State of the Union: MedTech

Strong Fundamentals Driving Valuation Recovery
As we close the book on 2023 and move deeper into 2024, MedTech fundamentals remain overwhelmingly positive. Procedure volumes, utilization, pricing trends, and the pace of regulatory approvals and new product launches are improving from recent years. Meanwhile, macro dynamics (ex: supply chain issues, staffing delays, and high inflation) have stabilized, and following a strong end to 2023, healthy growth expectations have rolled into 2024. In tandem, company valuations have bounced back from recent lows. As of today, high growth SMID MedTech average forward EV/Revenue multiples have recovered from 4-5x in 2023 to 6-7x, reflecting improving sentiment and anticipation for a more conducive environment for growth on both the top and bottom line.

Where to From Here?
Given a solid operating environment and clear guidance now set across the sector, we hope to see a stable-to-improving valuation environment looking forward. We aren’t expecting an acute upswing in MedTech multiples (considering few catalysts for the sector over upcoming months), but we are keeping a close eye on trends that could put the sector back in relative favor over the course of the year and beyond – for example: stronger-than-expected growth from new product launch cycles (ex: pulsed field ablation, renal denervation, and automated diabetes management devices) or sensitivity and risk aversion to pharma policy-related risk into the upcoming election cycle. Reach out to our team to talk about evolving market dynamics and factors that might be particularly relevant for investors taking a look at your business.

Focus on Profitable Growth
Investor quality screens also continue to evaluate high growth SMID MedTech companies for Adjusted EBITDA and margin expansion trends, with attention given to companies at an inflection point. While organic growth remains important in value creation, profitability and cash flow have remained a central focus. Similar to the rest of the market, MedTech valuations were inversely correlated with real treasury rates. Therefore, as interest rates declined, investors focused more on revenue growth than profitability and valuations rose. However, under quantitative tightening, heightened focus on profitable growth and cash generation has raised the “quality screen” for MedTech companies as investors key in on continued top-line growth, alongside a steady focus by management teams to improve operating leverage through prudent growth and cost initiatives, leading to somewhat healthy margin expansion, cash flow, and value creation. As illustrated, high growth SMID MedTech companies are expected to generate improving Adj EBITDA growth and margins in coming years on firm underlying business fundamentals and prudent management execution.

Optimistic for an Improving Deal Environment
Our positive outlook for 2024 is reminiscent of past environments marked by dynamic dealmaking and capital raise activity. We anticipate that growth-focused tuck-in acquisitions will remain an important value creator this year, as cash rich companies look to meet rising growth expectations while executing operating leverage improvements and cash generation.  As shown below, recent acquisitions of revenue-generating MedTech companies have closed at a premium.

Our team is engaging in a significantly greater number of IPO readiness discussions than in the past 1-2 years given a substantial backlog of scaled medtech businesses that could be well positioned to raise capital via the public market in the near-term.  

Further, a look at the biotech financing environment (often a leading indicator for other sectors of healthcare) would suggest that demand for new issue deals is alive and well. Year-to-date, more money has been raised in biotech IPOs, follow-ons, and overnight transactions than across the entirety of 2023. And in cases where transactions followed on heels of strong clinical data, investors have been willing to ascribe high valuations (ex: CG Oncology, whose stock has held above $42 / share for over a month following its upsized IPO which initially priced at $19 / share in January). We see the potential for heightened biotech activity to usher in positive deal momentum for MedTech as the year goes on.


In Summary
2024 is shaping up to be a promising year. Positive sentiment, strong underlying fundamentals, and improving valuations lay the foundation for additional value creating events.  As management teams focus on execution, it is important take the right proactive steps to benefit from potential capital market opportunities. Reach out to our team to talk more about your business and strategic positioning in this environment.


Gilmartin Group has extensive experience working with both private and public companies across the MedTech space. To find out more about how we strategically partner with our clients, please contact our team today.

Authored by: Vivian Cervantes, Managing Director and Steve Yeung, Associate Vice President

MolDX Proteomics Testing and CMS’s Proposal to Downregulate IVD’s

On Tuesday, February 27th, Gilmartin Managing Director, David Deuchler, hosted a webinar with Hannah Mamuszka (Founder & CEO, Alva10), Ipsita Smolinski (Founder & Managing Director, Capitol Street), and Isaac Ro (Partner, Catalio Capital Management). The panel discussed implications of FDA’s proposal to downregulate IVD’s from class III (high risk) to class II (moderate risk), FDA’s LDT proposal, and Palmettos MolDX on coverage for Proteomic diagnostic tests.

Moderator: David Deuchler, Managing Director, Gilmartin Group

Guest Speakers:

  • Hannah Mamuszka, Founder & CEO, Alva10
  • Ipsita Smolinksi, Founder & Managing Director, Capitol Street
  • Isaac Ro, Partner, Catalio Capital Management

Key Takeaways:

Background
On January 31, the FDA’ Center for Devices and Radiological Health (CDRH) announced the intention to initiate a reclassification process (see here) for most Class 3 (high risk) IVD’s to class 2 (moderate risk) for infectious disease and companion diagnostics. In doing so, the potential approval pathway moves to a 510K approval from a premarket approval (PMA) process. Importantly, in downregulating to a Class 2 device, the standard of “substantial equivalency” becomes the bar for approval. Additionally, the FDA proposed a rule in September 2023 to regulate LDTs as IVDs are regulated, with a final ruling planned for April. Lastly, we discuss Palmetto’s MolDX coverage change, which will now provide a reimbursement pathway for protein-based tests versus solely DNA and RNA prior. With our webinar participants, we delve into the regulatory and payor landscape and identify key potential implications of the aforementioned rules and proposals. 

The logistics behind a potential final FDA rule on LDT regulation or IVD reclassification largely remain up in the air
While the panelists acknowledged the potential for a 510k approval vs. a premarket approval (PMA) process with the down classification of IVDs, the 510k process could still take multiple years and require millions of dollars for labs to develop. Additionally, for the LDT proposal, Ipsita Smolinksi highlighted lobbying groups, including the American Clinical Laboratory Association (ACLA), are particularly vocal on the proposed rule. She believes if the rule were to be finalized in April, there could be potential for a variety of different process delays, including potential lawsuits and congressional engagement (in addition to a potential government shutdown) that could slow implementation. The VALID and SALSA Act’s, which have stalled in congress, could see renewed legislative attention following FDA’s action and subsequent litigation. The question of realistic implementation was also a topic of conversation, in which the FDA would likely need to implement oversight to thousands of labs, many of which are non-profits, which would likely bring complication to the process.

