The Rising Costs of National Healthcare

While there has been much focus across the U.S. recently on inflation throughout the economy, the healthcare industry has long captured the attention of the nation as costs have continued to rise steadily over the last few decades.

Healthcare is a uniquely positioned sector in the U.S. economy that impacts the personal lives and wellbeing of people across the country. The subject of ever-rising healthcare costs—and how to address them—understandably holds a prominent position in the concerns of politicians and everyday Americans. Ahead of the 2020 elections, a January 2020 poll by Morning Consult and the Bipartisan Policy Center found that 56% of the registered voters surveyed listed healthcare among the most important issues in their vote choice (followed by the economy and immigration at 44% and 33%, respectively). It is evident then why the rising costs of healthcare, and the potential solutions to address the underlying factors driving this, receive such consistent attention.

According to the Centers for Medicare & Medicaid Services’ report on National Health Expenditures, in 2019, U.S. healthcare spending increased 4.6% to $3.8 trillion, or $11,582 per person. The increase came on the back of similar growth (4.7%) from 2017 to 2018. Compared to 2018, U.S. healthcare spending in 2019 grew at a greater rate for hospital care (+6.2%), physician and clinical services (+4.6%), and retail purchases of prescription drugs (+5.7%), while there was a 3.8% decrease in expenditures for the net cost of health insurance. In all, the share of GDP related to healthcare spending reached 17.7% in 2019, compared to 17.6% in 2018.

While fundamental underlying factors remain the subject of constant debate, the disaggregation of healthcare spending by type of service or product is well understood, with hospital care representing the greatest portion of overall spend. In 2019, hospital care represented 31% of overall healthcare spending ($1.2 trillion), followed by physician and clinical services at 20% ($772.1 billion) and retail prescription drugs (10%) at $369.7 billion. The figure below illustrates the breakdown of overall spending by type of service or product:

Source of Healthcare Funds
On the other side of the equation, another key area of focus where stakeholders look to address healthcare costs is the source of funds—in 2019, private health insurance represented 31% of overall health spending, with Medicare at 21%, Medicaid at 16%, and out-of-pocket spending at 11%. CMS further notes that in 2019, the federal government (29%) and households (28%) accounted for the largest shares of spending, followed by private businesses (19%), state and local governments (16%), and other private revenues (7%).

As the COVID-19 pandemic began to spread across the U.S. in early 2020, among numerous prominent concerns was how the U.S. healthcare infrastructure would withstand this new threat, including dynamics around paying for the resulting necessary care. As the unemployment rate began to rise, policymakers and analysts questioned how this would impact the health insurance ecosystem: How drastically would this reduce employer-sponsored insurance? How will this increase state Medicaid enrollment? To what extent will the Affordable Care Act mitigate this impact as compared to prior economic downturns?

Questions and considerations such as these, among other factors, drove renewed interest in fortifying the U.S. healthcare landscape. Policymakers have continued to debate proposals to expand healthcare coverage through a combination of actions. Such proposals have included lowering the Medicare eligibility age, expanding Medicaid (either directly or indirectly) in states that have not yet opted to do so, expanding benefits associated with Medicare, expanding benefits associated with the Affordable Care Act and its related premium costs, and suggesting a host of drug price initiatives.

Higher Insurance Premiums
One of the avenues by which Americans most directly experience the rising costs of healthcare is insurance premiums. Per a recent report from Kaiser Family Foundation, annual family premiums for employer-sponsored health insurance rose 4% to average $22,221 this year. Further, workers this year are contributing an average of $5,969 toward the cost of family coverage (with employers paying the remainder). Approximately 155 million Americans receive employer-sponsored health insurance, and since 2011, average family premiums have increased 47%, more than the 31% growth in wages and 19% increase in inflation, the report adds. Meanwhile, private insurance is not the only area experiencing increased premium costs—CMS recently announced Medicare Part B premium rates for 2022, with the standard Part B premium increasing by $21.60 to reach $170.10.

Considering these dynamics and the ongoing COVID-19 pandemic—including administration of vaccines, testing, and treatments—it is understandable that the topic of healthcare costs permeates much of daily life. As we enter a midterm election year in 2022, it would be unsurprising that the topic of healthcare continues to dominate much of the national dialogue, and policymakers will likely persist in trying to take action in the near term to address healthcare costs for Americans.

At Gilmartin, our team has accumulated decades of experience that inform our historical perspective of the healthcare industry, and we continuously monitor the ever-evolving landscape for new developments and opportunities. Contact our team today to learn more about how we work with our clients to adapt to this dynamic environment.

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Alex Khan, Associate Vice President

 

 

 

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The Makings of a Successful Crossover Round in Biotech

The crossover round has become a rite of passage to any biotech company intending to tap the public markets, whether it be to fund specific clinical programs that will lead to long-term value creation in the public markets or serve as a quality or diligence check to more generalist investors or a higher step-up multiple on the IPO valuation. Ultimately, every biotech company is constantly chasing funding, and, for many, the crossover round is a necessity.

Why Do Crossovers Matter?
While an influx of capital is always a positive, from a company’s perspective, a crossover round in which public market investors participate not only sends a strong signal to the rest of the public market but can also de-risk the future IPO. It’s no secret that companies who build a successful crossover syndicate have more robust IPO order books and are more likely to trade well when they become public. In many ways, a crossover can serve as a backstop to the future IPO, especially when the “openness” of the IPO window is called into question.

From an investor’s perspective, the level of diligence one conducts during an IPO or follow-on roadshow pales in comparison to that of a crossover round. When public paper offerings take place, funds may only have an hour long one-on-one with the executive team before having to arrive at an investment decision. While participation in a crossover obviously limits liquidity in the short-term, the ability to conduct a deeper dive into the company’s technology or asset can prove to be invaluable in the long run. For investors that have confidence in a company, participation in the crossover round as well as the IPO can ensure a more preferred share count when the IPO shares are allocated.

