How “fit” is your capital allocation strategy? презентация

sciences

Transaction Advisory Services Sector Resident
Andy Lorenzetti
TAS Divestitures and Integration
Principal, Ernst & Young LLP
David Womelsdorf
Global Client Service Partner and
Principal, Ernst & Young LLP

business?

Slowdown in emerging markets

Pricing pressures

Portfolio optimization

Maintaining revenue growth and operating margins

Unsustainable R&D costs

Integration challenges

Investors are prepared to take a more aggressive stance.
One significant managerial misstep opens the door to activism.

Business pressures increased the importance of getting the capital agenda right

prepared?

Source: EY, FactSet’s Shark Repellent and Capital IQ.

Number of activist campaigns nearly doubled between 2010 and 2013-14

Number of activist campaigns initiated across all industries

and company filings. Includes only companies with market cap > US$1b.

A third of activist campaigns are driven by operational or business portfolio concerns.

Market capitalization ($USb)

margins
Shareholder return
Other: SG&A, effective tax rates

Simply put, “good enough” operational performance is less relevant if shareholders believe more could be done.

Big pharma: growth expected to revive in 2016
Specialty pharma/generics: growth via M&A
Biotech: growth hard to maintain organically

Source: EY, Capital IQ and company filings.

been included in specialty pharma for this comparison.

Source: EY and Capital IQ

* Ex-Gilead biotech margins: 41% Q1 2015, 34% 2014

Big pharma
Biotech*
Specialty pharma (incl. generics)

2012 2013 2014 Q1 2015

risk of activism

Source: EY and Capital IQ. Company financials were calculated through 31 December 2014. See ey.com/vitalsigns for full analysis.

31 biopharma companies in data set, including four that were targets of activism in 2013 or 2014

for pipeline
Use of milestone or gating mechanisms to improve R&D decisions

The biopharmas that drive the greatest value and productivity from their R&D organizations are the ones that have the most options with respect to capital allocation. ▬ Paul Clancy, CFO, Biogen

next five years …

… continuing a second wave of innovation similar to levels seen in the mid-2000s.

Source: “Global Outlook for Medicines Through 2018,” IMS Health and FDA’s Center for Drug Evaluation and Research.

Number of NME approvals (FDA)

Biopharma pipeline renaissance: analysts project ~ 25% increase in approvals

management teams pulling this lever when it is most likely to create the greatest value for shareholders – or to get a short-term “pop” in earnings?

M&A

2014

2013

2012

2011

2010

2009

2008

2007

Source: EY, Capital IQ and company financial data.

Big pharma

Biotech and specialty pharma

models

Big pharma companies have as much as US$50billion in excess working capital (WC)
Big pharma’s 2014 WC performance stronger than in 2007, but …
… WC varies widely overall along the metrics we track (e.g., DSO, DIO, DPO and C2C)
Individual opportunities for improvement, especially by adopting practices of leading WC performers in other industries

business or therapeutic area?
Perform sum-of-the-parts analyses

Financial data is not generally captured in ways that make it easy to assess the business implications of different kinds of carve-outs.

half

Source: EY, Datamonitor, Company Reports. 2015 data thru 4 June 2015.

. 2010 2011 2012 2013 2014 2015

Specialty pharma

2015 pipeline (2H)

ThomsonOne and Informa’s Strategic Transactions database.
2015 data analyzed through 30 June. Only divestitures valued at > US$500 billion included.

Innovative science; no clear path to profitability
Concerns:
Financial runway
Business development
Proof-of-concept

Emergent

Growing rapidly; profitable or likely to be soon
Concerns:
Expanding operations
Meeting changing expectations of stakeholders

Growth

Measurable profits, due to marketed products
Concerns:
Maintaining growth
Balancing R&D, SG&A and other expenses with long-term growth

Mature

structure

Business portfolio and M&A

2

3

4

to determine if they are optimized.

Operational performance

1

Use milestone and “gating” mechanisms to improve R&D investment decisions.

R&D

2

Are capital allocation decisions based on the right metrics? Do they enable optimal use of the balance sheet?

Capital structure

3

Perform virtual carve-outs to assess the value of potential divestment opportunities.

Business portfolio and M&A

4

Communicate relentlessly with investors about strategic objectives.

Communications strategy

5

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