Medical Device Link.

Originally Published January/February 2001

Improving Investor Relations

Maintaining open communications can keep shareholders happy—and dollars flowing.

Joanne Stephenson

It never ends. From the initial public offering to the latest product offering's anticipated effect on the bottom line, investors want to know what a business is planning—and they want to hear that information directly from the company. Medical device companies' investor relations strategy should be threefold: 1. Communicate. 2. Communicate. 3. Communicate.

In the short term, clear, honest, and well-thought-out communications can help companies' financials. "A company that doesn't provide meaningful information to investors will face a significant discount in value," Michael A. Rocca, CFO of Mallinckrodt Inc. (St. Louis), told MX earlier this year. "Companies can lose 1 to 2 P/E points, or more in some cases, simply because they are not providing adequate information." In the long term, having trusted, well-maintained relationships with investors will stand medical device firms in good stead when the inevitable, unforeseeable problems or delays occur.

What are investors looking for? They want quality companies with proprietary technologies, expanding markets, and strong management teams. Smart executives will exploit these facets of their company clearly and repetitively. Is your company communicating how novel its technology is, and how well it is protected? Have you outlined the size of the market, and how and why it is expanding? Are you showing off the management team whenever possible by having top officials speak at conferences, write for publications, or network through industry associations? Sometimes the most useful strategies can be the easiest to employ.

The Way to Go

Here are 10 more ways medical device firms can build stronger relationships with a few very important key audiences: shareholders and investors, analysts, and brokers.

Refine That Communications Plan. Most companies have already identified and defined their audiences and their respective needs, but a commonly missed element in communications planning is a timeline for communication. Companies should generally reach out to investors once every 10 to 14 days, being certain that no more than four weeks pass between communications. Traditionally, companies are under greatest scrutiny from January through June, then again from September through November. Don't schedule meetings or conference calls in the off season because they will fall on deaf ears.

What information will investors find valuable? Most companies distribute news releases about quarterly earnings, FDA approvals, and new product announcements, but any milestone or achievement that could cause a company's share price to rise or fall should be reported. Announcements of management changes and promotions, awards for product design, new facilities, new programs, and strategic alliances are well received. Some of the best communications opportunities come about when an independent group makes a new discovery about a disease or condition that underscores the need for a product. Just don't overcommunicate. Companies that make a new announcement every week (often on trivial matters like the status of their latest clinical trials) may—like the boy crying wolf—do themselves more harm in the end.

In addition to news releases, companies should prepare corporate backgrounders for analysts, media, and investors. Backgrounders should run one or two pages and describe the disease or condition the company's products treat or help diagnose, the demographics of the people affected (size of market, patients' ages, and geographic distribution), current treatment or diagnosis, how the company's products should affect the diagnosis or treatment, how those products differ from their competition, and how a specific announcement could affect the company.

Communications pieces should be written and designed to be mailed individually, used as stand-alones at trade or investment shows, or placed together in a single, comprehensive package. Tools like news releases, a corporate backgrounder, corporate profiles, product brochures highlighting specific attributes or applications, and annual reports should look good, but their main purpose is to report the financial information and progress of the company. Very expensive-looking materials may send the wrong message to investors, brokers, and analysts—they are likely to prefer that their dollars be spent on R&D.

And don't forget the Internet when developing a communications plan. In a recent survey by the Association for Investment Management and Research, 65% of analysts and portfolio managers indicated that a corporate Web site makes it "easier to provide an accurate analysis of a company." Most visitors to a company's investor relations pages are either current or prospective shareholders. "What they want to know, in 30 seconds or less, is why they should invest in the company," says Jeff Christensen, executive vice president of Christensen & Associates (Scottsdale, AZ), an investor relations consultancy.

To create a consistent Web image, medical device companies can simply rework the look and information developed for their printed pieces—with a few modifications. Companies should take advantage of the Web's interactivity to offer multimedia features such as conference-call replays, streaming video of product demonstrations, and slide-show presentations. A survey by CCBN.com (Boston), a company that hosts and updates investor relations sites for more than 600 companies, compared traffic trends for 130 active investor relations sites during the third and fourth quarters of 1998. It found that sites offering multimedia content (Webcasts, archived conference calls, etc.) experienced a 97% increase in traffic between quarters, compared with the 14% increase realized by pure text-and-data sites. While investors and analysts may not be able to participate real-time in on-line earnings reports, they value being able to pull up an archived version at their convenience (see Table I).

