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Common Questions Entering a Bear Market

Coming off the heels of a record breaking 2021, the first half of 2022 has shaped up to be less than ideal. With no one key driver in our current climate, factors such as eastern unrest, high inflation and interest rates, supply chain complications, and labor challenges due to wage inflation have indicated a looming recession. So, what does that mean for private and public healthcare companies? After several of our team leaders, we address some of the common questions and concerns our clients—and those in the space—have been left wondering.

What are healthcare investors most focused on moving forward?

Investors have put a significant emphasis on the ability of companies to deliver on their financial guidance without the need for additional capital.
Investors want to see clear messaging on the timeline for additional raises if necessary.
Remaining focused on operational performance and delivering better than expected financial results is one key way to drive new interest.

We have been watching our stock price plummet. How do we reverse this?

Look to control the fundamentals of the business.
Focus on hitting your timeline and delivering upon milestones. Losing sight of the importance of these smaller accomplishments can have a detrimental impact on company credibility.
Search for alternate ways to drive success: partnerships, ways to maximize cash flow, efficiencies in operational expenses, etc.

We need to raise capital, but this is not the right time. What are some alternatives?

Alter the conversation so as not to put a sole focus on raising capital, but pivot to preserving cash flow and growth. For example: tweak the presentation to represent a shift to cost containment versus revenue growth at any cost.
Execute on presented messaging by finding a pathway that emphasizes profitable growth and cash positions.
Look to operational expenses like traveling to in-person conferences. If asked to attend, consider if the entire management team needs to join, if those attending are investors that will bring the most value, or if they are even an ideal target.
Turn to advisors to drum up interest with investors through virtual meetings or 1x1s.

How do we navigate these unique times, simultaneously showing results, driving value, and differentiating ourselves in the market?

Turn to alternative tools, like ESG reporting. ESG has become a staple to show growth and evolution of a company, which is a win-win for private market investors looking to drive value while transforming unsustainable business models into green ones. Underwriters have taken serious measures to assess climate risk, with firms unwilling to run the risk of mispricing their investments.

Be discerning with how and which investors or banks are being targeted. Choose those that cater to a company’s sector and size to maximize a successful partnership.

Find alternatives to conferences with unique ways to get a company’s name and brand out. Examples could be KOL days, appearance on an expert panel, making introductions to smaller firms and family offices, or unique marketing activities.

Look to be strategic in how you are raising capital. Viable options include grants, partnerships, non-dilutive capital options, or licensing deals with productive co-partners.

Though everyone is weathering the same storm, not all strategies are universally applicable. It is important to understand the nuanced strategies, cash positions, and pathways a company can take to have productive, fruitful conversations with investors and achieve success beyond this bear market. No matter what size, stage, or sector, Gilmartin Group partners with healthcare pioneers, both public and private, to build corporate strategies and develop clear messaging that positions them to build credibility over time while highlighting the value they provide.

If you would like to discuss how Gilmartin Group can best help position you emerge from the current bear market, please contact us today.

Brynna O’Leary, Analyst

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

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

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

3 Advancements in Oncology for 2022

As we enter 2022, a new year, it is common to find ourselves full of hopefulness for the future. As we leave last year behind, we may also find ourselves reflecting on the past. Since 1933, cancer has held the position of the second leading cause of death in the U.S. As predicted by the National Library of Medicine, specialists anticipate 1,918,030 cancer diagnoses to take place in 2022, with 609,360 expected to take the lives of those affected. Despite these tragic numbers, deaths related to cancer in both men and women decreased by 32% between 1991 and 2019. With upcoming medical milestones paving the path, it seems we live in a time when the risk of dying from cancer is rapidly declining.

In lieu of the new year, City of Hope analyzed a few oncology advancements we can expect to see flourish this year. Let’s dive into three anticipated trends for cancer treatment in 2022.

1. Genetic Testing as the “Future of Oncology”

Figure 1: Karyotype, Human Genome Source: Wikipedia.org

In 2003, scientists discovered how to create personalized therapy for cancer patients based on the individual’s genetic information—the human genome. This allows doctors to analyze a person’s tumor and design a patient-specific therapy route focused on targeting particular mutations. As genetic data continues to identify new mutations, “we’re seeing a much broader number of patients with mutations who don’t classically fit current models,” stated Dr. Stacy Gray of City of Hope’s new Director of Clinical Cancer Genomics. This discovery only emphasizes the importance of personalized patient care.

