How to Conduct a Healthcare Investor Perception Audit
In the past several months, we have been asked by several of our medical device and diagnostics clients to conduct perception audits. Some were small and focused, with specific and timely topics in mind, whereas others were broad-based with long-term objectives. Often, investors and analysts provide feedback that is difficult to hear — especially when they are giving it to a third party and their comments will be confidential and/or not ascribed to them.
While no one wants to receive (or provide) negative feedback, it is important and often can be the most constructive data. If we could offer only one piece of advice to our clients, it would be to listen openly and objectively to your shareholders and analysts when you ask them for their opinion. Don’t try to talk them out of their viewpoint (for which you just asked them), and don’t discount their opinion because they are at a hedge fund or you think they don’t understand your company. Chances are, whatever their perspective, there are others with the same view. Investors are often happy and willing to offer their feedback — especially on a stock position that is meaningful to their fund performance — in an effort to help management teams communicate better. Let them. We think it’s enormously valuable, as their perceptions are your reality.
Here are some key considerations when conducting a perception study and evaluating the results.
1. Consider all of the data — regardless of your guess as to the source. Spending too much time trying to manipulate the data (for example, deleting comments from hedge funds) is counter-productive. We recently conducted a perception study for one of our clients, and we can honestly say that it would have been impossible to match the comments to the investor based on investment style. Some long-only mutual fund investors made comments about potentially selling their positions quickly, while some hedge fund investors referenced their sizeable position and long-term commitment to the stock. Trying to parse out who said what would not only be a bad use of time, and would likely be inaccurate. Both investor groups matter, and regardless of fund style, they often share information and have similar views and conclusions about financial performance. Separately, as we have commented in previous blog posts, hedge funds can be great long-term holders of your stock, so don’t assume that they are all short-term focused.
2. Share the data with the team. It is important to understand the feedback in order to incorporate it. We understand the propensity to want to discount negative feedback or limit its exposure, but this doesn’t really help you. For example, if several shareholders provide feedback that they would like the CEO to be more visible with the investment community, we suggest listening. This is worth exploring, as we believe that investors’ perceptions of management credibility and transparency are critical to making an investment decision — small changes in conference participation or increased CEO accessibility could yield new potential investors. The CEO of one of our client companies recently received a poor rating for “transparency and credibility,” despite his efforts to the contrary. He was proactive and open in wanting to explore the reasons and color commentary behind this data. He has since incorporated small changes in his communication style with Wall Street, and after the quarterly earnings call following the perception study, we received positive feedback.
3. It’s meant to be constructive — use it as such. Remember, when investors agree to participate in a perception study, they are taking time out of their day, which is already busy, to offer their thoughts. When we conduct a perception study, we are asking for critical thought and looking for participants to identify areas of improvement. It wouldn’t be accurate or helpful if every investor only had positive commentary. There are some negative aspects to all publicly traded companies, if not on the business fundamentals, then on the valuation or technical challenges such as lack of liquidity … or something else. Some of these are within your control, and others are not. Focus on those you can control, and take it with a grain of salt that the commentary is skewed negatively.
4. When they seem confused, they are. We conducted a perception study for a company that had recently undergone a management change and had a significant operational reorganization. When we asked investors to comment on their confidence in the company’s strategic direction, we found that most of them didn’t know what it was. Separately, when we asked investors what was most important to them in forming a positive opinion or in making an investment decision, we got disparate answers, ranging from growing the top line at all costs to focusing on profitability. This elucidated a key messaging problem: Investors didn’t have a clear picture of the company’s operational or financial strategy. When analysts and investors don’t understand a company’s strategic objective, they can’t measure its success, and if shareholders are each focused on different goals, it is impossible for the company to succeed. It became clear through the feedback that the management team needed to clearly articulate its strategic, operational, and financial objectives — and offer a roadmap as to how they would achieve them.
5. Results can be tangential … but sometimes poignant. When conducting a perception study, we formulate a specific list of questions beforehand that we believe will be helpful. Recently, we conducted a small, focused perception study for one of our clients. We created a subset of questions relating to analyst estimates and segment modeling, with an eye toward better understanding how investors valued the various pieces of the business. What came out of the conversations was that the investment community didn’t know what to expect for the individual segment performance, but they generally felt that estimates were too high to be achievable. While we didn’t necessarily get the answers we were seeking (relative to valuation methodology), we learned that we needed to spend time in prepared comments addressing guidance for the business segments and providing longer-term commentary on strategy and objectives.
In summary, we think perception studies can be incredibly valuable. You can’t make your stock go up by changing your messaging overnight. Long-term operational success will drive shareholder value, but you can help by communicating credibly, conservatively, and consistently. And while we don’t suggest that you manage your business to Wall Street whims, we do suggest that you pay attention to analyst and investor perceptions. Sometimes you may think you are communicating clearly, but if they aren’t “getting it,” then the message needs to be changed or delivered differently.
If you’d like to learn more about perception studies, Westwicke can help. The breadth and depth of our relationships across Wall Street has been the cornerstone of successful perception studies. The strength of our relationships with analysts and investors has helped us collect honest and direct feedback that can be truly helpful in guiding how our clients communicate and interact with Wall Street. Contact us for a conversation about how we can conduct a successful perception study for your company.
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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