The Un-stealthing Process for Early-Stage Private Companies

For early-stage private healthcare companies, the process of un-stealthing is thematically similar to the process of becoming a publicly traded company; namely, the company has to prepare for increased scrutiny from external parties. Therefore, when making the decision to un-stealth, when and how to do so should be decided in the context of several important considerations. 

Considerations

First, is your company ready to share its clinical and regulatory progress? The public eye, particularly investors, will be acutely focused on the current profile of the company and the progress they expect to make. Of course, early-stage private companies are not always ready to share granular timelines for clinical and regulatory milestones. For this reason, it is critical to develop a refined messaging strategy that remains sensitive to the inherent uncertainties of early-stage companies while simultaneously building the foundation for credible disclosure.

Second, does the company have the team in place to manage external communications? Most early-stage companies are laser focused on internal development, and rightfully so. However, the un-stealthing process will invite regular engagement with media, banking partners, and interested investors. While aligning on messaging is important, it is even more important to have the people in place to deliver the message effectively. 

And lastly, does the timing of your un-stealthing offer strategic value to your company? In other words, how does increased disclosure support future business development or financing goals? Timelines for a financing will often be set against the backdrop of positive news flow and encouraging macroeconomic conditions. Un-stealthing can provide further support toward a financing event, given later financing rounds often require a broader audience from the financial community. For this reason, it is important to align the two activities properly. This is arguably the most important consideration, addressing the “why” behind the decision to un-stealth.  

Preparation 

Once these considerations are carefully examined, the next step is a detailed preparation of strategy and materials as the company opens its doors to the public. 

Preparation starts with proper messaging. Communicating the value proposition of your company and laying out the milestones you expect to achieve requires careful consideration of the competitive landscape and an accurate projection of how ongoing activities will develop. The goal should be to lay out messaging that conveys excitement about what you bring to the market, without placing company representatives in a difficult position if developments do not go as planned. 

Subsequent materials should flow through from these key points to ensure consistency in communications to external parties. The materials key to engaging the financial community include the company’s corporate deck, website, and press releases, to name a few. An emphasis should be placed on clear and concise materials that engage investors and leave lasting impressions.

Finally, companies should plan out a comprehensive calendar of events and activities. Investor conferences, trade shows, and IR planned events are excellent venues for conveying the company message and engaging with those essential to the future development of the company.  A specific event may be leveraged to serve as the company’s debut, allowing the company to control their narrative from the very beginning. A target audience and a financing strategy should inform when to engage and what events to partake in. 

Gilmartin Group partners with many healthcare innovators, both public and private, to build nuanced communications strategies, developing sustainable messaging that sets companies up to build credibility over time while clearly conveying the differentiated value they provide. We partner with leading public relations and graphics firms to help companies build a website and corporate deck that reflects their objectives in a clear and concise manner. And most importantly, we act as a strategic advisor in contemplating the decision to un-stealth. Contact us today.

Noah Corin, Analyst

How to Leverage Your IR Calendar for Success

The IR calendar is a vital tool used by any investor relations professional. One of the most important aspects of IR is making sure that your management team is regularly in front of investors without limiting their ability to run their business. Ultimately, it is a delicate balance. The IR calendar allows the IR team, management, the company’s board, and other relevant stakeholders to look at the program holistically and understand where management should be spending their time with investors throughout the year.

Key Events to Include on Your Calendar

There are a few aspects of the IR calendar that are relevant for all companies: earnings reporting dates, press releases, industry events, investor conferences, and Board of Director meetings. As we have previously discussed, companies with larger market caps are more likely to be covered by more sell-side analysts than their smaller counterparts, and, in-turn, will likely be invited to more investor conferences. As such, management will likely draw a large investor audience. Smaller companies, on the other hand, are less likely to have broader sell-side coverage and won’t be invited to as many conferences. This is where it is up to the IR team to be creative in its approach to filling up the IR calendar. One option could be a conference in which the company pays the investor conference provider to participate. Another option could be asking your sell-side analyst to host a Key Opinion Leader (KOL) call in order to highlight a specific product or product line. This will drive investor awareness to your company’s story by allowing an independent voice to opine on use and efficacy of your company’s offerings.

