Business

Relating to Investors

July 1, 2006

14 Min Read

Originally Published MX May/June 2006

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Clear communications can keep medtech companies in good standing with existing shareholders and open doors to new funding.

Lori Luechtefeld

Sidebars:
Coordinating Investor and Public RelationsInvestor Relations for Medical Device Firms

In an industry in which new technology often materializes faster than the funding to support it, medical device companies that have investors' ears have a significant competitive advantage. Building trust by maintaining open communications can keep shareholders happy—and dollars flowing.

Nowadays medical device companies are relying on their investor relations (IR) for far more than periodic financial releases. Investor relations—whether maintained by in-house staff or outsourced IR firms—encompass everything from planning a company's financial calendar and orchestrating industry conferences to ensuring compliance with financial disclosure regulations and maintaining relations with the financial press. Establishing an effective program requires significant strategic planning on behalf of company executives.

Medtech Concerns

In addition to certain IR obligations that confront companies across industries, medical device companies face special considerations. "Companies need to be sure that they're providing investors with clear milestones for their products," says Carol Ruth, president of the Ruth Group (New York City). "Manufacturers need to ensure that investors understand what the key differentiators are for their products and that investors are given a clear thesis as to why doctors may want to adopt the new product."

Smith

Another significant difference for medical technology companies in planning their investor relations is having FDA as an additional regulatory body, says Evan Smith, a senior vice president for the life sciences division of business communications firm Financial Dynamics (New York City). "FDA adds another layer of regulatory oversight that, in some cases, may conflict with Securities and Exchange Commission (SEC) requirements. In some circumstances, SEC regulations may require a company to disclose something that the company may or may not want to or cannot disclose because of FDA restrictions. It puts the individual or organization in a fairly interesting predicament.

"Companies need to take greater caution to ensure they don't overstep their bounds when communicating progress on clinical trials or labeling information, or any other information that may be regulated or reviewed by FDA," Smith adds. "Every word has greater meaning, and companies need to be more sensitive to that when developing communication materials, particularly with respect to a product that is not yet approved—but also after approval."

Erickson

David K. Erickson, vice president of investor relations for Edwards Lifesciences Corp. (Irvine, CA), agrees that the FDA approval and product development processes present medical device companies with unique hurdles. "All companies have to get their arms around that and decide what their investor communications strategy will be," he says. "Their strategies are often driven by what their peer companies are doing and the expected norm."

According to Erickson, each medical device company's investor communications strategy falls somewhere on the continuum between secrecy and transparency. When issuing investor communications, companies that choose to remain quiet in regard to their product-development progress benefit by shielding their strategies from competitors. However, companies that choose to communicate their advancements often boast stock prices that reflect their progress.

"Investor relations strategies are not one-size-fits-all for medical device companies," he says. Whether to maintain secrecy or transparency is a decision often made on a product-by-product basis, with each decision contributing to a company's larger public personality. "One thing that a company can establish is its overall approach to communications," Erickson says. "In its investor relations efforts, does the company want to be viewed as a transparent company? Is the company going to make it easy or difficult for Wall Street to understand its business?"

Developing Investor Relations

How a device manufacturer chooses to communicate with existing and potential investors is largely a function of the company's stage of development. "The size and maturity of a company will affect the scope of the plan and the level of visibility achieved. But without a voice, a company is likely to find funding more difficult to come by, partnering potentially more difficult, and finding new talent more difficult," says Financial Dynamics' Smith.

"Early-stage companies cannot afford not to have an investor relations program," he adds. "One of the key issues for early-stage companies is to get a voice in the marketplace for a potential product, as well as with the investment community so it can raise capital. To do so, the company needs an IR program that includes communications that are directed toward the investment community as well as financial and trade publications. A significant number of investors read those publications to understand the company's current status, where it plans to go, and its potential needs from a financial and market standpoint."

According to Ruth, targeting investors is essential. "Companies in various stages of development must find investors who are interested in investing in products at their respective stage.

"There's more to consider in implementing an IR program than budget," she adds. "It's a matter of the relationship between the audience and the stock. For example, if the company is at a very early stage and the investment story is not yet ready for institutional investors, the company will have to focus more attention on retail investors, a complex audience to reach."