Private payors are not as concerned with regulatory policy (including a potential down classification of IVDs) as they are most concerned with test utility
Our panelists believe that the potential downregulation of IVDs is likely to be a lengthy process once it commences and will impact ~50% of high-risk class III tests. On the payor side, Hannah Mamuszka at Alva10 commented on payors’ lack of understanding the difference between IVDs and LDTs (or class II and class III IVDs). Rather, they are more interested in the problem the test solves, who will have access to the test, and which clinician, physician, or institution will utilize it. Importantly, payors are primarily concerned with test utility, which includes logistics surrounding patient management and the clinical workflow, improved patient outcomes, and ideally, improved economics. In other words, Payers are largely focused on understanding the problem that a test solves and whether it makes sense for a patient population, rather than solely focusing on clinical validity.

In terms of a potential IVD reclassification, investors are looking for diagnostic companies that will benefit from regulation or can navigate the change
In our discussion, it appeared that investors prefer to invest in companies who understand the regulatory landscape. Specifically, Isaac Ro indicated that he looks to partner with companies who understand regulatory and have a developed plan. He spoke to his experience examining companies who either benefit from down regulation or those who need to raise capital to contend with a new set of regulatory rules. His advisement to companies has been to “duck under the wave or get ready for it”, as he believes that some companies will not be prepared to navigate the potential new change. For the companies that Isaac works with, many of them have been navigating a potential IVD reclassification and remain well-prepared.

Regulation and potential reimbursement should be top of mind for diagnostics companies in their test development efforts
Engaging with payors earlier in development plans can be advantageous for companies in understanding clinical and financial payor problems that need to be solved.  Our panelists believe it is critical for diagnostic developers to involve themselves in conversations with payors, both CMS and private, to gather feedback on study plans and their perspective on utility. This engagement is not only important for payors, but for investors as well, as Isaac Ro noted that they typically look for companies who build their business model around this dynamic as there is higher probability for success.  Additionally, clinical utility and prospective data is not only important from a regulatory perspective but holds significant value to investors as well. Generally, companies attempting to raise capital have largely been asked to present utility data, which is the reason why we see companies performing large studies. Isaac highlighted that many companies he has worked with understood the importance of data prior to the launch of their company, and he stressed the advantage of undertaking utility studies with prototype tests prior to a company launch.

Palmetto’s MolDX coverage of protein-based diagnostic tests provides proteomics companies with a clear reimbursement pathway
Palmetto’s MolDX change released in January now includes coverage of protein-based diagnostic tests, in which proteomics companies under certain CPT codes will be required to go through the same pathway as DNA and RNA tests. The MolDX process includes utilization of a tech assessment framework and obtaining a Diagnostics Exchange (DEX) Z code. As a reminder, labs with LDTs are required to register their tests for a specific Z code while adhering to Medicare Administrative Contractors (MACs) jurisdiction policies. Hannah Mamuszka noted that the new coverage may benefit proteomics companies who do not currently have reimbursement, as it will provide them with a clearer pathway to coverage. Proteomics companies may now also benefit from discussions with MolDX, where there exists a technically educated group who is willing to engage with companies on utility and risk conversations. On the other hand, the change may present a challenge for reimbursed proteomics companies who will be required to submit a tech assessment and risk losing coverage. Overall, panelists view the MolDX proteomic coverage as a mostly positive development in the long term that will create more transparency for companies despite some current unknowns.


Gilmartin Group has extensive experience working with both private and public companies across the Medtech, Biotech, Life Science Tools & Diagnostics, HCIT & Digital Health. To find out more about how we strategically partner with our clients, please contact our team today.

Authored by: Gabby Gabel, Analyst, Gilmartin Group

Key Considerations for a Reverse Stock-Split

The recent uptick in biotech valuations has reduced the number of companies trading below a dollar, but there remain a large number of would-be drug developers whose stock price is still measured in cents. As such, once must assume that C-suites across the country remain awash with chatter of an imminent reverse stock-split. What, then, are the factors a company should consider when pursuing a reverse stock split? Do they affect the momentum of a stock’s trading? And why even do them at all? Let’s start with the latter.

Over the last year, a large number of small companies have risked being delisted for non-compliance with Nasdaq’s and NYSE American’s continued listing requirements, with the chief culprit being a failure to maintain at least a one dollar closing bid price for 30 consecutive (business) days. In other countries, minimum share prices are not a thing. On the London Stock Exchange, for example, there are numerous companies whose share prices are quoted in double-digit pence, and people are happy to hold them. After all, where do you think the phrase “penny stocks” came from? Not so in the U.S. though, which is why I find myself writing this blog.

Now, Nasdaq allows 180 calendar days to regain compliance to its rule by maintaining a one dollar closing bid price for a minimum of 10 consecutive days during a 180-day period. But if a company cannot meet this requirement, a reverse stock split is usually the path forward. A reverse stock split increases a company’s share price while reducing the number of outstanding shares. Meaning that, all other things being equal, a company’s market capitalization remains the same, and investors own the same percentage of the company before and after.

So, it’s about fixing a technicality.

We recently looked at data from over 100 reverse-splits since 2022 to answer the two other questions I posed earlier. For companies with a market cap of below $100M, a 1-for-10 or 1-for-20 reverse stock split is about average. Generally, post-split these companies’ stock performance has largely been positive (though it’s a small sample size and doesn’t account for the general rise in sector valuations).

Individual performance is highly stock-specific – as you might expect. By and large, individual stock momentum is the driving force of performance following a reverse stock split. Meaning that if a company’s stock price was heading south in the first place, it tended to continue. And if a company’s stock price was rising (but still remained below a dollar during the qualifying period) it continued rising. On average, a stock’s next-day performance following a split was roughly flat, though there were examples of both positive and negative outsized moves.

In summary then, a reverse stock split is a non-event. It’s a solution to an arbitrary problem, although a necessary one since trading OTC is suboptimal compared to being on the Nasdaq or NYSE American. Not surprisingly, companies do not regard reverse-splits as milestones, nor promote them as anything other than an administrative necessity. Case closed.


