| Biotechnology and the Capital Market: How to raise money and how to keep your investors happy once you get it | | Print | |
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More specifically, how can a successful communications strategy be employed to meet fundraising goals?
To develop an appropriate strategy, it is useful to start by looking at the end game. Assuming that capital raising is a necessity for life sciences firms years away from posting profits, there are essentially two paths to follow in dealing with the capital markets. Sometimes, these are consecutive steps in a plan and sometimes they are two separate strategies. Once a biotechnology firm has gotten to a critical size and needs additional cash (say a D round, or fourth attempt at raising cash), the choice is another venture capital injection to fund research and operations, or an Initial Public Offering (IPO) which has the possibility –if it is successful- of a secondary offering to bring in even more capital.
Regardless of the path, a clear strategy needs to be defined and that requires an in-depth understanding of the choices, their advantages, and their disadvantages. For example, venture capital may provide adequate short term research and development funding which positions a company to be acquired relatively quickly and keeps the shareholding base limited to the owners and the venture capital fund. Some companies may choose a longer term strategy and go the route of an IPO which has the potential of bringing in a larger amount of capital to fund long term growth and continued independence. The tradeoff here is that with a public company there is a larger shareholder base and the necessary adherence to regulatory requirements which can be difficult, if not onerous.
Regardless of whether the strategy is venture capital funding or an IPO, competition for capital is fierce and an effective communications strategy to create economic value is imperative. In this strategy, there are fundamental issues that must be addressed. In order to get first hand experience, we spoke with Clay Siegall, CEO and co-founder of Seattle Genetics, which has raised over $190 million through two follow-on offerings since the beginning of January 2009.“The markets have changed a little bit,” says Siegall, “but there is the similarity with the past in that the markets are looking for consistency in your story and presentation. They are looking for focus. We’ve been going out and doing quite a lot of presentations in non-deal road shows.”
Siegall indicated that it is important to note that, beyond the regulatory requirements, there is no real difference in preparing to tap the capital market for an IPO or to seek venture capital. Investors in general want to see that management has a clear understanding of the business, of the barriers to entry, and other hurdles common to a business development plan. The investors need to know why your product is important, unique, and competitively affordable to satisfy an unmet medical need. Where does it fit in the market place and how does it get there, both from a regulatory and a distribution point of view? What can you charge for that type of medicine? Communicating with potential investors, anticipating the questions that they will ask, and offering answers often before the questions are asked are a key to an effective communications strategy.
Investors are looking for drive and ambition from management, for relevant experience, and for a vision for the growth of the company., Investors want to assess the company’s leadership, their character, their experience and their expertise to make the business a success. This is the fundamental information that must be included in a capital market communications plan to build investor confidence, as well as to meet market and regulatory requirements.
PUTTING TOGETHER A COHERENT COMMUNICATIONS PLAN
In discussions with multiple people involved in the business, these are the elements of a communications plan that seem to be expected by everyone.
Clear indication that the company is lead by a strong management team - strong soldiers with a clear leader are essential for success. Documenting the background, accomplishments, and experiences of the business leaders is vital and sometimes, particularly in biotechnology, this may involve experiences that were not successful but taught the leadership vital lessons.
An irrefutable and coherentbusiness plan needs to be in place and effectively presented - future investors want to see a clear road ahead with defined markets, challenges, and forecasts with growth and profitability targets. Realistic projections, not hyperbole, are required with realistic costs, time frames, sales projections, and competitive analysis. Too rosy a picture is often a sign of business inexperience. Things can –and will-go wrong! This is true for even the best run companies.
Undisputed product uniqueness and strong market potential mustexist - investors need to understand how and why this product will generate revenue growth. In order to demonstrate this uniqueness, it is vital that a fair and accurate competitive analysis be done because any serious investor will be looking at the competitive landscape before they invest. You should know it better than the investors and discuss it accurately. Putting down the competition without accurate facts will only call your own analysis of your own product into question.
Atargeted growth marketmust be identified and accessible with barriers to entry possible to scale - the best research and development is useless if there is no market potential. Remember, answering how this is to be done is not an easy task or everyone would be successful. Thoughtful, innovative, and reflective insight is required and it will be required to impress investors and have them part with their money.
Theprofitability potential must be clearly defined and justified - at some point profitability must be achievable, at least at the gross margin level, within a specified time frame. Nevertheless, too optimistic a profitability picture should be avoided. It will almost certainly cost you more to develop the product and take longer than you had planned. There are few, very few, examples that demonstrate otherwise and you don’t want to disappoint investors by succeeding but doing it at levels far below your optimistic projections.
