MedTech Research Coverage: Who Covers Whom?

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

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

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

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

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

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

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

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

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

Large Cap (>$10B)

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

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

Mid Cap ($2B-$10B)

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

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

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

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

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

Hunter Cabi, Associate

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

Recap of Webinar: “How to Engage with Sell Side Analysts”

Insights from a Candid Conversation with One of Wall Street’s Leading Biotech Analysts

The Gilmartin biotech team recently held a webinar with Evercore biotech analyst Josh Schimmer on how to engage with sell side analysts for private and public companies. For those who were unable to attend, a replay of the conversation can be accessed at vimeo.com/561512437. Throughout the discussion, Josh covered a wide range of topics including how he became an analyst, his preferred methods of receiving information, timing of engagement with private companies, best practices for analyst due diligence and quarterly financial calls, and many other relevant topics. We recommend watching the full webinar to capture all the insights Josh shared, but here are a few key topics we wanted to highlight.

“Where do you receive information on the companies you cover or are interested in?”

While all analysts utilize news services to receive breaking news in real-time, we asked Josh where else he looks to find more information on a particular company. Where he goes first and foremost to learn more about a company is their website, particularly their corporate deck. As a company, your deck should be kept current and easy to find in the investors section of your website. The deck should be clear and concise, yet comprehensive with your catalysts and milestones clearly articulated. An analyst or investor only has a certain number of hours in a day, and they traffic in information. To that end, make sure your corporate materials are easy to access, comprehensive, and highlight the value creating proposition of your story.

“How early do you like to engage with private companies ahead of an IPO?”

Josh tracks every private financing starting with Series A and is happy to meet companies at an early stage. In fact, he says there is no such thing as too early to meet a private company, but the cadence of interaction may vary. Be careful not to overdo the touch points. Analysts are busy– if they cover one stock, it often requires knowledge of 15 or more other stocks in the space, so keep this in mind as you think about reconnecting with updates you want to share. Private companies and public companies have different scopes of value creation. New animal model data that may move the needle as a private company does not necessarily carry the same weight as a public company. The same can be said about the initiation of a clinical trial. As a private company, engagement with analysts is an important step in building Wall Street relationships and evaluating potential banking syndicates, but consider timing your communication around significant news and updates pertaining to your company’s story.

“What makes a good or bad analyst teach-in prior to an IPO?”

Analyst teach-ins prior to an IPO are a critical event in the education of Wall Street before entering the public markets; according to Josh, there are many factors that can make or break an event. Josh’s advice was to avoid making assumptions about your prospective analysts’ base knowledge around your science or therapeutic area. Start with the underlying concept behind the story, where this technology came from or how it was invented, and take your analysts all the way through commercialization. Analysts need every detail in order to build their models, valuations, and DCF analysis. Many companies come into these meetings very shortsighted because their private investors allow them to be. They are very focused on the next step in development, but what about the step after that and the step after that? Additionally, don’t forget to illustrate your company’s competitive landscape, which according to Josh is often lost during these sessions. A company does not need to explicitly prove your technology or programs are superior to competitors, but rather explain your differentiators and let your analyst come to their own conclusions. These are the questions analysts receive on a daily basis from investors and it allows them to make important projections, like potential market share. These sessions are the unofficial kick-off to hopefully a long-term relationship with your sell side analysts and a great way to begin building trust through education and effective communication.

“Do early-stage biotech companies need to host an earnings call every quarter?”

Josh, like many analysts, has a love/hate relationship with earnings season and quarterly financial calls. Oftentimes, they can be dry and time consuming, with a scarce amount of any value-add. Among biotech companies, three months is a very short amount of time in the grand scope of drug development and there will often be little to no new updates to report. However, calls can be valuable and give analysts an opportunity to check in with companies they cover and ask questions to gather greater visibility into clinical programs. If you do hold quarterly calls, one suggestion Josh offers is to cut out sections that can be read straight from the company’s press release, particularly the line item overviews in the financial section. Some of his favorite calls are ones that give a brief overview of clinical updates, explain the timing of next milestones, and proceed straight to questions. If your earnings call is 10 minutes, that’s a success. Do not feel pressured to fill airtime or conform to the traditional call structure.