Here are three important considerations for executive teams considering a crossover financing.

Measured Expectations
While it’s easy to plan a process around best case scenarios, the unfortunate reality is that companies often lose momentum in their fundraising process. A loss of momentum can occur for many reasons, such as clinical data being more murky than clear or the story not quite resonating with funds. While roadblocks are understandably frustrating for management teams, completing a successful crossover while simultaneously preparing for life as a public company is a daunting task. It’s completely normal to feel a sense of frustration, but by approaching setbacks pragmatically with the help of credible advisors, management teams can persevere and push towards the finish line. However, it is imperative that companies are opportunistic when positive catalysts occur, whether it be identifying a lead investor, a clinical program’s readout, or even a competitor’s validation of a less understood area.

Groundwork in Place
From a purely logistical standpoint, companies must have their affairs in order before beginning to socialize the idea of a crossover round with the Street. A few of the must-haves before formerly kicking off the process include:

  • A well-positioned investment opportunity that clearly articulates the thesis and highlights the credibility of management to execute on projected timelines and milestones.
  • A data room with all the preclinical and clinical data generated possible, corporate documents, audited financials and more.
  • A thought-out target list comprised of the most active groups that lead and follow, as well as funds that may be “lower profile” but are particularly active in a certain disease area or class of therapeutics.

A Trusted Advisor
For management teams that are actively preparing for life as a public company, the time required to just prepare, let alone actively manage a crossover process, can be daunting. There are many directions management teams can go when looking for an advisor with knowledge of the current landscape and best practices when considering a crossover financing. Management teams can always lean on IPO syndicate members – after all, the assistance that they provide in a crossover financing can only make execution of the IPO easier.

Having a well-defined process in place for the crossover round that clearly tracks investor interaction and level of engagement throughout the fundraising can also add tremendous value to both the crossover and the IPO process. An investor relations team is uniquely positioned in the ecosystem to add value to executive teams in the fundraising activities. In the normal course of business, investor relations firms provide their extensive relationships with Wall Street, corporate strategy and positioning, meeting logistics or fund intel, and the ability to provide sound judgement during an ever-evolving corporate lifecycle. Perhaps no service is more valuable than actively managing the process of a crossover round in a financial advisor role. These services can prove invaluable as a company navigates the critical time that is crossover financing.

The Gilmartin team is well-versed in optimizing crossover round processes. For more information on crossover financings or what we are seeing in the markets, contact us.

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Nick Colangelo, Associate

 

 

 

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A New Legacy: The Shifting Investment Landscape of Family Offices

Family offices around the world have become increasingly active and sophisticated in their investment into innovations over the years. The growth of family offices and their broadened investment mandates have led to an expanding influence in venture capital and private equity.

While the spotlight on investment capital has often focused on more traditional sources (i.e., investment banks, hedge funds and private equity firms), family offices have been quietly building their status in the background. It is evident today that the once traditional role of a family office has continued to evolve within the investment community, both directly and indirectly. Additionally, as various investment themes such as impact and ESG investing have surfaced, family offices have taken a keen interest in these investments.

The Growth of Family Offices
In our previous dive into family offices, we wrote about how family offices are one of the fastest-growing investment vehicles in the world today. The increasing concentration of wealth held by very wealthy families and rising globalization has fueled their growth.

Estimates of the number of family offices around the world now range from 7,000 to 10,000. Over half of these family offices were founded in the last 15 years. One organization that closely monitors wealth trends among the world’s wealthiest families is Campden Wealth, a family office membership association. Their research arm, Campden Research, estimated in 2019 that there are now 7,300 family offices, a 38 percent increase over the previous two years. These offices are also estimated to manage more than $6 trillion, compared to the $3.96 trillion in global hedge funds1. While the relatively unpublicized growth of family offices may surprise you, they prefer it this way.

A Changing Investment Direction
Family offices have historically focused on liquid bond and equity markets, passive alternative investments, such as allocations to hedge fund and private equity managers, and direct property investments. However, these traditional asset allocation decisions have broadened as private markets have developed.

Family offices today are increasingly favoring direct investments. They are adapting their investment approach to better reflect and align with the family’s values. The historical bar bell approach, which allowed wealth creation to focus on maximizing returns and channeled social conscience into philanthropy, is changing. The rising generation of wealth holders in these families are seeking more alignment across the board. They are seeking to make a difference through investments and becoming more influential within their families. This significant shift in interest has led to greater openness, which in return has created greater alignment between this next generation of investors and the existing generation of entrepreneurs.

Trends in Family Office Venture Capital Investments
Family offices around the world have been very optimistic about making investments in venture capital. The pandemic has accelerated their interest and according to financial experts, they are here to stay for the long term.

Campden Wealth in partnership with SVB Capital, the global venture capital investment arm of SVB Financial Group, recently released reports that evaluate the global trends of family offices investing in venture capital. Here are some of the key takeaways2:

  • Family offices progress through a similar path in their venture capital investing journey 
    • Although every family office is unique, their venture investing journeys are similar. Family offices typically make their foray into the sector by investing in venture funds. Then, as they gain experience, they progress into making direct investments into early and growth-stage startups, investing an average of $4.5 million per deal.
    • In 2020, the average global family office held 46% of its venture portfolio in funds and 54% in direct investments. The split remains roughly the same in 2021.

  • Family office participation in venture continues to increase
    • There has been an increased interest in direct investment opportunities by family offices over the past decade. Research shows that over three-quarters of family offices are engaged in direct deals.
    • Startups are increasingly open to direct investments from family offices, alongside venture funds. Family offices, in turn, are investing strategic capital, adding value based on their operating businesses and network connections. The average family office venture portfolio comprises 17 direct investments and 10 fund investments, and within the next 24 months, family offices expect to make 18 new investments.

