BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

In today's fast-paced, information-
driven business environment,
investors demand instant
access to detailed information
surrounding everything from a
company's stock price to its product
pipeline. Such expectations challenge
medical device manufacturers not
only to produce thorough, accurate
communications for the financial
community, but also to produce them
quickly and in a way that can be tailored
to the interests of an individual
investor.

Photo by Jupiter Images

To find out more about investor
relations (IR) challenges facing medical
device manufacturers, MX
recently spoke to four experts in the
field (see sidebar). In this excerpted
roundtable discussion, moderated by
MX managing editor Lori Luechtefeld,
these industry experts discuss
the process of building a robust IR
program, the benefits of transparency
in communications, and the IR
complexities associated with topics
such as reimbursement. The full text
of the discussion can be accessed via
the MX Web site at www.devicelink.com/mx.

MX: Investor relations play a role
in every medical device operation,
from multinational conglomerates
to fledgling one-person start-ups.
How this function evolves throughout
a company's life cycle differs
from firm to firm. In general,
though, what shape do investor
relations take in new companies,
and at what point does a company
usually have a need to create some
sort of formal investor relations
function?

Julie Tracy: I would argue that it's
never too early to create a formal
investor relations function. The need
for a company to differentiate itself
and communicate its value proposition
with current shareholders and
potential investors has never been
greater. I also believe that companies
with good IR and communication
practices are more likely to achieve
share prices that accurately reflect
their underlying value.

The need to establish and maintain
effective relationships with the
financial community translates into
an opportunity for a member of the
company's management team to
handle this function as a dedicated
investor relations officer. That person
must work in close collaboration
with the CEO, the CFO, and other
senior members of the team.

David Erickson: Of course, the
responsibilities and tactics of a
medtech company's IR department
will be different prior to an initial public
offering (IPO) versus following an
IPO, but it's still important to get
a company's IR department up and running early on in a company's life
cycle. There's always work to be done
in terms of establishing relationships
and communicating a company's
message, regardless of when the
company intends to go public.

Spencer Sias: My experience has
been with large companies, so I can't
offer a pre-IPO perspective. But I do
agree that you need to begin building
relationships early on and to manage
them effectively.

Varian is active on the acquisitions
side, but the company doesn't buy
large companies or, for that matter,
publicly traded companies. All its
acquisitions so far have been smaller,
privately owned companies.

In evaluating and executing these
transactions, I have never encountered
an investor relations officer (IRO) at
the companies we've acquired. The
companies have traditionally been
managed by their presidents, their
CEOs, and their financial executives.
None has had a person dedicated
exclusively to investor relations.

Having a more-developed investor
relations function would enhance
the value and drive up the price of a
company. But our company prefers to
acquire companies whose prices are
depressed. So to some extent, our
company benefits when the firms we
acquire don't have any internal IR
support in place.

Nick Laudico: It's interesting to
see how investors are currently evaluating
privately held medical device
companies. Their tolerance for earlierstage
companies and higher-risk companies
has grown. Investors are crossing
over the fence to invest in private
companies well before those companies
issue IPOs. Some of the larger
institutional investors and many of the
hedge funds are beginning to move in
this direction.

The more sophisticated IR programs
at these emerging companies
take different shapes. Often companies
start doing a lot of media outreach
and developing those relationships
in order to build momentum for
their technology prior to an IPO.
Those activities usually begin about
six months ahead of a planned IPO,
and such activities help the companies
establish a platform on which they can
build a more-robust IR program once
they're publicly traded.

What influence does a company's size
or maturity have on its ability to conduct
a sophisticated IR program? And
for early-stage and emerging companies
whose budgets do not permit a
significant expenditure for investor
relations, what are the most basic key
components for an IR program?

Tracy: Size doesn't necessarily dictate
a company's ability to conduct a
sophisticated IR program. Many companies
with small market capitalizations
have effective IR programs.

With an IR program, you get
back what you put in. So the essential
components of an IR program are
basically the same regardless of a company's size. First and foremost,
investor relations are all about being
available and responsive to your
shareholders and investors. I've heard
about companies with large IR teams
that do not return phone calls or
respond to inquiries. On the flip side,
I've heard investors give rave reviews
about companies with a single dedicated
IR professional who performs
the job very well.