“If a company finds an inaccuracy in a research report, how would you prefer they approach the situation?”

Analysts are sensitive to their product. They put a lot of time and effort into the reports they publish, so take that into consideration before you approach them with a mistake or inaccuracy. Be gentle and try to avoid nitpicking. Consider whether or not the inaccuracy is substantial enough to address before you do so. If it is material, your analyst should be happy to have a quick call to discuss the misunderstanding and how it can be avoided going forward. Always keep in mind however, the companies that send laundry lists of comments on each report can damage the relationship they have with their analyst.

A common theme from our discussion centered around trust. An analyst’s relationship with a company is built and maintained on trust. There is no shortage of companies in the public markets, and the second a company loses their trust, an analyst can and likely will move on to the next one. Be forthcoming with information, both positive and negative. Keep a steady cadence of communication with your analysts, but be respectful of their time. Quick email notes or 20-minute update calls can be greatly valuable and efficient for both parties. Building and maintaining these relationships is a critical part of a company’s life on Wall Street, and Gilmartin is here to help you throughout the process.

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Stephen Jasper, Principal

 

 

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Addressing Unfavorable or Undesired Analyst Coverage

Addressing Sell-Side Research Challenges: What to do When Your Company is Faced with Unfavorable or Inaccurate Analyst Coverage

At the top of almost any IR to do list, and certainly one of the more important metrics used to evaluate a successful program, is sell-side analyst research coverage – particularly as it relates to quality banks, favorable rating, and accurate consensus estimates. There is no shortage of reference material on ways to encourage and attract coverage, approaches for analyst targeting, and commentary on what is the right “mix” of profiles and what is the right number for your company’s size/market cap. But what if the unexpected occurs and you actually want to eliminate some coverage?

What?!

Yes, this happens. There are a few reasons why your team may want to address this: a rogue analyst whose estimates meaningfully skew your consensus numbers; an analyst that misinterprets or mis-states the fundamentals of your business despite repeated attempts to make a correction; an analyst that has become disengaged; and of course, the disappointing negative rating. There is a lot that goes on behind the scenes within any sell-side bank before coverage is launched, so getting an analyst (or the bank they represent) to discontinue coverage outside of an acquisition or exit from a certain sector is actually quite rare.

Let’s put this into perspective. In the absence of a transaction and at the outset of coverage, an analyst needs to support his or her rationale for covering a specific issuer, including a bull/bear case that will lead to sales and trading dollars, changes in the macro environment that present a new opportunity, and the overall fit within the coverage universe. On top of that, analysts do significant due diligence prior to launching coverage, both quantitative and qualitative. Building a model and becoming entrenched in a company’s business model is a big commitment, and it takes a lot of time and resources. Once launched, it is considered a long-term commitment. This is why analyst coverage is most often at the top of the priority food chain.

However, this is also what makes it very hard to get coverage dropped, particularly by banks that are making a market in your stock. Pursuing dropped coverage should be a last resort, only considered when it’s been deemed truly necessary for the best interest of your shareholders – not because you don’t like the analyst’s opinion, rating, financial model, or personality. Furthermore, it should not be based on a lack of time or interest to engage with another covering analyst. In our opinion, that reason should be a non-starter.

We would first encourage your team to evaluate whether you are offering that analyst the same access that you give all the other covering analysts. At a minimum, after every quarterly earnings release/conference call, offer to schedule a 1×1 call to connect on key messages, strategy, themes, and expectations. Like most relationships in life, an open dialogue with the analyst can go a long way towards clarifying misunderstandings and realigning messaging. Similar to how you would handle any discussion that has taken a left turn, engage in a conversation about the underlying assumptions and information that led to the analysis or financial estimates. We aren’t suggesting that you provide any information that isn’t in the public domain, but challenging model assumptions that seem out of line from publicly stated guidance is certainly recommended.

If the problem is lack of engagement, make a concerted effort to get as much public material in front of the analyst. For example, send an email and say, “We just wanted to be sure you were aware of XXX. This is a meaningful new component of our business that, as we stated on our call, we expect will boost growth by XX%. I’d love to discuss this with you in more detail, as it wasn’t noted in your latest report or model.” Be sure to copy the analyst’s whole team.