Newly public companies, particularly those in emerging industry sectors, must focus a good deal of their investor relations on general education, says Erickson of Edwards Lifesciences, which manufactures heart valves. "When our company went public, our business was something investors didn't know much about," he says. Although industry giants Medtronic and St. Jude Medical also manufactured heart valves, the products comprised a low percentage of those companies' overall sales. Consequently, Medtronic and St. Jude devoted few of their IR resources to education related to heart valves. "It was a new industry in the minds of investors," Erickson says.

Public Preparations

The decision to make an initial public offering (IPO) is often the first time many medtech companies consider investing in IR capabilities. "If a company plans to go public, it should start an investor program early in order to gain maximum visibility before the IPO," says Ruth. "Private companies that plan to do rounds of fundraising with new investors should also consider implementing an IR program."

Ruth says that IR personnel must ensure that a company has the best possible Web site prior to the IPO. Sites should be accurate, informative, and easy to navigate. The company's management must also be prepared to answer questions that will likely be raised by prospective investors during the company's road show, Ruth says.

"Companies can do more to raise their profiles in advance of the IPO if they start their IR activities before registration, including media activities and investor conferences," she says. "These activities must stop once a company is in registration and cannot begin again until after the IPO."

Sherk

"A company's IPO activities should start about six months prior to filing an S-1, which is the document filed with the SEC that starts the IPO process," says Douglas Sherk, founder and CEO of Enhanced Valuation Communications (EVC) Group (San Francisco). "There is a series of functions that need to be addressed at this early stage. They include determining the operating metrics Wall Street will use to evaluate the company; determining the company's ability to monitor those metrics; determining the financial model that will go to the investment bankers underwriting the IPO; determining the peers against which a company will be measured; and the creation of an IR infrastructure, with disclosure policies and procedures, among other things."

Huang

Julie Huang, a senior vice president for the life sciences division of Financial Dynamics, says it is never too early for a medical device company to set up an IR infrastructure. She says it is relatively inexpensive for private companies to set up basic IR features, such as a Web site, management biographies, a press release page, and a distribution list. Prior to making an IPO, she says, medical device companies must establish the following.

