Medical Device Link.

Originally Published MX July/August 2001

Finance

IPO veterans relay what it's really like to take your company public.

Stacey L. Bell

A few days shine more brightly than others in a company's history: the day a new product wins FDA approval, the day a company's first sale is made, and the days a firm's stock is priced and then begins trading publicly.

"You're tickled pink on pricing day," says Nassib Chamoun, president and CEO of Aspect Medical Systems Inc. (Newton, MA). "It's payoff day. You get to see the result of all your hard work. It's a phenomenal feeling—right up there with the next day, when your stock starts to trade."

Aspect Medical Systems went public in January 2000, 18 months after it originally intended to do so. The company first went through the IPO process—hiring underwriting bankers, filing and winning approval of SEC documents, and visiting and pitching numerous potential investors on the company's value—in 1998. But just as the company was preparing for its stock pricing meeting, the Southeastern Asia and Russian financial markets took a nosedive. "It was frustrating to realize that all of the time and effort invested in our IPO was now down the tubes," says Chamoun. "The offers just weren't there. We had to withdraw."

"Plus, we then had to return to the company and explain to all the employees why the IPO didn't go through," remembers J. Neal Armstrong, vice president, CFO, and secretary of Aspect. "We explained that the company was still in a good position to capitalize on market conditions, but the current market conditions weren't right. Instead, Aspect Medical Systems was a victim of a global economic crisis. People understood that and stayed focused on the business and its long-term goals."

Nassib Chamoun, president and CEO of Aspect Medical Systems Inc. (Newton, MA).

When Aspect Medical Systems decided to venture down the IPO road again less than two years later, it hit a home run. "The order rate was oversubscribed more than 50 times on opening day," reports Chamoun. "Our underwriters said that our offering was among the top 5% of all deals ever done in medtech."

Timing can have a great deal to do with the success of an IPO. In fact, executives from several companies that went public in 2000 cited Aspect Medical's success as an influencing factor in timing their own offerings for that year.

Investment bankers advise most companies to steer clear of making an offering around a holiday or in the months of August and December. Certainly, market conditions figure prominently also (see sidebar, page 19). But industry experts agree that even in the best of circumstances, before a company can properly pitch its value to potential investors, it must be at the proper stage in its development.

Before Making the Leap

Beyond the obvious reason for following the IPO route (being able to fairly quickly raise great sums of money at better valuations than available through other financing options), some medtech companies, like Regeneration Technologies Inc. (RTI; Alachua, FL), pursue a public offering to better position themselves against their competitors.

"Many of our competitors were already public companies; so we needed to maximize our economic clout in comparison," notes Richard R. Allen, CFO of RTI. "Since its formation, RTI had planned an IPO; so we'd been practicing walking the walk and talking the talk since day one."

This mind-set is key to success. "The most important consideration before thinking about taking your company public is to make sure that your business plan is in order and that your ability to meet projections for the next 10 to 12 quarters is locked down," emphasizes Armstrong. "You must be able to provide real value to investors."

John Morgan, president and CEO of Curon Medical Inc. (Sunnyvale, CA), also talked with investment bankers and some contacts on Wall Street to learn their perspectives about his company's readiness for—and the market's receptiveness to—a public offering.

A company also should consider all it means to be a public company. "You need to be certain you have a good management team in place, because they'll see far less of the CEO after the decision to go public than they did in the past," says Chamoun. "Others will need to keep the company running."

"Companies sometimes aren't prepared for the aftermath of the IPO," agrees Allen. "The IPO process is grueling, but it's relatively quick, and it's over within months. What really changes a company is the aftermath of the process. The focus of some of your key management shifts."

J. Neal Armstrong, vice president, CFO, and secretary of Aspect Medical Systems Inc.

"After the decision to go public, the roles of CEO and CFO change virtually overnight," concurs Morgan. "Before we made the decision to pursue public markets, I focused on clinical trials, submission of data to FDA, and preparing products for public launch. Once we decided to go public, I had to focus on compiling and writing the documents for the SEC and investors, and then I had to prepare for the road show and our presentation. Now I deal with analysts and institutional investors, and spend at least one week every quarter in New York visiting with large institutional investors and potential investors. I've been pulled out of the day-to-day issues of running the business.

"From the CFO's standpoint, there are significantly different reporting requirements when you're a public company," continues Morgan. "You're transforming your reporting system from what may have been one-page financial reports to the dozens of SEC-required documents. Not only do you have to learn what to report, but you'll have to find a new accounting firm that can support you in these efforts." Other members of the management team must be willing and able to step in and manage operational aspects of the business on which the CEO and CFO will now be unavailable to focus.

After considering these factors, if a company still believes it is ready to pursue the public markets, and conditions are conducive, it should expect the process to last from four to six months and cost somewhere in the range of $1 million to $1.7 million (plus an average 7% commission on raised revenues that goes to the underwriting bank).