One of the incredible benefits of genetic testing is that doctors can analyze a patient’s DNA with or without a cancer diagnosis. This allows physicians to identify risk factors and provide patients with treatment protocols to prevent disease development. Dr. Gray also stated, “Right now there are hundreds of thousands of people at high risk for cancer who don’t know it. Tens of thousands who could benefit from targeted therapies, but won’t get them.” As asserted by the American Cancer Society, as cancer rates have dropped significantly for both men and women, “some of this drop appears to be related to an increase in the percentage of people with lung cancer who are living longer after diagnosis, partly because more people are being diagnosed at an early stage of the disease.” It is essential to discuss the significance of genetic testing because detecting cancer in its early stages can prevent potential pain, suffering and death worldwide.

Figure 2: Dr. Stacy Gray Source: City of Hope

2. Improved Diversity in Clinical Trials

Figure 3: Angela L. Talton Source: City of Hope

City of Hope has recognized a diversity problem within its walls. The medical center noted a need for increased effort in ensuring people of different races, ethnicities, sexual orientations and ages gain representation in clinical research. Angela L. Talton, Senior Vice President and Chief of Diversity at City of Hope, stated that in 2022, “Our clinical and research scientists are conducting studies on health disparities within diverse communities and helping us find the best ways to address complex health issues, including diversity in clinical trials.” An individual’s background contributes to various environmental, physical and genetic factors that can allow diseases to differ between patients. City of Hope is looking at a long list of cancers, such as breast, prostate and colon cancer, as well as how they act amongst diverse populations.

As discussed by FierceBiotech, other entities are also striving to improve patient diversity in research. Novartis dedicated $5 million to historically Black universities and $13.7 million for medical trials to three research centers at Morehouse School of Medicine. The U.S. Food and Drug Association has also acknowledged the lack of diversity in the healthcare system. In the summer of 2021, the Agency “rejected Incyte’s PD-1 drug for anal cancer after the agency’s advisers cited lack of diversity as one reason for its vote of no confidence in the med” (Fierce Biotech). Similarly, Eli Lilly identified diversity issues explicitly related to its oncology trials. The company noted that it recognizes its clinical trials were previously composed of 11.5% Black patients while their studies within other disease spaces included 39%. The company is now expanding community partnerships to increase minority enrollment in its trials.

3. Targeted Immunotherapies

Oncologists can now identify genetic abnormalities within cancer patients and use specific immunotherapies to target each patient’s tumor. CAR T cell therapy is a process that allows specialists to manipulate “a patient’s immune cells to attack cancer, [and] is a true breakthrough in immunotherapy” (City of Hope). The therapy is FDA approved and is a featured program at City of Hope. The medical center is treating over 600 patients with around 50 ongoing/impending trials that will target cancers of the immune system and blood.

Figure 4: KEYTRUDA Rx Source: MPR

Additionally, pembrolizumab (Keytruda), an immune checkpoint inhibitor drug that directly combats protein PD-L1, is greatly enhancing the immunotherapy industry. PD-L1 is an immune system blocking protein that can appear at a 90% concentration rate within cancer cells. This allow pembrolizumab to target it efficiently. This drug will be revolutionary in treating various cancers, including lung, endometrial, esophageal and kidney cancer.

2022 will be an exciting year for oncology, and this year holds great potential to continue to reduce cancer-related deaths. With significant steps taken to increase early detection through genetic testing, diversity within clinical trials and research, immunotherapies such as CAR T cell therapy and monumental drug discoveries, we can remain hopeful for the future of oncology.

At Gilmartin, our biotech focused team has helped a number of oncology companies translate their story to the investment community. Contact our team today to learn more about how we can help you and your company communicate its story amongst a crowded biotech environment!

Rachel Mahler, Analyst

The Rising Costs of National Healthcare

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

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

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

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

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

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

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

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

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

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

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Alex Khan, Associate Vice President

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Stephen Jasper, Principal

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Maintaining Investor Trust and Shareholder Value Through a CEO Transition

When evaluating any company, investors look to the CEO for guidance, as CEOs are the bridge to the Street. As the face of the company, the CEO has to earn the trust of investors, customers, and employees. Therefore, the CEO’s role is heavily weighted when considering a potential investment.

Inevitably, every company reaches an inflection point and is faced with a CEO transition. At this point, the CEO role is thrust into an even greater spotlight. A CEO transition is one of the most important events for a company. It can affect its corporate strategy and initiatives, its shareholders and other stakeholders, and, eventually, its success.

This transition can be unnerving for company shareholders who may believe that a new CEO could result in a shift in culture and strategy, sometimes for the worst. With the significant role that the CEO plays in the financial community’s decision to buy, sell, or hold a company’s shares, the transition must be managed appropriately. The CEO must communicate in a way that will dissipate any uncertainty and disbelief among the investors that could make the company’s stock price volatile in the short term.