If you’d like to discuss the merits of a reverse stock split, or have another investor relations-related question, please contact our team today.

Authored by: Laurence Watts, Managing Director, Gilmartin Group

2024 Biotech Outlook

This past Wednesday, January 31st, Gilmartin Group’s Managing Directors, Laurence Watts and Stephen Jasper hosted a webinar with Jefferies’ Michael Brinkman, Managing Director and Joint U.S. Head of Biopharmaceuticals Investment Banking, and Charlie Glazer, Managing Director and Head of Healthcare ECM to discuss recent trends in the biotech capital markets and outlook for 2024.

Moderators:

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

Speakers:

  • Michael Brinkman, Managing Director, Jefferies
  • Charlie Glazer, Managing Director, Jefferies

KEY TAKEAWAYS

2024 Biotech IPO Market Outlook:

Jefferies believes the biotech bear market is over as the panelists are seeing broader investor optimism across the sector due to increased macroeconomic visibility with a preference for later-stage, de-risked programs. Jefferies was a bookrunner on more than half of the 19 biotech IPOs last year and noted that the IPO market for biotechs hasn’t necessarily been closed, rather the bar for quality deals was set high. That bar is slightly lower today, and looking ahead to the rest of 2024, the panelists believe IPO activity can double from 2023 levels.


A New Class of Biotech IPOs

Jefferies doesn’t expect to see the market return to 100+ IPOs as seen in 2021, which the panelists viewed as unsustainable, as investors today are much more deliberate about the way they invest. For biotechs, clinical news flow drives market price, and the later-stage a company is, there is a lower probability of failure/negative data. Investors are looking for biotechs with promising late-stage data (e.g., CG Oncology), strong proof-of-concept data (e.g., Cargo Therapeutics) or a de-risked pre-clinical program (e.g., Apogee Therapeutics). The panelists expect to see continued investment in the oncology space, particularly in radiopharmaceuticals and ADCs, and increased interest in the autoimmune and I&I space, while gene therapy has fallen out of favor amongst investors.


A New Class of Biotech IPOs

Jefferies doesn’t expect to see the market return to 100+ IPOs as seen in 2021, which the panelists viewed as unsustainable, as investors today are much more deliberate about the way they invest. For biotechs, clinical news flow drives market price, and the later-stage a company is, there is a lower probability of failure/negative data. Investors are looking for biotechs with promising late-stage data (e.g., CG Oncology), strong proof-of-concept data (e.g., Cargo Therapeutics) or a de-risked pre-clinical program (e.g., Apogee Therapeutics). The panelists expect to see continued investment in the oncology space, particularly in radiopharmaceuticals and ADCs, and increased interest in the autoimmune and I&I space, while gene therapy has fallen out of favor amongst investors.


Pharma M&A is Likely to Continue

The wave of pharma M&A is expected to continue, especially as big pharma is faced with imminent patent expiration in the next five years. The panelists noted that there are several large companies that have significant holes to fill, and those that have large programs (e.g., Lilly, Novo) are actively spending their profits on M&A. Jefferies doesn’t expect to see too many mega-deals, especially given the FTC’s aggressive proposed M&A guidelines. That said, the panelists expect any company with promising Phase 3 data will get snapped up, so long as valuations aren’t over-inflated.


Supportive Macroeconomic Backdrop

Overall, Jefferies sees a favorable macroeconomic backdrop for the biotech capital markets due to increased visibility around rate cuts. The panelists noted that the expectation for rate cuts is enough for generalists to start moving from an underweight position to an equal-weight position in biotech, and don’t believe the timing or number of cuts will have a material impact. The panelists added that they don’t expect the presidential election to have a significant impact on the biotech sector.


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

Authored by: Claire McCardell, Associate Vice President, Gilmartin Group

Key Sector Takeaways Out of JPM 2024

Last week was a productive and efficient return to the J.P. Morgan Healthcare Conference held in San Francisco. The annual event reunited fervid participants and fostered meetings among investors, analysts, bankers and strategic corporate teams across both public and private clients. At Gilmartin, we see this conference as the first look into the upcoming market environment, and the positive response to results and guidance has us looking ahead to investor expectations for 2024. In this blog post, we’re breaking down our key takeaways across the Medtech, Biotech, Tools & Diagnostics and Digital Health/HCIT sectors.


MEDTECH KEY TAKEAWAYS

MedTech Focus Areas During the Week: The news of the week was Boston Scientific’s (BSX) acquisition of Axonics (AXNX) for 11x EV/2023 sales (~8.5x EV/2024 consensus sales), met with widespread positive reception. Investors are optimistic that further M&A at above-market multiples could ignite a return toward modestly higher sector-wide valuations. Among large-caps at the JPM conference, Johnson & Johnson (JNJ), GE Healthcare (GEHC), and Edwards Lifesciences (EW) indicated heightened interest in growth through acquisitions, ideally through assets that are both revenue and margin accretive. 

Risk-On Appetite Improving: We saw strong meeting demand across private, public, emerging growth, and value companies at our Gilmartin event at Hotel Nikko. For many client companies, investor interest was the highest it has been in over 3-6 months, with investors now leaning into diligence on new ideas. With modestly better market performance and hopes of lower rates on the horizon, it’s clear that risk appetite is improving and growth companies, while not yet back in favor, are once again benefitting from some inflows.

Pre-Announcements & Guidance: What did we learn?

  • Over 60% of scaled SMID MedTech businesses preannounced Q4 revenue, a consistent rate with the prior year. The vast majority of pre-announcements beat consensus estimates, with an average beat of 5%. 
  • Of companies that pre-announced, 40% provided 2024 revenue guidance, up from just ~30% of companies last year. For example, Inspire (INSP) and RxSight (RXST) provided 2024 revenue guidance despite not providing guidance last year.
  • On average, companies initiated guidance at or slightly-above 2024 consensus estimates.

