Answering Awkward Investor Questions
In the past several months, several of our Medical Technology clients have participated in investment bank-sponsored conferences or traveled to meet investors in one-on-one meetings. In preparation for these meetings, we work with our clients to create a list of topical and provocative questions that investors are likely to ask, and we help to prepare scripted answers. We also create investor profiles ahead of every investor meeting so that our clients have information at their fingertips on competitive share positions, the investor’s background, and our insight as to focus areas for that particular investor.
While most questions that investors and analysts ask in these meetings pertain to the particulars of the business, revenue growth, and market dynamics, we have come to expect the unexpected. We know that thorough preparation is crucial.
For example, investors may ask about some small detail about the company unearthed through one of their many contacts in the sector. The answer may not be material — but the question can often leave a CEO surprised. Conversely, investors sometimes ask questions based on a piece of misinformation they heard from a third-party, believing it to be fact. With meetings typically limited to 25 minutes, they can usually start off with both provocative and hard-hitting questions which they believe are central to the investment debate on the stock.
What all of these scenarios have in common is that they can present awkward situations for management teams — sometimes in a formal, analyst-driven “Fireside Chat” and in other times in one-on-one investor meetings. In our experience, we have found that it works best to be prepared and have thought ahead about answers to as many questions as possible so that no one is caught flat-footed.
Here are some awkward questions that have recently been posed to some Westwicke’s Medical Technology clients and how the management team handled them.
1. “When will you need to raise capital?”
This question is sometimes followed by commentary that if the company reaches out directly, the investor could be inclined to buy a block of stock as there are liquidity constraints which make it difficult to buy in the open market. Unless you have immediate plans to announce a financing or you are highly confident that you will never raise capital again (even to fund a strategic acquisition several years down the road), then you can’t actually answer this question. We suggest that your response be centered around the idea that you are continually looking for ways to create shareholder value while also monitoring your balance sheet. Point out that certain growth initiatives, such as internal or external R&D, business development, and commercial expansion — require capital. At the same time, you might say, you are cognizant of not diluting your shareholders and in some cases may elect to bolster your capital structure. Clearly, depending on your cash and debt positions, the need to raise capital may be looming in the foreground or may be on the distant horizon. Every company is in a unique situation and needs to tailor their answer appropriately.
2. “It looks like next year’s consensus numbers are too high (low). Are my estimates reasonable?”
It is actually shocking how many times our Medical Technology management teams get this question. If you haven’t given guidance on the out-year, then you simply can’t answer this question unless you are doing so in a publicized format. We actually suggest pre-empting this by providing some visibility on your long-term growth expectations in public statements such as earnings calls. This can be in the form of a range (i.e. 15%-20% annual growth) which still leaves room for you to provide annual guidance at the appropriate time. Then, when you are asked the question, the direct answer is very consistent: “We haven’t yet provided 2016 guidance, but our long term objective is to achieve revenue growth of 15%-20% annually.”
3. “I heard from an industry source that your VP of Sales was leaving. Is that true? Do you have the right senior team in place?”
Well, this is a tricky one. Remember, you do not have to comment or react to rumors. Most corporate teams are constantly adding new people while others move on as part of the normal course of business. Analysts and investors can sometimes fixate on one or two people at a company and misgauge the importance of a new teammate. When answering questions about your team, it’s important to emphasize how the various groups function and how they interact and work within the organization, and focus less on the individuals. As it relates to specific people who may have left the organization (or be leaving), speak on a high level.
4. “When will you be retiring/turning over the reins?”
This question seems somewhat rude, but is has been asked of some of our Medical Technology CEOs, particularly those with experience at several previous successful companies. In our view, it’s a personal choice how much information you want to share with the Street about your long term plans. However, unless your retirement is imminent, you should send a strong message to Wall Street that you plan to continue running the organization and have several objectives in front of you that have not yet been achieved. If there is turnover on the horizon, we recommend that you pre-empt awkward questions — and more importantly, concerns — by building a bench of talented and capable senior officers around you with whom Wall Street can start to interact. When the time is right, you can start to socialize the concept of a succession plan in a public forum, such as an earnings call.
5. “Have you had any device failures?”
In our experience, all medical technology companies’ products have some modest failure rate — this is acceptable as long as it’s within the realm of normal for a given device. When you get this question, answer it truthfully. You don’t need to spin everything positively; all companies have device failures. But make sure you have the range of normal failure rates for your specific sector at your fingertips, so you can cite that and then comment that you are within that range, or below it (if, indeed, this is the case). Sometimes analysts will learn of an isolated incident, and they will assume that it is indicative of a large-scale problem. It’s important that you dissuade them of that notion but also let them know that a small percentage of device failures is immaterial and expected. As with our previous examples, preparation is key to having a conversation about failures in the field that is factual and not alarming.
Investors and analysts ask probing questions about your business, capital requirements, ROI expectations, and market dynamics. In addition, they often ask about your personal life, rumors, and workings of your internal team. Some of these questions can be pre-empted by offering high level commentary on “hot buttons” in a public forum so that you are covered under Reg FD and can answer potential questions openly. All of these questions will be handled better if you are prepared for them.
Good preparation, regardless of the subject matter, means you won’t be surprised, an emotion that is sometimes hard to hide. Would you like learn more preparing for conferences and investor meetings? Contact us for a deeper 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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