Typically, in the eyes of the investors, a honeymoon period of six months is given after the announcement. However, there is a lot on the plate of the incoming CEO during this time. First, they must align their organization to respond to change by setting the vision and strategy, while also establishing the appropriate expectations across stakeholder groups and engaging with stakeholders through new and diverse communication channels.

IR firms must find a healthy balance for the CEO, leaving them enough time to focus on the business and connecting with investors. The CEO will spend a large portion of their time building relationships with critical stakeholders on the Street. In addition, everyone wants to meet with the new CEO during a transition period, so the CEO will need to prioritize meeting with investors.

Here are three things to consider to maximize the CEO’s time and prioritize selecting investor calls.

Investors who are currently highly invested – This group of investors has already bought stock and sees upside potential in the company’s vision. This is an essential group of people to connect with sooner into the transition to avoid high stock volatility and devaluation. During a positive transition, they will need to be reassured that the new CEO is ready and able to continue the company’s success. In a time of company turmoil, they will want to hear that change is imminent and the new CEO is going to drive value back to the stock. Making time for these investors will aid in stock stabilization during the transition period, and these meetings should be prioritized.
Investors who currently have a medium level of investment but sufficient capital to increase their holding – This group of investors tend to be interested in the stock but have not gone all in. In essence, they are intrigued but waiting for more. A CEO transition is a great time to meet with these investors, communicate the strategy going forward, and entice them to participate in future growth. The goal here is to assure investors that the transition will be positive, in order to avoid stock volatility while selling them on the future, This can entice a more significant buy-in. Since they have a smaller stake, these investors don’t have to be the main focus initially, but they are still valued shareholders and should be prioritized during the transition period.
Investors who have capital but have not yet purchased stock – This group of investors can be those who have been following the story but have not invested yet or those who are new to the story. Either way, this is an opportunity to communicate your strategic plans for the company and begin to drive value through new investors. While this group is important, they should take a lower priority than the above investors during the initial period following the transition. These investors do not have as much capability to cause stock volatility in the initial period following a transition, but they do have a significant opportunity to grow future value.

The six-month period following the transition sets the tone for the CEO moving forward. If managed well, investor meetings during this time can be pivotal to driving value to the stock. While every company is different and situations are dynamic, this guideline can be helpful to follow during this time. If you want to know more, contact the Gilmartin team today.

Hannah Jeffrey, Analyst

Board Diversity and Wall Street – An Emerging Priority

Over the past year, Wall Street has increased its focus on diversity and its implications for companies. This discussion is reflective of not only a broader national dialogue on social justice, but also an international emphasis on Environmental, Social, and Corporate Governance (ESG) investing. While European-based funds have thought about socially responsible investing for quite some time, this framework has become increasingly important to US-based asset managers.

Below, we take a look at the ways in which different Wall Street institutions and governing organizations are trying to address diversity and its implications for public companies.

New Board Requirements

Nasdaq
On December 1, 2020, Nasdaq filed a proposal with the SEC to adopt new listing rules related to board diversity. According to the Wall Street Journal, Nasdaq found that more than three-quarters of its listed companies would have fallen short of the proposed requirements in a review carried out over the past six months. Around 80% or 90% of companies had at least one female director, but only about a quarter had a second one who would meet the diversity requirements.

If approved by the SEC, the new listing rules would require all Nasdaq-listed companies to publicly disclose board-level diversity statistics through Nasdaq’s proposed disclosure framework within one year of the SEC’s approval of the listing rule. The timeframe to meet the minimum board composition expectations set forth in the proposal will be based on a company’s listing tier.

Additionally, the rules would require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+.

All companies will be expected to have one diverse director within two years of the SEC’s approval of the listing rule. Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market will be expected to have two diverse directors within four years of the SEC’s approval of the listing rule. Companies listed on the Nasdaq Capital Market will be expected to have two diverse directors within five years of the SEC’s approval. Finally, foreign issuers (including foreign private issuers) and smaller reporting companies, by contrast, may satisfy the requirement by having two female directors.

Nasdaq is also partnering with Equilar to enable Nasdaq-listed companies that have not yet met the proposed diversity objectives to access a larger community of highly-qualified, diverse candidates to amplify director search efforts.

Goldman Sachs
On January 23, 2020, Goldman Sachs indicated it will only underwrite IPOs in the US and Europe of private companies that have at least one diverse board member. Starting in 2021, the company will raise this target to two diverse candidates for each of its IPO clients.

CEO David Solomon referenced how since 2016, US companies that have gone public with at least one female board director outperformed companies that do not, one year post-IPO. He also highlighted how over the two years leading up to this policy, over 60 companies went public in the US and Europe without a diverse board member.

State of California and Subsequent State Legislation
In 2003, Norway was the first country to pass a law that required public companies to have >40% of board seats held by women. Before California became the first US state to pass a board diversity law in 2018, other European countries (i.e., France, Spain) had implemented similar diversity laws.