Timing is Everything 

After you add earnings dates, investor conferences, and Board meetings to the calendar, it is useful to look at timeframes in which the company can participate in a non-deal roadshow. A good timeframe is typically after the company reports its earnings results and before the close of the quarter and/or in conjunction with key company events, like a new product launch or FDA clearance of a new drug. Additionally, it is beneficial to look at companies that are covering banking industry conferences for the year. If your company is invited to participate in a covering bank’s conference in March, a non-deal roadshow with the same bank in April might not be the best idea, as the same investors would likely be targeted by that bank. Instead, see if the covering bank has the ability to host a non-deal roadshow in August or September, so that if the bank targets the same investors, they will have had a chance to do more research on the company and take a position in the stock.

A regular news flow is important for all companies. However, releasing news too frequently or too infrequently may have negative effects on your company. Issuing news too frequently can dilute your messaging, so that when you do have news that will move the needle, investors won’t pay attention. Conversely, if you release news too infrequently, investors won’t pay any attention to the company, and those who were on the fence about taking a position might be discouraged by the lack of news. The IR calendar allows the IR team and management to think strategically about timing and frequency of issuing press releases. It is often a good idea to issue a press release prior to an investor conference in order to leverage the news in conversation with both existing and potential shareholders.

Another way to keep a steady news flow is to issue press releases outside of the regular earnings cycle. For example, if you report your quarter in early May, it might be beneficial to wait a month before issuing news so that your company’s name is in front of investors outside of the busy earnings season.  Additionally, if your company plans on hosting an analyst or R&D day throughout the year, use the IR calendar to find the best time to attract the best audience possible.

Conclusion

In all, you can add just about anything to the IR calendar, even if at first it has a note of Date TBD, Target Event, or Potential Press Release. In fact, it is beneficial to add these target events to the calendar as it reminds management what is on the horizon so that they can plan accordingly.

In recent years, the IR calendar has become even more flexible as many meetings have become virtual. We have discussed this in a past blog post, Revisiting Your IR Calendar. At Gilmartin, we have created countless IR calendars for companies of all sizes. If you would like to learn more about how to leverage your IR calendar for success, contact us today.

Jack Droogan, Analyst

 

How Public and Private Biotech Companies Should Utilize PR

Recently, the Gilmartin biotech team hosted a webinar with Berry and Company, discussing how public and private biotechnology companies should utilize public relations (PR). If you were unable to attend, you can watch a replay of the conversation. Gilmartin Group’s managing director Laurence Watts and principal biotech Stephen Jasper interviewed Berry and Company’s Bill Berry, Adam Daley, and Jenna Urban about the value of PR and how it differs from investor relations (IR). Berry is the founder of Berry and Company. He currently serves as a principal, bringing over 30 years of experience in the industry and holding specialties in media relations, business and medical writing, corporate positioning, and crisis communications. Daley is the head of social media services at Berry, working with the company for just over ten years. Finally, Urban serves as a vice president at Berry, working with the company for about seven years, focusing on traditional media. We recommend watching the entire webinar to capture all of the insights the Berry team shared, but here are a few central points we wanted to highlight.

There is some confusion between IR and PR among biotech executives. At times, and with certain accounts, our service offerings can appear to have some overlap, but as a PR agency, how would you define the difference?

In most of our engagements, Berry stated that they work with a separate IR team, and it is a very collaborative relationship. There is some overlap, but not a lot. With investor relations, the goal is to work with investors. On the PR side, we’re talking to a broader audience. The language, tone, and techniques one can use while talking to clinicians or patients are very different from the approaches you use with investors. In terms of social media, Berry ensures creative ideas and initiatives will appease investors as well. Furthermore, when posting content on social media, no one can guarantee that only investors will see it. The tone of each post must fit the entire potential landscape – which can include patients, clinicians, and even investors. The benefit here is learning what approaches and tones work best for specific audiences.