The other basic components of an
IR program are fairly straightforward.
Companies should have a comprehensive
Web site where people can
find up-to-date information about the
firm. A company's Web site is one of
the first places investors go for information,
and that information must be
kept current. A company should also
have a well-thought-out IR calendar. It
needs to focus on meetings that will
put the company in front of the
investor audience that's most likely to
be interested in the company's value
proposition.

Erickson: The effectiveness of an
IR program is dictated mostly by the
company's attitude toward investor
relations and what it hopes to get out
of its IR program. Companies that
want to be more communicative and
transparent will naturally perform
more investor relations functions.

Obviously, being responsive and
regularly being in front of investors at
conferences and on road shows requires resources. Certainly the size of
the company matters from the standpoint
of resource availability, but there
are still very large companies that
choose to take a more reactive
approach to their investor relations
efforts. I think these companies do
themselves a disservice.

On the other hand, smaller companies
with limited resources can
still take an open and transparent
approach to IR. They can put what little
resources they do have to work in their IR program, and quite often they
reap a greater reward because of it.

Building Transparency

When companies are looking to structure
their IR departments around
the ideal of transparency, what
kind of chains of command should
they put in place? For example, who
should be the initial point of contact
for investors or other individuals
interested in following up on IR
communications?

Erickson: Hopefully the investor
relations officer (IRO) is the point of contact for those individuals. After all,
the IRO is the most appropriate individual
to be fielding questions of that
nature. And for that reason, a company's
IRO needs to be part of the management
team—or at least have a seat
at the management table—so that the
person is able to speak with the voice
of the CEO or CFO or whoever else
serves as a company's spokesperson. A
company gets the most value out of its
IR leader when everybody at the company
is on the same page.

Tracy: Unfortunately, there are
examples where IROs merely serve as
gatekeepers for the CEO, the CFO, or
another management team member
who can answer shareholder questions.
But I think an IRO must be more than
a gatekeeper. IROs must have access to
the information that will enable them
to serve as a direct and knowledgeable
point of contact for investors and to
determine whether and when to draw
on the particular expertise of their colleagues
to address particular needs for
information.

Sias: The IRO has to be a champion
of the company and of its story.
In order to do that, the IRO has to be
able to express management's viewpoints
with conviction and passion.
The IRO has to be the go-to person
for the investor. The CEO and the
CFO can be pulled in to dot the i's or
cross the t's, but the IRO must be the
major ball carrier in terms of communicating
a company's story.

In the case of small emerging medical
device companies, a company
founder may initially wear multiple
hats, including that of the CEO, CFO,
and IRO. When the executive gets to
the point where he or she is looking
to bring in some help regarding the
company's investor relations, what
functions are they usually looking to
outsource?

Laudico: Most of the time they're
looking for a soup-to-nuts IR program.
Many small companies want
to outsource their IR functions
completely.

For emerging companies and
those that are looking to go public, IR
functions are mostly about gaining
visibility and exposure. So in these
cases, an outside agency can fulfill
a company's IR needs by talking to
investors, conveying the company's
initial investment characteristics, and
telling its story. The outside firm can
provide a view of the company from
10,000 feet to get investors warmed up,
and then the company's CFO can
come in to do the heavy lifting during
investor calls and meetings.

Sias: When Varian Medical Systems
spun out from Varian Associates,
we essentially launched a start-up
investor relations program. We didn't
inherit any of that function from the
parent company.

In getting that function up and
running, I found outside agencies to
be particularly effective at identifying
the tactical things that our company
needed to put in place to run an effective
program. They helped shape the
program by pulling together the Web
site and identifying the materials that
we needed to develop internally.

So, although it would be hard for
an agency to champion a company's
story with the passion and conviction
found among members of the company's
management, the outside firm can
still be quite effective on the tactical
side.

Evolving Needs

Investor relations functions are critical
for both public and private companies,
though their shape can take
vastly different forms in each type of
company. What are the key distinctions
between IR directed at private
versus public investors?

Laudico: When a company goes
from private to public, its IR function
moves from one focused on market
preparation, messaging, and roadshow
presentations to one focused on
the nuts and bolts of operating IR.

When a company becomes publicly
traded, earnings calls become the
major focus of the company's IR
function. This includes considerations
related to what messaging and
metrics to disclose or not disclose, as
well as how the company should position
itself in relation to its peers.
Once a firm is publicly traded, its
executives have much more to think
about in regard to earnings, investors,
and targeting.