  • Family office investors are preferring early-stage venture
    • Though early-stage venture investments are risky, they tend to deliver stronger returns for family office investors. Research shows that most single-family offices have made investments in earlier stage seeds.
    • Family offices are a good option to deliver smart money and patient capital. Most family offices also provide strategic guidance, participate on the board and facilitate connections to other investors.
  • Impact and ESG investment opportunities 
    • Research shows that 47% of the family offices are involved in impact and ESG investments.
    • The most significant sectors or industries of interest globally are Healthcare & Wellness (65%), Agriculture & Food (63%) and Energy & Sustainability (63%). In North America, Healthcare & Wellness is the top area of interest (74%).
    • In 2021, 18% of family offices have venture investments in Life Sciences & Healthcare (i.e., biopharma, drug discovery, medical devices, diagnostics, etc.), which is the highest single sector exposure.

Trends in Family Office Private Equity Investments
Historically low interest rates have forced family offices to revise their investment strategies. They are attracted by the potential returns that can be generated from private equity. For many family offices, investing in private equity is nothing new. And similarly to venture capital, there has been a significant increase in interest.

UBS also recently released their annual Global Family Office Report that evaluates the global trends of family offices investing in private equity. Here are some of the key takeaways3:

  • Private equity preferred
    • Private equity offers opportunities not accessible in public markets, according to half (52%) of family offices.
    • Family offices have become more involved as private equity has become a greater source of funding for the real economy. Research shows that the majority (83%) of family offices invest in private equity.
    • There has been a sharp drop-off in the use of funds of funds, with co-investments and direct investments rising significantly. Research shows that 37% of family offices invested in funds or funds of funds in 2020, falling to 23% in 2021.
    • In 2021, almost half of family offices (47%) invest in both funds and direct investments, up from 31% in 2020.
    • In 2021, just under a third (30%) of family offices only invest in direct private equity, a similar level to 2020.
  • Adapting to the investment environment 
    • Continued low interest rates have shaken family offices’ long-standing faith in fixed income. Looking forward five years, many plan to dial down their strategic asset allocation to low-yielding bonds and cash. Almost half (42%) of family offices intend to raise equity allocations in private equity direct investments.
  • Seeking innovation and sustainability 
    • At a time when many companies are growing fast and disrupting the incumbents, there’s a quest to invest in the innovators. More than three quarters (77%) of family offices make expansion/growth equity investments, with that proportion being even higher in the U.S. (92%).
    • Sustainable investments are entrenched in portfolios. More than half (56%) of families invest sustainably. As the most dynamic asset owners, family offices appear to be leading the evolution to ESG integration, planning to increase allocations to about a quarter (24%) of the portfolios.
    • The number of impact investments is growing. On average, family offices state they have impact projects across approximately six areas in 2021, versus four in 2020. While Education remains the most popular area, Climate Change and Healthcare are closely in line.

Conclusion
It is hard to deny the growing prevalence and impact of family offices within the investment community. Their once steadfast approach to investing has continued to expand and adapt with changing family and market dynamics. Family offices today provide an opportunity for many young and emerging companies to develop and grow. For more information about family offices, contact our team today.

  1. Beech, J. (2019, July 18). Global Family Office growth soars, manages $5.9 trillion. Campden FB. Retrieved from www.campdenfb.com/article/global-family-office-growth-soars-manages-59-trillion.
    Williamson, C. (2021, September 20). Hedge fund AUM increases 14.2% on disruptions. Pensions & Investments. Retrieved from www.pionline.com/special-report-hedge-funds/hedge-fund-aum-increases-142-disruptions.
  2. O’Brien, B., Sachdeva, S., & Samuelson, D. (n.d.). (publication). Family Offices Investing In Venture Capital 2021-2022. Silicon Valley Bank . Retrieved from www.svb.com/trends-insights/reports/family-office-reports/family-office-report-2021.
    O’Brien, B., Gooch, R., & Ally, M. (n.d.). (rep.). Family Office Investing in Venture Capital 2020. Silicon Valley Bank. Retrieved from www.svb.com/trends-insights/reports/family-office-reports/family-office-report-2020.
  3. UBS . (n.d.). (rep.). Global Family Office Report 2021. Retrieved from www.ubs.com/global/en/global-family-office/reports/gfo-r-21-4-client.html.

Stephen Yeung, Associate 

The SASB Standards: An Overview for the Healthcare Sector

With the rise of ESG integration across capital markets, investors are looking beyond traditional financial statements to understand how sustainability issues impact enterprise value. While companies are expected to disclose more ESG-related information than ever before, disclosures currently lack the standardization of financial statements. In the U.S., the SEC requires companies to report financial information in line with Generally Accepted Accounting Principles (GAAP), which allows investors to use transparent and comparable financial data in their investment processes. However, most ESG data is voluntarily disclosed at this point and is not required to conform to a certain standard. Investors have been particularly vocal about the lack of uniformity for ESG data, as it inhibits their ability to compare companies and use sustainability information in their investment models.

The Sustainability Accounting Standards Board (SASB) was founded to address this gap, developing a set of industry-specific standards to help companies disclose ESG information tailored for investors. The SASB standards were designed so that companies can report the minimum set of ESG disclosures that are likely to constitute financially material information for their respective industries. They were also designed to enhance the comparability of ESG information across companies, empowering both investors and companies to make decisions and set strategies based on ESG performance. The SASB standards are maintained by the Value Reporting Foundation, which is working closely with other standard setters around the world to improve corporate ESG reporting.

As of September 2021, more than half of companies in the S&P 1200 and 65% of companies in the S&P 500 used the SASB standards in their external communications to investors. SASB has emerged as the preferred framework of some of the largest institutional investors, including BlackRock, Vanguard, and State Street. In particular, State Street has deeply integrated the SASB standards into its internal ESG rating system, R-Factor™, which provides ESG scores for thousands of companies. State Street specifically notes that publishing metrics aligned with the SASB standards will help improve a company’s R-Factor™ score over time, especially as other third-party ESG data providers and rating firms integrate SASB standards.

