Roundtable:Investor Relations forMedtech ManufacturersRoundtable:Investor Relations forMedtech Manufacturers
Industry experts discuss the importance of open communicationsin building and maintaining company value.
July 1, 2007
BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT
In today's fast-paced, information-driven business environment,investors demand instantaccess to detailed informationsurrounding everything from acompany's stock price to its productpipeline. Such expectations challengemedical device manufacturers notonly to produce thorough, accuratecommunications for the financialcommunity, but also to produce themquickly and in a way that can be tailoredto the interests of an individualinvestor.
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To find out more about investorrelations (IR) challenges facing medicaldevice manufacturers, MXrecently spoke to four experts in thefield (see sidebar). In this excerptedroundtable discussion, moderated byMX managing editor Lori Luechtefeld,these industry experts discussthe process of building a robust IRprogram, the benefits of transparencyin communications, and the IRcomplexities associated with topicssuch as reimbursement. The full textof the discussion can be accessed viathe MX Web site at www.devicelink.com/mx.
MX: Investor relations play a rolein every medical device operation,from multinational conglomeratesto fledgling one-person start-ups.How this function evolves throughouta company's life cycle differsfrom firm to firm. In general,though, what shape do investorrelations take in new companies,and at what point does a companyusually have a need to create somesort of formal investor relationsfunction?
Julie Tracy: I would argue that it'snever too early to create a formalinvestor relations function. The needfor a company to differentiate itselfand communicate its value propositionwith current shareholders andpotential investors has never beengreater. I also believe that companieswith good IR and communicationpractices are more likely to achieveshare prices that accurately reflecttheir underlying value.
The need to establish and maintaineffective relationships with thefinancial community translates intoan opportunity for a member of thecompany's management team tohandle this function as a dedicatedinvestor relations officer. That personmust work in close collaborationwith the CEO, the CFO, and othersenior members of the team.
David Erickson: Of course, theresponsibilities and tactics of amedtech company's IR departmentwill be different prior to an initial publicoffering (IPO) versus following anIPO, but it's still important to geta company's IR department up and running early on in a company's lifecycle. There's always work to be donein terms of establishing relationshipsand communicating a company'smessage, regardless of when thecompany intends to go public.
Spencer Sias: My experience hasbeen with large companies, so I can'toffer a pre-IPO perspective. But I doagree that you need to begin buildingrelationships early on and to managethem effectively.
Varian is active on the acquisitionsside, but the company doesn't buylarge companies or, for that matter,publicly traded companies. All itsacquisitions so far have been smaller,privately owned companies.
In evaluating and executing thesetransactions, I have never encounteredan investor relations officer (IRO) atthe companies we've acquired. Thecompanies have traditionally beenmanaged by their presidents, theirCEOs, and their financial executives.None has had a person dedicatedexclusively to investor relations.
Having a more-developed investorrelations function would enhancethe value and drive up the price of acompany. But our company prefers toacquire companies whose prices aredepressed. So to some extent, ourcompany benefits when the firms weacquire don't have any internal IRsupport in place.
Nick Laudico: It's interesting tosee how investors are currently evaluatingprivately held medical devicecompanies. Their tolerance for earlierstagecompanies and higher-risk companieshas grown. Investors are crossingover the fence to invest in privatecompanies well before those companiesissue IPOs. Some of the largerinstitutional investors and many of thehedge funds are beginning to move inthis direction.
The more sophisticated IR programsat these emerging companiestake different shapes. Often companiesstart doing a lot of media outreachand developing those relationshipsin order to build momentum fortheir technology prior to an IPO.Those activities usually begin aboutsix months ahead of a planned IPO,and such activities help the companiesestablish a platform on which they canbuild a more-robust IR program oncethey're publicly traded.
What influence does a company's sizeor maturity have on its ability to conducta sophisticated IR program? Andfor early-stage and emerging companieswhose budgets do not permit asignificant expenditure for investorrelations, what are the most basic keycomponents for an IR program?
Tracy: Size doesn't necessarily dictatea company's ability to conduct asophisticated IR program. Many companieswith small market capitalizationshave effective IR programs.
With an IR program, you getback what you put in. So the essentialcomponents of an IR program arebasically the same regardless of a company's size. First and foremost,investor relations are all about beingavailable and responsive to yourshareholders and investors. I've heardabout companies with large IR teamsthat do not return phone calls orrespond to inquiries. On the flip side,I've heard investors give rave reviewsabout companies with a single dedicatedIR professional who performsthe job very well.