LIFE SCIENCE TOOLS & DIAGNOSTICS KEY TAKEAWAYS

Life Science Tools/Dx themes coming out of J.P. Morgan: We sensed improved optimism for the sector coming out of the conference this year. J.P. Morgan shared in their recap that Danaher (DHR) was the most requested company for 1×1 meetings at the conference (over large cap pharma), and 5 out of the top 25 most requested companies and 10 out of the top 50 companies were in the tools/dx coverage universe. Similarly, we saw very strong demand for meetings across private and public company clients at our Gilmartin event, with many companies seeing the strongest level of inbound interest they have seen over the past several months. As 2024 progresses, we expect to see a rise in activity in M&A deals and capital-raising by mid-2024.

Continued focus on the bottom line. For SMID cap growth, one thing that is becoming increasingly clear is the bifurcation between companies with a near-term (and believable) path to becoming cash-flow positive and those with significant capital needs on the horizon. Companies with less than two years of cash continue to message cost cutting and focus on extending their cash runway.

Pre-Announcements, guidance & trends heading into 2024. Over 40% of LS tools/dx companies that we track preannounced Q4 revenue, higher than prior year trends. The vast majority of pre-announcements beat consensus estimates, with an average beat of 9%. 

Commentary on 2024 was limited (6% of our tracked companies issued 2024 guidance alongside their preannouncement). That said, 2024 forecasts in LS Tools had been materially lowered at 3Q earnings following conservative outlook from a number of large caps. Commentary from tools players was consistent with messaging from 3Q earnings and, overall, 2024 is expected to be a below average growth year, with growth expecting to pick up in 2H stronger (driven by easier comps and anticipated macro recovery).


BIOTECH KEY TAKEAWAYS

As the industry converged on San Francisco there was an air of cautious optimism and even a day of sunshine to accompany a handful of M&A announcements to start the week. Large pharma continued to put their balance sheets to use with JNJ acquiring Ambrx (AMAM) for ~$2.0Bn (105% premium to prior close), MRK/Harpoon Therapeutics (HARP) for ~$680MM (118% premium to prior close), followed by two private deals GSK/Aiolos Bio for $1Bn upfront and $400MM in milestones and NVS/Calypso Biotech for $250MM upfront and $175MM in milestones.

Expectations for 2024 include a somewhat choppy market, with fits and starts of IPO activity before the election, though this is highly dependent on the anticipated rate cuts and further evidence of inflation tempering. In this environment, companies reporting clearly differentiated programs/data in large commercial opportunities will continue to be rewarded, yet there is an expectation that further cost savings measures and pipeline prioritization continues for some as cash runways are stretched. Overall, the mindset was significantly more positive than last year, the key will be maintaining the momentum.

Biggest Stories/Themes of the Week:

  • M&A Activity Remains Important Market Driver: Following a strong Q4 2023 that closed with a flurry of M&A announcements in the last two weeks of 2023 (BMY/RYZB, AZN/GRCL and BMY/KRTX), the activity continued in San Francisco. Importantly, large pharma signaled their willingness to conduct more deals, with AstraZeneca, Lilly and Merck as seemingly the most bullish. Disease areas that continue to be the hottest include oncology (ADCs, radiopharma), cardiovascular, metabolic and more.
  • IPOs Return: Six S-1 filings currently sit in the IPO backlog that will provide an important test of the health of the biopharma IPO market. Performance will be watched closely as companies evaluate their path towards an IPO.
  • Robust Competition: Despite the challenges acutely felt over the past two years, there are more biotech companies than ever before, competing for investors’ attention and support. The need to be clearly differentiated with the approach, clinical data, etc. is crucial in today’s market.

DIGITAL HEALTH & HCIT KEY TAKEAWAYS

Key Themes: AI investment was a major theme throughout the week. The discussion focused on both near term applications, like automating administrative burden, and longer-term use cases that could prove more transformative, like ambient clinical intelligence. Scrutiny of budgets across end-markets remains a key focus, especially in the context of a challenging labor market and delayed purchasing decisions, while strengthening utilization and pharma spend were noted as points for optimism in the space. Lower cost alternative care and virtual care modalities, along with growing demand for value-based care continue to be key themes. The election was often raised given its historical importance to the sector; however, the majority opinion is that healthcare is not likely going to be a top campaign issue.

Capital markets environment: The funding environment for the sector remains challenged as companies continue to balance profitability and positive cash flow with robust growth targets. The prevailing view is for an IPO window to possibly open towards the latter part of 2024, with a significant pipeline of scaled privates waiting to come to market. Once open, the durability of the IPO window will be another important indicator. Additionally, M&A was top of mind at the conference, as certain verticals are considered poised for consolidation and big strategics position themselves for acquisitions. The overarching sentiment was that of cautious optimism as capital markets activity is expected to pick up.

Looking Towards 2024

  • 2/3rds of digital health and HCIT companies issued 2024 guidance prior to the JPM healthcare conference, which was higher than past years, many highlighting macro concerns, elevated utilization trends, and budgetary constraints across end markets. Expectations heading into the conference were for higher medical cost trends and increased transparency especially around the pharma supply chain.
  • At JPM, another 1/3rd of companies provided visibility into 2024 for at least one metric, with most above Street expectations. Concerns related to higher-than-expected utilization trends, especially outpatient procedures; predictability of medical cost trends, especially within Medicare Advantage; and cautious optimism across HCIT end markets dominated much of the dialogue. Stock performance was mixed during the conference with HCIT names overall flat with wide variation while Services names were overall down modestly.

Gilmartin Group has extensive experience working with both private and public companies across the Medtech, Biotech, Life Science Tools & Diagnostics, Digital Health & HCIT. To find out more about how we strategically partner with our clients, please contact our team today.

Authored by: Marissa Bych, Principal, Gilmartin Group; Carrie Mendivil, Managing Director, Gilmartin Group; Nick Colangelo, Vice President, Gilmartin Group; Ryan Halsted, Managing Director, Gilmartin Group

Preparing for Climate Disclosure: Where Companies Can Start

Last week, Patrick Smith, Gilmartin’s Head of ESG Advisory and Green Project Technologies’ Founder and CEO Sam Stark had an in-depth conversation about the state of climate disclosure regulation today and what companies can do to gather and prepare their greenhouse gas (GHG) emissions data.

Click here for access to the replay of the webinar.