SASB has developed specific standards for 77 industries, including six within the healthcare sector:

  • Biotechnology & Pharmaceuticals
  • Drug Retailers
  • Health Care Delivery
  • Health Care Distributors
  • Managed Care
  • Medical Equipment & Supplies

SASB has identified 26 broad, sustainability-related business issues to guide companies’ ESG disclosures. However, SASB does not consider every issue to be financially material across all sectors. For example, within the healthcare sector, the issue of “GHG Emissions” is considered to be material only for companies in the Health Care Distributors industry, while “Supply Chain Management” is only material for companies in the Biotechnology & Pharmaceuticals and Medical Equipment & Supplies industries.

Considerations for Healthcare Companies

SASB uses the concept of financial materiality to focus disclosures on industry-specific issues, recognizing that increased disclosure can be burdensome for companies. For the healthcare sector, some SASB disclosure topics relate to information companies already disclose in accordance with regulatory requirements or industry best practices. SASB standards simply consolidate this information into a consistent format so investors and other stakeholders can make relevant comparisons among companies within the same industry. For example, data surrounding the total number of recalls issued is a disclosure topic for the Biotechnology & Pharmaceuticals, Drug Retailers, and Medical Equipment & Supplies industries. These disclosures should be relatively easy for companies to formulate because this information is readily available to the public through FDA databases.

While investors have led the call for increased ESG transparency so far, regulations regarding ESG disclosure are on the horizon in the U.S. The SEC launched a Climate and ESG Task Force in March 2021, and in July 2021, SEC Chairman Gary Gensler said that he directed his staff to “develop a mandatory climate risk disclosure rule proposal for the Commission’s consideration by the end of the year.” To proactively address both investor and regulatory expectations, we recommend companies consider publishing information according to SASB standards for their respective industry.

Since SASB reporting is currently voluntary, we have found that disclosures related to specific topics can vary considerably between companies within the same industry. SASB states that companies can publish their disclosures through a variety of reporting channels, including annual reports, sustainability reports, integrated reports, regulatory filings, corporate websites, and standalone SASB indices. At Gilmartin Group, we recommend that companies publish SASB indices to make this information easily accessible to investors and other stakeholders. A SASB index can be published as a standalone report, but it is best practice to include it as an appendix to a company’s full sustainability report.

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 plan to release relevant news, updates, and guidance more frequently to assist companies who want to take the next step of their ESG journeys. Contact our team today for guidance surrounding your ESG journey.

Patrick Smith, Analyst, ESG

How the $3.5T Federal Spending Package May Impact the Healthcare Industry

After almost two years of near constant twists and turns through the COVID-era, the fiscal roller coaster ride isn’t over yet. As the House gears up to jockey over final details of the $1T spending bill passed by the Senate in early August, eyes are already turning towards the $3.5T package that is expected to cover the vast majority of the Biden Administration’s ambitious “cradle to grave” social spending overhaul.

While the final details of the plan (as well as its prospects for becoming law via the budget reconciliation process) remain opaque, Democrat led House committees have recently begun drafting and releasing specifics based on the blueprint that was greenlit a few weeks ago. From what we know, it’s clear that the healthcare industry will be heavily impacted should the bill make it to President Biden’s desk.

Specifically, we know that a few key areas are likely to be covered: Medicare expansion, Affordable Care Act (ACA) Subsidies and the so called “Medicaid coverage gap”, and a push to reduce pharmaceutical prices and enhance competition.

Medicare
Anticipated changes to Medicare primarily fall into two buckets: the expansion of coverage and the expansion of eligibility.

Relative to coverage, the new package is expected to expand coverage to include dental, vision, and hearing benefits for beneficiaries – aimed specifically at the approximately 60% of those who are not currently enrolled in Part C Advantage Plans. According to details released by the House Ways and Means Committee in early September, the current draft policy language would enable coverage under Medicare for dental care beginning in 2028. To bridge the gap, more progressive Democrats would likely seek vouchers to help offset dental costs in the meantime.

While other details remain to be determined, bills advanced previously in the House (which may provide insight into current thinking) included coverage for dentures, preventive and emergency dental care, routine eye exams, eyeglasses and contact lenses, and hearing aids and exams. A bill that cleared the House in 2019, but was not taken up by the Senate, called for beneficiaries to pay a standard 20% for some dental coverage with certain procedures costing more.

In addition to coverage expansion, Democrats are also seemingly eager to deliver on a marquee campaign promise – lowering the Medicare age of eligibility from 65 to 60. According to some estimates, this would cover nearly 25 million more Americans under Medicare. While this would have a profound impact on coverage rates, it could also put pressure on providers and health systems who rely on relative premiums paid by private insurers.

Affordable Care Act Subsidies & The Medicaid “Coverage Gap”
Another focus area for legislators is to extend the recently expanded ACA premium subsidies beyond the 2022 coverage year. As a reminder, the expanded subsidies were extended through 2022 as part of the American Rescue Plan which was signed into law by President Biden in March 2021. Through 2022, those seeking coverage via the ACA marketplace will not pay more than 8.5% of their household income for the benchmark plan (with no cap on income eligibility) with families making under 150% of the poverty level paying as little as $0.

Furthermore, legislators are intent on closing the Medicaid “coverage gap”. Specifically, they hope to cover those who do not qualify for the income-based subsidies due to their Medicaid eligibility, but who are also not covered by Medicaid due to lack of action to expand coverage by several states following a Supreme Court decision that made that element of the ACA effectively non-binding.

Both of these moves could materially increase the number of covered lives in the United States, which would have a cascading impact across the healthcare industry.

Drug Prices & Competition
Another element of the package anticipated by many is a comprehensive strategy with mechanisms to reduce pharmaceutical prices.

First, legislators are expected to empower the government to negotiate the price of certain prescription drugs including insulin, potentially by indexing prices to their lower costs in other countries and prohibiting markup above a certain threshold relative to those prices.

