Analyst Interactions with Biotechs

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

Moderators:

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

Guest Speakers:

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


Key Takeaways:

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

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

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

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

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

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

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

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

TD Cowen Recent Acquisition:

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

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

Authored by: Rachna Udasi, Analyst, Gilmartin Group

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

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

Moderator: David Deuchler, Managing Director, Gilmartin Group

Guest Speakers:

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


Key Takeaways:

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

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

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

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

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

Authored by: Nina Deka, Vice President, Gilmartin Group

Navigating Today’s Liquidity Environment

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

Moderator: Vivian Cervantes, Managing Director, Gilmartin Group

Guest Speakers:

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


Key Takeaways:

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

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

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

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

Cash burn, execution and keeping an eye on profitability targets

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

Flexible evaluation of financing structures and valuation

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

Be ready

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

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

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

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

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

Navigating IR: What Healthcare Executives Need to Know

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

Moderator: Lynn Lewis, Founder & CEO, Gilmartin Group

Guest Speakers:

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


Key Takeaways:

Wall Street is undergoing change.

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

An effective IR strategy is crucial.

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

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

Guiding expectations while not disclosing sensitive information is a balance.

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

Preparing to go public.

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

Generating interest in the absence of a catalyst is delicate.

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

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

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

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

Webinar Recap | Medtech Spotlight 2023—What Matters From Here

Moderator: Marissa Bych, Principal, Gilmartin Group

Guest Speakers: Travis Steed, Managing Director, Equity Research, Bank of America & Ryan Zimmerman, Managing Director, Equity Research, BTIG

Earlier this week, Gilmartin Group’s Marissa Bych hosted a webinar with Travis Steed, Managing Director, Equity Research, Bank of America and Ryan Zimmerman, Managing Director, Equity Research, BTIG to discuss evolving investor sentiment, financing in the current market and expectations for medtech companies into the balance of 2023. Here are the key takeaways from our conversation:


Key Takeaways:

  • Investors entered 2023 poised for a recession but rotated out of healthcare into high growth and cyclical sectors (tech; discretionary; homebuilders) as equity markets rallied early in the year, driving YTD healthcare and medtech underperformance.
  • With ongoing market uncertainty and continued interest rate hikes, a rotation back into healthcare is not out of the question, and medtech has historically outperformed in market downturns.
  • Companies that can show operating margin improvement, consistently generate cash flow, and have a realistic path to profitability are most attractive to investors, while investors are more cautious of companies needing additional funding, as the cost of capital overshadows the reward of high growth.
  • Investors largely expect companies to deliver at-or-above consensus estimates this year, as many companies reset 2023 expectations during Q3 reporting season, then bracketed consensus with 2023 guidance while macro factors have improved (FX headwinds abating, relative staffing stability, and some supply chain resolution).
  • With a lower base coming into the year, full-year guidance has been viewed as conservative across most companies in the space. Investors expect that numbers will move higher from here with a lower ‘acceptance threshold’ for exogenous impacts on performance. Stronger performance could be back-half weighted for many as structural factors improve.
  • How stocks move in reaction to their results will be valuation dependent (higher multiple names face higher expectations for beating-and-raising).
  • Revenue growth remains the most important metric to drive high-growth SMID stock performance, but appetite for ‘growth-at-all-costs’ has been traded for cost control and a path to profitability.
  • Investors are also likely to look for names with less selective risk, defensible moats, and strong product cycles, as well as potential M&A prospects. Innovation and differentiation remain important.
  • Following several M&A deals in recent months (J&J, Abiomed), (Abbott, Cardiovascular Systems), look for large-caps with strong balance sheets and acquisitive histories (for example: Abbott, Boston Scientific, Zimmer Biomet) to be shopping as they add to their growth profiles and round out assets.
  • Private companies can consider engaging with public equity investors and sell-side analysts as early as Series B or Series C life-stage. Building an early and lasting relationship is important to help management understand Wall Street dynamics, build operational credibility as companies progress against key milestones, and help analysts better understand business dynamics. Rapport can continue to grow through challenging market cycles.

In conclusion, even in challenging markets, patients require care. Difficult conditions will abate over time, and there will be significant opportunities for companies to improve procedures, address healthcare costs, and contribute to better patient outcomes. 

