The communication approach your company chooses has a major impact on how investors view the management team and the attractiveness of the company. This is particularly true for biotech and other highly technical industries.
For competitive and practical reasons, it often isn’t feasible for biotech companies to disclose all available information related to the company’s technology or its R&D programs. Investors must trust that management has chosen to communicate in a balanced manner that fairly reflects the company and its pipeline. This trust will impact the value investors ascribe to the company’s therapeutic candidates and its technology more broadly.
In a note to investors, Evercore ISI biotech analyst Josh Schimmer succinctly summarized the importance of trust:
“…[W]e are increasingly reliant on trust—that companies have presented us with a full and accurate dataset and not buried (or withheld) important information or disclosures. If we do find relevant details which have been de-emphasized (or not disclosed), we then have to decide independently if they are important to the investment profile – because the reality is that we need companies to filter some information since we don’t have bandwidth to know EVERYTHING. But as with most things in life, there are shades of grey when it comes to disclosures, and when investors believe companies have gone too far in ‘selective’ data presentation, they lose trust. And when that trust is gone, it can be very hard to win back.”
The disclosure approach a company selects can be thought of, in aggregate, as defining the ‘tone’ of its communications. This tone can either be more assertive and promotional, or more subtle and conservative. The tone of communications will be driven by various factors including communication transparency, the balance of positive / negative language used, the frequency of communications, and a company’s approach to providing financial and operation guidance.
Degree of transparency
Perhaps the single factor with the largest impact on the tone of a company’s disclosures is the degree of detail provided and the timeliness of updates. There are legitimate reasons – often related to competition and intellectually property – that may motivate a company to disclose less information. However, this is a balance, and without sufficient information, prospective investors will find it difficult to gain comfort and fearful of ‘unknown unknowns’ that may lurk beneath the surface.
Securities laws and Nasdaq/NYSE exchange rules provide a framework for disclosure obligations but there is still a lot of need for good judgment. Securities laws are clear regarding the obligation not to mislead investors, as well as the requirement to fairly disclose material information to all investors at the same time. However, rules related to disclosure in other important areas are more ambiguous and even experienced securities attorneys often have different views on disclosure obligations. This even includes information deemed to be potentially material to an investor. These disclosure gray areas can pertain to the more challenging issues that arise in biotech such as obtaining new troublesome feedback from the FDA, or identifying a new safety signal in a clinical study. With this ambiguity in legal obligations, management’s judgment is crucial to determining the optimal approach to disclosure.
In addition to what is required from a legal perspective, it is essential that management also consider the reputational impact of any communication approach. Companies that take an appropriately transparent and timely approach to disclosure will be viewed as more trustworthy, and management will be seen as more credible.
Balance of communications
The language and supporting facts management uses in discussing the company and its assets also affects communication tone. While management will, and should, emphasize the positive attributes of the company and its therapeutic candidates, it is important to be mindful that overemphasizing the positives, without sufficient acknowledgement of risks and unknowns, may be seen as overly promotional and may impact credibility. It is often advisable to be open about challenges, while expressing optimism about the company’s overall approach.
Volume and outlets
The overall volume of a company’s communications is another manifestation of tone. For example, in considering press releases, some companies have relatively low bar for what is considered worthy of a press release and they may issue press releases on a frequent basis. Other companies reserve press releases for news that is particularly noteworthy and issue them more rarely.
Companies also take differing approaches to their participation at investor conferences. Some participate only in a limited number of the highest impact conferences, while others participate much more frequently, including conferences targeting professional, as well as, those targeting retail investors.
Pipeline and financial guidance
Biotechs vary greatly in the type of forward-looking guidance they provide to the investment community. Some take a more aggressive approach and provide financial and commercial guidance based on more optimistic forecasts. Others take a more conservative approach and will only guide to figures that they are confident that they will beat.
Similarly, biotech companies use different approaches regarding guidance related to anticipated future pipeline milestones. In a more aggressive approach, some companies will provide guidance for milestones that are uncertain and dependent on yet-to-be achieved milestones. An example of an aggressive and more risky approach is providing guidance on anticipated product approvals before Phase 3 studies are even completed.
There are important reasons why companies should provide financial and pipeline guidance, and it isn’t possible to provide an all-purpose recommended approach for all companies. However, as with most investor relations communications, the edict of ‘underpromise and overdeliver’ is often sound advice.
Driving toward an investor targeted communication approach that emphasizes your company’s promise, while also highlighting management competence and credibility, should be core objectives of any investor relations plan.