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

Tips & Tricks for a Smoother Earnings Report

Management teams are constantly juggling numerous tasks, and they often look for ways to improve and expedite processes. For public company management teams, reporting quarterly earnings is of critical strategic importance, requiring meticulous thought and consideration. If not planned properly, earnings calls can cause unnecessary stress. This blog post will cover some of the tips and tricks that Gilmartin recommends to management teams for a smoother earnings report.

Reporting earnings may be one of the only times in business where it is recommended to be a follower instead of a leader, as management teams do not want to be an outlier when compared to peers. Considering this, most management teams follow a similar cadence when reporting earnings. Management and their investor relations team should plan ahead and agree on a gameplan to execute.

The first step management teams and their IR partners should consider is the target reporting date. Most public companies follow a historical pattern, i.e., the first Tuesday of the given earnings season. When reporting for the first time, newly public companies should carefully consider the date and time they choose (pre-market or post market reporting). This establishes a precedent for future reporting periods. With this in mind, management and IR teams should begin planning for earnings roughly six weeks out from the target date.

Six Weeks Out from Target Date
The IR team should provide management with an earnings prep calendar. This calendar should include an outline for the initial kick-off call, due dates for drafts of the press releases, call script, and scheduled times for mock Q&A sessions. The IR team should also schedule weekly prep calls with management, as it is critical the process remains on track. At the same time, the IR team should plan to confirm conference call/webcast logistics with the service provider early, given the recent traffic that platforms have been experiencing due to the increase in virtual events compared to pre-COVID times. Furthermore, we suggest preparing the advisory release with a target date of two weeks prior to the earnings call. Even more, the IR team should update the earnings release and call scripts from the previous period. It is essential to start the reporting process early to minimize any scrambling at the eleventh hour.

Four to Six Weeks Out
The IR team will create an outline for the earnings call script, which should consider larger themes and trends from the quarter, as well as a first attempt at guidance. Additionally, the IR team will begin tracking peer and sector earnings dates to stay up to date on market dynamics and sentiment.

Three to Four Weeks Out
At this point in time, teams should create the first iteration of the press releases and the script. Hash out ideas, suggestions, and edits during weekly prep meetings. It is important to remember that not everyone will agree on specific communication and language at this point.

Two Weeks Out
The IR team will review and make any changes to the company’s distribution list which includes covering analysts, shareholders, and anyone management chooses to include.  Once the list is in place, the IR team will issue an advisory press release to update the public when the company will host its earnings call. The IR team at this point should schedule follow-up calls with covering analysts, ideally on the day of reporting when the topic is still fresh on minds of the involved parties. Together, management and the IR team will make another turn on the earnings press release and the script. Additionally, management should begin to consider responses to the question list provided by the IR team. It is important that management is prepared to answer questions confidently and consistently across the board.

One Week Out
The IR team should continue to track sector and peer earnings trends and provide updates to their clients. This helps management make informed decisions regarding guidance, as the company does not want to be an outlier with what they choose to disclose. At this point, the IR team should request financial tables from the CFO to include in the earnings press release. With quarterly trends becoming clearer, management and the IR team should make another turn on the press release and script and confirm the final versions. Additionally, the IR team should touch base with management during weekly prep calls and perform practice Q&A.

An emerging trend among management teams is pre-recording the earnings call instead of reading the prepared remarks live on the day of the call. Pre-recording the script eliminates the stress of performing live and fumbling over words, and it also allows management teams to focus solely on the analysts’ questions the day of the call. We highly recommend this approach. The pre-recording can be done whenever management is comfortable with the script; ideally, it should be completed a few days to a week before the reporting date.

Day of Earnings
The IR team should confirm the final version of the press release and issue it to the exchange the company trades on. The IR team will then host and lead the earnings call, making sure to take notes during both the call and follow up meetings. The team should pay special attention to new investors and analysts and write down any questions they might have.

Following the call, the IR team should provide management with the call transcript, analyst notes and snapshots. In the days to follow, the IR team should provide management with an updated consensus model and IR deck, both of which will be posted to the company’s IR website.

Like anything in business, reporting earnings should be taken seriously and given a great amount of thought and collaboration. With the proper guidance from the IR team, reporting earnings can be a smooth and stress-free process. It’s all about starting early, being organized and executing each step with collective thoughtfulness. Contact our team today for guidance on your next earnings call.