Erickson: The stakes are a lot
higher for public companies. Although private companies have certain
rules that they must adhere to
from a disclosure point of view, such
responsibilities are taken to a whole new level once companies become
public. At that point, companies must
file quarterly earnings reports, adhere
to Regulation Fair Disclosure (Reg
FD), and fulfill numerous other obligations associated with being public.

Tracy: In the midst of preparing
for an IPO, it's easy for companies to
get so focused on just getting through
the IPO process that they may not be
looking very far beyond that event.
Therefore, some IR processes may not
yet be in place. For example, they may
not have established a formal disclosure
policy or determined who will
handle other investor-related communication
responsibilities over the
long term.

Drawing Boundaries

How do companies draw the line
between their investor relations functions
and public relations functions?

Tracy: At Kyphon, I'm involved
with both functions so, in some
respects, that makes it pretty straightforward.
I get involved in all external
communications that touch our
shareholders or investors. Even if it's
a project in which our marketing
department takes the lead, there's still
very close coordination.

Although IR and PR might have
different target audiences, different
strategies, and different issues that
they must manage in setting up their
programs, they do need to have close
collaboration. Companies that perform
both functions well do so by
collaborating to get a unified, consistent
message to their customers,
their shareholders, and their employees. The functions support each
other, making the whole greater than
the sum of its parts.

Erickson: It's critically important
for a company to speak with one voice,
regardless of the audience. And there
is a lot of overlap among audiences.
For example, a company may have
employees who also have stock
options. It may have customers who
are also shareholders. Therefore, the
company must speak uniformly.
Whether or not the message is tailored
to a certain audience, its core has to
be the same. Whether it's coming from
a person who handles both IR and PR,
or whether a company maintains a
bifurcated IR-PR structure with different
people handling each function,
the message has to be uniform.

Sias: I handle both functions for
Varian—all the corporate communications
and all the investor relations.
In developing both functions,
we work very closely with our marketing
department. Not surprisingly,
investors are very interested in
knowing what our company is doing
in terms of marketing its new products.
So the IR, PR, and marketing
teams work hand in hand in putting
together company communications.

In addition to the Securities and
Exchange Commission, investor relations
executives at medical technology
companies must consider another
regulatory body: FDA. Does this dual
layer of regulation present any challenges
on the IR side?

Sias: I have not found SEC and
FDA regulation to be in conflict with
one another. Each entity has different
regulations, and we need to comply
with both. Our company has never
run into any conflicts between the two.

Of course, our communications
and marketing activities are governed
by certain rules. For example, we can't
do any marketing for a product prior to its 510(k) clearance. We find it
pretty easy to follow rules like that.

Tracy: To ensure compliance,
Kyphon's regulatory and legal affairs
departments are involved in reviewing
communications documents. I
see this as a benefit because it helps
ensure that we are not only promoting
a product consistent with regulatory
requirements, but also that we
are promoting it with a consistent
message among audiences. So involving
regulatory and legal affairs in
reviewing communication documents
and their claims is a smart
practice to have in place.

Laudico: FDA regulation can play
an important role in the investor relations
of an emerging company. For an
early-stage company, its communications
program may revolve heavily
around FDA milestones. A lot of earlystage
companies have gone public
without revenue, and they've had to
rely on progress in achieving their
milestones related to FDA approval to
drive their stock valuation.

Of course, until the curtain is lifted,
you never know which way an FDA
decision will go, so medtech manufacturers
need to have communications
plans in place that can handle
both good and bad news on the FDA
front. That's where I see FDA exerting
the most influence over medtech manufacturers'
IR functions.

You've each mentioned transparency
as an ideal when it comes to investor relations. But in what situations
does a company need to guard itself
closely when it comes to investor
communications?

Laudico: The time during which a
company is evaluating a potential
acquisition is the time when communications
are most guarded. But even
during that time, communications
with investors should be business as
usual—but that particular topic just
shouldn't be discussed.

Investors will always ask questions.
Particularly in one-on-one
meetings, many of the interactions
have to do with investors trying to
read the body language of management.
Investors consistently request
meetings just prior to earnings announcements so they can get a feel
from the management team as to how
the quarter looks.

It's important for companies to
make sure their executives are consistent
and, in some respects, guarded
with their communications. Companies
should have documents that outline
disclosure policies related to certain
questionable situations.

For example, when is it appropriate
to conduct a one-on-one meeting
between management and investors?
When is it too close to the close of a
quarter? When is it too close to the
earnings call?