CHOOSING A FUNDING SOURCE
When going the venture capital route, it is important to conduct a thorough due diligence of the various potential investment groups in order to understand different funds’ strengths, reputations, particular interests, and preferences for stage-of-company development. It is important to remember that there are many types of venture capital funds and it is important to approach the appropriate venture capitalists are approached for your business or market. This will be true for assuring the highest likelihood of success in getting the original tranche of money, but for advice, for contacts, and for access to additional capital if required.
Try to get an introduction through someone the fund knows and respects - lawyer, colleague, or accountant - that can network you through to be heard. While communications are likely to be face-to-face, the communications strategy should include the development of supportive materials, targeted as appropriate to generate interest and confidence in your company as a potential investment.Professional, high quality presentation material following the topics described above is essential in getting your story heard.
The IPO route is more complex, found to be more rewarding by some, and is most often the second step after the venture money has allowed the company to get to the stage to garnish public interest. Nevertheless, once you have public and institutional investors, it is still important to understand the investment strategies of your key investors. “We look for really strong long-term shareholders who believe in what we are doing and will be there when we have major success,” says Siegall, who spent 10 days in October meeting with 60 large investors to explain some unexpected trial data that tripped up Seattle Genetics’ stock price just two months after its latest offering was oversubscribed.
To obtain cash without having to pay it back is the irresistible draw for going the IPO route. Of course, CEOs and CFOs have a detailed plan to use it in the most efficient and profit-generating way possible. But this cash is like a double edge sword. On one hand, the money doesn’t have to be paid back but, on the other, it requires constant communication with holders of the stock and with those who may buy it in the future.
So why is communicating with the market so important? In the first place, the SEC requires public companies to at least communicate on their earnings and financial status. Furthermore, beyond the regulatory requirements and, of course, the company’s “moral” obligation to keep its shareholders informed, there is always the possibility that the company may want to return to the market in the future.
In any case, management’s credibility needs to remain intact. This is achieved by effectively communicating with the market and the company’s shareholders. Just as important to remember is that investors speak to customers, suppliers and anyone else who will listen, including journalists, about their holdings. There is a buzz on the street that can be very positive for public companies. As a result, it is important to get started on the right foot and to stay there.
GOING PUBLIC
Let us assume that the decision to go public has been made, that the underwriters (investment banks) have been chosen, that the company’s legal counsel is on board, that the prospectus filed, and that the road show is being planned. What can companies do to make the next several weeks count toward a successful listing and a continued fair valuation of their stock price? Too often, miscommunications or mistakes during this period cost the company tens of millions of dollars in value. Therefore, there are a series of “check-points” to follow during this period:
Build the presentation. Investment bankers are experts at putting a road show presentation together. This is part of their role. Normally senior management is highly involved in this process. Some companies choose to engage outside investor relations counsel on messaging and coordination, which is optimal in that it ensures that management and investors are considered long term. Listen to the banks and to outside investor relations groups. You may know the company best but you may not know best what the investors want to hear.
Review strategy. This is an excellent time to review and confirm business strategy, products, market position and future direction for the mid to long term. This is also the time either to reinforce or to change the messages surrounding the company’s future. A well put together presentation reflecting senior management’s vision is the bedrock of fund raising.
Enhance communication skills through coaching. Everyone can improve the way they communicate. This is a busy time and there isn’t a lot of it to spend on extensive training. But a couple of one-hour sessions can go a long way. Issues such as giving too much information in answering a question or not answering it at all, being far too technical or not enough, and inappropriate voice inflection, just to name a few, can be easily addressed and will make communication and interaction with potential investors much more effective.
Target the right investor. Again, investment bankers are expert at targeting a company’s potential shareholders. Nevertheless, it’s important to understand the kind of investor that senior management will be meeting. For example, do the investors’ understand the company’s product or are they generalists? Do they own the company’s peers? Are they an aggressive growth investor or are they looking for long term value? Are you seeing hedge funds? The IPO will be most successful if the investors engaged are comfortable with investing in the specific growth style of the company
During the exhausting road show, between the short naps that are inevitable, try to keep abreast of what’s going on in your markets and with your competitors, in addition to running the company. Once again, investment bankers and your outside counsel can help out on this.
WHAT HAPPENS AFTER THE ROAD SHOW?
