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.
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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.
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.
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.
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.
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.
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.