The ABC’s of GHG Accounting

As defined by the Greenhouse Gas Protocol – the most widely used GHG accounting standard – an organization’s emissions sources are divided into three “scopes.” Scope 1 emissions entail direct emissions from sources that are owned or controlled by a company, such as natural gas used in company-owned facilities for heating. Scope 2 emissions refer to the emissions derived from purchased electricity consumed by a company. These are “indirect” emissions because the company’s electricity needs are supplied by utilities that emit carbon and other greenhouse gases in the process of generating electricity. Scope 3emissions cover all other indirect emissions that occur as a result of a company’s operations, such as employee business travel and use of sold products. 

For most companies, a majority of their emissions fall under Scope 3, yet this data is the most difficult to collect. Companies just starting their efforts should try to calculate their Scope 1 and Scope 2 emissions first, which can largely be accomplished by gathering data from utility bills, company-owned vehicles, and refrigerant use. Companies should also track their spend data and map their various business activities to the emissions categories defined by the Greenhouse Gas Protocol.

For certain healthcare companies, one industry-specific challenge to keep in mind is laboratory plastic waste. Nitrile gloves, pipette tips, and other lab materials made from plastic are derived from petrochemicals and factor into a company’s Scope 3 emissions. As a result, even a clinical stage biotech company (with no commercial products available yet) could have potentially significant Scope 3 emissions depending on how much plastic they use in the lab.

Investor Pressure for Climate Data

Historically, companies have been pressured to disclose climate-related data by investors that have integrated climate data and other ESG metrics into their investment processes and risk management procedures. GHG emissions are often a key focus of investors and other stakeholders because companies are able to quantify their baseline emissions more easily than other ESG metrics. While the  most energy intensive industries and largest companies have been tracking their GHG emissions for years, investors are now requesting emissions data from across their portfolios. As a result, many SMiD cap companies have also begun disclosing this information. Moreover, climate disclosure is being integrated in the private markets, with private equity firms increasingly pushing their portfolio companies for climate information.

Evolving Regulations

Regulation covering climate disclosure is evolving at a fast pace. In the U.S., the SEC floated its climate disclosure proposal in the Spring of 2022, but it has yet to be finalized. However, California Governor Gavin Newsom signed two bills into law this October that establish GHG emissions disclosure requirements for thousands companies that operate in the state.

The SEC disclosure rule will only apply to public companies, with various tiers of disclosure based on the size of the company. The SEC proposal draws from the Task Force on Climate Related Disclosures (TCFD), a best practice climate disclosure framework. The SEC has received more than 16,000 comments on the proposed rule, and according to SEC Chair Gary Gensler, a primary area of concern in the comments was the disclosure of Scope 3 emissions, as well as the rule’s implementation timeline.

On the other hand, California’s laws will apply to both public and private companies that conduct business in California and generate a certain amount of revenue. Senate Bill 253 requires companies with over $1 billion in revenue to disclose their Scope 1-3 emissions, while Senate Bill 261 requires companies with over $500 million in annual revenue to disclose their climate-related financial risks. Like the SEC’s proposal, California’s laws are inspired by the TCFD’s recommended disclosures.

Across the Atlantic, the European Commission has adopted its own set of sustainability reporting standards for companies to adhere to. Under the Corporate Sustainability Reporting Directive (CSRD), every business in Europe, including U.S. companies with significant operations in Europe, have to report their Scope 1-3 GHG emissions.

Business Partners Looking Downstream

Beyond investors and regulators, companies are also being pressured by their key business partners to measure and manage their GHG emissions. In the healthcare space, large biopharmaceutical companies have set ambitious climate commitments, which requires them to work with their downstream suppliers and partners to help calculate their Scope 3 emissions. Some biopharmas have integrated climate-related expectations into their contracts with smaller business partners, and procurement teams are increasingly involved in sustainability due diligence processes.

This pressure affects both public and private companies – most of Green Project Technologies’ customers are private companies, which are also receiving climate-related questions from their larger business partners. Newly public and late-stage private companies should start tracking their climate data sooner rather than later while their overall footprint is small and data is easier to collect.

How ESG SaaS Providers can Help

Software tools like the Green Project platform can help management teams conduct carbon accounting projects in weeks instead of months. Green Project partners with tens of thousands of utility providers to help companies automate data collection and eliminate the risk of costly errors done through manual calculation. The Green Project platform reduces the difficult and time-consuming work of mapping emissions data to popular reporting frameworks such as CDP, EDCI, TCFD, and others. After calculating their emissions, companies can partner with ESG experts like Gilmartin to interpret the data and craft climate and ESG-related disclosures for investors, business partners, and other stakeholder audiences. 


At Gilmartin Group, our dedicated ESG team helps companies gather and manage their climate data and has extensive working knowledge of sustainability evaluation criteria and reporting frameworks. Contact our team today if you are looking to evaluate or further develop your company’s ESG and sustainability practices.

Authored by: Patrick Smith & Tamsin Stringer, ESG Advisory, Gilmartin Group

GLP-1s and MedTech—How to Respond & What’s Ahead

The efficacy and availability of GLP-1s have caused a dramatic and unprecedented sell-off across the MedTech sector. Understanding management teams are well versed in many of the street’s views and concerns already, our Gilmartin team composed a quick synopsis of major events (both recent and forward-looking) and our recommendations for companies.


Newsflow

  • At the American Diabetes Association (ADA) meeting in late June, Eli Lilly and Novo Nordisk presented data showing sustained weight loss with semaglutide therapies, sparking questions around their potential long-term impact on demand for diabetes products, namely CGM and pump therapies.
  • On July 20, Intuitive Surgical (ISRG) reported a slowdown in bariatric surgery volumes on its Q2 earnings call.
  • On Aug. 8, Novo Nordisk announced headline results from the SELECT cardiovascular outcomes trial, demonstrating a statistically significant and superior reduction in major adverse cardiovascular events (MACE) of 20% for people treated with semaglutide 2.4 mg compared to placebo. The strength of results vs. expectations raised conviction in the potential benefits of GLP-1 therapies for patients with health conditions spanning diabetes, sleep apnea, and cardiovascular diseases, while fueling concerns around the potential impact to interventional procedure volumes and broader MedTech end markets.
  • On Oct. 10, Novo Nordisk announced it had stopped its FLOW trial early due to the fact that results from an interim analysis met pre-specified criteria for stopping the trial early for efficacy. FLOW is intended to assess Ozempic in the prevention of progression of renal impairment and risk of renal and cardiovascular mortality in people with type 2 diabetes and chronic kidney disease (CKD).
    • Dialysis and kidney transplant-exposed stocks (including Baxter, CareDx, DaVita, Fresenius, Natera, Outset Medical, and Transmedics), fell double-digits in response.

