When Dennis McGrath was CFO of Photomedex, a supplier of dermatology products for physicians, the board asked him to step in as CEO to lead a turnaround. His solution was two-fold — cut unprofitable product lines and merge with a direct-to-consumer dermatology company with a marketing platform McGrath felt would help the company better penetrate its target market.
The direct-to-consumer company, McGrath said this week in a CFO Thought Leader podcast, "was getting four dollars in sales for every dollar they spent on their platform [and generated direct-response data from consumers]. I wanted to use that market intelligence and advertising platform and put it into our physician-based business."
Because of the other company's position, the transaction was structured as a reverse merger, with McGrath giving up 80% of the company to make the union happen.
"It was really an inflection point for our stockholders," said McGrath, now CFO of PAVmed, a pre-revenue life sciences company set to go to market with its first products later this year. "The stock went from $1 a share to $19 a share and our shareholders were able to exit extremely well."
McGrath credits his auditing experience with early-stage companies and later running his own financial services company with giving him the experience to make necessary changes and come up with the complex reverse-merger structure the transaction used.
"A lot of that insight came from the early training," said McGrath, who started his career in the late 1970s with Arthur Andersen & Co. "We were deal structuring privately held companies that were looking to access public markets or to sell their business. I just happened to be an observer not only of structures but the personalities and philosophies that went into the whys of doing it. And that just translated throughout my career."
Maintaining cash flow
At PAVmed, McGrath focuses on cash. The company is preparing to go to market later this year with its first product, a diagnostic tool to help physicians identify patients at risk of esophageal cancer. The company licensed the technology from another company and has received breakthrough status for it from the FDA, a designation that helps speed it through the regulatory process and gives it special status on the reimbursement side.
It’s also poised to go to market with a device developed in-house that uses a minimally invasive incision to treat carpal tunnel without burdening patients with long recovery periods.
"Patients shy away from [the regular procedure] and suffer in silence with this pain, because the recovery time is so significant," he said. This "allows people to get back to work extremely quickly."
The company used the downtime at clinics caused by COVID-19 to meet with physicians virtually to gauge their interest in the esophageal cancer diagnostic tool and the results look promising, McGrath said.
"We found out that many of the physicians, the GI [gastroenterology] folks, were not on the front lines [of the COVID outbreak] and were open to accepting a virtual sales call," he said. "We found in the process that, when they come back online, they're going to have [a backlog] of patients wanting attention. So, we’re excited about where this is going now that we’ve had this opportunity to have more time with physicians. So the second half of the year should be really good to us."
To keep the company's costs down, McGrath has relied extensively on outsourcing. The company has 16 employees but is leveraging contractors to give it another 40 to 50 full-time equivalent positions as it gears up for commercialization.
"We had assembled and trained a sales force to take our diagnostic to market, and, fortunately, it was all variable cost, 1099s if you will, independent reps," he said. "So, although they were all sitting on the bench when the clinics closed, it wasn’t costing us anything."
The company is also outsourcing its manufacturing. "We are as lean as you can be," he said.
To ensure the company had money to get to this stage, McGrath about two years ago went to market with convertible debt financing, a first for him. He closed the initial tranche in December 2018 after working on the deal for about six months and then closed a second tranche.
"You always tread carefully when you move into an area that’s new to you or the business," he said. "We probably started those negotiations in the summer. Everybody thinks deals can get done overnight. That possibility exists, but I like to say most of them take anywhere from four to six months."
The extended time is necessary to build trust, McGrath said. "At some point in the negotiation you're still trying to figure out each side's motivation, make sure they're pure. It just takes time to get comfortable. After we did that first transaction the next transaction was pretty easy because both parties trusted each side, both parties understood the components that would make it align for success, for all the constituents."
The end result of the financing has been good for the company, he said. "[We got] a nominal discount and a significant profit to the investor while giving us the money we needed to continue financing our business," he said.
Understanding the other side
McGrath calls his training and experience in finance core to his career in business, and says it's let him operate in many industries — manufacturing, real estate, finance, technology, life sciences — and wear multiple hats over the years, including CEO and company owner.
"That CPA path really has allowed me to migrate from one industry to the next," he said. "The compliance reporting has some distinctives, but the dealmaking and business share common traits."
It also helps to understand your coworkers, and what they need to be successful. "To really succeed, you need to understand the obstacles your colleagues in the other departments are facing and how you can help them solve [them],” he said, “whether it's providing information, resources, intelligence or experience."
McGrath learned this the hard way; for many years he ran his own business and understanding others' obstacles wasn’t an organizational priority.
"Having run my own business before I went to that CFO role, I had to figure that out," he said. "I didn’t have the mentors I now treasure to be. Once you figure out you're a piece of that endless circle, understanding others' needs, and trying to make them successful, will make you successful."