The other basic components of anIR program are fairly straightforward.Companies should have a comprehensiveWeb site where people canfind up-to-date information about thefirm. A company's Web site is one ofthe first places investors go for information,and that information must bekept current. A company should alsohave a well-thought-out IR calendar. Itneeds to focus on meetings that willput the company in front of theinvestor audience that's most likely tobe interested in the company's valueproposition.
Erickson: The effectiveness of anIR program is dictated mostly by thecompany's attitude toward investorrelations and what it hopes to get outof its IR program. Companies thatwant to be more communicative andtransparent will naturally performmore investor relations functions.
Obviously, being responsive andregularly being in front of investors atconferences and on road shows requires resources. Certainly the size ofthe company matters from the standpointof resource availability, but thereare still very large companies thatchoose to take a more reactiveapproach to their investor relationsefforts. I think these companies dothemselves a disservice.
On the other hand, smaller companieswith limited resources canstill take an open and transparentapproach to IR. They can put what littleresources they do have to work in their IR program, and quite often theyreap a greater reward because of it.
When companies are looking to structuretheir IR departments aroundthe ideal of transparency, whatkind of chains of command shouldthey put in place? For example, whoshould be the initial point of contactfor investors or other individualsinterested in following up on IRcommunications?
Erickson: Hopefully the investorrelations officer (IRO) is the point of contact for those individuals. After all,the IRO is the most appropriate individualto be fielding questions of thatnature. And for that reason, a company'sIRO needs to be part of the managementteam--or at least have a seatat the management table--so that theperson is able to speak with the voiceof the CEO or CFO or whoever elseserves as a company's spokesperson. Acompany gets the most value out of itsIR leader when everybody at the companyis on the same page.
Tracy: Unfortunately, there areexamples where IROs merely serve asgatekeepers for the CEO, the CFO, oranother management team memberwho can answer shareholder questions.But I think an IRO must be more thana gatekeeper. IROs must have access tothe information that will enable themto serve as a direct and knowledgeablepoint of contact for investors and todetermine whether and when to drawon the particular expertise of their colleaguesto address particular needs forinformation.
Sias: The IRO has to be a championof the company and of its story.In order to do that, the IRO has to beable to express management's viewpointswith conviction and passion.The IRO has to be the go-to personfor the investor. The CEO and theCFO can be pulled in to dot the i's orcross the t's, but the IRO must be themajor ball carrier in terms of communicatinga company's story.
In the case of small emerging medicaldevice companies, a companyfounder may initially wear multiplehats, including that of the CEO, CFO,and IRO. When the executive gets tothe point where he or she is lookingto bring in some help regarding thecompany's investor relations, whatfunctions are they usually looking tooutsource?
Laudico: Most of the time they'relooking for a soup-to-nuts IR program.Many small companies wantto outsource their IR functionscompletely.
For emerging companies andthose that are looking to go public, IRfunctions are mostly about gainingvisibility and exposure. So in thesecases, an outside agency can fulfilla company's IR needs by talking toinvestors, conveying the company'sinitial investment characteristics, andtelling its story. The outside firm canprovide a view of the company from10,000 feet to get investors warmed up,and then the company's CFO cancome in to do the heavy lifting duringinvestor calls and meetings.
Sias: When Varian Medical Systemsspun out from Varian Associates,we essentially launched a start-upinvestor relations program. We didn'tinherit any of that function from theparent company.
In getting that function up andrunning, I found outside agencies tobe particularly effective at identifyingthe tactical things that our companyneeded to put in place to run an effectiveprogram. They helped shape theprogram by pulling together the Website and identifying the materials thatwe needed to develop internally.
So, although it would be hard foran agency to champion a company'sstory with the passion and convictionfound among members of the company'smanagement, the outside firm canstill be quite effective on the tacticalside.
Investor relations functions are criticalfor both public and private companies,though their shape can takevastly different forms in each type ofcompany. What are the key distinctionsbetween IR directed at privateversus public investors?
Laudico: When a company goesfrom private to public, its IR functionmoves from one focused on marketpreparation, messaging, and roadshowpresentations to one focused onthe nuts and bolts of operating IR.
When a company becomes publiclytraded, earnings calls become themajor focus of the company's IRfunction. This includes considerationsrelated to what messaging andmetrics to disclose or not disclose, aswell as how the company should positionitself in relation to its peers.Once a firm is publicly traded, itsexecutives have much more to thinkabout in regard to earnings, investors,and targeting.