In the sections that follow, executives from four companies that went public in 2000—Aspect Medical Systems Inc., Regeneration Technologies Inc., Curon Medical Inc., and Wilson Greatbatch Technologies Inc.—share their advice for a successful IPO.

Find the Right Help

Once the decision to go public has been made, a company's first item of business is to hire the underwriting bankers who will help the company prepare the SEC documents, craft the presentation for potential investors, and set the company's valuation.

"Valuation is based on a combination of factors, including comparable public companies' value, growth rate, profitability, and revenues," explains Thomas J. Gunderson, managing director and senior analyst for U.S. Bancorp Piper Jaffray (Minneapolis). Choosing a banker is "like picking a surgeon. You don't want someone practicing on you, and you don't necessarily want to rush into anything. Most important is your relationship with the bank's team—the banker, analysts, sales, and trading syndicate—and the bank's reputation for this particular kind of deal. How many such deals has it done before? How long has its team been together? How important will you be to the bank after the IPO check is cashed?

"How do you figure out these things? Call CEOs that have been through the process, and talk with investors," advises Gunderson.

Curon Medical, Aspect Medical Systems, RTI, and Wilson Greatbatch (Clarence, NY) all researched the available institutional bankers and invited at least six firms to make presentations to company management.

In evaluating the firms, Chamoun says Aspect Medical developed criteria that analysts, bankers, and the institutions themselves had to pass with flying colors. "The analysts had to be credible, knowledgeable about our industry, and have sufficient time to devote to working with Aspect. The bankers had to impress us with their knowledge of how to prepare and write a prospectus, and how well they would drive the action behind the scenes once we were on the road show. Bankers play an enormous role in the success or failure of your venture for those few weeks when you're on the road. Finally, the reputation and track record of the firm in completing similar transactions in similar sectors was considered."

Personal interaction counts, too. "Your relationship with your bankers and the analysts who will follow your stock is critical to the success of your IPO," says Edward F. Voboril, president, CEO, and chairman of Wilson Greatbatch. "We chose the groups we did because we really liked the analysts we'd be working with."

Curon Medical's Morgan advises companies to be very comfortable with their counsel and attorneys as well, since "they'll be in your pants pocket from day one of the process."

The Great Debate

Edward F. Voboril, president, CEO, and chairman of Wilson Greatbatch Technologies Inc. (Clarence, NY).

Once a company has established its IPO team (the company's senior managers, the underwriting bankers, attorneys, and accountants), an organizational meeting is held so that company officials can deliver a comprehensive overview of the company's vision and goals to all players involved. A target IPO date, timelines for when the prospectus and other documents will be ready, possible stock valuations, key points to be made to investors, and other points are discussed. Then the real work begins.

Creating an S-1, a registration statement used in the first sale of securities to the public, that the SEC will approve involves the efforts of the entire team and can be frustrating as well as time-consuming. "S-1s are required to contain all substantial information that could have a significance or bearing on an investment decision," says RTI's CFO Allen. "You need to provide a reasonably comprehensive look at the market in which the company operates and its operations—including manufacturing and regulatory factors, information on the product lines and technology, and details about principal competitors and competitive factors."

Curon Medical gained a huge head start in this area because someone on staff had worked as an investment banker before joining the company. "She wrote most of the first draft, using our business plan as the basis of the document," Morgan explains. "We went into the meetings with our team with a crafted document that they were simply refining, rather than creating from scratch. We argued about words and context rather than content." Still, it took nearly six weeks to complete the document to everyone's satisfaction.

"Your meetings are filled with lawyers, accountants, analysts, top management—an army of 30 or 40 highly intelligent, opinionated, detail-oriented people," says Armstrong. "You spend hours arguing about the right sentence, the right word to describe your company and your product and your technology."

"It's really writing by committee," adds Chamoun. "Imagine writing a several-hundred-page document that way. It takes time; it's frustrating; but when you have the right team on board, it produces a compelling document."

Once the document is submitted to the SEC, the agency has 30 days to comment. This process is not without frustrations of its own.

"We had a very careful SEC examiner," reports Wilson Greatbatch's Voboril. "Working with the SEC is like working with FDA; the approval process depends a lot on who you get." The SEC may require revisions, which must then be incorporated into the final prospectus that will be delivered to prospective investors during the road show.

Prepare to Hit the Road

CEOs and CFOs also spend a great deal of time crafting the story of their company and product for their investor presentations.

"One of the most helpful things we did was hire a presentation coach and undergo a one-day coaching session before the road show," reports Voboril. "And in addition to preparing a PowerPoint presentation, I had a backup hard copy. It sounds like a nit, but you need to be prepared for any contingency."

"Your story should be the presentation. Your slides are just the props," says Chamoun. "You need to be able to tell your story confidently and comfortably. Investors want to connect with you, your company, and your vision. When it comes to writing a check, it comes down to people and personal interaction. Too many people hide behind their slides."