Market Reactions & Trading Commentary

  • Trading commentary from banks such as JP Morgan and Morgan Stanley (alongside public data) suggests that generalist long-only funds are reducing and exiting MedTech positions, with both MedTech and healthcare now underweight within many portfolios.
  • Oct. 10-13 may have represented capitulation as stock movement post FLOW news exceeded that of SELECT headline data in August.
  • MedTech valuations now sit at 10-year lows with stocks experiencing 10-30% multiple compression across subsectors and capitalizations.

The Path from Here

  • Final SELECT data, scheduled for presentation at AHA (Nov 11-13), is the next major focus for investors. We expect investors to remain cautious into the SELECT readout given the significant number of secondary endpoints that could carry derivative implications.
  • Meanwhile, rising rates and concerns around future year earnings and cash flow are driving investors to place a greater premium on profitability now (or certainly sooner than in prior periods).
  • Especially in the context of GLP-1 concerns on long-term MedTech growth achievability, many investors are hesitant to dig deeper into stocks and stories without a clear, and ideally risk-adjusted, path to profitability.

Gilmartin View & Recommendations

  1. The magnitude of stock moves and liquidity are driving increasing short-term fear – but the primary investor concern is that there are future trials ahead and potential expanded indications (with few side effects) for GLP-1s. Investors are having a hard time developing a thesis for a recovery.
  2. As a firm, our perspective is that the evolution of population health, patient disease states, and various medical device end markets in the presence of GLP-1s is far more nebulous than what can be reliably identified as a quantifiable headwind or tailwind. Said plainly – it’s hard to disprove the negative or quantify perceived existential threats.
  3. We do believe it is important for most companies- first, internally– to develop an informed view of potential impact from GLP-1s. From there, strategize messaging and create a deliberate approach to address investor sentiment during Q3 reporting season and into 2024.

Specific Actions

  1. Don’t play into the fear. Remain confident in the end market fundamentals of your business and specific disease states, but be proactive in addressing questions from investors.
  2. Have an informed view of what the introduction of GLP-1s to your company’s end market(s) might mean, and be prepared to discuss what analytics have contributed to informing your view – KOL discussions, available data, commentary from medical societies, etc.
    • These preparations should be both mechanistic/clinical and commercial.
    • For example – if, biologically, GLP-1 mechanisms or weight loss has little bearing on incidence levels in the disease state addressed by your business, consider reminding investors that even in an eventuality where your TAM is some % smaller over time, your penetration into that end market remains in early stages (ideally, quantify this) with a massive opportunity remaining.
  3. Be prepared to share commentary. Investors recognize the difference between tangible and perceived risks, but they will likely be dissatisfied with commentary that GLP-1s do not impact your business at all. Create talking points to address concerns and communicate that your company is closely following GLP-1 developments and potential market implications. At the same time, you are focused first and foremost on executing your ongoing business strategy.
    • Our general advice is to leverage standard-cycle communications (e.g., quarterly prepared remarks or carefully crafted Q&A responses during public calls) rather than more reactive, “out-of-cycle” statements – however, this will also be company dependent.
  4. Be deliberate in deciding whether it’s appropriate to weave this view proactively into your external talk track, including Q3 earnings commentary, investor presentations, and other public comments or in preparation for Q&A. There is no ‘one size fits all’ approach.
  5. Drive fact-based answers and a thoughtful approach. Prepare to be pressed on the size of your end markets and asked about your company’s patient demographics, including how they have evolved in recent months and years, as well as expectations for the future.
  6. Understand the audience in your investor conversations. It is now more important than ever. Healthcare portfolio analysts will be in the weeds on the topic vs. growth-oriented and generalist investors.
  7. Profitability matters. If you have introduced a path to profitability, prioritize delivering on it. If you’re on track, reiterate it.


For many companies, there are too many unknown variables to accurately quantify potential changes in market growth rates or patient behavior. We believe that investors understand that, but still expect you to opine on what drives the error bars around your business.

We recognize this is a lot to digest, and we are happy to talk further. Please contact our team today to discuss how we can be of strategic advisory.

Authored by: Marissa Bych, Principal, Gilmartin Group

Navigating SEC & FINRA Regulations in Healthcare

This past Tuesday, August 1st, Gilmartin Managing Directors, Laurence Watts and Stephen Jasper hosted a webinar with Latham & Watkins Partners Colleen Smith and John Sikora. The panel explored all things FINRA and SEC-related, and best practices when confronted with inquiries. Below are key takeaways from this conversation. 

Moderators:

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

Guest Speakers:

  • Colleen Smith, Partner, Latham & Watkins
  • John Sikora, Partner, Latham & Watkins


Key Takeaways:

FINRA Inquiries Towards Biotech Companies are Routine
As a self-regulating organization (SRO) with authority over broker dealers and public markets, FINRA is tasked with assuring market integrity and being the main surveillance body under the SEC. They watch for member firms involved in suspicious trading, collect information from cooperative parties, and then defer to the SEC for further investigation if necessary. Newly public biotech companies are likely unaccustomed to being under regulation, but management should not panic if they receive a FINRA inquiry. Since biotech companies are largely event driven with stock prices that are heavily affected by company news announcements, FINRA inquiries are common.

FINRA Inquiries are Triggered by Large Stock Movements and Have a Standard Process
Large stock movement is not defined by specific percentages or a metric, but rather is associated with company specific news that causes the stock price to move. When FINRA begins their inquiry process, an initial request for more information regarding the specific news announcement will typically go to one person in the company (general counsel if available). This is an attempt to better understand the triggering event, who knew this information before it was announced, and retrieve relevant documents. The next steps in the process will be a name recognition request containing individuals or institutions that made coincident trades. FINRA will then decide whether to turn the inquiry to the SEC, who is the ultimate decision maker on pursuing a deeper investigation.