Erickson: The stakes are a lothigher for public companies. Although private companies have certainrules that they must adhere tofrom a disclosure point of view, suchresponsibilities are taken to a whole new level once companies becomepublic. At that point, companies mustfile quarterly earnings reports, adhereto Regulation Fair Disclosure (RegFD), and fulfill numerous other obligations associated with being public.
Tracy: In the midst of preparingfor an IPO, it's easy for companies toget so focused on just getting throughthe IPO process that they may not belooking very far beyond that event.Therefore, some IR processes may notyet be in place. For example, they maynot have established a formal disclosurepolicy or determined who willhandle other investor-related communicationresponsibilities over thelong term.
How do companies draw the linebetween their investor relations functionsand public relations functions?
Tracy: At Kyphon, I'm involvedwith both functions so, in somerespects, that makes it pretty straightforward.I get involved in all externalcommunications that touch ourshareholders or investors. Even if it'sa project in which our marketingdepartment takes the lead, there's stillvery close coordination.
Although IR and PR might havedifferent target audiences, differentstrategies, and different issues thatthey must manage in setting up theirprograms, they do need to have closecollaboration. Companies that performboth functions well do so bycollaborating to get a unified, consistentmessage to their customers,their shareholders, and their employees. The functions support eachother, making the whole greater thanthe sum of its parts.
Erickson: It's critically importantfor a company to speak with one voice,regardless of the audience. And thereis a lot of overlap among audiences.For example, a company may haveemployees who also have stockoptions. It may have customers whoare also shareholders. Therefore, thecompany must speak uniformly.Whether or not the message is tailoredto a certain audience, its core has tobe the same. Whether it's coming froma person who handles both IR and PR,or whether a company maintains abifurcated IR-PR structure with differentpeople handling each function,the message has to be uniform.
Sias: I handle both functions forVarian--all the corporate communicationsand all the investor relations.In developing both functions,we work very closely with our marketingdepartment. Not surprisingly,investors are very interested inknowing what our company is doingin terms of marketing its new products.So the IR, PR, and marketingteams work hand in hand in puttingtogether company communications.
In addition to the Securities andExchange Commission, investor relationsexecutives at medical technologycompanies must consider anotherregulatory body: FDA. Does this duallayer of regulation present any challengeson the IR side?
Sias: I have not found SEC andFDA regulation to be in conflict withone another. Each entity has differentregulations, and we need to complywith both. Our company has neverrun into any conflicts between the two.
Of course, our communicationsand marketing activities are governedby certain rules. For example, we can'tdo any marketing for a product prior to its 510(k) clearance. We find itpretty easy to follow rules like that.
Tracy: To ensure compliance,Kyphon's regulatory and legal affairsdepartments are involved in reviewingcommunications documents. Isee this as a benefit because it helpsensure that we are not only promotinga product consistent with regulatoryrequirements, but also that weare promoting it with a consistentmessage among audiences. So involvingregulatory and legal affairs inreviewing communication documentsand their claims is a smartpractice to have in place.
Laudico: FDA regulation can playan important role in the investor relationsof an emerging company. For anearly-stage company, its communicationsprogram may revolve heavilyaround FDA milestones. A lot of earlystagecompanies have gone publicwithout revenue, and they've had torely on progress in achieving theirmilestones related to FDA approval todrive their stock valuation.
Of course, until the curtain is lifted,you never know which way an FDAdecision will go, so medtech manufacturersneed to have communicationsplans in place that can handleboth good and bad news on the FDAfront. That's where I see FDA exertingthe most influence over medtech manufacturers'IR functions.
You've each mentioned transparencyas an ideal when it comes to investor relations. But in what situationsdoes a company need to guard itselfclosely when it comes to investorcommunications?
Laudico: The time during which acompany is evaluating a potentialacquisition is the time when communicationsare most guarded. But evenduring that time, communicationswith investors should be business asusual--but that particular topic justshouldn't be discussed.
Investors will always ask questions.Particularly in one-on-onemeetings, many of the interactionshave to do with investors trying toread the body language of management.Investors consistently requestmeetings just prior to earnings announcements so they can get a feelfrom the management team as to howthe quarter looks.
It's important for companies tomake sure their executives are consistentand, in some respects, guardedwith their communications. Companiesshould have documents that outlinedisclosure policies related to certainquestionable situations.