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Oliver Eberth, Analyst

 

 

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How COVID-19 Continues to Affect Earnings

Twelve months ago, society as we knew it changed forever at the hands of the COVID-19 pandemic. As a result of this increased volatility and certain negative impact on health care systems and the global economy, public company executives had no choice but to withdraw 2020 financial guidance. This led investors to ask tough questions around underlying business trends on what felt like shorter and shorter time horizons. Under “normal” circumstances, management teams would never dream of providing this level of detail and transparency, as it ultimately introduced risk that could be avoided by focusing on the intermediate to long-term trends. Interestingly, management teams who skillfully updated investors on monthly (and sometimes weekly) business trends were able to enhance their credibility by delivering on what they said. Given this backdrop and declining COVID-19 infection rates, one of the biggest questions heading into Q4 ’20 earnings season was whether or not small/mid-cap med-tech companies would issue full year 2021 guidance. At the start of earnings, everyone had an opinion on what companies should or should not do, but with Q4’20 earnings behind us, some interesting themes have emerged.

As detailed in Exhibit 1 (see below), 25 of the high-growth med-tech companies have reported Q4 ’20 results, with 16 issuing full year 2021 revenue guidance. Within this group, 4 issued guidance above consensus, 6 were roughly in-line with expectations, and 6 were below. Not surprisingly, companies who guided above consensus estimates saw their shares rise roughly 4% (excluding Inari), while those who came in below saw shares decline roughly mid-single digits as a percent. What is more interesting, but also not surprising, is the variability in stock prices of companies who did not issue guidance (ranging from down 7% to up 9%). Realizing this is a simple analysis and that each company is uniquely impacted by the COVID-19 pandemic, the results are still noteworthy.

More specifically, if you combine all 25 companies, those who did not issue guidance are scattered evenly throughout the broader group – Exhibit 2 (see below). The point being that companies who issued guidance are not necessarily being rewarded for it at this point. While guidance allows management teams to put a stake in the ground for the year, investors know they cannot rely solely on management’s guidance at this stage in the recovery, given macro uncertainty and idiosyncratic risk at the company level.

So, what is right and what is wrong? While we like to believe there are heuristic shortcuts when presented with two options, as is the case in all facets of life, decisions are not made in a vacuum. When presented with the option of issuing guidance, it is not IF you do it but HOW you do it. Specifically, the logic and confidence at which you deliver a message is sometimes more important than the message itself.

What’s next? Since Q1’21 negative trends are likely fully priced in, investors will be keenly focused on: 1) what the COVID recover looks like in Q2’21 and if the backlog recapture is as robust as it was in Q3’20 and 2) what the back half of 2021 looks like with limited COVID headwinds. In less than 50 days, this is the communication challenge that management teams will need to grapple with to properly maintain expectations.

The team at Gilmartin is experienced in helping companies deliver compelling messages. Contact us today for help crafting your next public message.

Exhibit 1

 

Exhibit 2

Matt Bacso, Principal

 

Reinstating Guidance for 2021

Is it Time to Bring Back Guidance for 2021?

When the COVID-19 pandemic started to affect the world in early 2020, nearly every business saw an immediate and meaningful impact on revenue. Public companies began withdrawing financial guidance that was previously provided for the fiscal year 2020 as well as any outlook leading into 2021 due to lockdown restrictions, social distancing mandates and growing uncertainty.

As the year progressed, resurgences in COVID-19 cases were occurring all over the country, and even into 2021, we continue to see the impact. With fourth quarter earnings reporting wrapping up, as we close in on the end of the first quarter for 2021, there are notable trends that public companies must consider when deciding whether or not to reintroduce formal guidance for 2021.

Keep it Conservative
Looking toward healthcare, hospitals are remaining open to elective surgeries and the singular focus on COVID-19 has slowly started to shift back towards normalcy. Concurrently, we have noticed the reintroduction of guidance by a large portion of medical technology and diagnostics companies for fiscal year 2021. While sentiment in returning to pre-COVID growth is high, reporting companies are taking a conservative approach.

Through February, more than 75% of these reporting companies have reinstated some form of formal guidance for the year. On average, those providing guidance have given a range of approximately 3.5% and have kept their estimates conservative. The large range stems from concerns looming around new potential shutdowns, vaccine efficacy and the development of new strains which may lead to further drawbacks on revenues.

