for 2022. SSGA will focus stewardship activities on climate change and diversity. Noting that one-third of S&P 500 companies do not make climate-related disclosures aligned with the Task Force on Climate-Related Financial Disclosures (TCFD), Taraporevala said SSGA “will start taking voting action against directors across applicable indices should companies not meet these disclosure expectations.” For the 2022 proxy season, SSGA also expects all portfolio companies to have at least one female director on their boards, and in 2023, they expect boards to be comprised of at least 30% women for companies in major indices. SSGA pledged to vote against the Chair of a company’s Nominating Committee for failure to meet these diversity expectations.

ONE BIG THING

In January, BlackRock CEO Larry Fink published his highly-anticipated 2022 Annual Letter to CEOs. Defending BlackRock’s push to integrate sustainability into investment decisions, Fink said, “We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.”

Fink emphasized that divesting from carbon-intensive companies and sectors “will not get the world to net zero” and that businesses “cannot be the climate police.” Rather, Fink called for “governments to provide clear pathways and a consistent taxonomy for sustainability policy, regulation, and disclosure across markets” and proclaimed that the combined power of the public and private sectors is needed to achieve net zero.

Addressing the “Great Resignation” and high employee turnover, Fink pointed to BlackRock’s own research, which showed that “companies who forged strong bonds with their employees have seen lower levels of turnover and higher returns through the pandemic.” He warned, “Companies not adjusting to this new reality and responding to their workers do so at their own peril.”

SAVE THE DATE – MARCH 17

Gilmartin Group Webinar: Demystifying ESG Reporting for Healthcare Companies
We want to invite you to join our upcoming ESG webinar on March 17, where we will convene a panel of leaders from healthcare companies to discuss expectations, considerations, and best practices for ESG reporting. Details will follow in a separate email. Stay tuned!

QUESTIONS ON ESG?

Our dedicated ESG team has deep institutional knowledge and experience in ESG and healthcare, which enables 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 polices, practices, data, and disclosures, feel free to contact our team today.

MATT BERNER

Managing Director, Head of ESG

PATRICK SMITH

Analyst, ESG

3 Advancements in Oncology for 2022

As we enter 2022, a new year, it is common to find ourselves full of hopefulness for the future. As we leave last year behind, we may also find ourselves reflecting on the past. Since 1933, cancer has held the position of the second leading cause of death in the U.S. As predicted by the National Library of Medicine, specialists anticipate 1,918,030 cancer diagnoses to take place in 2022, with 609,360 expected to take the lives of those affected. Despite these tragic numbers, deaths related to cancer in both men and women decreased by 32% between 1991 and 2019. With upcoming medical milestones paving the path, it seems we live in a time when the risk of dying from cancer is rapidly declining.

In lieu of the new year, City of Hope analyzed a few oncology advancements we can expect to see flourish this year. Let’s dive into three anticipated trends for cancer treatment in 2022.

1. Genetic Testing as the “Future of Oncology”

Karyotype.png

Figure 1: Karyotype, Human Genome Source: Wikipedia.org

In 2003, scientists discovered how to create personalized therapy for cancer patients based on the individual’s genetic information—the human genome. This allows doctors to analyze a person’s tumor and design a patient-specific therapy route focused on targeting particular mutations. As genetic data continues to identify new mutations, “we’re seeing a much broader number of patients with mutations who don’t classically fit current models,” stated Dr. Stacy Gray of City of Hope’s new Director of Clinical Cancer Genomics. This discovery only emphasizes the importance of personalized patient care.

One of the incredible benefits of genetic testing is that doctors can analyze a patient’s DNA with or without a cancer diagnosis. This allows physicians to identify risk factors and provide patients with treatment protocols to prevent disease development. Dr. Gray also stated, “Right now there are hundreds of thousands of people at high risk for cancer who don’t know it. Tens of thousands who could benefit from targeted therapies, but won’t get them.” As asserted by the American Cancer Society, as cancer rates have dropped significantly for both men and women, “some of this drop appears to be related to an increase in the percentage of people with lung cancer who are living longer after diagnosis, partly because more people are being diagnosed at an early stage of the disease.” It is essential to discuss the significance of genetic testing because detecting cancer in its early stages can prevent potential pain, suffering and death worldwide.