In early September, the Department of Health and Human Services released a plan that went further, calling for negotiated rates to apply beyond Medicare and for reimbursed rates to be based on the clinical value they provide to patients. The plan also calls for increased federal funding for research into new treatments, in part by potentially creating a new agency within the National Institutes of Health to drive innovation in medicine.

Notably, PhRMA, the trade group for drug manufacturers, commented that the plan could hamper the sector’s ability to develop new treatments, largely due to a shift in the risk/reward paradigm. According to an analysis by the non-partisan Congressional Budget Office of a 2019 bill with similar components, such policies could lead to eight to fifteen fewer drugs coming to market over the following decade should the government negotiate prices.

Other elements of the plan, likely to be used as a blueprint for Democrats drafting policy language, called for a prohibition of pharmaceutical companies from paying generic competitors to keep them from marketing their versions of brand-name drugs, the reduction of barriers that impede the approval of generics and biosimilars, and the capping of out-of-pocket costs for beneficiaries of Medicare’s prescription-drug benefit program at $2,000 a year.

Finally, Democrats seem intent on a full repeal of a Trump-era rule that would remove safe harbor protection for Medicare Part D drugs which could in turn raise prices. A delay in the enactment of that rule was included in the $1T bipartisan infrastructure bill passed in the Senate last month.

Conclusion
Taken wholly, there is little doubt that change is on the way. While the fate of the $3.5T package remains uncertain, many elements of the Democrats strategy are backed across the aisle and are popular with voters – particularly efforts to reduce drug prices and policies that expand coverage. While timing may be unclear, it is hard to imagine that at least some elements of the plan won’t be enacted soon, $3.5T deal or not.

Brian Johnston, Vice President

Dual Listings: Considerations and Processes to Ensure Success

It’s approaching dawn in New York. We’re keeping a watchful eye on trading, as our market in the East has opened, trying to get a sense for how the US market will react when it too opens for trading. Earlier, we had ushered in a press release, with the timing of issuance earmarked to serve the needs of two exchanges. Within easy reach is our prepared Q&A, as we anticipate investor inquiries to come in, first from the market now in active trading and then from the US.

IPO x 2
As companies weigh the merits of a dual listing, we note that the main rationale for doing an IPO not once, but two times, rests primarily on access. Access not only to two capital markets—for liquidity, sophisticated investors, and public market funds, but also to target addressable markets—essentially, commercial reach of products and services to propel growth.

In evaluating access, we note successes made in selecting exchanges where the Company has an established or is establishing a commercial footprint, providing context for the opportunity and laying practical groundwork for the public markets. Therefore, the benefit to the Company is in the support gained from investors that have local/regional understanding of the commercial opportunity and their ability to provide liquidity in the exchange, shoring up management’s ability to raise capital to grow the business.

As the Company expands its commercial operations beyond local/regional markets to establish a more global footprint, again we note successes made in selecting an exchange where sophistical investors participate. These investors not only have resources to evaluate investment opportunities that cross the pond, but they also have more substantial assets under management with varying investment strategies that can be earmarked to align with the Company’s goals. Therefore, the Company benefits by having access to a larger pool of capital to raise the funds needed to establish a more global presence.

Dual listing is a strategic decision that, once made, requires some investments for smooth execution.

What does this mean, exactly? On a day-to-day basis, it means having resources to cover the requirements of two markets, with trading around the clock. In an IPO, this involves the assembly of banking, legal, and accounting teams that provide expert advice on matters that affect two distinct exchanges. It also involves investor relations support with capabilities and relationships to cover both regions.

The overriding goal for these investments is to drive multiples in returns. The expectation is for two successful capital raises generating resources to advance business plans.

Coordination 1×1
For seamless execution, close coordination between regions is a necessity, followed closely by flexibility. For example, regulatory requirements between regions may vary, resulting in some customization. While one market may require additional public disclosures, the other may not. Regardless, relevant information is provided, which maintains transparency and reinforces good governance.

While seeming repetitive, close coordination between regional teams helps ensure that redundancy is minimized. Instead, there is a focus on shared know-how that can be leveraged across two exchanges.

Company Coverage 1-4-All
While management teams have the benefit of engaging consultants and expert advice across geographic regions, those experts all share the same management team. And a near 24-hour coverage for anyone in the managerial ranks is not sustainable.

We have found success with the strategic, regional deployment of the company’s management team. C-level personnel are selectively posted across regions, with support from local teams.  For instance, the CEO is based in the US, while the CFO is stationed in the East. We have also seen CEOs who have established operations out of two regions and divide their time as they travel. There are also creative scheduling techniques employed, with morning ET maximized for close coordination across time zones.

If your company has decided to dual list an IPO, you can ensure smooth day-to-day activities with regional expert assistance, close coordination amongst all parties, and a management team geographically dispersed and supported to meet the needs of two markets. Contact our team today for guidance in your dual listing.

Vivian Cervantes, Managing Director

 

 

A New Era of ESG – Environmental, Social, and Governance

2020 was a transformative year in recent history, and it also marked a pivotal year for ESG. Between the COVID-19 pandemic that upended the world, the swell of activism over social injustice, rising populism and political polarization, and the increasing occurrence of natural disasters linked to climate change, the events of 2020 warranted a major reckoning for “business as usual” in just about every sense of the phrase. Emphasis on ESG has been steadily growing over the past several years, and with all that occurred last year, the stage has been set for ESG to enter a new era characterized by heightened scrutiny and expectations surrounding corporate behavior and transparency.

The ESG landscape is evolving rapidly, and a reactive approach to ESG—which may have worked in prior decades—no longer appears viable for investors or corporations. Succeeding in this new era of ESG requires getting ahead of potential legislation and rulemaking. This involves closely examining the linkages between ESG issues and corporate strategy and risk, and taking steps to help preserve and create long-term value for all stakeholders. A number of ESG concepts are currently being examined in depth by regulators in the U.S. and abroad, and we want to shed some light on a few recent developments with potential lasting implications for public companies.