If you are reinstating guidance, consider providing a larger than normal range with a focus towards the lower end to maintain a conservative outlook. Additionally, develop messaging around the guidance that will help the investment community understand the ongoing constraints that may impact the business. While quarter-over-quarter growth through the pandemic has been promising, the comparison to recovery to pre-COVID numbers should be front of mind.

If you have not yet reinstated guidance for 2021 and your business is trending back towards predictability, it is time to consider doing so.

If Unsure, Wait
While many large and mid-cap companies have started to provide guidance as they report fourth quarter financials, there are still small-cap and sector specific companies that remain impacted by COVID-19.

Ongoing pandemic impacts only fuel uncertainty when taking COVID-19 resurgence, potential low vaccine efficacy, and new strains into consideration. If your business continues to see a substantial impact through the first quarter of 2021, it is best to hold off providing guidance until predictability is reached.

Keep in mind that a conservative approach is best. If management remains committed to providing guidance, consider a larger range with a focus towards the lower end, coupled with transparency.

Final Thoughts
Wall Street is understanding of the ongoing headwinds companies are facing due to COVID-19. It is no surprise that industry leading giants with stable businesses have been able to provide guidance earlier than most. As recovery continues among all companies, the thought of providing financial guidance should be front of mind.

If your company has found predictable growth over the last few months and financial guidance has not been implemented, it should be. With a majority of companies seeing growth trends into the first quarter of 2021, guidance is to be expected. If your company continues to face obstacles due to COVID-19, maintain the position of no guidance.

It is better to under promise and over deliver than to over promise and under deliver. No matter your decision, remain conservative in your estimates and be transparent with the investment community. Increased transparency and a conservative approach in discussions can provide Wall Street with color on the current state of the company in lieu of formal guidance for the year.

The team at Gilmartin is experienced in helping companies prepare meaningful financial guidance. Contact us today for help with preparing guidance for your company.

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Collin Beloin, Associate

 

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Intro to Quarterly Financial Reporting

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

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

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

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

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

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

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

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

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

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

Kelly Gura, Analyst

More Timing Considerations For Earnings Calls

In a 2017 blog titled Important Timing Considerations For Earnings Calls, we covered several things to keep in mind when scheduling quarterly earnings calls. In this blog we will review the quarterly reporting requirements and expand and look at a couple more considerations.

An earnings call refers to the time when publicly-traded companies host a conference call to review their financial results of a prespecified, 90-day period. For every earnings call, companies must submit a report to the SEC for review; there are two versions of this report – a 10Q and a 10K. Both types of report summarize the company’s financial performance and disclose certain information to stakeholders and shareholders. 10Qs are filed in conjunction with the results of the first three quarters of a calendar/fiscal year, while 10ks are only filed in the final quarter of the year and include data from the entire twelve months of a company’s calendar/fiscal year.

While the SEC only requires companies to file 10Qs and 10Ks, nearly every company hosts an earnings call prior to filing these reports. This allows management teams to craft and deliver a personalized message to their shareholders and host a live Q&A session with sell-side analysts.

As you might imagine, these calls are very important for both companies and investors. Since quarterly earnings calls are a valuable tool to get new investors to purchase stock and shareholders to hold or increase their position in the stock, everything must be perfect. With a long list of materials to prepare for the call, the date and time of the call can often be overlooked.

Every company has a maximum of 45 days to file a 10Q after the first three quarters and 60 to 90 days to file a 10K after the year-end. Finding the perfect day and time for an earnings call isn’t as much of an issue for larger companies because they have a faster audit process which allows them to schedule their earnings call during a much quieter part of the earnings season. On the other hand, mid to micro-cap companies take longer to complete the audit process and prepare their 10Qs/10Ks and, therefore, have fewer options for scheduling their earnings calls. This results in a competition for the mindshare of Wall Street and the investor community.

For companies trying to expand their reach on earnings calls, there are two very important things to keep in mind: the timing of competitors’ earnings calls and the amount of covering sell-side analysts who will join the call and ask questions.

Timing of Competitors’ Earnings Calls

This first point is important for every company but can have a much bigger impact on smaller public companies. Because investors have limited capacity, especially during earnings season, small companies should avoid making potential investors decide which earnings call they will tune in to.