For example, when is it appropriateto conduct a one-on-one meetingbetween management and investors?When is it too close to the close of aquarter? When is it too close to theearnings call?
If there is any question as to whatwould be fair, then it should beaddressed in the company's disclosurepolicy, and the company shouldabide by that.
Do investors frequently ask certainquestions just to see how long an executivepauses?
Tracy: Some investors will try toask certain kinds of questions andgauge the executive's response basedon body language and how the personsounded, especially if it's in the timeperiod leading up to an earnings call.This underscores the need for disclosurepolicies and consistent messages.Putting appropriate disclosure policiesin place will help maintain theintegrity of the communications andinformation that flow to investors.
Erickson: For most medicaldevice companies, a significant part oftheir stock valuation has to do withtheir product pipelines. Oftentimes,there is a healthy internal tension at acompany when it comes to decidingwhen to disclose a new technology orproduct that's still in development.The tension generally exists betweenthe R&D personnel and the company'smanagement.
Management may be looking toget some credit for what the companyis working on and to build someinvestor excitement and anticipationfor the pipeline. But the R&D sidetends to want to keep such informationclose to the vest. R&D personnelwill often argue that it's prematureto discuss the product in developmentbecause a competitor couldpick up on it and put the companyat risk of not being first to marketwith it.
There's no easy answer to resolvingthis tension. Company executivesmust remember that once they releaseinformation, they can't take it back.Once they open the door on a newtechnology that's under development,they're essentially obligated to continue discussing it and providingupdates.
The technologies at the core of a medicaldevice company are sometimes completely outside the realm ofinvestors' expertise or understanding.How can companies clearly conveythe value of new technologies to existingand potential investors?
Erickson: In my experience, theanalysts and investors that we're dealingwith are pretty smart people, so Idon't find the need to simplify technologiesto any great degree. Yes, we'renot talking to our clinical clients, sowe do try to put things in layman'sterms. But companies usually don'thave to dumb it down to the pointwhere it becomes ridiculous.
Also, when appropriate, we putclinicians in front of investors and letthem discuss the technology and theopportunity for certain products intheir treatment of patients. This sort ofinteraction gives investors a differentperspective on the application of thetechnology, and we get rave reviewsfrom investors when we do this. Theylove having access to cliniciansbecause that's not an audience thatmany of them can or do reach on theirown.
Of course, there's a risk in connectinginvestors with clinicians.Companies don't want that interaction to be either too loose or tooscripted. But if a company can find theright clinical figurehead who candiscuss a technology in a way thatcomplements what the company issaying, it offers a huge advantage inthe IR effort.
Sias: Medical device companiesscore a lot of points with investorswhen they give them access to clinicianswho can explain what they'redoing, why a technology is important,and how it helps them to help theirpatients. And a company doesn't wanta clinician who is nothing more than amouthpiece. A manufacturer shouldlook for an independent, thoughtful, respected clinician who is usingthe technology, has evaluated itthoroughly, and can speak about iteffectively.
In terms of putting clinicians infront of investors, our company doeseverything from inviting doctors tospeak at our own events, to bringingthem to third-party events, to simplymaking referrals. Occasionally we'llgive the investor community thenames of 10 different clinicians whoare using our technology. That enablesthe analysts to put together their ownpanels, which can produce some veryinteresting discussions. Our companyhas generally fared well in using thatapproach.
Yes, occasionally a clinician willsay something that a company isn'tterribly pleased to hear, but it's worththe risk. Those discussions help establishand reinforce a company's reputationfor transparency.
Medical device reimbursement isbecoming a key metric for measuringa technology's market potential. Howsavvy is the investor community whenit comes to reimbursement issues?What can a company do to effectivelycommunicate with investors on thistopic?
Sias: Our investors watch reimbursementand the activities of theCenters for Medicare and MedicaidServices (CMS; Baltimore) like hawks.The rates are put in place in January,and as early as February, we've hadcalls from investors interested inwhat's going to happen the followingyear. The investors attend workshopsfocused on this topic, and they cancreate quite a stir in the market withspeculation based on what they hearat these events.
Our company is challenged tomanage all the market speculationsurrounding reimbursement. After all,as soon as somebody speculates abouthow reimbursement might change,investors seize on that informationand try to determine the impact itcould have. This speculation has createdmovement in our stock price inthe past.