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

Co-Authored by: Webb Campbell, Associate, Gilmartin Group & Noah Corin, Associate, Gilmartin Group

Webinar Recap | ATM Usage by Biotechs at a Time of Depressed Valuation

Moderators: Laurence Watts, Stephen Jasper

Participants from Cantor Fitzgerald: Steve Aldridge, Sameer Vasudev

Gilmartin Group’s Managing Directors Laurence Watts and Stephen Jasper hosted a virtual webinar with Cantor Fitzgerald’s Steven Aldridge, Managing Director of Healthcare Investment Banking, and Sameer Vasudev, Managing Director and Head of ATM Capital Markets. The discussion centered around ATM usage by biotechs at a time of depressed valuations. Our key takeaways below:


Key Takeaways:

ATMs are Essential for Public Biotech Companies
ATM stands for at-the-market offering, which describes the issuance of stock shares by a public company to rapidly raise capital. A company can sell at their discretion, taking advantage of rising stock prices and selling incrementally. Offerings are spaced out and can last for as long as a company wants. They tend to have significant advantages over traditional follow-ons because there is no set number of shares sold at a set price, affording the company flexibility. Every biotech company that will need to raise money should have an ATM in place. Greater adoption of ATMs has occurred from small-cap to large-cap companies over the past decade, as management teams begin to understand the ease of creating and using ATMs. 

ATM Utilization is Increasing
In the past few years ATM utilization has overall increased, however the past year in particular witnessed a decrease in ATM usage due to the reduced stock prices. While many biotech companies have put ATMs into place, it remains challenging to convince some boards to utilize them. Cantor predicts that as share prices recover and cash balances decrease, ATM utilization will rebound. Previously, they had mostly been used by hedge funds but are now being adopted by other funds, including both domestic and global investors.

Splitting ATMs Across Multiple Banks Should be Approached with Caution
While Cantor will participate in joint ATMs, they do not recommend it. Multiple banks being involved increases the risk of leaked information, which can be negative for a company’s stock price and financing options.

ATMs Provide Flexibility Around Clinical and Corporate Milestones
As most biotechs do not have revenue, earnings are often considered non-material events. Although the management team may have a personal trading blackout around quarter-ends, an ATM can operate through earnings. However, once a company is in possession of data, or far along in corporate partnering discussions, they would likely need to pause their ATM use.

Working with a Bank on an ATM can give the Company Access to the Full Suite of a Bank’s Services
Cantor is willing to provide comprehensive services to the companies they work with on ATMs. For them, ATMs represent an opportunity to build a long-term relationship with the company.

Be Ready to Take Advantage of Financing Options which will Change Rapidly as the Macro Environment Shifts
With an unpredictable and fast-moving capital markets environment, biotechs need to be ready to raise money when given the opportunity. ATMs can help companies take advantage of high-volume trading days. Despite some recent recovery in pricing, small-caps have largely been left out of the bounce back, but with more investors willing to put money to work, the financing strength of biotechs will increase as positive data and value-driving events occur.

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

Authored by: Henry Diamond-Pott, Analyst, Gilmartin Group

Webinar Recap | The JPM “Post-Conference”: Medtech Insights and 2023 Expectations

Earlier this week, Gilmartin’s Founder & CEO Lynn Pieper Lewis hosted a webinar with J.P. Morgan’s Annie Wernig (Managing Director, Healthcare Investment Banking) and Benjamin Burdett (Managing Director, Healthcare Equity Capital Markets) to discuss insights, trends, and 2023 expectations for public and private MedTech companies. Here are our key takeaways:


Key Takeaways:

There seems to be a cautiously optimistic tone around the MedTech industry and an increased focus on private companies and opportunities

  • Early sentiment entering the year was positive – during the JPM conference in January, ~30 MedTech companies pre-announced results or provided directional color with many revenue consensus beats supported by optimistic management tones
  • Importantly, investors are also engaging in fundamental analysis across both large-cap and earlier-stage companies, particularly on the private side
  • Overall, while a degree of market volatility is expected to remain at least through the first half of the year, 2023 is starting off with increased optimism among investors with both macro and micro-driven tailwinds expected to continue through the year

M&A, IPOs, and follow-on offerings may be more prevalent in 2023 vs. 2022

  • We have already seen a few notable M&A and fundraising announcements in 2023:
  • This trend is expected to continue, particularly as MedTech valuations further stabilize and access to capital at terms remains
  • However, ongoing volatility can still make it difficult for parties to align on valuation
  • For M&A, we are seeing incrementally greater focus on companies or assets that are close to breakeven or have a clear path to profitability
  • For IPOs, while the specific timing of a window opening is up for debate, there is an expectation for a medium amount of activity in 2023, with the first wave including more scaled companies that will likely set a sense of confidence for others