Establishing Efficient Company Policies are Critical for Preparation and Protection
When a company has an upcoming news announcement that will likely trigger a FINRA inquiry, it is within the company’s best interest to ensure the blackout period is in place. While this will not prevent the employees from purchasing shares outside of company knowledge, it will provide protection for the company in the case of inquiry. Chronology and tracking the necessary facts are also part of best practices. This includes taking detailed chronological notes of the relevant people involved, information exchanged, and conversations. Finally, to ensure insider trading rules are well known by employees, efficient and engaging training is critical to implement before employees begin work, and continually reestablish during their tenure.

Be Aware of Regulation FD when Making Disclosures  
Regulation FD stands for Regulation Fair Disclosure, which is an SEC rule regarding how companies can disclose material information. While the definition of material information is largely within the context of each individual company, it is important to remember that information can be material even if it has not yet been disclosed. Material information for biotech companies is often data, conversations with regulators, or FDA related. Latham & Watkins cautions against using personal judgment to determine materiality and advises to take Regulation FD seriously, as penalties can lead to fines, injunctions, and reputational damage that can affect companies in their future years.


Gilmartin Group has extensive experience working with both private and public companies across the Medtech, Biotech, Life Science Tools & Diagnostics, HCIT & Digital Health. To find out more about how we strategically partner with our clients, please contact our team today.

Authored by: Devon Chang, Analyst, Gilmartin Group

Market Perspectives of Digital Health and Health Technology

This past Wednesday, June 21st, Gilmartin’s Managing Director, Ryan Halsted, hosted a webinar with BTIG’s David Larsen (Senior Research Analyst, Digital Healthcare/HCIT) and Marie Thibault (Senior Research Analyst, Digital Healthcare/HCIT) and Needham’s Ryan MacDonald (Senior Research Analyst, Digital Healthcare/HCIT/Vertical SaaS). The panel explored market perspectives of the digital health and healthcare technology sectors and discussed views on technological innovation across the sector. Below are key takeaways from this conversation. 

Moderator: Ryan Halsted, Managing Director, Gilmartin Group

Guest Speakers:

  • David Larsen, Senior Research Analyst, BTIG
  • Marie Thibault, Senior Research Analyst, BTIG
  • Ryan MacDonald, Senior Research Analyst, Needham


Key Takeaways:

The Street defines Digital Health as companies with solutions powered by technology to address the Triple Aim of healthcare
Digital health solutions aim to optimize the quality of care, reduce costs and improve patient health to deliver better medical outcomes and results. Serving end markets across the healthcare ecosystem, they cover a broad spectrum of solutions from wearables and remote patient monitoring devices to technologies that provide telehealth services, streamline healthcare operations and optimize drug development.

State of the market for digital health reflects macro headwinds with companies offering strongest ROI proposition outperforming rest of the group
While the industry accelerated during the pandemic, the current macroeconomic environment has adversely impacted the sector consistent with the broader market. End market budgetary constraints and a focus on cost management have led to some decreased adoption for these solutions, however, budgets have proved more resilient than investors feared. Offerings that deliver direct ROI in cost savings or incremental revenue, along with a comprehensive suite of solutions rather than point solutions, have performed well despite these headwinds. With the spotlight on generative AI as key drivers of future growth, investors have been keen on understanding how this technology can be used within healthcare, but we are still in the early innings with limited use cases in the industry.

Inflection points, as we look ahead, include loosening budgetary constraints and regulatory changes
In addition to the stabilization of the market, the panelists are looking out for the shortening of elongated sales cycles, the impact of pressures with Medicare Advantage rates, RADV audit implications and legislative changes as it relates to digital devices and therapeutics.

Data and Analytics is leading innovation across the space in addition to novel patient and provider engagement solutions
Companies are leveraging the advancements of health data to pave the way with innovative technology platforms and devices to drive forward better patient care, engagement and outcomes. The panelists expressed excitement over healthcare navigator companies, precision medicine solutions, platforms that accelerate clinical trial enrollment and activities, offerings that can reduce costly hospital admissions, including health technologies at home, such as remote patient monitoring, testing and therapies.

Companies that are viewed by the Street as Health IT, versus pure technology, address the healthcare end market and have recurring revenue and a durable customer/utilization profile
Digital health companies that are at the cross-section of tech and healthcare are often faced asking where they fit within the framework of pure tech versus health IT. The panelists noted one way in which to think about this distinction is whether at its core, the company is operating as a tech-enabled healthcare business or as a software-as-a-service (SaaS) business. To determine categorically whether a company may be operating as a pure SaaS business, some of the characteristics investors may ask are (1) whether the company has a recurring revenue model, (2) how sticky the customer base is and whether utilization lasts greater than 12 months and (3) whether the gross margin profile is above 70%. As it relates to valuation, tech and Health IT companies are generally valued at an EV to Sales multiple whereas over time health IT companies tend to trade on an EBITDA basis. Moreover, SaaS investors often will turn to the Rule of 40 to measure a company’s value and understand its balance between growth and profitability.

Companies that are viewed by the Street as digital health, versus pure medtech, often apply technology within a care delivery model and therefore may have a higher degree of exposure to reimbursement than pure medtech companies
Given the difference between digital health versus pure medtech, another consideration for companies that are sitting at this cross-section is which investors would understand their story best. For these companies, health IT investors may not fully appreciate the nuances of medtech as it relates to risks associated with the business. As an example, if regulation around reimbursement is a hurdle, a tech investor may not closely understand the related implications to the business. Tech investors may care more about commercial and marketing activities while healthcare investors may be more focused on clinical data and roadmaps.

Common KPIs in digital health
Common KPIs in digital health highlighted by the panelists include the number of patient lives and contracts, average or total contract value, annual recurring revenue and net retention rate. They also suggested that management teams consider these metrics in the context of the quality and size of the total addressable market and the ability to capture that TAM.

Companies contemplating an IPO need to emphasize preparedness
The panel stressed the importance of public company readiness. As part of this preparation, management teams need to understand the dynamics of operating as a public company and set forth clear expectations to deliver against and to demonstrate execution. This includes key inflection points investors can follow.  Establishing and maintaining credibility with the street is essential around messaging and communications. Finally, aim to beat and raise.


Gilmartin Group has extensive experience working with both private and public companies across digital health and health IT and the broader healthcare space. To find out more about how we strategically partner with our clients, please contact our team today.