If you’ve reached a point where additional measures are deemed prudent, here are a few approaches that might move the needle:

  • Talk to the bankers at the firm about the relationship, future opportunity to work together, your company’s goals (e.g., financing, M&A, ATMs, etc.), and the importance of an improved relationship with the covering analyst.
  • Reach out to the Director of Research. There may be an opportunity to have coverage reassigned or re-directed if the relationship is hurting both parties. In this conversation, point out things like your public messaging that isn’t reflected in current notes, responsiveness to your outreach, the financial model relative to consensus, or in some cases, the lack of routine updates following earnings or other significant news.
  • Decline requests for Non-Deal Roadshows (NDRs) or participation in bank-sponsored conferences and events.
  • Decline to take questions from the analyst on public calls.
  • Eliminate the bank from participating in any potential offering or M&A transaction.

While these may or may not have any impact, maintaining long-term relationships should always be a top priority of investor relations. It is extremely important to try keeping these relationships positive and on track – even if you and your management team don’t agree with the message or model. Our goal as IR professionals is first and foremost to ensure that any material information that an investor needs to know to make an informed buy/sell/hold decision is consistently publicly available and readily accessible in one of the many formats that the SEC has deemed appropriate under Reg FD (e.g., press releases, websites, or conference call webcasts with open access).

It’s in the fine print.

At the end of any published research note, there is a section called “Analyst Certification.” In this section, the author certifies that (i) the views expressed in the research report accurately reflect his or her personal views about any and all of the subject securities or issuers, and (ii) no part of his or her compensation was, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report.

So, it is important to keep in mind that there should always be room to discuss that view. That should be the ultimate goal. Contact Gilmartin today for guidance on any sell-side analyst challenges you may be facing.

Leigh Salvo, Managing Director

 

Intro to Quarterly Financial Reporting

There are many decisions that must be made before every company’s earning call. Every company will have its own correct answer based on the past working experience and comfort level of the management team presenting. A few of themost commonly asked questions are:

The thought and strategy that you put behind these decisions will ultimately impact the company’s shareholder confidence and overall analyst reception. At Gilmartin, we walk with our clients every step of the way during this crucial time. But first, we must understand a few basic principals around what goes into each quarter.

Quarterly Reporting
All public companies must provide a quarterly update on their financials through a formal 10-Q SEC filing, although almost all of these companies will also distribute a press release and a webcast of an earnings conference call. The 10-Q is available and archived for years on the Investor Relations section of the company’s website, but it is still worth having a thoughtful discussion on why earnings calls and earnings releases are valuable additions to the quarterly reporting cycle. Institutional and individual investors, buy-side and sell-side analysts, and all other interested parties have the option to tune in or later reference the earnings release and call to provide additional color on the quarter apart from what is published in the 10-Q. A more detailed account of each type of disclosure can be found below.

10-Q SEC Filing
The 10-Q is a comprehensive report that includes all the necessary objective disclosures of the company’s performance since the prior quarter filing, including unaudited financial statements and relevant information about the company’s financial position. 10-Qs can be hundreds of pages long and full of redundant information, making it difficult for readers to quickly extract information and get a sense of the quarter’s overall results. Although earnings releases and calls are not required on a quarterly basis, it is extremely uncommon for a company to file a 10-Q without the additional documents.

Earnings Release
Earnings releases summarize the financial results of the quarter and provide a consistent update on company-specific metrics. Earnings releases begin with a few highlights or interesting updates over the quarter and include pages of financial tables. Earnings releases allow easy access to other metrics such as guidance, which management includes for intended benefits such as improved communications with the financial markets, higher valuations, and lower share price volatility. Apart from guidance, earnings releases mostly reference the prior quarter and don’t mention expectations for the following periods.

Many companies include a quote from the CEO or other notable company representative to add some subjective remarks to the flow of the release. However, it is becoming increasingly common to exclude the quote and stick to the essentials. Bringing key messages such as updated guidance and revenue growth percentage up to the heading and subheading of the earnings release takes advantage of the real estate and focuses the reader’s attention on the overarching message. Earnings releases are also one of the main sources for FactSet’s StreetAccounts and other data aggregators that pull this information as soon as it is live for broader distribution and awareness.