Investors generally expect companies pursuing an IPO to have ~$100mn in revenue (or a strong execution path) and a cash runway to achieve break-even

  • There is no hard rule on reaching profitability at a specific revenue threshold as there remains an appetite for growth companies if they can scale to profitability efficiently
  • Bottom line, it is important for private companies to maintain access to capital and demonstrate a strong execution path


Privates can start to engage with institutional investors ~18-24 months before a potential IPO to build upon their investment story and strengthen relationships

  • You do not want to be on the verge of going public and not have talked to investors, and 18-24 months before a potential IPO is a good timeframe to begin having those discussions
  • If you are further out from an IPO, having some forward-looking information could be beneficial
  • On the other hand, if closer to an IPO, you need to be sure that you can execute on what you disclose


Public companies can differentiate themselves by meeting/exceeding expectations (guidance), messaging effectively, and showing a path to profitability if possible

  • Setting and delivering against realistic expectations is important – inflated expectations have short-term benefit but a long-term risk of value destruction
  • At the same time, don’t forget to prioritize IR and develop relationships with the types of investors that are focused on your sector


Implementing a shelf registration (Form S-3) is encouraged, and generally viewed as good corporate housekeeping


We are still seeing a lot of volatility in the market, and it is smart for companies to take an opportunistic approach to raising capital

  • Given the amount of risk in the broader market today, understanding your options is important, and it is prudent to think about capital raising opportunities early on and prepare beforehand where possible

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

Authored by: Elizabeth Sparicio, Analyst, Gilmartin Group

Key Sector Takeaways Out of JPM

Last week was a welcomed return to the in-person J.P. Morgan Healthcare Conference held in San Francisco each January. The annual event reunited fervid participants and fostered meetings among investors, analysts, bankers and strategic corporate teams across both public and private clients. At Gilmartin, we see this conference as the first look into the upcoming market environment, and the positive response to results and guidance has us looking ahead to investor expectations for 2023. In this blog post, we’re breaking down our key takeaways across the Medtech, Biotech, Tools & Diagnostics and Services/Digital Health/HCIT sectors.

Public Medtech Key Takeaways

Key Takeaway: Macro dynamics improve and stabilize, setting the scene for recovery within the MedTech sector

Context: Underperformance, market volatility, and general unpredictability complied a mixed bag for companies in 2022, but the MedTech sector looks ahead to a more positive 2023 after a successful conference.

Additional Thoughts: Most companies delivered in-line to better-than-expected results as procedure volume recovery led to positive trends within the recovering MedTech sector and provided early visibility into an improved 2023. While some uncertainty remains, the space seems to be looking ahead to a healthy year.
Why this matters: Sentiment is a crucial indicator of investor interest and appetite and now is the time to set the stage, have conversations and execute goals.

What’s needed? Market recovery and increased clarity on the direction of the market. While procedure volume recovered and staffing shortages lessened, many held off on providing initial 2023 guidance or published conservative ranges to account for unpredicted volatility.

  • FX, inflation, supply chain, and China concerns are still looming and remain top of mind, and investors will look to Q123 for clarity.

In the meantime, growth remains essential, and there is a renewed focus on profitability or a pathway to it. Investors remain interested, engaged, and patient and will keep focusing on continued growth within the sector. Setting achievable expectations and upfront communication to enable future beats and raises is key for companies looking to capitalize on upside potential.

What investors are looking for:

  • Execution – clear communication of expectations and outperformance of goals
  • Continued market recovery – stabilization/improvement of macro trends will be critical to a healthy 2023
  • Profitability or a clear plan towards it

Private Medtech Key Takeaways

Key Takeaway: Incremental buzz building around the most mature private medical device companies with M&A likely a key 2023 theme

Context: 2022 marked by volatility, fewer private financings with many valuation contractions, no meaningful non-spin IPOs.

Additional Thoughts: As the gap in bid/ask valuation expectations appears to remain wide, companies are mostly “heads down” in execution mode as they bolster their investment theses and prepare to move opportunistically to raise private capital, move to an IPO process, or consider strategic options.