If there is any question as to what
would be fair, then it should be
addressed in the company's disclosure
policy, and the company should
abide by that.

Do investors frequently ask certain
questions just to see how long an executive
pauses?

Tracy: Some investors will try to
ask certain kinds of questions and
gauge the executive's response based
on body language and how the person
sounded, especially if it's in the time
period leading up to an earnings call.
This underscores the need for disclosure
policies and consistent messages.
Putting appropriate disclosure policies
in place will help maintain the
integrity of the communications and
information that flow to investors.

Erickson: For most medical
device companies, a significant part of
their stock valuation has to do with
their product pipelines. Oftentimes,
there is a healthy internal tension at a
company when it comes to deciding
when to disclose a new technology or
product that's still in development.
The tension generally exists between
the R&D personnel and the company's
management.

Management may be looking to
get some credit for what the company
is working on and to build some
investor excitement and anticipation
for the pipeline. But the R&D side
tends to want to keep such information
close to the vest. R&D personnel
will often argue that it's premature
to discuss the product in development
because a competitor could
pick up on it and put the company
at risk of not being first to market
with it.

There's no easy answer to resolving
this tension. Company executives
must remember that once they release
information, they can't take it back.
Once they open the door on a new
technology that's under development,
they're essentially obligated to continue discussing it and providing
updates.

Conveying Value

The technologies at the core of a medical
device company are sometimes completely outside the realm of
investors' expertise or understanding.
How can companies clearly convey
the value of new technologies to existing
and potential investors?

Erickson: In my experience, the
analysts and investors that we're dealing
with are pretty smart people, so I
don't find the need to simplify technologies
to any great degree. Yes, we're
not talking to our clinical clients, so
we do try to put things in layman's
terms. But companies usually don't
have to dumb it down to the point
where it becomes ridiculous.

Also, when appropriate, we put
clinicians in front of investors and let
them discuss the technology and the
opportunity for certain products in
their treatment of patients. This sort of
interaction gives investors a different
perspective on the application of the
technology, and we get rave reviews
from investors when we do this. They
love having access to clinicians
because that's not an audience that
many of them can or do reach on their
own.

Of course, there's a risk in connecting
investors with clinicians.
Companies don't want that interaction to be either too loose or too
scripted. But if a company can find the
right clinical figurehead who can
discuss a technology in a way that
complements what the company is
saying, it offers a huge advantage in
the IR effort.

Sias: Medical device companies
score a lot of points with investors
when they give them access to clinicians
who can explain what they're
doing, why a technology is important,
and how it helps them to help their
patients. And a company doesn't want
a clinician who is nothing more than a
mouthpiece. A manufacturer should
look for an independent, thoughtful, respected clinician who is using
the technology, has evaluated it
thoroughly, and can speak about it
effectively.

In terms of putting clinicians in
front of investors, our company does
everything from inviting doctors to
speak at our own events, to bringing
them to third-party events, to simply
making referrals. Occasionally we'll
give the investor community the
names of 10 different clinicians who
are using our technology. That enables
the analysts to put together their own
panels, which can produce some very
interesting discussions. Our company
has generally fared well in using that
approach.

Yes, occasionally a clinician will
say something that a company isn't
terribly pleased to hear, but it's worth
the risk. Those discussions help establish
and reinforce a company's reputation
for transparency.

Regarding Reimbursement

Medical device reimbursement is
becoming a key metric for measuring
a technology's market potential. How
savvy is the investor community when
it comes to reimbursement issues?
What can a company do to effectively
communicate with investors on this
topic?

Sias: Our investors watch reimbursement
and the activities of the
Centers for Medicare and Medicaid
Services (CMS; Baltimore) like hawks.
The rates are put in place in January,
and as early as February, we've had
calls from investors interested in
what's going to happen the following
year. The investors attend workshops
focused on this topic, and they can
create quite a stir in the market with
speculation based on what they hear
at these events.

Our company is challenged to
manage all the market speculation
surrounding reimbursement. After all,
as soon as somebody speculates about
how reimbursement might change,
investors seize on that information
and try to determine the impact it
could have. This speculation has created
movement in our stock price in
the past.