Although the reasoning behind this strategy is obvious, it can be difficult to execute because most companies set internal dates for their earnings calls at the beginning of each year but do not make the exact dates/time public until an advisory press release is published, roughly two weeks before the call. That said, companies typically follow a pattern and report on the same day of the week for every earnings call. Given that one of the main goals of an earnings call is to maximize exposure to the investment community, finding these trends is definitely worth the time.

To discover such trends, look for the “past events” or the “events and presentations” section on a company’s Investor Relations web page, or look at transcripts of past earnings calls.

Capacity of Sell-side Analysts

In addition to looking at the timing of your competitor’s earnings calls, it can also be beneficial to check on times that work for the covering sell-side analysts.

First, sell-side analysts will likely ask the management team to clarify something that might not have been as clear as intended, or they may even ask the management team to go into greater detail on an important development or aspect of the company. The answers to these questions can save investors valuable time when doing their research after the call.

Second, sell-side analysts that cover your stock want to show their support of the company when they can, so touching base with them regarding their schedule during earnings season is a great way to maintain or strengthen your relationship. It can also help shorten the turnaround time of their research reports that are published after the earnings call.

Conclusion

The earnings season can be a hectic time for all parties involved, but carefully considering aspects that seem small can make all the work and time spent leading up to the main even that much more worthwhile.  We closely track the timing of earnings calls each quarter, so contact us for help in optimizing the timing of your quarterly calls.

 

Hunter Cabi, Analyst

Should All Companies Prepare Quarterly Earnings Slides?

As we have stated in multiple blogs, quarterly earnings calls are possibly the most important form of communication that companies have with the investment community. With the advent of Regulation Fair Disclosure (Reg FD), the earnings call is an ideal opportunity for management teams to avoid selective disclosure and provide company information to all investors at the same time. Because of the importance of these calls, investors now expect corporate management to not only provide a quarterly financial update, but also offer business updates.

Over the past several years, many mega and large-capitalization companies have started incorporating PowerPoint slides into their quarterly earnings reports and conference calls. While adding a presentation to an earnings call can help alleviate some investor questions, should every public company utilize this tool?

Below are some of the pros and cons of quarterly earnings slides.

Pros of Quarterly Earnings Slides

  • The financials are clearly displayed. A quarterly earnings presentation will typically include quarterly financials and company-specific metrics. Having these numbers in a presentation allows investors and analysts to concentrate on what management is saying instead of spending a large portion of time writing down financial measures and metrics. While there are several services available that can transcribe earnings calls for you, they typically take several hours to have the “revised” transcripts available.
  • Reconciliation between GAAP and non-GAAP earnings. All public companies in the United States are required to report quarterly earnings according to generally accepted accounting principles (GAAP) developed by the Financial Accounting Standards Board (FASB). Through acquisitions, corporate restructurings, etc., a company’s “true” quarterly performance may not be represented by GAAP reporting.  The Securities and Exchange Commission (SEC) allows public companies to report non-GAAP measures as long as these companies report comparable GAAP financial measures and a step-by-step reconciliation of the two reporting methodologies. While these measures and their non-GAAP to GAAP reconciliations must be included in the quarterly financial statements, a quarterly earnings slide deck that includes an earnings reconciliation can be very helpful to investors.

Cons of Quarterly Earnings Slides

  • You will likely set a precedent. Investors like quarterly earnings presentations because they help ease the burden of listening and note taking during earnings conference calls. Unfortunately, once a company begins down the path of supplying a quarterly earnings presentation, investors will expect one every quarter.
  • Metrics. As stated above, earnings presentations typically contain quarterly business metrics. Companies should be very careful about which metrics should be given as investors will expect to see them each quarter.
  • Creating a slide deck can be time consuming. Putting together a quarterly earnings PowerPoint slide deck takes time, and adding another “to-do” to a quarterly earnings cycle may be too difficult for some smaller companies.

Supplemental quarterly earnings presentations are appreciated by investors and analysts because they consolidate important financial measures into one, easy-to-read document. It is possible that adding another document to the financial reporting cycle could put an unnecessary burden on some companies. However, as companies become larger, offer more products, or make acquisitions and divestitures, having a concise earnings presentation can be very helpful in understanding the “true” financial state of a company. If your team is looking for guidance in creating a quarterly earnings presentation, or simply looking for advice on strategy for a slide deck, we’d love to help. Contact Gilmartin today to get started.