Why does Berry not do IR like some supposedly “full service” agencies?

They are different professions – IR and PR require different skill sets. IR deals with analysts, broker networks, and the overall complexities of investing. They stated that it is a matter of what kind of communication you prefer. They prefer to engage with patients and work with clinicians to increase disease awareness and highlight the unmet need. The Berry representatives noted one of their essential roles is to help scientists explain their science. This won’t always resonate with investors, but it will resonate with patients and clinicians who might use the products down the line. Those target audiences often require very different messages. Overall, the company strives to speak with patients and clinicians firsthand. They stated, “It reminds us why we do the work that we do, you know, to get important information out there that patients and clinicians could find useful and help them make good healthcare decisions.”

When companies employ PR and IR, how do you think responsibilities are best split?

The communications do divide neatly. We will often support with messaging and provide help with presentations. If it is a data announcement, the IR team will take the lead. Berry will take the lead on releases that deal with subjects such as Rare Disease Day. They work with IR teams a lot on developing corporate decks because that is something that has applications across the board. Daley chimed in to add that there are many ways that social media efforts complement IR teams. He stated, “We’ve seen many Key Opinion Leader (KOL) events lately, where companies will bring in a KOL to talk to investors. We then use social media to get the word out. That is probably the key piece here, no matter who’s working on the press release. As long as we’re all connected and discussing the messaging beforehand, it usually is a successful collaboration.” In IR, investors are the primary target; you need to keep your investors engaged so your development program will resonate with patients or clinicians in the early stages. During this pivotal time, Berry will initiate collaboration with the IR team to build out capabilities and services slowly and expand to other audiences.

How should biotechs think about social media and how can you help in this regard? 

Biotech and pharma leaders should look at social media as an opportunity. The group noted that there was a time when companies “were sort of afraid of it in 2014. The FDA put out guidance for the industry on how to use social media, and we saw a massive shift around that time when everyone changed from ‘I need to convince clients that they should be there’ to ‘we need to be there, which platform should we use?'” Social media is about your thought leadership, your disease awareness opportunities, and building your company’s influence, which is where Berry would jump in.

Social media is like a microphone. Companies are talking directly to your stakeholders – patient advocacy groups, investors, the media and clinicians are all at your fingertips. The key is to be targeted. Before you even pick a platform, you must step back and say, “Who are we trying to engage with specifically? What organizations will make a list? You are not trying to reach millions of people; we would never recommend a client go viral. The goal is to find a handful of the most critical stakeholders and determine what platform they often use. Once you pick your platform, you build your content to engage your target audience. Often, leaders in biotech and pharma do not realize how powerful their existing networks are already; they can have 50 or 100 connections on LinkedIn, all of which belong to their target audiences. They also noted that many people do not have the time to sit down and become good at posting regularly, and that is where an agency like Berry steps in. Berry will take on the responsibility, provide guidance, and manage the logistics.

Throughout the webinar, Berry and Company emphasized how it works with companies of all stages. However, they do welcome collaboration with IR companies to provide clients with well-rounded care. The company noted the lines between the work of PR and IR companies are clear but again emphasized collaboration works well with proper communication and mutual understanding. Social media is incredibly relevant in today’s society, and Berry and Company is always ready to take the lead and utilize pre-existing or new connections to help spread a company’s message.

To hear the full conversation, be sure to watch the replay. If you have questions about how we strategically partner with our clients, contact the Gilmartin team today.

Rachel Mahler, Analyst

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

Understanding Short Interest for Recent IPO’s

It is no secret that newly listed companies face a host of issues that many established public companies do not face. Whether it be a lack of executional credibility or liquidity issues caused by the lock-up period, management teams are often fighting an uphill battle during the early days of being a newly public company. Regrettably, these issues can manifest themselves into short positions. Understanding the true impact of short positions gives management teams an accurate view to build a plan of action to combat a short thesis.