The stock is priced, the listing begins, and the money is in the bank. The road show- weary CEO and CFO breathe a sigh of relief and quietly celebrate. They hand the business cards they have collected over to their assistants, or put them somewhere on the desk close to the files that have piled up while they were away. While each one has every intention of following up with investors and keeping the momentum going, days, then weeks pass, the business cards gather dust, and it is time for the first quarterly earnings announcement, even if you are not yet profitable.
The first question is what do we say? How can we follow-up with the messaging we had on the road? Is it still true? Can we send out the earnings announcement to our list of investors? Where is the list? How can we invite them to the conference call? We could go on with this scenario. And no, not everyone is likely to have this lack of organization or focus. But it is easy to get caught up in day to day, high priority events and put investor relations on the back burner. Here are some easy steps that can keep a company on the right investor relations track once the stock is trading:
Create your contact list. Now is the time to take that stack of business cards you collected during the road show and compile (and maintain) an email and telephone list. Investors like to receive press releases and other news from the company, rather than seeing it on the news wires. Again, the underwriters and outside counsel can help here, monitoring and adding contacts you may have missed.
Analyze the investment profile of your shareholders. Even though you assessed your target investors, it’s a good idea to take a look at who ended up buying the shares. Group your investors together by their investor profile and keep this in mind when setting objectives for the market to follow.
Write down what you said while on the road show. Most likely the presentation was scripted. Nevertheless, you must be prepared to answer investor questions. In giving your answers, it is important to bear in mind that investors will remember how their concerns were answered and will return to these issues in future interactions. “Any period when there are difficult times in the marketplace, people will drill down even more,” says Siegall. “The expertise is so great these days at these investment houses with teams of individuals PhDs, MDs, and MBAs. The folks are so talented we have to be on our toes and ready for the toughest questions and grilling as to what our goals and objectives are. They have taken notes and they pull those notes out and say: ‘lets go over what you told us.’
Formalize key messages and business strategy. The strategy was reviewed and clarified while working on the road show presentation. Were there any changes to the way you presented the strategy once it was tested in front of a “real audience”? Take the slide pack that was prepared for the road show, plus any notes, and put down on paper the key messages that were given and that need to be highlighted in the future. This exercise will be very useful for communication going forward such as earnings releases where strategic achievements are reported, as well as in on-going conversations with investors. The list of messages doesn’t have to be long, just accurate and, best case, quantifiable.
Call the shareholders. Go back to the list of who bought the stock during the IPO. Initiate contact, thank them for their confidence, and let them know that senior management is available to them. Don’t worry, investors are busy and this initiative will not open the floodgates. What it will do is instill confidence that the company is taking them as seriously as it is its other high priorities.
Prepare a short to medium-term program for news releases. Investors want to keep abreast of events that affect their investment. The news doesn’t have to be only about financial results or contract awards – senior management appointments, product launches, upcoming conference presentations, and participation in trade shows all merit a press release and will serve to keep the company on the investors’ radar screen.
Implement an investor relations program going forward. There is no right or wrong way to develop or run an investor relations program. Some companies have the budget and desire to fund this position internally. In other companies, the CFO runs this function, juggling his other duties while trying to maintain effective investor contact. In some instances, the CEO leads the initiative. The issue is always one of time, experience with the capital markets, and the ability to communicate strategy across the board, not just a set of numbers. More and more companies are outsourcing their investor relations function to seasoned professionals who can deliver an effective IR program at an efficient cost. Regardless of the approach, one thing remains certain: effective investor relations helps in reaching higher stock valuations. Using high-value stock as currency, companies can acquire and raise capital more efficiently, two very significant competitive advantages, and this, in itself, keep investors happy.
In closing, not only is the future of biotechnology industry vibrant, the capital is beginning to return to the market to fund its growth. Cumberland Pharmaceuticals went public in August of this year about the same time Seattle Genetics was in the market for its latest follow-on offering. The Wall Street Journal (WSJ) touted this IPO as a “big success”. Even though the IPO priced a bit under its initial price range at $17, Cumberland is the first IPO for a biopharmaceutical company since the end of 2007. The WSJ contended that “while Cumberland may have set the goals for its IPO a bit high, the fact that the company was able to raise $85 million at a rich valuation confirms investors’ willingness to participate in the sector.” At the beginning of October Talecris Biotherapeutics debuted on the public market, raising $950 million and garnishing the position of the largest IPO of the year. This certainly bodes well for those pharmaceutical companies hoping to raise money with the capital markets. With a sound strategy and well executed communications plan, there is no reason why they cannot be successful. Charlotte Laurent-Ottomane and De'Ann Weimer
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