Technology backgrounders for the company's devices.
Internal and external communications protocols.
Friends and family e-mail distribution.
An investor kit.
An IR portion of the company's Web site.
Management biographies with photos.
An IPO road show PowerPoint presentation.
IR 101 training for the senior managers.
Division of Labor
When developing a company's IR strategy and materials, a medical device company must also evaluate which functions should remain in-house and which are candidates for outsourcing. This determination is yet another area where no one-size-fits-all approach exists.
Burrows
"The decision will be based on the available resources and skill set in-house, plus the desire to maximize efficiency," says Andy Burrows, director of investor relations for medical technology development firm BTG plc (London). "Activities that require close contact with existing and potential shareholders would be kept in-house, and specialist activities might be outsourced. For example, distributing key news updates to shareholders and any follow-up calls would be handled in-house. But distributing and following up news dissemination to the financial media may be better handled by a financial PR agency.
"Investor targeting, especially in overseas markets, would normally be outsourced to either an IR agency or, in the UK, a corporate broker. They have existing databases and relationships that shortcut the process of understanding an investor's style," Burrows adds. "Analyst relations should be maintained in-house primarily because of the obligations to ensure all information is completely accurate and consistent, but perception audits among analysts would be outsourced to maintain anonymity and gain open responses."
EVC Group's Sherk agrees that outside firms can provide value through their existing investor networks, particularly if a medtech company needs to build a wider audience. "An outsourced resource is likely to have multiple points of contact with the investment community to help overcome the lack of following," he says. "Another major consideration is the composition of the shareholder base and the size of the float. Typically, the larger base and the larger float makes an in-house IR function more efficient, largely because the following has been created and the function becomes reactive to the large investor base's information needs."
McCoun
Gordon McCoun, senior managing director of investor relations for Financial Dynamics, agrees that the decision related to which functions to outsource is contingent on a company's size and stage of development. "A small company that may have recently gone public might have a minimal amount of resources to address the IR requirement and therefore would need both the expertise of an agency or just the arms and legs to be able to provide all the material and the necessary responses to the financial community," he says. "On the flip side, a very large company has, in most likelihood, a very substantial internal IR department with a decent-size budget. As a result, such firms are able to satisfy all the requirements internally but still have room for an external firm to bring value."
Erickson of Edwards Lifesciences says that the decision to outsource IR functions also depends on the public personality a company chooses to establish for itself. "There is an involvement factor," he says. "Does the company want to outsource its external contact? I would argue there is more value in keeping outreach efforts in the hands of someone who really understands the company rather than someone who serves as just a mouthpiece."
Kevin O'Boyle, chief financial officer of NuVasive (San Diego), says the outsourcing decision should also take into consideration the capabilities of the company's management. "A key ingredient to determine if any IR functions should be outsourced is whether current management has experience communicating with the public markets," he says.
O'Boyle says such experience is particularly relevant in light of the SEC fair disclosure regulation (Regulation FD), which became effective in October 2000. Regulation FD complicates IR by stipulating that if any nonpublic material information is disclosed by a company to any investors in particular, it must be disclosed simultaneously to the investing public in general.
"Since the SEC implemented Regulation FD, in 2000, management has needed to be very careful about what it says to whom, to be certain it communicates with the entire investing public equitably and does not commit selective material disclosures," Sherk says.
In addition to Regulation FD, some industry participants say the accounting requirements of the Sarbanes-Oxley Act have also had an impact on companies' IR activities. "While these regulations have placed a greater accounting and control burden on companies, there is also a greater responsibility from a communications standpoint," says Smith of Financial Dynamics. "With the passage of Sarbanes-Oxley, as well as other regulatory legislation, corporate governance and oversight have taken center stage with investors. These regulations attempt to create additional transparency regarding information flow to the investment community."
"The introduction of Sarbanes-Oxley and other corporate governance legislation in other territories has increased the burden on in-house IR and finance functions and has increased the cost of compliance," says BTG's Burrows. "It has also provided the IR function greater access to the boardroom to provide education about the new legislation and to demonstrate that due process has been followed. On the downside, some companies are using the new legislation to adopt a box-ticking approach to corporate governance, which actually decreases investor communications."
Going Outside
Medical device companies that decide to outsource some or all of their IR functions must choose among myriad potential firms. Each firm possesses distinct capabilities and experience; therefore, establishing criteria for selecting an IR agency is key to finding the right fit.
According to NuVasive's O'Boyle, factors to consider when selecting an IR firm include the following.
The firm's industry experience.
Its knowledge of analysts who cover the sector.
Its knowledge of smart-money healthcare investors.
Its access to partners and senior management for brainstorming purposes.
Its references.
Its experience handling companies in a similar stage of development.
Ruth of the Ruth Group says that an IR firm with industry specialization adds focus to a medtech company's investor communications. "IR firms that focus on medtech can help a company's communications support capital-market goals because they understand federal regulations and know—beyond which investors focus on medical devices—which kind of device companies different investors want," she says.
Birt
"Because medtech is a complex field, investors tend to be highly specialized," agrees Jonathan Birt, managing director for the life sciences division of Financial Dynamics. "A good IR firm will know all the sell-side analysts and the buy-side firms that focus on a company's area. They should also be able to help companies keep investors informed about progress through close relationships with the medical device trade and financial media that cover a company and its peers."
On the other hand, Erickson of Edwards Lifesciences says that medical device manufacturers can also find value in looking for IR firms with expertise beyond the medtech sector. "I prefer a broader horizon in terms of experience," he says. "If a company looks for someone with only industry experience, it may overlook important lessons that could be learned from other industries."
Regardless of selection criteria, Burrows says it's wise for a company to consider multiple candidate firms. "Always have pitches from two, or preferably three, agencies," he says. "Any more is wasting time and making the final choice harder. Also gauge whether you can work with the particular team that pitches—and find out who will be the main contact and how many other accounts the person is running."
Conclusion
Competition in the medical device industry continues to grow, making clear and effective communications with investors more crucial than ever. How a manufacturer chooses to interact with the investment community is a nuanced decision based on numerous factors, but in light of today's regulatory climate and market expectations, one truth is evident: Silence is not an option. Whether a medical device company is a private entity with public dreams or an established market leader with firm footing in the investment community, the key to sustained financial success for a medtech company lies in forging and nurturing shareholder relationships. An effective IR program can ensure such partnerships get off on the right foot and pave the way for continued support in years to come.
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