When a recently listed company is evaluating a short position, it is essential to evaluate the position as a percent of float rather than a percent of shares outstanding. As is common with newly listed companies, a large percent of shares outstanding will not be regularly traded in the open market. This is especially true in the early days following a company’s IPO before the lock-up expires. When you put your position in the context of daily volume, as a percent of float/outstanding share, you get a more accurate view of the active short position.

Interpreting the Short Position

  • <5%: Should be of no concern
  • 5%-10%: A developing view the stock will underperform
    • Possible Drivers: Competitive products will limit upside and/or sentiment, expectations set by management are too high, whispers exist that create noise or challenges for new buyers
  • >10%: A reasonably well-defined short thesis exists
    • Drivers: Market participants have a view the stock will significantly underperform peers due to a lack of buyers

How to Resolve the Situation

The threshold for management teams to start actively managing communications around their short position is typically ~8%. At this level, it is essential to recognize there could be a building position on the horizon; management teams should actively work to mitigate that risk. The best and often easiest way to combat a building short position is to execute on your publicly stated goals, which should drive stronger financial performance. It can also be helpful to discuss short views and negative feedback with sell-side analysts to understand what they and the buy-side sees as “headwinds” to investment.  A typical thesis might suggest one of the following explanations: guidance is too high, a lack of confidence in new product expectations, developing competitive landscape dynamics, cash burn issues, dilution concerns, etc. There are times when negative sentiment surrounding a company will lead to elevated short interest but not at a material level; it is only a cause for concern when short interest starts to become a considerable amount of shares outstanding or float. Understanding the perception of your company by outsiders is crucial to addressing the underlying problem.

The flip side of a low float for short investors is that it is very difficult to exit the position if needed. The shorts could be taking liquidity risk with their position, just as large holders do. If short interest is more than five days to cover (i.e., short interest ratio is days to cover), it will take the shorts some time to close out their position at 10-20% of daily volume. When liquidity is low and short interest is high, the short fundamental view will be compounded by the low liquidity of the short position. Shorts need to be right, especially when liquidity is low, so that the selling volume is available for them to cover their positions. If the shorts are wrong, there is not only no selling volume to cover other buyers in the market, but also the potential for a “short squeeze.” This will drive stock higher, mostly due to the lack of liquidity from sellers.

A low float is an unfortunate reality most recent IPOs experience, which usually introduces many company-specific issues. Understanding a company’s float in comparison to active short positions is crucial when thinking about external messaging, liquidity considerations, and business execution. Gilmartin Group can help you navigate floats and determine the smartest moves for your company. Contact us today.

Webb Campbell, Associate

Impacts of Labor Dynamics on Hospital Finances and the Healthcare Industry

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

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

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

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

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

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

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

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

Alex Khan, Vice President

 

Recap of Webinar: Demystifying ESG Reporting for Healthcare Companies

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

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

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

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

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

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

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

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

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

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

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

What feedback have you received since publishing your ESG reports?

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

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

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

Patrick Smith, Analyst

How to Navigate Clinical Development Setbacks

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

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

What to do when you receive notice from the FDA?

Is it a full or partial hold?

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

Are clinical holds only due to adverse safety events?

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

What should your investor relations plan be?

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

Who should be notified?

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

Additional Considerations 

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

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

Silinda Neou, Associate Vice President

 

 

Recap of Webinar: Debt Financing for Emerging Biotechs

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

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

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

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

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

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

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

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

What are the prerequisites for lending?

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

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

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

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

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

To hear the full conversation, be sure to watch the replay. If you have questions about how we strategically partner with our clients, contact the Gilmartin team today.

Rachel Mahler, Analyst

Ins and Outs of “Down Rounds”

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

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

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

For Example: 

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

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

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

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

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

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

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

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

Louisa Smith, Associate Vice President