Unless you’ve been stranded on a distant planet, you’ve noticed that equity markets have been hitting new highs lately, and that’s been accompanied by an increasingly robust capital markets environment, even including initial public offerings (IPOs). In fact, the current public healthcare IPO backlog stands at 14, with many more companies already confidentially initiating plans to pursue going public over the remainder of the year.
As recently as six months ago when we would meet with CFOs and CEOs of private companies (or their venture investors), they would have long lists of reasons why their company would never go public. The reasons included cost of capital, the hassle of being a public company, legal requirements, and compliance costs. All of these are particular burdens for smaller companies. In addition, if executives or investors were looking for an exit, they calculated better valuations if they sold to a strategic acquirer or private equity firm. An IPO was truly an option of last resort. Today, when we meet with these same constituents, we see a dramatic shift in their attitude towards going public.
Changing Tides for Healthcare Companies
So what has changed? The overall equity markets are much stronger, IPOs are getting done and trading up in the aftermarket and sentiment from the buy-side has become much more favorable. Some of this positive change has to be credited to the federal JOBS Act—a series of measures that allows private companies to become public in ways that are less burdensome and less costly.
In March 2013, a journalist for The RPM Report (subscription required) wrote that the U.S. Food and Drug Administration (FDA) had held a “late cycle” review meeting with a drug candidate sponsor. The meeting – an element of the 2012 Prescription Drug User Fee Act-V – introduced a new formalization of communication between the FDA and sponsors, and hailed a new investor relations dilemma for companies: Should “sponsors” disclose what is discussed in these late cycle meetings with the agency, or not?
Late cycle review meetings are a change from past FDA practice; previously the agency engaged in less formal, ongoing communications. Formality might be a good administrative move by the FDA. The agency will now more clearly state what page it’s on, rather than making the sponsor figure out the scenario via a stream of communications over several months.
Last week, we wrote about Regulation FD, now in its 13th year of implementation, and offered Part One of a quiz designed to test how well you understand the regulation. Here, we offer a slightly more challenging Part Two of the quiz. We hope you will find this helpful as you think about real life Reg FD situations. Since the following answers should not be construed as legal advice, we also urge you to talk with your legal counsel before deciding what practices are best for your company and its particular disclosure situations.
Reg FD Quiz, Part Two- Violation or Not?
1. CEO is aware that your company will likely miss quarter consensus estimates, but this hasn’t been disclosed. CEO looks downtrodden in 1×1 meeting, and talks about what a tough macro environment it has been for the industry. A week later, your company announces lower than expected revenues. Stock trades down sharply on higher than normal volume.
Did the CEO violate Reg FD? (YES) The CEO selectively disclosed material, non-public information through non-verbal cues. Hindsight is perfect; hold a poker face or don’t talk.
2. At a webcasted analyst day, management outlines its new product pipeline, how the products compare to existing technologies and treatments and the timeline for product launches. Two weeks later, in a 1×1 meeting with an investor who missed the analyst meeting, management answers questions about how some of the new products differ from competition.
Regulation FD, now in its 13th year of implementation, remains a source of consternation for senior management and investor relations teams in their communications with investors. Some companies err on the side of excessive caution and end up rarely engaging in regular, productive dialog with The Street. Other companies go the other extreme and provide copious amounts of detail while filing an abundance of 8Ks. Finding the appropriate balance is the best strategy for open, useful relationships with investor audiences while steering clear of actions that could lead to SEC penalties.
Here, we offer a brief description of what Reg FD is, followed by a simple test to help you determine your level of compliance with the regulation. We hope you will find this helpful as a starting point as you think about Reg FD. Since the following answers should not be construed as legal advice, we also urge you to talk with your legal counsel before deciding what practices are best for your company and its particular disclosure situations.
What is Reg FD?
Reg FD is the SEC’s attempt to level the playing field for all investors – institutional and individual – by prohibiting selective disclosure of material information.
Some management teams are reluctant to meet with hedge fund managers. While planning a road show or conference appearance, they try to meet with “long only” fund managers. While I can understand that management teams are reluctant to meet with hedge fund managers out of fear of a tense line of questioning or some form of brow beating during the meeting, the reality is that you can’t (and shouldn’t) avoid these meetings. The sheer number of hedge funds is staggering and almost $2 trillion dollars are under management within these funds.
Following are the top ten positive reasons management teams and IR professionals should keep hedge funds on the schedule:
- Don’t judge the book by its cover. Hedge funds come in a variety of flavors. Funds can differentiate themselves by investment style, sector focus, geography, market cap, market neutral, long/short, etc. You may even be surprised to learn that some hedge funds are long-only or exclusively long-term oriented.