Authored by: Ji-Yon Yi, Vice President, Gilmartin Group

Counting Carbon: How Healthcare Companies Can Navigate the Emissions Reporting Landscape

Although climate change is one of the most widely discussed ESG and sustainability issues, disclosing climate-related information is not the first natural step for healthcare companies to take as they start their ESG initiatives. In one of our previous ESG blog posts, we recommended that healthcare companies use the Sustainability Accounting Standards Board (SASB) standards to identify the ESG topics most relevant to their business. According to SASB’s materiality map for the healthcare sector, SASB has determined that greenhouse gas (GHG) emissions are not a priority for five out of the six industries within the sector. Healthcare companies often prioritize other ESG issues, such as Access & Affordability and Product Quality & Safety, because they are already factored into their existing policies and procedures.

However, investor demand for GHG emissions data has remained strong despite recent backlash against ESG, and the SEC is expected to finalize its climate disclosure rule in the coming months. The healthcare industry accounts for 8.5% of GHG emissions in the U.S., but the industry is relatively further behind others in addressing and managing climate issues. According to MSCI, only 6% of companies in the healthcare sector have set net-zero GHG emissions targets, which was the lowest percentage for any GICS® sector. However, large healthcare companies that have set ambitious net-zero goals are starting to pressure their suppliers and business partners to set GHG reduction goals of their own. For example, Pfizer expects its suppliers to set a GHG reduction target in line with the Science Based Targets initiative (SBTi) by the end of 2025.

As the expectations for healthcare companies on climate issues heat up, here are some basic steps that companies can take to start understanding and managing their GHG emissions:

Learn the Scopes

As defined by the Greenhouse Gas Protocol – the most widely used GHG accounting standard – an organization’s emissions sources are divided into three “scopes.”

Scope 1 emissions entail direct emissions from sources that are owned or controlled by a company. For example, Scope 1 covers emissions from natural gas used in company-owned furnaces and heating systems as well as emissions from company-owned vehicles.

Scope 2 emissions refer to the emissions derived from the purchased electricity consumed by a company. These are “indirect” emissions because the company’s electricity needs are supplied by utilities that emit carbon and other greenhouse gases in the process of generating electricity.

Scope 3 emissions cover all other indirect emissions that occur as a result of a company’s activities. For example, emissions from employee business travel and freight transport for supplies would fall under Scope 3 (as long as company-owned vehicles are not involved). The GHG Protocol further distinguishes Scope 3 emissions between “upstream” emissions, which involve emissions related to the manufacturing and purchase of products and services, and “downstream” emissions, which involve the distribution, use, and disposal of a company’s sold products and services. As a result, Scope 3 emissions often entail the bulk of a company’s GHG emissions. For example, Philips estimates that the customer use phase of their products (a downstream activity) accounts for 80% of its total environmental impact.

Collect the Data

Scope 1 and Scope 2 emissions are relatively easier to calculate than Scope 3 emissions because most (if not all) of a company’s natural gas and electricity usage data can be found in utility bills. We recommend that companies gather their utility bills for each of their facilities as the very first step in conducting a baseline GHG inventory.

Keep in mind that some Scope 1 emissions, such as gasoline purchased for company-owned vehicles, might not be captured in utility bills. Moreover, companies may lease office space in multi-tenant facilities where the tenant does not pay for gas or electricity individually. In this case, the GHG Protocol recommends that companies count the energy consumed in leased facilities (including on-site heat generation) as part of their Scope 2 emissions.

Many companies calculate and disclose their Scope 1 and Scope 2 emissions before addressing Scope 3. Calculating Scope 3 emissions is a more complicated exercise because it requires engaging with all the suppliers, vendors, and other business partners across a company’s value chain to gather accurate data.  The GHG Protocol’s Scope 3 standard provides a standardized approach for companies to prepare Scope 3 GHG inventories in a cost-effective manner. However, given the complexity and time-burden of Scope 3 data gathering and management, many companies utilize external resources when developing GHG inventories across all three scopes. In recent years, a plethora of user-friendly SaaS tools have arrived on the marketplace to help companies manage their GHG data as well as other ESG information.

Align Disclosures with Industry-Leading Frameworks

Even if a company follows best practice standards like the GHG Protocol in calculating its emissions, investors and other stakeholders may expect them to disclose climate data in alignment with other industry-recognized frameworks. Moreover, ESG ratings agencies often evaluate companies based on whether their emissions disclosures follow these frameworks.  

The TCFD (Task Force on Climate-Related Financial Disclosures) is one of the leading climate-reporting frameworks and is supported by over 3,900 organizations. The TCFD’s recommended disclosures are centered around four general themes: governance; strategy; risk management; and metrics and targets. Underneath these four themes, the TCFD has developed 11 specific disclosures for companies to discuss how they approach and manage their climate-related risks and opportunities. Like SASB, the TCFD’s goal is for companies to disclose consistent and comparable climate-related information, and it remains a voluntary standard. However, the SEC’s proposed climate-disclosure rule incorporates various elements of the TCFD’s recommendations.

CDP (formerly Carbon Disclosure Project) is an environmental data platform that scores individual companies based on the quality of their disclosures and overall environmental performance. CDP allows stakeholders to access a company’s self-reported environmental data and request information for disclosure. Companies with leading CDP scores disclose comprehensive strategies to manage their environmental impact, assess environmental risk, and improve their performance. CDP enables companies to report climate-related information in line with the TCFD’s recommendations, but CDP also asks companies to disclose information related to other environmental issues, such as water and deforestation.

The Science Based Targets initiative (SBTi) is the gold standard for companies that have set net-zero emissions pledges. The SBTi aims to help limit global warming to 1.5°C above pre-industrial temperatures by assessing and validating emissions reduction targets that individual companies set. To have their targets recognized by the SBTi, companies must follow the GHG Protocol to calculate their Scope 1-3 emissions. The SBTi has also developed a Corporate Net-Zero Standard to support companies in setting emissions reduction targets that can be validated by the initiative.


At Gilmartin Group, our dedicated ESG team helps companies gather and manage their climate data and has extensive working knowledge of sustainability evaluation criteria and reporting frameworks. Contact our team today if you are looking to evaluate or further develop your company’s ESG and sustainability practices.

Authored by: Patrick Smith, ESG Associate, Gilmartin Group