Earnings Call
Earnings calls provide more color on the quarter and expected future results than the other two disclosure types listed above. This is where you will find more information on product development, roadmap, and overall strategy. Earnings calls include at least the CEO and CFO, and oftentimes other senior management members will to either deliver a section of the script or field questions from analysts. However, this is more common in larger companies or when there is a notable company update, such as new data or a big commercial launch.

As the analysts’ questions are not known in advance, management’s answers can be very indicative of the company’s confidence and performance beyond just numbers on a page. Prepared remarks usually follow a similar format to the prior quarter, but there can be new and relevant information that is necessary to share. As an alternative to incorporating this information (i.e. unwanted precedent of anecdotes, case studies, products sold, etc.) into the prepared remarks, management can prepare with focused talking points that can be weaved into the Q&A portion of the call.

It is necessary to focus on tone and delivery of the call as this can send a powerful message about the future of the company beyond just the financial results. Earnings calls can be a great way for a company to explain why it fell short on internal or external expectations, defend the fundamentals of the business, or prevent a bad stock reaction from the news. On the other hand, if a company has significantly beat its guidance, the earnings call is an opportunity to show the performance was truly better than expectations rather than an intentional beat on an overly conservative guidance range.

It is important to understand how all of these pieces fit together to create a clear and concise message for the quarter. For additional information on the purposes of the earnings script, earnings release, and 10-K filing for your quarterly earnings communications, please contact our team.

Kelly Gura, Analyst

Secondary Offerings In The COVID World

With the COVID-19 pandemic continuing to overwhelm global economies and the uncertainty around the future and recovery timelines, many listed companies are recapitalizing through equity fundraising in the capital markets. Given the solid market recovery and valuations among med tech names, this has proven to be an opportunistic time for companies to finance. New equity has helped these companies shore up their balance sheets as they recover from recent COVID-related declines in medical procedures, in order to give them a cushion and financial flexibility for future uncertainty and to obtain liquidity.  Additionally, many of the larger cap companies have been very forthcoming in their intention to further capitalize to be prepared for potential strategic activities. Smaller companies are also contemplating a more conservative view of their balance sheet and are raising money earlier than they might normally consider, thus maintaining a larger cash runway “slush fund” compared to historical levels. As a result, in the last two months, over $5 billion has been raised in follow-on offerings by public medical technology companies alone.

While follow-on offerings have implications for dilution, particularly when a company already has a solid cash balance, recently companies have been rewarded for being conservative and adding to their coffers, despite the dilutive impact. In fact, offerings have been priced high and upsized as investor demand outpaces supply.

The downward pressure on stocks that is traditionally felt and feared around dilutive financings has been somewhat staved off, not just by the counter-balancing impact of investor demand, but also by the evolution and transformation over the past several years of alternative forms of follow-on transactions. Due to market developments, such as heightened volatility and concerns about investor front-running, fewer public offerings now involve traditional marketing. Additionally, in 2005, in conjunction with some regulatory reforms, a new category of issuer — the “well-known seasoned issuer” (WKSI) — was adopted, which enables WKSI-qualified issuers to benefit from some registration flexibilities including the ability to register their securities offerings on shelf registration statements that become effective automatically upon filing. As a result, a WKSI is not required to wait for a review period or to declare its registration statement effective before selling securities. Instead of the traditional publicly marketed deals, many of today’s follow-on transactions are executed in shortened windows, essentially making public offerings less public and allowing liquidity discounts to be minimized.  We will discuss a few of these alternative transactions below.