Among the elements that should be part of the investor presentation are the following.

• The Company. Explain its history, products, technology, management team, vision, current customers, anticipated growth rate, yet-to-be-published clinical data, and other products in the pipeline that will help the company achieve its vision.
• The Competitive Environment. Discuss other companies that create similar products and why investors should bet on this company instead.
• The Regulatory and Reimbursement Environments. Explain how FDA and the Centers for Medicare and Medicaid Services (CMS) currently view the company's products and technologies. Also discuss physicians' and other healthcare workers' acceptance of the product or technology.

"Among the most important messages is the company vision—explaining where we want to go, along with giving a quick summary of recent successes and how we got to where we are today," says Allen. "But it's important to be flexible. I'd estimate that in only 20% of our meetings with investors were we allowed to tell our story from beginning to end. In the other 80%, questions arose. We found that we actually preferred this scenario, since it allowed us to get the right points across and freed up our listeners' attention to hear the remainder of the story."

"The toughest questions you'll get are related to your financial models and the expectations of your underwriters' analysts," recalls Morgan. "Be sure you're prepared to justify your business model."

Almost Famous

When executives are on the road visiting potential investors, "some days you're just ready to keel over from the schedule and the pressure, but there's also an incredible high," reports Aspect Medical Systems' Chamoun. "You're like a rock star for two weeks. You're using private jets, private cars, getting lots of attention. But the novelty wears off after about a week and a half. Fortunately, by then, the end is in sight."

All four companies interviewed for this article held at least 60 meetings, more often closer to 80, with prospective institutional investors and mutual-fund and money-management companies overseas and across the United States over a two-week period. In addition to traveling to London, Zurich, Geneva, and Paris, CEOs and CFOs took whirlwind tours of San Diego, San Francisco, Los Angeles, Dallas, Houston, Denver, Minneapolis, Chicago, Kansas City, Detroit, New York, Philadelphia, and Boston.

Meetings were typically scheduled to last from 45 minutes to one hour, but many concluded in only 30 minutes. Again, flexibility is key, partly to account for the changing demands of prospective investors for allowed meeting time, but also purely for the sake of logistics. "When you have six to eight meetings in one day, you're constantly running and jumping into the limo and dashing off to the next meeting—often with just 15 minutes between presentations," notes Aspect Medical's Armstrong.

"After a week, it begins to feel like Groundhog Day [a movie in which the main character repeats the same day of his life every day for perpetuity]," adds Chamoun. "You're giving the same pitch to the same types of folks several times a day for days on end. You're hearing the same questions, giving the same responses. After each meeting you call the institutional sales force to learn how buyers responded to the pitch, and adjust your message accordingly before the next meeting—if possible. It's tiring."

Having gone through the IPO process twice, both Chamoun and Armstrong recommend that IPO prospects go to the expense of leasing a private jet for the U.S. meeting schedule. "The schedule is so tight. You're often visiting several cities in one day. The cost is almost a breakeven, depending on the number of people traveling on the road show. A private plane permits you to schedule the meetings with confidence and minimizes wear and tear on the management team," Chamoun says.

Wilson Greatbatch's Voboril also relied on a private jet. "Given the airport delays and congestion, I don't know how we would have covered so much ground coast to coast otherwise," Voboril says. "The charter was well worth the investment."

RTI used chartered flights for about half of its investor meetings. Curon Medical relied on commercial flights nearly exclusively for both its domestic and international travel. "We were the airlines' best friends for those two weeks," says Morgan. A few airline delays required reworking scheduled meetings, but most meetings weren't affected by travel problems. (Keep in mind that RTI went public in August, and Curon Medical went public in September. Companies going public in January, when much of the country is experiencing harsh weather, might be wise to consider their mode of transportation carefully.)

Best of Times

Despite a company's best efforts, outside forces sometimes intervene. Aspect Medical Systems experienced the fallout of a suddenly weakened global economy during its initial IPO venture in 1998. Last fall, Curon Medical faced another frustration.

"The same day we priced our offering, Intel announced that it would miss its third-quarter earnings," laments Morgan. "The market traded down. Certainly, that announcement cost us $1, if not $2, of opportunity. Investors were nervous because a company like Intel was missing earnings; they certainly weren't going to take a chance with a smaller, new company.

"During the month of September, we kept hoping that NASDAQ would stay above 4000," Morgan continues. "It seems surreal to say that now when the market has been trading below 2000. What a difference a few months makes."

Which is why most investment bankers are now advising companies to avoid an IPO until the U.S. and world economies strengthen.

No matter when a company decides to enter the public markets, Wilson Greatbatch's Edward Voboril makes one final suggestion: "If you're going to go through an IPO, enjoy it. It's probably the only time for most of us that we'll have that experience. They were some of the most enjoyable months of my career. We had a ball."

Stacey L. Bell is a freelance writer specializing in business and marketing issues.

Copyright ©2001 MX