On September 30, 2020, California Governor Gavin Newsom signed into law a measure that will require publicly-held corporations in California to achieve diversity on their boards of directors by January 2023. This law follows the passage of its 2018 law mandating that public companies headquartered in the state have at least one woman on their boards of directors by the end of 2019, with further future increases required depending on board size.

By the end of 2021, California-headquartered public companies are required to have least one director on their boards who is from an underrepresented community, defined as “an individual who self‑identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self‑identifies as gay, lesbian, bisexual, or transgender.”

By the end of 2022, the number of diverse directors is required to increase, depending on the size of the board, as follows:

Source: Harvard Law School Forum on Corporate Governance “New Law Requires Diversity on Boards of California-Based Companies”. Posted by David A. Bell, Dawn Belt, and Jennifer J. Hitchcock, Fenwick & West LLP, on Saturday, October 10, 2020.

Companies are also considered compliant with the addition of one or more board seats, rather than removing directors, and in some cases the addition of one board member satisfies multiple requirements.

Although California is facing court challenges, other states have followed suit by passing similar measures. Both Washington and Illinois have passed board diversity legislation. Other states, like Hawaii, Massachusetts, and Michigan are in the process of drafting similar laws to be effective in coming years.

Implications for Public Companies
While some of these requirements have been challenged and it remains unclear if the SEC will approve Nasdaq’s proposal, Wall Street’s interest in diversity is here to stay. Notably Vanguard, State Street Advisors, BlackRock, and the NYC Comptroller’s Office include board diversity expectations in their engagement and proxy voting guidelines.

Companies can address the growing requirements and investor interest in diversity in the following ways:

Work with counsel to develop a process for disclosing relevant information on diversity at the board level
Prepare to discuss board composition and diversity plans with investors
Devise a plan to address or consider board diversity in the context of recruiting
Consider implementing an ESG strategy that consists of routine disclosures on a number of areas highlighted by the Sustainability Accounting Standards Board (SASB)

For additional information on how to address diversity as part of a broader ESG strategy, contact our team today. We have helped our clients publish Corporate Responsibility Reports for investors, and we would be happy to support and guide you through this process as well.

Caroline Paul, Principal

What to Consider When Providing KPIs Post IPO

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A public company’s first earnings call is an opportunity to set a precedent with Wall Street on how it plans to report. It is important to be intentional, consistent, and thoughtful with key performance indicators (KPIs).

Metrics & KPIs
Revenue is important for growth companies, but the strategy is in demonstrating metrics beyond revenue to show the business’ traction and acceleration. Metrics are quantifiable measures used to gauge performance or progress. KPI metrics are essentially the kinds of metrics that will help you track your company’s performance over key goals. Most KPIs tend to be specific and measurable so that you can easily gauge your performance. In short, KPIs track whether you hit business objectives/targets, and metrics track processes.

Why are KPIs important?
KPIs help you evaluate your company’s performance where it matters most. As these performance indicators highlight how well you’re achieving your core business objectives, you can easily monitor your organization’s and team’s performance in achieving those key goals.

KPIs show a company’s holistic progress through time and performance. As you transition to a public company, focus on the metrics that best represent how you think about the business. You should be mindful of the balance between choosing metrics that show traction, growth, and momentum in the first year versus the longer-term outlook. For example, you may be excited about providing metrics that are currently showing traction, but do these make sense to be reporting on a few years down the road? Could these metrics become less relevant?

KPIs should be consistent, and you should only retire metrics when you can make an argument that they are no longer the right way to think about the business. Use year-end to reevaluate metrics and see if anything has changed or needs to be retired. This is the time when you can also introduce new metrics.

Changing KPIs
Firstly, it is important to be consistent when giving KPIs (no cherry-picking based on a good or bad quarter). Retiring a metric without explanation can indicate a bad signal, such as not having a good line of sight into the business.

The year-end call is an opportunity to reassess KPIs and determine if anything needs to be changed moving into the next fiscal year. As you grow, the business will change. Your metrics you choose to report on will need to reflect this change, and this is normal. In order for Wall Street to understand (and accept) this, you have to give convincing reasoning as to why this isn’t the right way to think about the business anymore. Being transparent and clear of what to expect going forward will address investor expectations.

For example, due to a shift in core business or revenue mix, previous metrics may not be the right proxy for traction. Point out the factors you are considering or how working with customers has changed, and point to the new metric as a better way to note acceleration and progress.

Here at Gilmartin, we have extensive experience helping our clients through the intricacies of their quarterly reporting. For additional information on navigating the reporting as a newly public company, please contact our team.

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Carrie Mendivil, Principal

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