- Despite their depiction by the popular press, not all hedge fund managers are “bad guys.” Many hedge fund managers are smart, considerate, thoughtful, long-term investors. Don’t let the structure of their fund dictate if you meet with them. Continue Reading
On April 2, 2013, the Securities and Exchange Commission (SEC) issued a report that outlines how companies can use social media outlets to disclose information and remain in compliance with Regulation FD. The report was the result of the SEC’s investigation of statements made on Facebook and Twitter by Netflix CEO Reed Hastings, where he announced a “viewing” milestone for his online movie and TV rental company. While the investigation centered on whether Hastings violated Regulation FD, Hastings has maintained that his disclosures were neither material, nor exclusive.
From my vantage point, while the SEC’s new report opens the door for companies to disclose information via social media, it’s only propped open a crack and not enough that I’d encourage every company to use social media for this purpose. For one thing, a company is compliant only if it has previously communicated to investors that it plans to use certain social media outlets for news and information, and if access to these social media outlets is unrestricted. Following is more information about the report, what it means for your company, and what the risks are for communicating material information via this means:
What has changed?
The use of social media outlets is now included in the SEC’s interpretive release (34-58288), which in 2008 allowed company websites to be used to make disclosures under Regulation FD. The appropriate use of social media, like websites previously covered under this release, is the responsibility of the company. Websites and social media must be used according to the following rules:
- They must be recognized as a channel of distribution of information to the market
- They must be a source of broad dissemination to the market
- There has to be a reasonable waiting period for investors and the market to react to any posted information
What does it mean for your company?
Sell ratings got you bothered? Can’t shake the feeling that an analyst is holding a grudge? Wish you could just make them go away?
Let’s discuss your negative analyst strategy in 3 steps:
- Remember the big picture
- Avoid the pitfalls
- Engage and execute
1. Remember the big picture.
There will always be analysts who are negative on your company. They won’t go away. Why?
A “miss” relative to a company’s financial guidance can happen to even the best management teams. Misses can arise from a hiccup in company operations or they can be related to factors outside your company’s control. In either case, the ways in which you assess the problem, communicate it, and follow up in later quarters will have a powerful and lasting impact on the Street’s views of management’s credibility and thus your stock’s long-term valuation.
Assessing the problem
Before you communicate with the Street, make sure you’ve honestly assessed the reason for the miss and its ongoing impact to your results. Was this merely a soft quarter for seasonal or other factors, or was there a one-time event? While it’s possible that ongoing results won’t be impacted, it’s also possible that greater forces are at play: a business segment could be maturing, or your internal growth expectations may have to be moderated. Even if the miss is truly related to an issue out of your control, such as a reimbursement change, make sure you critically evaluate the impact before you communicate any revised guidance.
If it seems to you that there is an investment banking conference every week, you’re just about right. Investment banks routinely hold investor conferences that tend to focus on certain industries (like healthcare or technology). A few Wall Street firms also hold what I’d call “best idea” conferences, which include representative companies from different industries.
Attending a conference can be a valuable part of your investor relations strategy. It’s a great way to get more investors to know your company, and to make vital business connections. But, if you have, say, 15 analysts covering your stock, and each one hosts a conference, that can mean you’re getting invited to 15+ conferences a year. How can you possibly accept every one of these invitations?
Before deciding “yea” or “nay” on attending upcoming conferences, it’s important to understand why they’re held. Decades ago, Wall Street’s equity divisions made money primarily by underwriting stock offerings and trading stocks. As institutional commissions have shrunk, trading has become much less profitable. However, while the buy side is no longer paying as much for trading execution or research services, buy side firms and analysts will pay for access to management. Therefore, Wall Street has strong incentives to arrange venues where they can introduce companies to investors.
Our clients often ask, “Why did account X sell my stock? Our last meeting with them went so well.” Generally speaking, there is one reason investors buy a stock: the assumption that its price is going up. There are, however, countless reasons why stocks are sold. Sometimes when a company’s fundamentals seem to be improving it’s not always clear why a portfolio manager might sell a particular stock. We want to shed some light on the factors that can lead to the “sell” decision via this month’s Top 10 list.
- Locking in gains. No one has ever been fired for locking in gains. Even an investor who’s held your stock for years can’t be faulted for taking some money off the table.
- Macro concerns or sector rotation. Even for a company that derives zero revenue from Europe and does not sell directly to the federal government, events like foreign debt defaults and sequestration cause fund managers to lighten up on stocks. In uncertain times, cash is king! Similarly, depending on the outlook of the firms’ economist, portfolio managers shift money between sectors, increasing and decreasing their exposure based on the economists’ suggestions. If healthcare is deemed an underperforming sector at a particular time, your stock might be caught in the sector rotation. Continue Reading