  • Confidentially Marketed Public Offering (CMPO). Sometimes referred to as a wall-crossed offering or pre-marketed offerings, a CMPO is an offering that is initially marketed only to specific institutional investors who may have an interest in purchasing the issuer’s securities. During this preliminary, confidential phase, no public announcement of the offering is made and no preliminary prospectus is used. Once the issuer and institutional investors agree on the basic deal terms, the offering is then “flipped to public” via a Form S-3 takedown shortly before pricing so that the underwriters can market the offering more broadly. Selling efforts may be completed over the next trading day but are often completed overnight, and final pricing and terms are announced before the market opens the next day.
    • Considerations: This type of offering, which requires an active shelf registration, does not benefit from the robust marketing efforts of a traditional marketed deal and therefore can involve a higher risk of execution given the need to generate demand in a short time frame; however, public “exposure” and market risk is limited, as is management time requirement, and overall costs to the company are lower.
  • Bought Deal.  Bought deals occur when an underwriter purchases securities directly from an issuer before a preliminary prospectus is filed. The underwriter acts as principal rather than agent and actually owns or “goes long” the company’s stock. The underwriter and the issuer negotiate a price that is usually at a discount to the current market price, and then the underwriter uses best efforts to sell the stock.
    • Considerations: Generally, a bought deal will only be feasible for a WKSI. There is no pre-marketing involved in a bought deal, and the amount of the deal is a certainty without execution or financing risk to the issuer – the risk is put on the shoulders of the underwriter. Subsequently, Bought Deals are usually priced at a larger discount to market than fully marketed deals, and therefore may be easier to sell. Additionally, because Bought Deals generally involve only one bank, the banking fees are often lower for the issuer.
  • PIPE Investments.  Private Investment in Public Equities (PIPEs) can provide an alternative source of funding for businesses that are trying to weather the current crisis. PIPEs allow private investors to purchase common stock or preferred stock in a public entity at a predetermined price. PIPE shares do not need to be registered in advance with the SEC or meet all the usual federal registration requirements for public stock offerings. These transactions are done confidentially and allow issuers to raise capital quickly without public disclosure, thereby eliminating the potential impact of the deal announcement on the stock price.
    • Considerations: Because they have less stringent regulatory requirements than public offerings, PIPEs save companies time and money and raise funds for them more quickly. The discounted price of PIPE shares means less capital for the company, and their issuance effectively dilutes the current stockholders’ stake.
  • Block Trades.  A company may also sell secondary shares through a block trade, but most often these are used by sponsors, VCs, and other large stockholders (such as holders that acquired stock in an M&A transaction) to sell down their position. Block trades, which are effective for selling smaller amounts of stock, are cheaper than an underwritten transaction.

With the current COVID-19 pandemic, raising money efficiently and opportunistically has become even more relevant than ever for public companies. The traditional fully marketed transactions, however, have become somewhat archaic, replaced by faster and more nimble transactions. Coupled with a broad range of mitigating actions to manage the cost base and cash flow, there are several alternative transactions that can provide sufficient liquidity to deal with this challenging trading environment. Such alternatives provide increased balance sheet protection for companies raising extra cash as a way to shore up their balance sheets and provide increased comfort as they navigate through the crisis. Furthermore, existing investors seem to understand that being diluted by fundraising may be a worthwhile tradeoff to ensure the business can survive.

The team at Gilmartin is here to help navigate secondary offerings during the COVID pandemic. Contact us today.

 

Debbie Kaster, Managing Director

Analyst Education during Your IPO Process – Part II: Financial Diligence Meeting

Initial public offerings (IPOs) are one of the most important milestones for many companies. During the IPO process, analysts are required to conduct formal diligence of the market opportunity, the unmet need, your company’s solution and your prospects for long term growth and business viability. Companies typically initiate this by hosting an Analyst Diligence meeting, followed by an Analyst Financial Diligence Call—both with the entire group of analysts and their associates. Throughout the process, there will be additional diligence calls with industry participants as well as subsequent company hosted calls and meetings to review any outstanding items.

Last week, we wrote about the Analyst Diligence meeting and what to expect. In this week’s blog post, we are focusing on the Financial Diligence meeting, bearing in mind that these two meetings (or calls) are related to one another in the broader context of analyst relationship development and education.

Analyst Financial Diligence Meeting
The primary purpose of the Financial Diligence meeting is to review the financial model, historical performance and future projections. This discussion will provide the framework for how analysts should think about the business on a quarterly, annual and long-term basis. Almost universally, the financial diligence meeting is separate from the initial analyst diligence meeting, following it by a few weeks or more.

What You Should Expect
This is a condensed meeting that is focused on the financials and is usually scheduled for 1-2 hours. Typically, this is a call rather than a meeting, and we expect that to continue in today’s environment.

  • Companies normally present between 10-25 slides, focused exclusively on quarterly performance, KPIs and assumptions behind forward projections.
  • Most companies include current year quarterly projections and three-year forward annual projections.
  • Plan for this discussion to be much more interactive than the original diligence meeting; the analysts use this information to create their revenue builds, so they are stress testing assumptions.

