Given the inherent scientific uncertainty in the drug development process, it is common for management teams to communicate equivocal or negative news to the investment community. Most seasoned biotech investors will say they make their investment decisions without a quarter to a third of the information they would like, and that the goal is to get 60% of their “bets” correct. Against this backdrop, properly communicating data that is neither positive nor clear is an incredibly important task and often sets the stage for an equally common event in the industry: the comeback.
The history of biotech is rife with examples of companies whose initial candidates did not produce desired results but nevertheless were able to rebound from that setback to create effective therapies for patients and long-term value for shareholders. And while no amount of good management and effective communication can overcome a non-viable asset, there is unquestionably a proper way to both present bad news and subsequently regroup and re-engage. The manner in which a management team handles this process often goes a long way in cementing reputations, for better or worse, in the minds of investors.
Handling the Bad News: It’s OK to Paint with a Positive Brush, But They Know You’re Doing It
Investors make their living trying to avoid negative returns. Not surprisingly, therefore, they are very attuned to finding management commentary that deviates from previously established facts. The presentation of negative or unclear data often puts these skills to the test. In presenting these types of data sets, managements need to understand that every assertion they make will be under an especially high level of scrutiny, and while the presentation of mitigating factors is perfectly acceptable, it should be done factually with minimal commentary. Give them the information, and don’t try to tell them what to think. In this context it is axiomatic that managements have both financial and emotional reasons for wanting a company to succeed. Investors will presume any mitigating commentary is being presented as a short-term strategy to avoid the full admission of a setback.
Cutting Bait or Doubling Down on the Lead Asset
After communicating with the investment community, a management team with mixed data must decide whether to move forward with the asset or prioritize cash conservation, shut down development and move to another asset. The facts driving this decision are wildly variable in each given situation; however, the decision itself requires an unemotional, long-term view informed by both scientific and financial realities. Following the decision, a detailed rationale for whichever course of action is chosen must be prepared to provide investors with as much information as possible to inform their subsequent decisions. It is important to point out that, given relentless competition in the industry and the generally accepted wisdom in financial circles, “good drugs show early.” Pushing forward with an asset that has shown mixed data will likely be the course of action inviting a higher degree of skepticism and scrutiny.
When and How to Re-engage with Investors
After the dust settles and it is time to engage investors with the strategic vision around the new asset, there are tactical do’s and don’ts. The overarching theme of engagement has to be patience and persistence. These attributes are required because it will take investors time to embrace the second act no matter how logical and well-planned it is. Invariably, management will have to overcome overt and implied doubts following a failure. Management has to understand this skepticism and meet with polite persistence, almost embracing it. Only then will investors feel that management “gets it” and be willing to start with a clean slate.
In terms of communications strategy, it all starts with a well-thought-out vision, complete with an extensive list of both scientific and financial deliverables with explicit timelines. The investor must know with as much certainty as is possible what to hold management accountable for and over what timeframe. The more concrete milestones that can be provided, the more confidence the investor will have in their ability to evaluate and finance the plan.
Once the plan has been created, the next important step is understanding which investors to approach initially. This is a critical step as there is definitely a group to approach and a group to not approach. The group to approach is that of data-driven, science-based investors who have more of an ability to assess each asset on its own merit. These investors will need to understand the past in order to provide context, but they will have sufficient confidence in their ability to assess both the asset and the plan against the current valuation to gauge the magnitude of the opportunity. These investors also have many analogous situations from their own experience as points of reference.
After the target investors have been engaged, it is time for management to focus on nothing but execution. It is time to go into the bunker and not emerge until concrete steps have been achieved. At this point, management should be far less available at conferences and for NDRs so they aren’t continually providing redundant updates with hardly any new information. This is where patience comes in. Too many “nothing new to say” presentations will invariably lead to investor boredom and make it harder to attract attention when there is something new and exciting to report.
Ultimately in biotech, data drives all, for better or for worse, and no amount of managerial and communication skill can overcome a non-viable asset. However, understanding the expectations of investors around strategic communication can go a long way towards ensuring that managements maintain credibility and allow themselves multiple opportunities to keep their assets on investors’ minds.
If you’re looking for a team to help you strategize how to re-engage with investors after a setback, contact Gilmartin Group today.
Matt Lane, Managing Director