Securities and Exchange Commission (“SEC”) Task Force on Climate and ESG
On March 4, 2021, the SEC announced the creation of a task force focused on climate and ESG issues. The 22-member task force within the enforcement division will “develop initiatives to proactively identify ESG-related misconduct” in partnership with other SEC divisions. A probable outcome of this new task force’s work is a set of proposed rules on mandatory public company disclosure of information related to climate change and other ESG topics. On March 15, 2021, Commissioner Allison Herren Lee, who was then Acting Chair of the SEC, solicited public input on climate-related disclosure as well as ESG disclosure more broadly. Submitted comments can be viewed on the SEC’s website. Many of the comments encourage the SEC to incorporate existing disclosure standards from organizations such as the Task Force on Climate-Related Financial Disclosures (TCFD) or the Sustainability Accounting Standards Board (SASB; now known as the Value Reporting Foundation). With SEC action seeming imminent, we advise companies to examine these frameworks and identify potential intersections with their current or future ESG disclosure strategies.

House Bill H.R. 1187, the “Corporate Governance Improvement and Investor Protection Act”
Building on the SEC’s efforts, on June 16, 2021, the House of Representatives narrowly passed H.R. 1187, the “Corporate Governance Improvement and Investor Protection Act.” Two of the bill’s main titles focus on ESG disclosure requirements, and the bill would give the SEC enforcement and rulemaking authority over such disclosures. While the bill will be challenged to move through the Senate and signed into law, it nevertheless helps reinforce elevated expectations for corporate transparency and ESG reporting. Regardless of the ultimate outcome of H.R. 1187, we view this bill as another signpost that the ESG landscape is accelerating towards a state where public companies implement more comprehensive disclosure.

International Organization of Securities Commissions (“IOSCO”) Examination of ESG Ratings Firms
We at Gilmartin Group have written about ESG ratings before, and we continue to believe it is important for companies to take ownership over their ESG narratives, understand the third-party data and ratings that influence investor decision making, and take steps to triangulate ESG improvement opportunities with the highest potential to strengthen stakeholder perception, company reputation, and long-term performance. A July 2021 consultation report from the International Organization of Securities Commissions (IOSCO) examines ESG ratings firms and recommends that regulators focus greater attention on the influence these firms have on sustainable investing.

Some key themes that emerge from the report include:

  • The lack of clarity, alignment, and transparency around the methodologies and evaluation criteria utilized by ESG ratings firms
  • The wide divergence among conclusions reached by different ratings firms and uneven coverage across industries, with certain industries or geographical areas benefiting from more coverage than others
  • The potential for conflicts of interest to arise when certain ESG ratings firms attempt to objectively evaluate a company’s ESG performance while simultaneously offering rating improvement consulting services to the subject company
  • The need to further evaluate communication mechanisms between ESG ratings firms and companies being evaluated

While we continue to monitor the ongoing work of IOSCO and others in examining the above, we recognize that ESG ratings firms can have significant influence over the perception of a company’s ESG performance. That influence should not be ignored; however, we consistently advise our clients not to be overly concerned by the specific ratings and to instead focus efforts on being the source of truth for ESG data they believe to be relevant to their business. Through thoughtful and accurate ESG disclosure, we believe ratings improvements will be a natural outcome over time.

Now is the time for companies to be more proactive in understanding and addressing ESG expectations for their business. While it may still be possible to “fly under the radar” of ESG scrutiny in the short term, multiple signals indicate that window is coming to a close. If you want to learn more about ESG, contact the Gilmartin team today.

“Boards that proactively seek to integrate climate and ESG into their decision-making not only mitigate risks, but better position their companies and business models to compete for capital based on good ESG governance.” – SEC Commissioner Allison Herren Lee; Keynote Address at the 2021 Society for Corporate Governance National Conference, June 28, 2021

Matt Berner, Managing Director, Head of ESG

Considerations of a SPAC: Part III – Takeaways from a Dozen Healthcare SPAC Processes

Given the prevalence of recent SPAC-sponsored public listings, the process of executing a successful SPAC combination may seem clearer than ever. Advantages of combining with an SPAC (Special Purpose Acquisition Company, or blank-check company) are now relatively well understood, including (1) efficient access to capital and (2) the potential to leverage your SPAC partner for strategic advice, industry expertise, investor relationships, and greater commercial visibility. Further, a growing list of precedent transactions provides a potential “model SPAC” framework to assess and deploy as challenges and questions on the path to public listing arise.

Ready, Set, SPAC?
Not (necessarily) so fast! There are multiple, varied approaches to accessing public markets via SPAC merger, and what works for one company is not necessarily the right strategy for another. As with any major corporate decision, there are material risks and benefits to acknowledge as you consider pursuing an SPAC combination. The advantages may well outweigh the risks, but your company’s challenges and opportunities are unique, driving the need for a tailored strategy.

Gilmartin Group is working with nearly one dozen healthcare companies in SPAC combination processes.

If your company is considering, or in the early stages of, public listing via SPAC merger, we highlight several considerations to help you (1) assess your company’s public market readiness; (2) communicate your story and objectives to employees, investors, and external stakeholders; and (3) map out logistics as you prepare to be publicly listed within a matter of months.

Our recommendations center on making a thoughtful decision to go public, creating a sincere, consistent, and well-supported message outlining your value proposition and objectives, and organizing processes such as timeline management, internal education, and external outreach in advance. When unexpected challenges arise, having a plan in place to address them will go a long way.