Greg Chodaczek, Managing Director

Financial Modeling for Biotechs

The average publicly listed biotech generates neither profit nor revenue. As such, so-called “quarterly earnings” announcements are typically non-events. Instead, management teams use quarterly releases and occasional “earnings calls” to update The Street on strategic events or pipeline development. While other companies and their following analysts fret over sales growth, gross margins, and market penetration, the world of development stage biotechs is almost entirely focused on proving efficacy and safety. Biotechs are typically about the promise of cake tomorrow, rather than the size of today’s slice, its flavor, and whether or not it comes with ice cream.

That being said, biotech managements need to have a comprehensive in-house financial model, not just of their administrative and development cost projections, but also of the potential market opportunity for each of their pipeline assets. This is especially important around the time of your IPO, when you will need to hold a teach-in for your prospective covering analysts. At this time, and while you are still a private company, you can share the details of your model to guide analysts who are thinking about the commercial prospects for your potential therapies. Analysts are free to agree or disagree with your numbers and market assumptions, but the more logical and transparent you are, the more likely analysts are to share your views, and the more successful you will be in building a consensus around numbers similar to your own.

Here are a few points to consider when putting together your biotech financial model:

DON’T get too complex.

Any Wall Street analyst can tell you that the models built to simulate companies can get very complex; however, they pale in complexity compared to the in-house models created by some biotechs. There are a number of reasons for this. An analyst may have 20-30 models, one for each issuer they cover, while a biotech will only have one – their own. As such, time will constrain the intricacy of analyst models. Biotechs also have access to far more data than analysts (including the true inner workings of the company), and they tend to overcomplicate things by including too much information. One of the largest mutual fund companies has a rule that their internal company models, which exist as Excel files, aren’t allowed to be bigger than a single page of letter paper. Keeping models this small requires major simplification.

So, keep it simple. Have valid reasons for the assumptions you make, state them clearly, but don’t be afraid to simplify.

DON’T be discouraged by the “crystal-ball” nature of what you’re doing.

If your development assets are early stage, perhaps even preclinical, it may seem extremely theoretical to hypothesize about the price, market, and potential use of therapies that are years away from approval and commercialization. The world will likely have changed a lot by the time your drugs are approved, but that doesn’t invalidate your model as the best possible prediction for what the world might look like when or if you get there. Be logical, and work within the constraints of what you know now.

DON’T worry as much about secondary programs.

As biotech entrepreneurs, you might think it is prudent to develop multiple potential therapies to diversify risk and/or provide a series of potential milestones around which you can raise capital. When it comes to the public markets, however, investors and analysts are fairly short-term and will focus heavily on your lead asset, ascribing little (if any) value to your secondary assets.  Some 80-90% of your company’s perceived value is likely to come from your lead asset. Typically, secondary assets are much earlier in development than your lead program. As such, when building your financial model, it is reasonable to allocate fewer lines to secondary programs, though the lines you do include should be justifiable.

DON’T be too conservative.

Good analysts will use your numbers as a reference point. If they believe your projections for market penetration are too high, or that your development timeline is too aggressive, they will apply their own discounts and edits to the data you make available, or come up with their own estimates. Lazy analysts will simply use your numbers and arbitrarily apply a discount. The point is, it is typically unheard of for a covering analyst to be more aggressive or optimistic than management, so the numbers and or/guidance you provide from your model will likely form the upper bound of projections for your company. Consequently, if management is too conservative when creating the internal model, your company could be undervalued.

DON’T worry too much about your commercialization plans.

If you’re still in early development, chances are you won’t have the individual(s) in place who will eventually oversee your commercial infrastructure. Knowing the exact number of salespeople required to sell your drug(s), your cost of goods sold, or the exact price of your product isn’t necessary since such details are likely to change in the years that follow. In addition, the average biotech typically sells out before they ever commercialize a product. Make some assumptions based on existing drug products on the market and real-world numbers generated by your peers. The investment community won’t typically expect you to go into further detail on your commercial strategy until the months leading up to a potential drug’s regulatory approval.

Finally, DO get feedback from your IR advisor and bankers.

