How to Communicate Bad News to Wall Street
Even great companies with excellent management teams will face the inevitable challenge of having to communicate bad news to Wall Street. In a previous blog post, my colleague Tom McDonald discussed how to handle missing a quarter, but what about other results that can have a material impact on your business in the future?
In the healthcare industry, a number of things can go awry — a clinical trial that doesn’t meet your primary endpoint, a setback in your product’s regulatory approval process, a change in reimbursement policy, or a delay in your product launch date due to a manufacturing issue. Effectively communicating these scenarios with the Street can mitigate adverse reactions to your company’s reputation — and to your share price.
When bad news is brewing, how can healthcare companies prepare? How can you communicate effectively, and avoid unwanted consequences? Here, a few guidelines to keep in mind when a negative turn of events is on the horizon.
Transparency matters
The number one thing to remember when communicating bad news is to be transparent. This can’t be stressed enough. Why? In many ways, the most important thing your management team has is its credibility. How Wall Street feels about your company, and how much shareholders and analysts can trust your management team, play a large part in determining the long-term value of your stock.
What are some things you don’t want to do in these scenarios?
- Don’t try to hide anything. When I worked on the sell-side, I covered a company that would respond to negative information by issuing a press release on a Friday afternoon. No one took them seriously. Other healthcare companies have tried to hide bad news by slipping it into their 10Q — never a good move.
- Don’t attempt too rosy of a positive spin. This will be met with eye rolls, and again, your credibility will take a hit.
- Don’t say this is what we expected all along. Past communications are well documented, and investors are smart and diligent, and will pick up on even a slight change in wording.
Think before you act
Before communicating bad news, management needs to first consider the full implications of the news and be ready to discuss them. Prepare a script, and spend plenty of time developing (and rehearsing) potential questions and answers. Working up the Q&A and looking at it through the lens of an analyst may lead you to aspects you haven’t considered before. Make sure everyone from your company involved in communicating the news understands what to say and how to say it, and tailor your talking points to each of your constituents, including your sell-side analysts/investors, your board of directors, and reporters.
Importantly, know what concrete steps your company will take to overcome the problem, and demonstrate to the Street that you have a handle on the issue and are making clear progression toward a solution.
Time it right
Timing is essential when it comes to bad news, and not easy to get right. Do you wait until the earnings call? Host a separate call? Most often, the best time to communicate bad news is during a regularly scheduled earnings conference call, when management has control and can decide the appropriate amount of time to spend on the issue in prepared remarks and the Q&A. In addition, your earnings call is part of the normal course of business, and addressing the bad news there can help you avoid the appearance of a major setback that might provoke the Street to overreact.
Sometimes, in order to maintain more control over your message, your management team may need to miss out on other scheduled events (such as a conference or a non-deal road show). This needs to be decided on a case-by-case basis because it depends on a number of factors, such as the severity of the bad news and the relationships that may be damaged by cancelling an event.
Recently, when one of our clients faced a change in FDA guidelines that negatively affected a clinical trial, the client contemplated holding a call before the regularly-scheduled earnings call to explain the impact. We counseled against this, in part because the news hit close to their earnings call date, and it made sense to wait.
The client then wanted to change the format of the earnings call to comment on the bad news and take a Q&A before delivering their earnings results fully. We counseled against this as well — the analysts might not have stayed for the remainder of the call, when management could highlight all of the things going well in the business. In the end, the best solution was to stick with the routine earnings call and address the negative news at the end.
When faced with bad news, the course of action your company wants to take is to communicate with complete transparency, while demonstrating that you’re prepared and have a plan of attack in place (which you can disclose at the same time). This approach will go a long way in preserving your management team’s credibility with the Street and abating a negative turn on your company’s shares.
If you find yourself confronted with hard-to-communicate news, Westicke can help you figure out the right timing, messaging points, and strategy. Download our Investor Relations Guide to learn about our experience and approach, and reach out to us to start the conversation.
ICR Westwicke is the largest healthcare focused investor relations firm in the country. We provide customized investor relations programs and independent capital markets advice to small and mid-cap healthcare companies.
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