Stacy Gray
Figure 2: Dr. Stacy Gray Source: City of Hope

2. Improved Diversity in Clinical Trials

Angela L. Talton

Figure 3: Angela L. Talton Source: City of Hope

City of Hope has recognized a diversity problem within its walls. The medical center noted a need for increased effort in ensuring people of different races, ethnicities, sexual orientations and ages gain representation in clinical research. Angela L. Talton, Senior Vice President and Chief of Diversity at City of Hope, stated that in 2022, “Our clinical and research scientists are conducting studies on health disparities within diverse communities and helping us find the best ways to address complex health issues, including diversity in clinical trials.” An individual’s background contributes to various environmental, physical and genetic factors that can allow diseases to differ between patients. City of Hope is looking at a long list of cancers, such as breast, prostate and colon cancer, as well as how they act amongst diverse populations.

As discussed by FierceBiotech, other entities are also striving to improve patient diversity in research. Novartis dedicated $5 million to historically Black universities and $13.7 million for medical trials to three research centers at Morehouse School of Medicine. The U.S. Food and Drug Association has also acknowledged the lack of diversity in the healthcare system. In the summer of 2021, the Agency “rejected Incyte’s PD-1 drug for anal cancer after the agency’s advisers cited lack of diversity as one reason for its vote of no confidence in the med” (Fierce Biotech). Similarly, Eli Lilly identified diversity issues explicitly related to its oncology trials. The company noted that it recognizes its clinical trials were previously composed of 11.5% Black patients while their studies within other disease spaces included 39%. The company is now expanding community partnerships to increase minority enrollment in its trials.

3. Targeted Immunotherapies

Oncologists can now identify genetic abnormalities within cancer patients and use specific immunotherapies to target each patient’s tumor. CAR T cell therapy is a process that allows specialists to manipulate “a patient’s immune cells to attack cancer, [and] is a true breakthrough in immunotherapy” (City of Hope). The therapy is FDA approved and is a featured program at City of Hope. The medical center is treating over 600 patients with around 50 ongoing/impending trials that will target cancers of the immune system and blood.

KEYTRUDA

Figure 4: KEYTRUDA Rx Source: MPR

Additionally, pembrolizumab (Keytruda), an immune checkpoint inhibitor drug that directly combats protein PD-L1, is greatly enhancing the immunotherapy industry. PD-L1 is an immune system blocking protein that can appear at a 90% concentration rate within cancer cells. This allow pembrolizumab to target it efficiently. This drug will be revolutionary in treating various cancers, including lung, endometrial, esophageal and kidney cancer.

2022 will be an exciting year for oncology, and this year holds great potential to continue to reduce cancer-related deaths. With significant steps taken to increase early detection through genetic testing, diversity within clinical trials and research, immunotherapies such as CAR T cell therapy and monumental drug discoveries, we can remain hopeful for the future of oncology.

At Gilmartin, our biotech focused team has helped a number of oncology companies translate their story to the investment community. Contact our team today to learn more about how we can help you and your company communicate its story amongst a crowded biotech environment!

Rachel Mahler, Analyst

Gilmartin ESG Newsletter | November 2021

Welcome to Gilmartin’s inaugural 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. If you want to learn more about ESG, contact the Gilmartin ESG team.

IN THE SPOTLIGHT

Medtronic released its latest annual ESG report in mid-October, highlighting ESG initiatives across four focus areas: access to healthcare, patient safety and product quality, diversity and inclusion, and environmental sustainability. Medtronic’s report contains references to disclosures made in line with leading ESG reporting frameworks such as the Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), the Task Force on Climate-Related Financial Disclosures (TCFD), and the World Economic Forum Stakeholder Capitalism Metrics.