Our solution for managing thisaspect of our investor relations is todirect investors toward outside reimbursementexperts who focus on themarkets we serve. Our big market isradiation oncology, and we find thatthe companies that help radiationoncologists do their billing can communicatea lot more effectively onreimbursement than we ever could.And the investors appreciate getting athird-party perspective on this topic,particularly from somebody whoactively works with CMS in settingrates and in helping hospitals andclinics process their billing.
Tracy: Our company doesn'tprovide any guidance as to what wethink future reimbursement rates willbe for our products or procedures. Butwe've found that educating our investors about how the reimbursementprocess works is helpful and appreciated.We focus on providing factualinformation to questions: What arethe inpatient and outpatient codesthat are used for the procedure? Whatis a new-technology add-on payment? How is it calculated? Companies canserve as a useful resource for that kindof information.
Erickson: There is no time lagwith regard to the issuance of reimbursementnews and how quickly theanalysts are on top of it. This is particularlythe case with sell-side analysts,many of whom employ the sameoutside consultants that our companyemploys to help us understandthe changes. For these analysts, it's arace to be the first one to interpretreimbursement information andissue a report. But the informationthey're using is usually preliminaryand likely to change before final ratesare issued.
So in this respect, education ishelpful and appropriate becausesome analysts may not be students ofmedtech. They may invest in ourcompany's stock, but not necessarilyin a broad portfolio of medicaldevice companies, so they often needa little bit of help in understandingwhat reimbursement changes meanto us.
But like I said, the sell-side analyststend to be all over these issues.In fact, it's likely that they will getinformation out there in advance ofour company's communications, particularlyif they are working withgood consultants or just workingthrough the night.
Sias: I agree. No matter how fastI try to get to the bottom of reimbursementissues, I find that I'm oftenreading an analyst's report that isalready out before I've finished myown research. And I also agree thatcompanies can and should educatepeople on reimbursement processesand codes. I just stay away from issuingcommunications based on whichdirection CMS appears to be leaning.
Tracy: The other question that weget asked a lot is, 'Is your procedureprofitable for the hospital?' Well, that'sa question that's difficult to answerbecause every hospital's cost structureis different. Therefore, profitability canvary widely. But I think it's interestingthat investors are asking these types ofquestions.
Sias: Yes, they do ask that question.Our company addresses suchinquiries by discussing return oninvestment (ROI) based on certainassumptions, excluding hospital overhead.We use a specific reimbursementrate for a piece of equipment anddemonstrate the ROI based on a certainnumber of patients treated. TheROI range we provide excludes thenuances of an individual hospital.People often ask us for those estimates,and we are comfortable providingthem in that way.
Erickson: That's the area where Ithink investors require the most education.If the payment rate for a particulardiagnosis-related grouping(DRG) goes down by 10%, theirknee-jerk reaction may be to assumethat means manufacturers will haveto take a 10% price cut on their products.That's not necessarily the case.So companies have to walk themthrough the value proposition. Forexample, that may mean remindingthem that a particular product comprisesonly 15% of the DRG, with theother 85% providing a much largertarget for potential cost savings.
IR for the Future
How do you see the responsibilities ofIR representatives changing in theforeseeable future?
Erickson: As the market becomesmore focused on the short term, newchallenges will be created for companies'IR departments. That issue isplaying out as we speak.
Tracy: Yes. The market's focus onshort-term results--and the potentialincreased volatility that short-termfocus creates--will be interestingissues to navigate in the future.
Erickson: When companies providequarterly guidance, they areessentially giving the financial communitya short-term report cardby which they can be judged. Somecompanies hope that if they moveaway from quarterly guidance andfocus instead on broader annualguidance, Wall Street's expectationsmight follow.
The thought is that the financialcommunity might become lessfocused on how companies performfrom quarter to quarter. I don't knowif companies will be able to changeinvestor attitudes simply by changinghow they provide guidance, butthat's at least one theory out there.
Laudico: The biggest questionswe get from clients revolve aroundguidance and metrics. And althoughcertain larger companies may be ableto stop providing quarterly guidance,many of the companies that we dealwith have very short, if any, publictrack records. Therefore, they are heavilyscrutinized right out of the gate, andit's extremely important for them to beable to provide performance metricsfrom quarter to quarter.
Tracy: The competition forinvestment dollars is increasing, andcapital markets are becoming moreglobalized. And so, in the future,the role of the IRO is going to needto expand in order for companies todistinguish their investment propositionand potential with investors.Companies that recognize this andput a strong IR team and programsin place are going to be in a betterposition to realize the full value oftheir stock.
Copyright ©2007 MX
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