At Gilmartin we see the list of “public ready” private device companies already long and continuing to grow with many eyeing a window that may be open as soon as mid/late-2023 for first movers, and more broadly in 2024 (when companies more likely to get credit for FY25 expectations).

Why this matters: Time/attention of key investors increasingly at a premium and relationship building now will pay dividends in terms of reducing IPO execution risk.

What’s needed? Further clarity on Fed action cadence/inflation and the ability for U.S. economy to “soft land” as well as avoidance of exogenous geopolitical and macroeconomic headwind events will remain critical as investors and bankers eye the VIX and further upswing in risk-on sentiment.

  • Clarity on “time to exit” will further de-risk private financings, particularly for crossover investors who seem to remain more focused on existing portfolios and fair-valued publics.

In the meantime, VCs are still fundraising with meaningful dry powder. In SF around the conference many seemed incrementally eager to put in real work (many have mandates to deploy “rain or shine”) with interesting companies beyond just relationship development.

What investors are looking for:

  • De-risked (regulatory, reimbursement, TAM) platform technologies with upside potential over medium term.
  • Strong commercial execution and supercharged growth (50%+) despite challenging macro environment over last 2 years.
  • High level of predictability in model over medium run.
  • High margins with near-term path for EBITDA positive increasingly important – this may inform which companies move first towards an IPO.

M&A: Consolidation (transformational & tuck-in) likely a key theme for 2023 and 2024 as less mature private companies with interesting assets and significant potential TAMs but dwindling capital look to M&A to deliver long-awaited shareholder value.

  • Go Deeper: Shockwave Medical Announces Agreement to Acquire Neovasc

Biotech Key Takeaways

Key Takeaway: Bankers are keen to emphasize that Big Pharma is motivated by filling gaps in their portfolio (relating to patent expiry, etc.) rather than opportunistic buying at what most would consider bargain basement prices. The biggest opportunity for rapid value creation is among undervalued small/mid cap companies, which are already starting to show some signs of life at the start of the year.

Additional Thoughts & Context: When you’ve reached rock bottom, there’s only one way to go, and that’s up. Life sciences M&A activity remains near historic lows, with a handful of deals announced early in the week, and expectations for a continued anemic environment for consolidation. All deals ranged ~$1-1.5B and went for major (~100%+) premiums, perhaps a more encouraging sign entering 2023, compared to the lower premiums observed in 2022. Acquirers continue to highlight the attractiveness of the rare disease space (as well as CV disease).

What Biotech Investors are Looking for:

  • In the biotech world, we all know that data is king…but what kind of data? In the pre-COVID era, biotech investors were more willing to take risks on preclinical stage platform companies with cutting edge science. In today’s environment, cool science simply won’t make the cut as investors seek to fund de-risked companies with clinical data.
  • Investors have emphasized that the bar for capital allocation into private companies is higher now than it has ever been. Investors with optionality are pivoting their focus to the public markets.
  • Positive data and drug approvals continue to play a significant role in value creation and upward movement in stock prices in 2023.
  • Despite the chaotic market over the past three years, Sofinnova Partners Chair and Managing Partner Antoine Papiernik believes biotech is still in a much better position than it was a decade ago.

Tools & Diagnostics Key Takeaways

Key Takeaway: J.P. Morgan engagements were exceedingly positive across the Tools & Diagnostic sector, leaving an increased appetite for bolt-on acquisitions to consolidate a fractured market.

Additional Thoughts & Context: Headed into the conference week, sentiment was largely subdued for the Tools and Diagnostics sector, as investors weighed the economic backdrop and other macro factors against companies’ fundamental business outlooks. Against that backdrop, the sector provided predominantly positive updates for Q4 of 2022 – with nearly three-quarters of the companies preannouncing messaging. Looking ahead however, companies were less forthright on the outlooks for the year, with only a handful providing forward guidance for 2023. The reluctance to provide concrete guidance metrics for 2023 is unsurprising in our view, given the persistence of various factors including inflation, China uncertainty, COVID, and the state of the global economy – in turn creating uncertainty in sales cycles, geographic expansion, and capital markets activity. For growth companies in particular, investor focus remains on cash conservation/extension and, as applicable, paths toward commercialization/revenue and profitability.