Our solution for managing this
aspect of our investor relations is to
direct investors toward outside reimbursement
experts who focus on the
markets we serve. Our big market is
radiation oncology, and we find that
the companies that help radiation
oncologists do their billing can communicate
a lot more effectively on
reimbursement than we ever could.
And the investors appreciate getting a
third-party perspective on this topic,
particularly from somebody who
actively works with CMS in setting
rates and in helping hospitals and
clinics process their billing.

Tracy: Our company doesn't
provide any guidance as to what we
think future reimbursement rates will
be for our products or procedures. But
we've found that educating our investors about how the reimbursement
process works is helpful and appreciated.
We focus on providing factual
information to questions: What are
the inpatient and outpatient codes
that are used for the procedure? What
is a new-technology add-on payment? How is it calculated? Companies can
serve as a useful resource for that kind
of information.

Erickson: There is no time lag
with regard to the issuance of reimbursement
news and how quickly the
analysts are on top of it. This is particularly
the case with sell-side analysts,
many of whom employ the same
outside consultants that our company
employs to help us understand
the changes. For these analysts, it's a
race to be the first one to interpret
reimbursement information and
issue a report. But the information
they're using is usually preliminary
and likely to change before final rates
are issued.

So in this respect, education is
helpful and appropriate because
some analysts may not be students of
medtech. They may invest in our
company's stock, but not necessarily
in a broad portfolio of medical
device companies, so they often need
a little bit of help in understanding
what reimbursement changes mean
to us.

But like I said, the sell-side analysts
tend to be all over these issues.
In fact, it's likely that they will get
information out there in advance of
our company's communications, particularly
if they are working with
good consultants or just working
through the night.

Sias: I agree. No matter how fast
I try to get to the bottom of reimbursement
issues, I find that I'm often
reading an analyst's report that is
already out before I've finished my
own research. And I also agree that
companies can and should educate
people on reimbursement processes
and codes. I just stay away from issuing
communications based on which
direction CMS appears to be leaning.

Tracy: The other question that we
get asked a lot is, 'Is your procedure
profitable for the hospital?' Well, that's
a question that's difficult to answer
because every hospital's cost structure
is different. Therefore, profitability can
vary widely. But I think it's interesting
that investors are asking these types of
questions.

Sias: Yes, they do ask that question.
Our company addresses such
inquiries by discussing return on
investment (ROI) based on certain
assumptions, excluding hospital overhead.
We use a specific reimbursement
rate for a piece of equipment and
demonstrate the ROI based on a certain
number of patients treated. The
ROI range we provide excludes the
nuances of an individual hospital.
People often ask us for those estimates,
and we are comfortable providing
them in that way.

Erickson: That's the area where I
think investors require the most education.
If the payment rate for a particular
diagnosis-related grouping
(DRG) goes down by 10%, their
knee-jerk reaction may be to assume
that means manufacturers will have
to take a 10% price cut on their products.
That's not necessarily the case.
So companies have to walk them
through the value proposition. For
example, that may mean reminding
them that a particular product comprises
only 15% of the DRG, with the
other 85% providing a much larger
target for potential cost savings.

IR for the Future

How do you see the responsibilities of
IR representatives changing in the
foreseeable future?

Erickson: As the market becomes
more focused on the short term, new
challenges will be created for companies'
IR departments. That issue is
playing out as we speak.

Tracy: Yes. The market's focus on
short-term results—and the potential
increased volatility that short-term
focus creates—will be interesting
issues to navigate in the future.

Erickson: When companies provide
quarterly guidance, they are
essentially giving the financial community
a short-term report card
by which they can be judged. Some
companies hope that if they move
away from quarterly guidance and
focus instead on broader annual
guidance, Wall Street's expectations
might follow.

The thought is that the financial
community might become less
focused on how companies perform
from quarter to quarter. I don't know
if companies will be able to change
investor attitudes simply by changing
how they provide guidance, but
that's at least one theory out there.

Laudico: The biggest questions
we get from clients revolve around
guidance and metrics. And although
certain larger companies may be able
to stop providing quarterly guidance,
many of the companies that we deal
with have very short, if any, public
track records. Therefore, they are heavily
scrutinized right out of the gate, and
it's extremely important for them to be
able to provide performance metrics
from quarter to quarter.

Tracy: The competition for
investment dollars is increasing, and
capital markets are becoming more
globalized. And so, in the future,
the role of the IRO is going to need
to expand in order for companies to
distinguish their investment proposition
and potential with investors.
Companies that recognize this and
put a strong IR team and programs
in place are going to be in a better
position to realize the full value of
their stock.