What the Analysts Expect
The analysts are looking to use this time to understand how you expect your company to grow over the next few years.

  • The analysts expect you to provide enough information that they can understand the assumptions behind your projections and build their models.
  • Ideally, you can tell them what metrics you will be providing once public. This is important as they want to include items that they can update over time.
  • Key questions the analysts will want to have answered during this discussion include:
    • What is your addressable market opportunity, and how should they differentiate between theoretical and addressable markets?
    • How will you penetrate your market, and how will you expand the opportunity over time?
    • What are the current market dynamics and assumptions on ASPs, share capture and competitive dynamics?
    • What are the right metrics to demonstrate success?
    • Are the growth rate estimates achievable based on their understanding of market dynamics and your strategy?
    • What are the appropriate sales and support structure with commensurate expenditures and margin expansion as you grow?

A Few Helpful Hints

  • Be prepared to have multiple follow-up discussions with individual analysts as they conduct diligence and construct their models.
  • Following the financial diligence call, if you haven’t heard from one or more of the analysts, reach out to schedule time to answer their questions. It’s in your best interest that their model accurately represents your business.
  • Prepare a Q&A document and practice. The analysts will ask provocative questions, and you don’t want to be caught flat-footed or seemingly ill prepared. It’s OK if you answer that you will circle back with them later, but know in advance that is the plan.
  • Stress test your assumptions and be prepared for push-back. Don’t get defensive; this is part of the process.
  • Ask to review the model before it’s final—this is one of the last chances you have to provide feedback down the P&L while you are still private.
  • Plan to send electronic copies of your slides, and, if possible, the financial model information in Excel, before the call. This will give the analysts time to review the materials and come to the meeting prepared with thoughtful and productive questions.

We have extensive experience working with management teams through the IPO process, from preparing for the analyst diligence meetings to thinking through metrics and KPIs on a historical basis and for guidance. If you would like to discuss more about planning for an IPO, contact our team today.

 

Lynn Lewis, Founder & CEO and Kelly Gura, Analyst 

 

Analyst Education during Your IPO Process – Part I: Analyst Diligence Meeting

Initial public offerings (IPOs) are one of the most important milestones for many companies. During the IPO process, analysts are required to conduct formal diligence of the market opportunity, the unmet need, your company’s solution and your prospects for long-term growth and business viability. This is typically initiated with companies hosting an Analyst Diligence meeting, then following that up with an Analyst Financial Diligence meeting – both with the entire group of analysts and their associates. There will be additional diligence calls with industry participants, as well as subsequent company hosted calls and meetings to review any outstanding items throughout the process.

In Part I of our series, we will do a deep dive into the Analyst Diligence meeting and what to expect, and next week in Part II, we explore the Financial Diligence meeting, bearing in mind that these are related to one another in the broader context of analyst relationship development and education.

Analyst Diligence Meeting
The Analyst Diligence meeting provides an opportunity to tell the story that is becoming solidified through drafting the S-1. It also provides a forum for you to showcase the depth of management with business leaders each presenting their respective sections. Analysts receive an in-depth overview of the company and begin shaping the way they think about the business as a public company.

What You Should Expect…This is a similar exercise to the Organizational Meeting, albeit with a much smaller group and a slightly different focus and will typically be scheduled for 3-4 hours.

  • While the analysts will not ultimately be privy to as much detail as the Working Group, you will generally provide more information in diligence sessions while private than what you plan to share as a public company.
  • Analyst teams will come to the meeting with varying degrees of understanding of the company – this is a chance to level set their knowledge base and educate the group on nuances of your sector and company.
  • Don’t be surprised if the analysts ask a lot of questions, or if some stay relatively quiet. We find that this is a function of individual knowledge levels coming into the meeting, current bandwidth, politics among the group, and their specific focus areas. They will typically dig in more deeply over the following few weeks as they conduct industry diligence and create their models in advance of the IPO roadshow so that they are prepared to answer questions. Later – after the IPO has priced – they will work on their initiation reports and circle back with final questions as they arise.