Table I. Types of company information most sought by investors visiting 950 investor relations Web pages. Source: CCBN.com (Boston).

The estimated 10.5 million on-line trading accounts is expected to double by 2001, and the equity assets in these accounts are expected to reach $3 trillion by 2003, from about $400 billion at the end of 1999. With an increasingly large and diverse on-line investor pool, medical device companies need to ensure they're doing all they can to communicate electronically (see insert below).

Keep It Simple. It should go without saying, but it is essential that companies keep communications simple and concise. No one is as enamored with the minutiae about or possibilities for a company's products as the members of that company's management team. The audience members need to be able to understand the technology and its possibilities in a manner that they can easily explain to their doctor, spouse, colleague, or teenager. For instance: "XYZ product could save time and lives by detecting heart attacks in the emergency room. People are treated faster and more successfully, and the whole healthcare system benefits. The market is growing due to an aging population."

Pick a Partner. Why reinvent the wheel when there are plenty of companies that already have a successful investor relations strategy? Top company officials should network with colleagues at other medical device companies that conduct successful investor relations programs, and find out what they do. They should find out what works for companies their size, in their field, on their stock exchange, and in their stage of development. Even more important, they should find out what doesn't work.

Building alliances with other medical device firms that have similar agendas and goals can take an investor relations program to a whole new level—and present special opportunities for investors. In British Columbia, for instance, 10 firms recently joined forces to put on their own biotech show. They split the costs, pooled invitees, and found a guest speaker, and each company made its own presentation. The show was inexpensive, but very effective. The firms were able to combine their pools of shareholders and brokers who were looking for additional biotech investments; so each firm got great additional exposure. The firms' combined strength and size garnered attention from the media, investment communities, and analysts. The firms will continue the program biannually, and there's now a waiting list of companies wishing to participate.

24/7/365. As much as the Internet has been a boon to business, it has also heightened expectations— especially those of technology investors. If they can get on-line all day and all night, why can't they access the spokespersons of their favorite investment?

Be available! Have people, not machines, answer phones. An investor relations officer that screens calls sends but one clear signal—that person is not the beck-and-call investor relations professional that all companies want. Investors may not leave a message on a machine; so they will instead cling to their doubts and consult someone outside the firm. That person will definitely not tell the company's story as well as the company itself would, yet this is the information that the investor may use to make his buy, sell, hold, or bad-mouth decision. Lots of unanswered calls lead to discontent (see insert below).

Be aware that investor calls have dwindled significantly during the past 18 months, as more and more people have begun to prefer to get their information on-line, on their schedule. So, be new! Web sites that are not updated at least once each week will soon fall off the list of favorites. Add an article on the field, technology investment, anything fresh. Keep them coming back.

Manage Expectations, and Never Disappoint. There's the good, the bad, and the ugly. A company can't come out on top like Clint Eastwood every day. There are bad days, and just plain ugly days, and, occasionally in the world of investor relations, there are good days. Savor the good, since they can be few and far between.

It's essential to be consistent in communicating with investors and to let them know what the company is doing and what impact those activities are expected to have on the bottom line. When the market is soaring on the wings of a biotech high, tell financial audiences that the company is meeting its commitments, but most of the upside is due to market conditions. When the opposite is true—which is most of the time—explain that the company is meeting milestones, but the market is reacting negatively for certain reasons. Don't stop there: try to explain those reasons—perhaps the market simply had unrealistic expectations based on a hot economy.

People handle bad news just fine; it's often the delivery that they have problems with. Sincere, honest communications gain respect. If the message is, "We are one big family, all in this together; the management shares in your feeling," then investors are more likely to be loyal.

Reg Jones, CFO of Hycor Biomedical (Garden Grove, CA), says, "The foundation to a successful investor relations program is managing expectations. We really shouldn't be forecasting, but it is common practice in the absence of outside experts. Keep the expectations within the realm of reality. The dire results of overestimating seem to come back to roost very rapidly. Once corporate credibility is shaken or lost, numerous positive achievements can go unrewarded in terms of share value."