Unless this is your second, third, or more public venture, chances are you haven’t done this kind of modeling before. By contrast, your IR advisor and the lead bank in your syndicate have been through this process countless times. Seek counsel from your advisors and rely on them to give you greater bandwidth at a time when management’s time is likely stretched thin.

Also, don’t get angry or defensive when other people (like your advisors or your covering analysts) disagree with you. So much of the future is unknowable, and outsiders will usually have less faith than you do in your drug’s potential. Additionally, models and discounted cash flow (DCF) calculations are incredibly sensitive to tiny changes in certain parameters, and innumerous valuations and results are possible even when parties agree on a majority of the “facts.”

Do you have any questions on building your biotech financial model, or are you ready to get started? Contact us today!

Laurence Watts, Managing Director

Earnings Video Conference Calls

Must see T.V. – Thoughts on using video broadcasting for earnings conference calls

Earnings calls are arguably the most important form of communication that companies have with the investment community. Investors expect management teams to discuss business updates and financial performance every 90 days. This is the best opportunity management teams have to broadly disseminate material information and provide context to the formulaic legalese of quarterly SEC filings while gaining Reg FD cover.

Amid the wave of social media proliferation and big data, investors now have more resources than ever to do their due diligence on companies.  Using mediums like Twitter and LinkedIn for corporate communication requires companies to be aware of all content creation and dissemination to ensure consistent messaging.

To stay in line with this progression and take complete control of messaging to investors, some companies have started video broadcasting their earnings calls. The early pioneers of this are telecom, media and tech companies, who can use earnings calls to demonstrate and promote their own products, services and values in order to create a deeper connection with customers and shareholders. T-Mobile and Netflix stream their calls on YouTube. Recent IPO Zoom used their own video conferencing software to host their first call as a public company. We’ve watched these calls, and here is a breakdown of the structure of each.

T-Mobile US (TMUS) Q1 2019 Earnings

T-Mobile has been video broadcasting earnings calls for about four years, and they are certainly leaders of the format. From their IR site, the video stream is as easy to find as the webcast. During the call, the management team is situated in standard press conference position, with leadership seated on one side of a table and the company logo and ticker behind them. As would be expected from a large-cap company with significant resources, the production quality is high. Multiple cameras are used, one on the whole team and others focused separately on individual speakers. For the prepared remarks, CEO John Legere reads from a script on the table in front of him. Q&A is moderated via telephone operator, and camera angles adjust to t focus in on the speaker. The flow and structure is similar to a standard earnings call.

Netflix (NFLX) Q1 2019 Earnings

Earnings reports from Netflix are unique because they forego the standard call format; instead, they publish a letter to shareholders and then hold a video conference call that consists only of Q&A moderated by a sell-side analyst. The discussion lasts around 30 minutes, and sections of the shareholder letter are expanded upon and referenced.  The structure is very conversational.

Zoom (ZM) 1Q FY2020

In an effort to highlight their technology, Zoom webcasts their earnings report using their own software. The video conference includes live video of management delivering prepared remarks along with corresponding slides. This webinar format is familiar and works well for an earnings call. When it comes time for Q&A, analysts ask questions on video. This demonstrates an important connection between participants.

Conclusion

In each of these video-broadcasted earnings calls, Q&A is what sets this format apart from the standard audio call. Video enhances the experience and allows for more engaging discussion between management and analysts. Body language and facial expressions convey information and tone that disembodied voices on a Polycom do not. Much like a one-on-one meeting, there is value in seeing how someone answers a question. Video provides management teams with the ability to show genuine confidence, conviction and excitement about developments and initiatives. Investors and analysts appreciate this level of transparency. Overall, the video experience fosters highly effective communication.

Unfortunately, a quality production requires additional preparation, logistics, time and resources, but in terms of effectiveness, it is hard to identify shortcomings. Now that video streaming technology is widely available and accessible, we expect to see this format become more prevalent over time. To make this transition easier for companies, consider starting with one video report a year, such as the annual report.

Could video broadcasting earnings calls make sense for your company? Contact us today to set up a meeting with our team. We’d love to work with you and strategize what is best for your company.