What the Analysts Expect…The analysts use this time to get to know the broader company better, meet members of the management team beyond the CFO and CEO, and to get up to speed on current information.

  • The analysts are starting to form the framework around how they will be thinking about your business as a public company and determining what the key metrics are that will demonstrate commercial success and execution of milestones and, ultimately, value creation. This will be crucial once you get to the Financial Diligence meeting (which will be several weeks after the Analyst Day), but it will be helpful to start laying the groundwork for these key performance indicators (KPIs) here.
  • The analysts will also start to ascertain where potential challenges lie and where the investment community will find any weakness in your story. This is important, as the analysts will be talking to investors, so we want them armed with good information. And, we want their feedback on what we can communicate more clearly or with additional information.

Sample Analyst Diligence Meeting Agenda & Participants

  • Introduction to the company – Chief Executive Officer
    Overview, history and key accomplishments
  • Market overview – Chief Executive Officer
    Competition
  • Product introduction – VP of Marketing or Product Development
    Technology platform
    Product pipeline
  • Commercial strategy – VP of Sales or Marketing
    Market segmentation and strategy
    Industry trends
    Sales structure and growth
  • Clinical & regulatory – VP Clinical & Regulatory
    Clinical trials and data
    Clinical trials underway
  • Reimbursement codes and payment structure – VP Clinical & Regulatory   
  • Manufacturing and operations – VP of Operations or R&D
  • Finance history – Chief Financial Officer
  • Legal, IP Overview – General Counsel or Chief Financial Officer
  • Wrap up; Q&A    All

A Few Helpful Hints….

  • Keep in mind this is an interactive process. Be prepared to have follow-up discussions with individual analysts as they conduct diligence and construct their models.
  • As your business continues to evolve, you may be in a position where you want to provide a business update to the analyst group. It isn’t unusual for companies to schedule a follow up call late in the process with slides showing new information since the initial diligence meeting.
  • Prepare a Q&A document and practice. The analysts will ask provocative questions, and you don’t want to be caught flat-footed or seemingly ill prepared. It’s OK if an answer is that you will circle back with them later, but know in advance that is the plan.
  • Bear in mind that that the analysts are asking questions to better understand the business, they generally aren’t being critical. They are also pre-empting questions that the investment community will have, and it’s important that you maintain an open dialogue.
  • The analyst teams will receive electronic copies of the deck in advance of both meetings. Nothing should be shared that you aren’t comfortable with them having access to once you are public, and you have the opportunity to redact certain slides that you plan to present.
  • Analysts will likely use graphics from your materials in their initiation reports (we suggest they request permission before using any content from the Analyst Day materials to confirm any graphics used in their reports are current and up to date).
  • The better educated they are on the story, the better the analyst reports will be and the more useful they can be to investors.

Moving to a Virtual Environment
COVID-19 has uprooted life in many ways, and many people are continuing to navigate work remotely. Hosting the analyst diligence meetings in a virtual environment has its benefits and its challenges. To start, in a virtual environment, you have the opportunity to leverage members of your executive leadership team that may have otherwise had travel constraints and show a deep bench and expertise across business areas. That said, there are higher risks of technical issues (i.e. failed video calls), a shift in dynamic due to the lack of in-person interactions, and supplemental materials might be limited by network speed. For example, videos generally do not work on a webcast. If there is a video you want the analysts to see, we suggest sending it separately.

Educating your analysts during your IPO process in a virtual environment can be a challenge at first, but planning and preparation go a long way in hosting a successful event.

Whether your Analyst Diligence meeting in person or virtual, we have extensive experience working with management teams through the IPO process, including preparation for the analyst diligence meeting. If you would like to discuss more about planning for an IPO, contact our team today.

 

Lynn Lewis, Founder & CEO and Kelly Gura, Analyst 

Financial Community Perception Surveys

Is it time to consider a financial community perception survey?

At some point in a public company’s lifespan, it’s prudent to consider conducting a formal survey of the financial community. The primary goal is to reach out to a targeted group of analysts and investors to identify how they currently perceive certain aspects of your business. This analysis can be used to identify gaps that exist between a company’s strategy, market opportunities, leadership, guidance, key metrics, etc., and how the market perceives these attributes and assigns a relative value as an investment opportunity.