Presentations from industry leaders highlighted financial flexibility to fund current business growth as well as strategic M&A opportunities supported by strong balance sheets and often a chest of cash on hand ready to facilitate acquisitions. Across the table, sellers and investors alike remain disciplined to make sure these assets ultimately end up in the hands of the best acquirer with proven management teams that will drive long term value growth and thus, willing to be flexible on upfronts for earnouts. Following the myriad of meetings last week, we came away encouraged by the fact that investors and management teams were aligned in crafting pragmatic structures that will ultimately benefit both buyers and seller

What Tools/Dx Investors are Looking for:

  • Clarity on sales cycles and business pipelines given economic backdrop
  • Impact of macro factors – China uncertainty, COVID, inflation – on operations, and active efforts to address those persisting
  • Activities to manage cash conservation and extend runway
  • As applicable, paths toward commercialization/revenue and profitability

Tech-Enabled Healthcare: Services/Digital Health/HCIT Key Takeaways

Key Takeaway: For tech-enabled healthcare and services, JPM started with a deluge of news flow (aligning with the atmospheric river we faced); but for the takeaway on preannouncements and 2023 guidance, companies were largely in line with expectations and included a few beats.

Context: With the macro backdrop of recessionary concerns, inflation, budgetary constraints, tight labor markets, this near-term caution was somewhat expected. Once the conference started, the sentiment turned more positive based on the solid fundamentals of the sector, the availability of strategic options and longer-term outlook.

Additional Thoughts: There was strong representation across the sector with roughly 100 companies participating in the space, ~60% of which are public and ~40% private. Notable sub-sectors included primary care provider groups; behavioral health; chronic disease management; care coordination; physician enablement tools for better engagement, workflow solutions and women’s healthcare groups.

What Investors Are Looking For & Key Themes from the Public Sector:

  • M&A – top of mind for companies with strong balance sheets prioritizing objectives to broaden clinical capabilities, solidify geographic footprint and/or enhance strategic partnerships
  • Importance of ROI amid the macroeconomic backdrop
  • Restructurings and divesting less profitable businesses to expedite pathways to positive cash flow and to extend cash runway
  • Clinical labor constraints persisting with many provider groups expecting labor costs to remain a pressure point; however, many citing deceleration in wage inflation compared with past years
  • Regulatory overhang around Medicare Advantage (MA) suggesting some potential reimbursement risk into 2024
  • While early innings for value-based care (VBC), continuing growth across capitated providers and companies investing in risk bearing capabilities
  • COVID impact waning since December, including on utilization

What Investors Are Looking For & Key Themes from the Private Sector:

  • Investors eyeing 2H 2023 for a re-opening of the IPO window with an expectation for further correction to private valuations, especially late-stage, to first catch up with public markets
  • High growth companies messaging shift to profitable growth as primary focal point rather than prior emphasis around growth at all cost
  • Gross margin profile to be key bridge to EBITDA profitability pathway
  • More non-financial KPIs (e.g., patient/member engagement metrics, clinician retention rates, workflow productivity measures)

Conclusion & Final Thoughts

Overall, we come away from the week incrementally encouraged by the state of the sector given the largely positive Q4 updates, while awaiting further clarity on how the space views the outlook for 2023.  

2022 saw volatility and uncertainty across all sectors, putting many investors on the sideline, but early looks at 2023 provide insight into what a shifting landscape could look like assuming recovery continues.

There has been a very broad reshuffle of talent across banks and funds that has fundamentally changed the landscape of key players since the ’19-’21 cycle that underlines the need to plan well ahead of time for an IPO. 

Although one never really knows where rock bottom lies, optimism is in the air. 1H23 is expected to see some follow-on offerings, PIPEs and private financings, with the IPO market possibly reopening in 2H23, subject to recovery in asset prices, an easing of geopolitical tensions, an end to U.S. interest rate increases. 2023, let’s go.  

To learn more about how Gilmartin strategically partners with our clients, please contact our team today.

Authored by: David Holmes (Managing Director), Alex Khan (Vice President), Kiki Patel (Principal), Brian Johnston (Principal), Hannah Jeffrey (Associate), Ryan Halsted (Managing Director) & Ji-Yon Yi (Vice President)

4 Things to Look for at JPM 2023

After a two year COVID-related hiatus, healthcare executives, investors, research analysts, bankers, and venture capitalists are once again headed back to San Francisco to meet with corporate management teams and greet old friends. While COVID-19 has somewhat loosened its grip on the U.S., its repercussions are still being felt in every industry, especially healthcare. Throughout the next week, tens of thousands of corporate presentations and 1×1 meetings will occur within a quarter mile of Union Square—most (if not all) of which we expect to touch upon these four topics:

  1. The U.S. economy
  2. Hospital staffing
  3. Foreign exchange rates
  4. 2023 financial guidance

The U.S. Economy

Starting with the elephant in the room, the state of the U.S. economy. In the first quarter of 2022, the federal funds rate was approximately 0%, and the Federal Reserve continued stimulating the economy by buying billions of dollars of bonds every month to ward off a potential COVID-related slowdown. Fast forward to today, the Federal Reserve has increased rates seven times in the last ten months to a rate of 4.50% as it tries to slow the overheated U.S. economy. Based on the Market Probability Tracker from the Federal Reserve Bank of Atlanta, the probability of an additional rate hike of 25 bps on March 13, 2023 is 92%, which would move the federal funds rate to a level not seen in over 15 years.

The question on everyone’s mind is, has the Federal Reserve raised rates so quickly that a recession is inevitable? According to a recent Washington Post survey of eight major banks, 75% of the participants predict a mild to modest recession starting sometime in the early spring or summer. In contrast, 25% believe the U.S. will “narrowly avoid” a recession. Recession or not, the rapid increase in rates has helped to lower inflation rates, including gasoline and food prices. Unfortunately, higher interest rates also typically lead to lower job openings, home sales, and equity valuations, all of which have occurred. With that in mind, investors will be listening very closely to the comments made by corporate management teams to help determine if the U.S. economy is destined for a 2023 recession.

Hospital Staffing

During the third quarter’s earnings cycle, over half of the 75 medtech companies we track cited a shortage in hospital staffing or the generic “macroeconomic headwinds” as a factor for a current or potential slowdown in sales. While hospitals typically deal with worker burnout and staff turnover annually, COVID has exasperated these issues. This phenomenon, coupled with increasing wages, has created problems for hospitals nationwide. With limited staff, hospitals have no choice but to postpone certain elective surgeries in favor of emergency procedures or surgeries with higher returns. As a result, we expect hospital staffing will be a hot-button question next week, and we will track this issue closely.

Foreign Exchang Rates

Starting in May 2021, the U.S. Dollar Index increased over 25%, peaking in late September 2022 at 114.10. While a strong dollar is great for companies looking to purchase foreign goods in a local currency, it hurts companies that sell their products in foreign currencies, as they must convert these foreign sales back to U.S. dollars. Throughout the third quarter earnings cycle, many of the larger healthcare companies mentioned the strong U.S. dollar as a reason for slower year-over-year revenue growth. Fortunately for these companies, the U.S. Dollar Index has decreased approximately 9% from its September high. While predicting foreign currency changes is best left to the experts, we expect most large healthcare companies attending the J.P. Morgan Healthcare Conference to call out foreign currency exchange rates during their presentations and 1×1 meetings.

2023 Financial Guidance

Last and certainly not least, 2023 financial guidance. First, the data. Based on the companies we track in the Medtech and Diagnostics sectors, the trend of pre-announcing financial results and providing forward guidance increased before the COVID-19 pandemic. However, this trend reversed over the past two years. As a reminder, the past two J.P. Morgan Healthcare Conferences have been conducted virtually.

  • 2016: 23% pre-announced; 9% provided guidance for the upcoming year
  • 2017: 28% pre-announced; 11% provided guidance for the upcoming year
  • 2018: 39% pre-announced; 17% provided guidance for the upcoming year
  • 2019: 38% pre-announced; 17% provided guidance for the upcoming year
  • 2020: 27% pre-announced; 14% provided guidance for the upcoming year
  • 2021: 23% pre-announced; 11% provided guidance for the upcoming year

In the past, we have advised companies to consider factors like the finality of the financial results and investor preference for consistency before pre-announcing and providing forward guidance during the week of the J.P. Morgan Healthcare Conference. However, we think this year is different based on the previous three topics we have discussed, and we expect the number of companies providing 2023 financial guidance could be less than 10%. For those companies that do, investors will be listening intently to help formulate their own thoughts on what 2023 could mean for healthcare stocks.

Conclusion

Next week, San Francisco will once again be overrun with healthcare investors, analysts, bankers, and corporate management teams overpaying for food, drinks, and hotels, all the while hoping to hear incremental information to help shape their investment decisions for 2023. Bring an umbrella.

Have fun, stay safe, and here’s to a better market in 2023!