Medtronic also held its inaugural ESG Investor Briefing, where company executives elaborated on their ESG priorities and performance targets, including:

  • Patient Safety and Product Quality: Achieving a 10% reduction in the aggregate complaint rate for a specific group of products by FY25
  • Innovation and Access: Deriving 20% of Medtronic revenue from products and therapies released in the prior 36 months by FY25 and serving 85 million patients annually by FY25
  • Diversity, Equity, and Inclusion: Ensuring 45% of global management positions are held by women and 30% of U.S. management positions are held by ethnically diverse talent by FY26
  • Product Stewardship: Reducing packaging waste by 25% for targeted high-volume products by FY25

On the investor call, Medtronic fielded multiple questions about product quality and safety. One analyst noted that ESG ratings providers, such as MSCI, rate companies in the medical device industry unfavorably due to product quality concerns. CEO Geoff Martha said it is important to interpret product quality data based on the size and the complexity of Medtronic’s products, noting that they prefer to normalize product quality data in terms of revenue and that the lifesaving nature of their products is tied to the severity of product recalls.

THE HEALTHCARE VIEW

In late October, The Lancet published their latest annual report on the impact of climate change on human health. The 2021 report, which was developed by a consortium of 43 academic institutions and UN agencies, dives into various ways in which climate change is not only threatening initiatives to improve global health but also disproportionately impacting the most underserved populations. “Through multiple simultaneous and interacting health risks,” the report said, “climate change is threatening to reverse years of progress in public health and sustainable development.”

In particular, the report highlighted how climate change exacerbates food and water insecurity. It also mentioned how climate change is undermining efforts to eradicate infectious diseases such as malaria or V cholerae by creating environmental conditions that make them more transmissible.

IN THE WEEDS

A major milestone toward the creation of unified, global sustainability reporting standards was reached the first week of November with the official formation of the International Sustainability Standards Board (ISSB). The ISSB, which is overseen by the International Financial Reporting Standards Foundation (IFRS), is tasked with developing “a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs.” The ISSB will integrate two other major sustainability standard setters: the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (which oversees the SASB standards).

In mid-October, the Department of Labor issued a proposal to fully reverse a Trump-era rule that restricted the ability of 401(k) funds to consider ESG factors in their investment decisions. The rule was widely criticized by investors when it was proposed in 2020, receiving thousands of comments—95% of which opposed the rule. Given the enthusiastic response to the newest proposal, expect a slew of ESG funds to be made available to 401(k) holders in the near future.

A NOTE ON ESG INVESTING

PwC recently published their 2021 Global ESG Investor Survey, probing the thoughts of 325 investors, most of whom identified as active, long-term asset managers. Investors showed strong support for integrating ESG factors in their investment processes, with 79% saying that “ESG risks are an important factor in investment decision-making” and 75% saying that “companies should address ESG issues, even if doing so reduces short-term profitability.” One of the main takeaways from the survey was the need for more extensive ESG reporting from companies. Nearly 75% of investors supported unified ESG reporting standards, but only one-third said that the current quality of ESG reporting was sufficient.

ONE BIG THING

COP26—the much-anticipated United Nations climate change conference—took place in Glasgow, Scotland from October 31st to November 13th . Gathering world leaders from nearly 200 countries, the summit marked a watershed moment for the global fight against climate change. It was the first time since the 2015 Paris Agreement that countries gathered to share national plans to reduce emissions, aiming to limit global warming to at least 2.0°C and ideally 1.5°C above preindustrial levels by 2100. The conference yielded a significant number multinational agreements, including a pledge to reduce the world’s methane emissions 30% and end deforestation by 2030.

Ahead of COP26, the World Health Organization issued a special report that proposed ten recommendations for governments and policymakers to address health and equity during climate change negotiations. The recommendations, which include restoring biodiversity and promoting sustainable food systems, aim to promote the “health co-benefits from climate actions,” noting that the public health benefits from these actions outweigh their costs. The WHO also hosted a conference on health and climate change at COP26 on November 6th.

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 polices, practices and data, feel free to contact our team today. We will be sure to enhance your ability to speak to investors with confidence!

MATT BERNER

Managing Director, Head of ESG

PATRICK SMITH

Analyst, ESG