We have been fortunate, and sometimes unfortunate, to have observed hundreds of companies go through an initial public offering (IPO) process, and then begin trading as a public company. What is astounding is how frequently healthcare IPOs “blow up” within the first few quarters of their public life. This happens so much so that a small group of investors has made a career of buying these broken IPOs. Why? Because they know that a broken IPO does not necessarily make a broken company.
The challenge, of course, is that once a newly priced IPO blows up, and the stock drops to a point where it is deemed broken, there is an incredible amount of work, credibility re-building, energy and time required to gain back lost valuation and earn back Wall Street’s trust.
Why do companies blow up and when does permanent credibility damage occur? Here are the most common issues that we see:
- Missing quarterly estimates out of the gate – either revenue or earnings. This is just unacceptable. While it may not seem reasonable, when you are on your road show, the assumption from the investment community is that the current quarter is in the bag, and that the current year estimates are easily attainable.
- Changing metrics within the first two quarters after pricing an IPO. This is confusing for modeling, which is frustrating for the sell-side analysts. Even worse, it makes both investors and analysts nervous that you are hiding a deteriorating business trend.
- Making management team changes soon after pricing an IPO. If you’re not sure public company life is for you, make the switch before going public.
- Modifying your business strategy soon after pricing an IPO. Sometimes it is necessary to modify strategies, but ideally, by the time your IPO prices, you will be executing on the strategy that you outlined in investor meetings during your road show…not creating a new one.
- Glossing over challenges and/or only reporting the positives. Investors have a low tolerance for this – they do actually understand that there are challenges that every company faces and macro and/or competitive factors that impact results. Honesty and humility can go a long way.
So…how do you avoid a blow-up post IPO? Here are some tips:
While still private –
- Create an IR strategy. This includes a process to report quarterly financial results, handle conference and meeting requests from Wall Street, and provide information to investors and analysts.
- Build relationships with Wall Street constituents (both the investment community and sell-side analysts). Learn what they care about, how they value companies and why. Start building credibility through open conversations before going public. Take advantage of “test-the-waters” meetings to help with this goal.
- Establish the financial metrics that you will report and how you intend to report them. Include which revenue components will be reported as separate line items and also consider including detailed items such as the number of sales representatives you intend to add and their productivity ramp time.
- Write down a cheat sheet of key statistics on the company and a list of investor questions you anticipate (with answers). Practice giving those answers and be consistent.
- Make back-office readiness a priority, not a last minute reaction. This includes the IR portion of your webpage, FAQs and talking points, vendor selection and others.
Once you are public –
- Be consistent with reporting metrics. As your business evolves, if it does make sense to change metrics, message it with advance notice and explain the rationale at least one to two quarters ahead of time.
- If something doesn’t go right, own up to it and then explain it. Importantly, convey that you understand the problem, outline the solution/action plan, and what it will take in terms of time and capital to achieve that solution. Charlie Lynch emphasized this in his blog post on handling negative financial results.
- If you have a delay, don’t be overly optimistic. We understand the temptation to paint an optimistic scenario and to try and keep expectations high. That said, it is worse if you announce a delay, and it is immediately followed by more bad news. Take advantage of the opportunity to set new, achievable and conservative, expectations. Then meet or beat them.
- Don’t worry about short-term fluctuations in your stock price and certainly do not try to explain to investors how they should be valuing your company. Sometimes they will focus on the wrong issues. This can be addressed through execution paired with careful and strategic messaging over time.
- Be well versed on Regulation Fair Disclosure (Reg FD). There is a wide gap in what is acceptable to discuss as a private company as compared to a public company. Reference our quick true/false test to see if your Reg FD knowledge is up to snuff.
And, both before and after you go public, lean on your IR firm. For private companies, firms providing strategic investor relations counsel to healthcare companies have tremendous experience in helping companies go public. Let that be an asset for you. For companies who have already gone public, your IR firm can support development of processes around quarterly preparation, can help test your messaging and will question your guidance before you take it to the public markets.
In summary – being a public company isn’t easy and sometimes it’s not fun. Trying to live up to unrealistic expectations or having too many of the wrong metrics will make it less fun and downright challenging. Being prepared with a post-IPO strategy – with back office support and processes in place – will allow you to spend more time on your business while juggling a growing workload. Consistency builds credibility, which builds shareholder value over time.
Contact us for more strategic information that can help with your IR decision making, check out the replay from our recent webinar offering a view of the current healthcare IPO market, and sign up for our newsletter to learn more about this and other IR-related topics.