Philip Taylor, Associate

Internal Forecasts, Guidance and Consensus Considerations

At the start of each earnings cycle, one of the first places we look to begin preparations for quarterly reporting is the external consensus numbers (what Wall Street expectations are) and our client’s internal forecasts –for the current quarter, the upcoming quarter and the full year. Topline growth, gross margins, operating expenses, and net income are generally the easiest metrics to pull out and compare when determining where to take the public commentary. Are the current quarter’s actual results in line with expectations? If not, we will need to explain what happened.  Are the upcoming quarter’s results in line with the forecast? If not, and we need to adjust, we will need to offer commentary as to why. Looking at the year, are we still on track? If not, what do we see on the horizon that changed?

Hopefully, actual results and external expectations are relatively close, but here are some additional factors to consider as you work through messaging, reporting your quarterly results, and preparing to give guidance.

Internal Forecasts – as the name suggests, keep it internal

Obviously, internal rollups and the resulting forecasts are a starting point for determining guidance.  And regardless of where your forecast lands, your external guidance should consider these.  However, our (strong) recommendation is to keep it internal. Perhaps this sounds simplistic, but it can be very tempting to share forecasts with your analysts and key investors in candid conversations. Forecasts, though, are not guidance. As you determine what language to use when answering Q&A, consider that saying, “we are forecasting revenue of $45 million” is an entirely different message than, “our guidance is $45 million.”

Public Guidance – be realistic, not optimistic

About a year ago, we published a blog called “What’s the Consensus on Guidance” and highlighted that ninety-four percent of public companies in a NIRI survey responded that they provide some form of guidance (financial, non-financial, or both). This figure is consistent with data dating back to 2009. Of course, the challenge with giving public guidance is providing enough detail to enable an investor to make some reasonable assumptions about your future business without hyping the near-term valuation and disappointing investors down the road. Even for the most conservative management teams, this becomes a challenge when you believe in your business (and your sales team) and don’t want to publicly state expectations for revenue that are lower than what you believe your potential results can be. Moreover, it’s challenging to provide guidance twelve months out when there could be any number of variables from headwinds to tailwinds to macro-economics to the completely unexpected.

So, here is where your internal forecast is so valuable. Your internal forecast is your INTERNAL goal and an obvious starting place. However, we caution our clients to take into consideration the myriad of factors that could impact that forecast and to find a reasonable range for their external guidance. As a suggestion, take the low end of your forecast as the high end of your public guidance and then work backward in determining a range from there. Give your company enough room to move within that range and narrow the gap as the year moves forward. Be realistic, not optimistic, in determining your range.

Following along the P&L, if you’ve decided to provide additional guidance beyond revenue, consider what metrics are important to your investors and which of those reflect the progress of your business. For example, if you are in the capital equipment space, consider providing a range of placements. If you are in growth mode, you may want to offer guidance on GM and OPEX. If profitability is important to your investors, consider guidance on net income. Whatever you decide is right for your company, be prepared to stick with it for at least a year or longer.  Finally, look at your forecast to see what those metrics say and whether your public messaging supports those forecasts. For example, we had a client that wanted to give annual guidance on US/OUS sales, but the internal quarterly forecast showed wide volatility on a quarterly basis. So, while the annual guidance may have been an interesting metric, given their goals for the year, updating on quarterly actuals and providing commentary to back it up made that metric more confusing than helpful.

One final note on guidance – we generally recommend annual guidance and then quarterly adjustments on your conference calls, if necessary. This policy will enable you to provide a wider range at the start of the year (typically when a company reports year-end they will provide guidance for the following year) and then narrow or adjust that range throughout the year as you gain more visibility. A recent survey highlighted that 89% of public companies would update financial guidance in the event of a positive or negative material change.

Consensus – what the Street heard

Following the earnings call and commentary on guidance, whether updated or reiterated, your covering analysts will update their models, and this gets reported into the databases of several service providers, which can then be accessed by professional investors. Ideally, the consensus numbers land within the range of the guidance you publicly provided. In general, we see the Street typically go towards the midpoint of your publicly stated guidance range, unless you have offered qualitative commentary that would give an investor the impression you are being overly conservative or bullish. So, as you determine your guidance range, consider where you want consensus to land and the associated commentary you offer in your conference call to justify that range. There will undoubtedly be outliers for a variety of reasons, and many companies don’t have the benefit of a lot of covering analysts to put those outliers in perspective. Regardless, the Street’s consensus numbers are what will set the expectations for the coming quarter and full year, so we place a high priority on factoring that into our investor communication considerations.

Leigh Salvo, Managing Director