1. Assessing Your Company’s Public Market Readiness
The timeframe from definitive agreement (announcing mutual intentions between an operating company and SPAC to combine) to listing day often spans no more than a few months. As you evaluate your readiness to pursue an SPAC business combination, consider:

  • The capacity, experience, and rigor of your internal FP&A team
    • Questions to ask: Is our team prepared to build a detailed, quarterly financial forecast? Do we have a consistent process behind internal financial forecasting? How has our business performed relative to our internal model in recent quarters? Is our team prepared to offer a formal financial forecast to investors and sell-side research analysts? Who is leading our FP&A team (do we have a suitable CFO)?
  • SPAC partner value-add
    • Questions to ask: How sophisticated is the SPAC management team and Sponsor with public equity investors? What is the relevant experience, relationships, and/or industry expertise that the SPAC partner brings to our company?
  • Advisory and leadership
    • Questions to ask: Is our executive team complete? Do we have relationships with experts or advisors who can support our transition to a publicly traded entity, and/or would be additive to our Board of Directors? What characteristics, background, and range of experience will we prioritize in selecting Board of Directors members?
  • SEC process readiness
    • Questions to ask: Do we have materials to draft the necessary components of an S4 filing? Have we done proxy work ahead of the definitive agreement announcement?
  • Number and caliber of banks involved in the transaction
    • Questions to ask: Which banks do we want to bring on as financial advisor(s), capital markets advisor(s), and private placement agent(s) if the transaction will be supported by a PIPE offering?
  • Preparation for equity research coverage
    • Questions to ask: Have any Equity Research teams expressed interest in covering our company? Have we reached out to introduce ourselves to banks and their research teams? Have we expressed direct interest in having analyst coverage?

2. Communicating Your Story and Objectives
First impressions matter, but strategic investor and stakeholder communications go well beyond your initial pitch. Prepare a compelling, concise, and consistent message that will help investors, sell-side analysts, and other internal/external stakeholders understand the company’s value-add. We suggest outlining:

  • Company mission
    • Questions to ask: How can we convey our purpose in one concise statement? What are our near-term and long-term objectives? Are we messaging our mission consistently across customers/commercial relationships, employees/internal relationships, and investors/sell-side constituents, and other external relationships?
  • TAM (total addressable market) characteristics
    • Questions to ask: Is our market readily understood? Is it clearly defined? Who are our peers and/or competitors? What is our current level of market penetration, and what level of penetration are we assuming in our financial forecasts?
  • Financial forecasts and supporting rationale
    • Questions to ask: What are the key assumptions underpinning our model? What metrics and KPIs will we provide regularly? Are we confident that we can execute on our financial forecasts? What could a Bear Case (downside scenario) and Bull Case (upside scenario) look like, if those assumptions prove too aggressive or conservative?
  • Diligence materials
    • Questions to ask: Do we have a list of experts and KOLs (key opinion leaders) familiar with our product, whom we can connect to investors and sell-side research analysts? Do we have a packet of clinical/commercial/other materials that we can provide to help educate these parties?

3. Mapping Out Logistics
Every well-executed transaction relies on an organized calendar and a consistent decision process. Consider preparing:

  • An integrated timeline or workstream tracking responsibilities and deadlines
    • Questions to ask: What are the key responsibilities of the executive team, banks, legal counsel, FP&A team, investor relations, and public relations? What are our priorities from the point of LOI (letter of intent) through merger-close and beyond? How often will we meet to track progress?
  • Internal communications
    • Questions to ask: Are we prepared to communicate the rationale for, and implications of, our business combination agreement to employees? Do we have a prepared list of employee and shareholder FAQs to distribute upon definitive agreement announcement? Are we ready to host a series of internal Town Hall Meetings to educate employees about implications of going public, and/or explore other ways to maintain our culture, drive excitement, and “make a splash” with our news? How will we celebrate our first day of trading as a public company?
  • Wall Street communications
    • Questions to ask: Do we have a curated list of investors and sell-side research analysts for outreach? When are we scheduling meetings, and who is facilitating? How will we provide business or financial updates in the period between merger-announcement and transaction close? Are we prepared to host an investors’ email inbox? Do we have, or are we building, an investor website?
  • Additional stakeholder communications
    • Questions to ask: How will we message our intent to go public with customers/clients, researchers, advisors, Medical Advisory Board members, or other stakeholders who have contributed to our business?

Conclusion
No two SPAC processes are the same, and there are multiple, varied approaches to successfully accessing public markets through an SPAC business combination. The considerations here are just a sample of questions that we have helped our clients address. If you are interested in working with us or simply learning more about our approach, contact our team today.

Marissa Bych, Vice President

 

A Beginner’s Guide to Non-Deal Roadshows

Non-deal roadshows (NDRs) offer investors a comprehensive look at a company’s story that press releases, conference presentations, and other public documents cannot. Public and private companies alike may benefit from scheduling NDRs to foster effective communication between the executive team and investors. The focus of NDRs is to update investors on company performance (i.e. financial results and developmental milestones), communicate future goals, and learn from industry experts and analysts.

Some of the benefits of NDRs are:

  • Develop and build long-term relationships between management, investors, and sponsoring research analysts
  • Hear from investors on areas of interest and receive feedback on company perception
  • Manage expectations and correct misconceptions
  • Access investors that do not attend conferences
  • Recruit new shareholders

Successful NDRs require proactive planning and preparation. Below are some considerations to include in your NDR strategic plan.

Set and Define Goals
Setting defined goals before scheduling NDRs will maximize their potential. What is the executive team looking to achieve with NDRs? Are they aiming to engage new shareholders or change the company’s current investor composition? There are many different types of investors out there. To name a few variables, investors differ in investor category, portfolio performance, geographic location, and typical length of holding. Similar to how a company analyzes investors based on certain criteria, institutional investors may have to adhere to specific parameters to make a deal. Understanding and incorporating investor metrics and parameters into the NDR strategic plan avoids unnecessary calls with investors that may be uninterested. Though adding new shareholders is an exciting and important goal for NDRs, it cannot be the only focus. Updating and reconnecting with current investors should not be overlooked. Maintaining an open dialogue with current and long-term investors is crucial in strengthening relationships, receiving feedback, and understanding why they continue to invest in your company. Investor targeting is a selective process.