Part of best practices in any IR program should be a continuous feedback loop with analysts and investors. Open, candid dialogue is critical to continuous improvement in messaging and communications. Following a non-deal roadshow, investor conference participation, or an earnings cycle is an ideal time to reconnect with your investors and prospective holders to see if your presentation and messaging landed as you intended. If it didn’t, you have the opportunity to make immediate adjustments.

However, a perception study goes way beyond routine feedback. It is not specifically event driven, the outreach is much broader, and the scope of the questions goes well beyond a recent meeting or presentation. The results should reflect longer-term strategic thinking rather than short-term tactical changes. When making the decision to move forward on a full perception study, there are several important things to consider.

Is this the right time?

Some public issuers include perception studies as part of their ongoing IR program and build them into their plans and budget on a regular cycle, such as every few years. Other companies may want to pursue this exercise when they have completed or are contemplating a significant change in their strategy or a financing activity. Another consideration may arise if there is concern that key messages are not resonating with the street or if the street’s valuation doesn’t seem to be in sync with internal growth expectations. A perception study can be invaluable in uncovering where there is a disconnect and reveal opportunities for bridging that gap and/or prioritizing strategies for improvement.

Who should I include?

A perception study should canvass a broad audience that reflects your coverage, your investor profile today, and where you want it to be in the future. It should include not only the analysts that cover your company, but also those that cover the broader sector and your competitors. They will most likely have knowledge of your company but can put it in perspective of the overall landscape. Similarly, you will want to target current investors in a range of sizes. Some of the smaller investors may be much more familiar with your story because their position may be a more meaningful part of their portfolio. Also, look at investors that have changed their positions over time, as well as those that have once had meaningful positions and are no longer involved. Insight as to why they sold or what catalysts they are looking for in the future can be just as useful as why an investor holds. Finally, target investors that you have met but have not yet taken a position, as well as investors that hold your peer group but not shares in your company. Canvassing a broad base of the investment community can reveal certain widely accepted sentiments, rather than only those of the investors closest to your story.

What should I ask?

Create a formal questionnaire that encourages open dialogue. Multiple choice and yes or no answers provide interesting datapoints for quantitative analysis, but getting to what’s behind that sentiment is where real value lies. It’s important to ask questions that make participants feel like they are really adding value. Getting to their candid feedback is crucial to a successful outcome. The questions should be general enough to be used with a broad base of participants but targeted enough that you can gather feedback on the topics that are most important to your purpose. For example, if this initiative is for the purpose of determining what drives the current valuation of your shares, questions should revolve around how what characteristics are most important in making an investment decision. Also consider the perspective of the respondent in developing your questions. As an example, there is a very significant distinction in the question “How would you characterize XYZ Company’s strengths and weaknesses as a business?” and “How would you characterize XYZ Company’s strengths and weaknesses as an investment?”

How do I get the most participation?

It seems that we are all inundated with survey requests these days. “Did you enjoy your recent stay at [insert hotel name]?” “How was your service at [insert restaurant name]?” “Would you have time after this call to participate in a short survey?” Add to that the frequent surveys that are initiated within the investment community sector by the sell-side. As a result, it’s critical to identify a time when you won’t have to compete for mindshare and other critical timelines. Avoid times that overlap with quarterly reporting, so essentially 45 – 60 days following quarter end. Heavy conference times should also be avoided. This is typically the weeks following the earnings reporting cycle and through the midpoint of the quarter. Investors are focused on meeting with management teams, gathering updates, and new ideas. We suggest targeting the weeks just before quarter end and right after, when management teams are closing their books, entering quiet periods, and are unlikely to be on the road meeting with investors.

How do I get started?

Financial community perception studies can be a great way to gain important insight from your current and potential investors to ensure that the way the company is being managed internally is connected to how it is being presented to the outside world. It is also a powerful tool for signaling that your leadership team values the input of its investors and prioritizes shareholder value creation.  Critical to the success of your perception study is identifying a partner that has the ability to understand your business and also has the trust of the financial community to keep feedback confidential and impartial. The team at Gilmartin Group has conducted numerous perception surveys for our clients. If you are considering one for your company, we’d be happy to share our insight with you. Contact our team today.

Leigh Salvo, Managing Director