Authored by:  Greg Chodaczek, Managing Director, Gilmartin Group

10 Tips for a Better J.P. Morgan Conference

JP Morgan 2023 is right around the corner. Readjusting to attending the conference in-person can be a bit daunting. To help spark your muscle memory and prepare you for a successful conference, we’ve pulled together our top 10 tips & tricks to a better, more efficient and valuable JPM week.

1 | If you’re going to refresh your deck, do it now, not during the first week of January when everyone’s sprinting to the finish line and dealing with rush prices and high stress levels. Messaging and thoughtful graphics take time, so be sure to carve out an appropriate amount of dedicated time in your schedule over the next week to finalize your presentation deck with your IR and communications teams.

2 | Focus on quality over quantity. Schedules for JP Morgan fill up quickly—prioritizing your meeting list with your IR team is essential to making sure your time and efforts during the week are as valuable as possible. Focus on buy-side investors and target funds you were unable to meet with on your last roadshow. Use residual space in your schedule for your covering sell-side analysts and those within your space who don’t yet cover your company. Strategic prioritization will allow you to have fewer conflicts, less exhaustion and likely a happier week.

3 | Have something new to say. JP Morgan is a time where many companies will display new strategies, revamped messaging and lay out next year’s milestones. To avoid falling flat in investor meetings, we recommend bringing something new to the table. No one wants to walk into a meeting to hear the words, “well, nothing much has changed.” A quick tip for remaining Reg FD compliant: consider putting out a “cleansing press release” ahead of time so that you’re free to talk about whatever you need to during meetings.

4 | Do the necessary health and wellness prep and packing. Get your flu shot and COVID booster in advance and bring painkillers, an umbrella and comfy pair of shoes with you. Nothing is worse than taking meetings when you are ill or aching, and with 2023 being the first in-person JPM since COVID, bringing your cough and cold into meeting rooms will largely be frowned upon.

5 | Have something to look forward to every day. It’s no secret that J.P. Morgan can be a daunting week and take a toll mentally and physically. Be sure to take care of your emotional wellbeing to avoid burning out too early in the week. Take time to hit the gym, go to a cocktail reception, meet up with an old friend or carve out 30 minutes of down time to rest. Being in the best mental and physical space will ultimately translate over into more productive, efficient meetings.

6 | Don’t drink too much/make sure you get enough sleep. Meetings can be tough to sit through as the week goes on, especially if you’re not the principal speaker. Maintaining a healthy balance between having some fun at networking receptions and getting enough sleep is essential. Try your best to look alert and interested in even your fifth or sixth meeting of the day. The overall optics of your management team during investor meetings can make all the difference.

7 | Optimize logistics and be amenable to going off-site. Companies aren’t the only ones who secure dedicated JP Morgan meeting space. Some financial institutions will only take meetings in their own reserved space or in their San Francisco office locations. Ensure that your IR team or scheduling manager is optimizing time by arranging your on-site meetings on the same day, and reserving space on other days for traveling around Union Square to meet with funds and investors in their dedicated meeting spaces.

8 | Don’t arrange your BoD meeting for JP Morgan week. Why make the week any more difficult than it has to be? There are plenty of other weeks in January. Board meetings take a lot of preparation, work and effort. Despite being “all in the same city at the same time,” a better use of energy and effort might be to catch-up with your board in a more informal setting over dinner or drinks and save the formal board meeting for later in the month.

9 | Consider only going for 1-2 days. Make efficient use of your time by limiting your attendance. This is also a great way to avoid extra costs, burnout and exhaustion. You can maximize your efficiency and minimize your down time by opting for 1-2 days. This goes without saying, but you can make yourself and the larger management team available during the rest of January to anyone whose schedules were unable to accommodate a meeting during your days at the conference.

10 | Use a mobile app like Expensify to track your expenses during the conference. Mobile expense apps make multi-day trips like J.P. Morgan so much easier. They save you the time and effort of going through all of your receipts when you get back to the office. Expense-tracking apps are quick, easy and mean that you can be done with classifying your J.P. Morgan expenses by the time you board your plan back home.

All-in-all, the JP Morgan conference takes an immense amount of planning, strategy and forethought. With decades of experience attending the conference, we hope that our Top 10 Tips & Tricks to a Better JP Morgan helps to further prepare you and your team for an intense week of meetings. To learn more about how Gilmartin strategically partners with our clients, please contact our team today.