Timing is Crucial
Navigating the busy calendars of company leadership, investors, and analyst sponsors may make the process of scheduling NDRs seem like a daunting task. Consider industry and company events before booking an NDR. First, NDRs should not conflict with earnings or any large industry and investor conferences. Though valuable, conferences create a lot of noise in the industry. Minimizing potential conflicts will optimize attendance and participant engagement. Secondly, NDRs should follow notable company events and milestones. Since the focus for many NDRs is to provide additional information for investors, this is easier to do when there is new information to talk about. Highlighting recent news may be a great way to kick off the conversation. Wall Street and the healthcare industry is constantly changing. Therefore, it is crucial to keep the company’s IR calendar updated and in hand when picking potential NDR dates.

Be Prepared
The dates are set and the invites are out, so what’s next? Prepare, prepare, prepare. Management should know who they’re meeting and have access to background information on the investors, analysts, and their institutions. First impressions matter. The investor relations team should practice with management to ensure their message is both clear and standardized across the board. Presenters should have an in-depth understanding of the NDR slide deck and be prepared for any questions that may arise. Such preparation will build trust between management and investors that will open the door to long-term relationships and conversations.

Conclusion
Non-deal roadshows are a unique way for management to connect with potential and current investors. The NDR planning process may be tenuous, but having clear goals and a strategic plan will help companies maximize their potential. With most NDRs transitioning to Zoom during COVID, it’s now time to turn on the camera and get the show on the road. Contact our team today if you’re looking for more advice on where to start.

Laine Morgan, Analyst

Leveraging KOLs and PIs for Investor and Analyst Diligence

Before investing in or launching coverage on a company, investors and analysts will want to perform rigorous due diligence. The ability to leverage primary research can go a long way. Key opinion leaders (KOLs) and primary investigators (PIs) are key assets in this area and can play an important role in educating the overall investment community given their backgrounds. KOLs and PIs are experts in a particular field or area and can independently validate a company’s clinical hypothesis and/or provide context on publicly available data and information. They can add further value by comparing a company and its data with other publicly available information. That being said, KOLs and PIs are subject to non-disclosure and embargo agreements, which prevent them from discussing material non-public information. However, their independent validation of public information can help investors understand the unique value proposition a company presents. Let’s touch on the basics of how to plan and execute for a productive and well-attended KOL/PI diligence event.

Select KOLs/PIs

KOLs and PIs are often practicing clinicians, and their time dedicated to a company for investor meetings can be limited. With this in mind, when hosting an event for investors/analysts, it is important to have a few subject matter experts present to maximize the efficiency of the experience for everyone involved. Having advocates that have worked on different data sets or business units is also ideal, so they can speak to specific areas of interest about the company.

The Investment Community Interaction

There are various forums where KOLs and PIs may interact with investors and analysts. This includes presentations, fireside chats, or 1×1 meetings at industry conferences, company analyst and investor days, formal due diligence calls, and ad hoc requests. It’s important to be mindful that KOLs and PIs may not have extensive experience interacting with the investment community. Sufficient prep calls to provide an overview of what to expect and answer any questions will help ensure a stress-free event.

Prep Calls to Prepare for Expectations

Once you have selected KOLs/PIs to participate, scheduling a brief overview is ideal to help them prepare for the event. It is helpful to communicate to the KOLs/PIs how familiar the investors are with the company and the purpose for the call. Generally, the diligence call should provide a chance for investors to ask about first-hand experience with the technology, data, or industry in which the company operates. Often, investors will be knowledgeable about the company, its markets, and any specific data that the interaction is featuring. Therefore, the event is less of an introductory and background experience and more a discussion about application that includes opinions and direct experience of the KOLs/PIs. It can be useful to send the KOLs/PIs the information that the investors have seen beforehand, so they have an understanding of the investors’ level of knowledge; typically, this would be an investor presentation or summary of publicly available data. Remind the KOLs/PIs that the answers they provide will not make or break an investment decision but can help investors become more informed about the company. This can make them more comfortable with participating in the event. Also, providing the KOLs/PIs with logistics, such as how many investors are expected to participate and the allotted time for the event, is helpful to communicate ahead of time.

Drive Attendance and Promote a Dynamic Conversation

Selecting a date for the entire target audience to attend can often be unattainable. However, you want to avoid having nobody attend after accommodating your KOL’s/PI’s schedule. Try to ensure you have generated sufficient interest for the event before coordinating with your KOL/PI. A 1×1 or 2×1 call can be helpful in certain cases, but it is best to aim for a group meeting to make the best use of time and resources. Encourage the investors to be prepared with questions for a productive conversation. Providing the biography and background of the speaker ahead of time helps investors to develop questions relevant to the speaker’s experience and relationship to the company.

How Gilmartin Can Help Facilitate KOL/PI Meetings for Clients

Like the first day at camp or a first date, the first few questions of a conversation can be the toughest. At Gilmartin, we work with clients to establish a framework for the expected KOL/PI interaction. Furthermore, while hosting, we will help facilitate dialogue with questions previously discussed with management. They can be general questions around the technology, data, and personal experience of the KOL/PI. A few sample questions are below.

  • Can you talk about your overall experience with the technology?
  • How do you see this technology being used among the scientific and medical community?
  • Why do you think this technology could change the current standard of care?
  • How enthusiastic are you about the potential for this technology?

After discussing a few introductory questions, the investors and KOLs/PIs will oftentimes fall into the traditional question and answer dialogue.

Conclusion

In conclusion, investors will seek to perform thorough due diligence before making investment decisions. With proper guidance and planning, KOL and PI diligence events can be valuable resources for potential investors and analysts. Gilmartin has guided many clients through the investor/analyst diligence process. For additional information, contact our team today.

Emma Poalillo, Vice President