Put a Crisis Communications Plan in Place. Murphy's law is very consistent, and all too often in R&D or manufacturing everything that can go wrong does. But remember, not everything is a crisis; the depth and ramifications of any new problem should be judged calmly and rationally. When evaluating a situation, think about whether the story would be harmful if it ran on the front page of the daily paper without the company's interpretation. If it would be, the company's crisis communications plan should be implemented immediately. All companies should have a crisis communications plan in place; this plan is simply modified according to specific situations and implemented when required.

The key to successful crisis communications is having a single spokesperson who consults with management—who may even be a member of management—and who has enough latitude and authority to tell the story. The audience wants to know what happened, why it happened, who is to blame, and what the company is doing to correct the issue and ensure that it doesn't happen again.

Flash back to the infamous Johnson & Johnson (J&J) Tylenol scandal. When it was reported that some bottles were tampered with and could contain poison, J&J immediately recalled the Tylenol product in question, took full responsibility, and made apologies and amends as quickly and as often as possible—even though the tampering was beyond its control. These actions raised the company's image in the eyes of the public and made J&J a moral icon in the industry.

When in a crisis situation, it's essential to explain the difficulties that need to be overcome, the strategy the company will pursue, and the timeline for activities. Updates are essential—at least daily, and sometimes even hourly. The real message is: "We take this as seriously as you do."

Use the Right Spokespersons. If consistency and the message are key, then who do you trust to tell your story? Hycor's CFO Reg Jones says that only he and the company's president handle investor calls. They manage the expectations and know which way the wind is blowing in the investment community. Some companies may have an in-house investor relations professional handle the front-line calls, but the CFO or president still must oversee the communication, perhaps even going so far as to be within earshot to get a feel for the quality of the calls and the responses.

Connect with Investors. Employee attitude can be a great differentiator in company value. Companies should convey to their employees the attitude that "We are all in this together; we are all stakeholders." All employees should be informed about the company's progress and expectations. When employees buy into those goals, they are better able to become spokespersons for the company in their everyday conversations with friends and family, or even among colleagues or at trade shows. They can share your message with suppliers, vendors, and the delivery guy.

Last summer, one of our employees was stopped by a postal worker who asked what was happening with our stock and the progress of the company. The employee was able to provide the proper information and knew to refer the postal worker to the in-house investor relations professional. Could the same be said of every employee at your company?

Keep Investor Relations In-House. Consultants should be just that—people who advise companies on aspects of their business about which they have greater expertise than the companies have. They should not become the workhorses of a company's investor relations program. The best success with consulting investor relations firms is often achieved by using them only for special projects such as increasing analyst exposure or increasing exposure for a new round of financing. Says Hycor's Reg Jones, "It's difficult to ascertain the value of a program. When the stock goes up, everyone takes credit, and when it goes down, no one does. I have seen good results with special projects, but not with generalized programs."

It is usually a greater value to have an in-house spokesperson, clerical staff, and professionals to oversee printers, graphic designers, and Web developers. Companies that keep these functions in-house are more likely to get what they want and need within their budget.

Spend Some Money. Say a company is trying to raise $10 million. It spends $200,000 on investor relations for that project, and is thereby able to keep the company's shares at $10 instead of $8. As a result, it saves 125,000 shares of dilution at a price of $10, which leaves an additional $1.25 million of equity the company can sell at a later date. Do the math, and spend money wisely—but spend it when it is needed.

All the Right Moves

One of the best investor relations programs I've seen is conducted by a medical device company in California that has been producing products for several years now. When investors call the company to get investor relations information, either the CFO or the president answers the call. They are candid and clear. If they are traveling, they return calls within 24 hours.

The company's Web site is easy to navigate—users are never more than two clicks away from the investor relations data.

The annual report and other collateral materials are colorful and attractive and provide facts and easily understood information. But the paper and art the company uses don't look as though they cost a large percentage of the company's R&D budget.

The company also communicates with investors through a bimonthly shareholder newsletter that gives the company's story in more detail than can be discussed in news releases or annual reports. It holds quarterly conference calls, and top officials answer questions calmly, politely, and accurately. The management team regularly assures investors that they're shareholders, too.

This company is making all the right moves, and your company can, too. The key is to regularly and consistently communicate who you are, what you do, and why your company is a great investment.

Joanne Stephenson is vice president for business development at Response Biomedical Corp. (Burnaby, BC, Canada).

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