Showing posts with label CEO. Show all posts
Showing posts with label CEO. Show all posts

Monday, August 20, 2012

The strange cases of Benjamin Buttons!

While drug makers around the world are lamenting the death of their patent rights on many blockbusters, there is a certain tribe smiling about it – the Indian generic tribe

A year back, when John Lechleiter took charge as the CEO of the $21.8 billion-a-year earning US pharma giant Eli Lilly, he decided to send his top executives a gift. It was a digital clock, which counted backwards, second by second. The clock was programmed to stop ticking precisely 48,384,000 seconds later. The deadline – October 23, 2011, the day when Eli Lilly’s top-selling (which raked-in $4.9 billion in 2009) schizophrenia pill Zyprexa would go off-patent, setting-off the alarm for generic drug companies to work double-time. This is however, not the only heartache in store for Lechleiter. Besides two more blockbusters losing their exclusivity rights by 2016 (its second-best selling Cymbalta expires 2013 and its third-best Alimta in 2016 – two drugs that make for another $4.8 billion-a-year), two of its most promising compounds failed the final clinical trials last year. Result: Lilly’s stock could not withstand the shock that the company had no new compound ready to hit the global market, while standing to lose close to $10 billion (of its $21.8 billion revenues FY2009) by 2016. It became the worst performer amongst the eleven S&P pharma stocks, and fell by 11% in just the year 2009. This is however just the beginning of the landslide for Eli Lilly, and much remains to be seen. As for the clock, it has started ticking backwards, and it’s the generic challengers that are waiting for the time, to make most of the misery of the once-proud patent holders, Lilly being just an instance.

When shareholders don’t like you, they let you go sans remorse. Much as this sounds a “generic” take on shareholder activism, it is true. Jean-Paul Garnier was voted out despite trying hard for seven-and-a-half years to revive the GlaxoSmithKline stock. Busy ensuring delivery of drugs at cost and selling 90% of its vaccines at not-for-profit prices in developing economies, it lost focus on new drug discovery. During his tenure, the GSK stock had fallen by 41%. He got the boot in May 2008. His successor Andrew Witty hasn’t made amends yet. Since February 2009, the company has enforced price cuts on its patented versions, in more than 50 countries, while winning just one patent (on a vaccine for H1N1 influenza). Witty is dreading the day when the second-highest selling drug in history, the $7.8 billion-a-year earning Advair, expires on April 1, 2011. Pfizer, the biggest pharma giant is no exception. CEO Henry McKinnell was booed-out in June 2006, following a stagnant stock price. His successor Jeff Kindler hasn’t been an exception. Under him, Pfizer’s stock has touched the sub-$18 level for the second time in over a decade and its bottomlines for 2009 have shown a drop of 57% as compared to pre-Kindler days. Worse, despite losing patents on 14 big drugs by 2014 (representing 70% of its annual revenue for 2009), its new launches have simply been shadows. Of the biggest setbacks will be the losses of Lipitor’s patent (the largest-selling drug ever) in 2011, and that of Viagra in 2012 and Celebrex in 2013 – add the losses from these two, and you would have Pfizer’s revenues being reduced by an alarming $13.74 billion (as per Evaluate Pharma, loss of revenues, post-patent expiry, is estimated at 85%). “Pfizer has a number of downward revenue revisions. You have to believe board members are scratching their heads,” says David S. Moskowitz, Analyst at Friedman, Billings, Ramsey Group Inc. The company has 148 compounds in the early developmental stages, but hopes of producing another blockbuster drug remains a fantasy.

Time is running out fast for these Benjamin Buttons of the pharma world, and of the lot most hated by them, the Indians are definitely on top of the list! But the volume-playing generic players in the country won’t mind it. The potential that lies in wait to be tapped by the Indian players can be imagined by the fact that despite being the third largest player in terms of volumes in the world, the Indian pharma market is still 14th in terms of value ($21.04 billion, as per Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers). A market which was written-off about half-a-decade back, when the world was heaving forward at a great rate of knots to catch the patent blockbusters bus, is now chugging ahead faster than imagined before. While the domestic market alone is expected to grow at a CAGR of 12-15%, as opposed to a global average of 4-7% during 2008-2013 (according to an October 2009 report released by research firm IMS Health), Indian pharma companies are finding the proposition of lapping up the opportunities granted by the patent expiries simply irresistible. Over the next two years, more than 26 bestsellers, with an annual value of $70 billion (Rs.3.1 trillion) are going off-patent, representing 240% of the current Indian pharma space. This justifies well why despite struggling to win approvals for generic versions from the USFDA, Indian drugmakers are filing for generic licences at a brisk pace. Indian companies have filed for approvals to market 11 of 15 drugs that go off-patent by 2010 and 22 of the 26 that expire by 2012. “These developments present large opportunities to the Indian pharma companies and with their low-cost manufacturing capabilities India is well-positioned to tap the opportunities,” says Animesh Kumar, Principal Consultant, Datamonitor Healthcare to B&E.

Explaining his company’s outlook in the generics space, Ramesh Adige, President, Ranbaxy tells B&E, “Ranbaxy is today well positioned in the global generics space and is amongst the top 10 generic companies globally offering products in over 125 countries. With over $80 billion of drugs going off patent by 2012, the generics market will continue to provide attractive growth opportunities in future.” Even Uday Baldota, VP – Investor Relations, Sun Pharma tells B&E, “In our view, generic drugs is a significant, growing and profitable opportunity, worldwide. We are working towards getting a meaningful presence in the worldwide generic industry over the longer term.” As per a report by HDFC Securities, 34 Indian players are looking ahead to play this game. While Dr. Reddy’s stands to gain the most, there are others like Ranbaxy and Sun Pharma (despite their troubles with USFDA), which are amongst the top gainers. Even Cipla, which has so far avoided the US market, has filed for permission to market generic/low-cost editions of drugs that make over $45 billion annually! While 10 Indian firms have seeked permission to sell generic versions of the highest-selling Lipitor, in US alone, it is Merck’s Cozaar (anti-diabetic drug) and Astra Zeneca’s Arimidex (anti-cancer), which have received the maximum number of applications from the country.


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Monday, July 30, 2012

Stratagem-TELECOM: POST 3G IMPACT

Amidst sluggish indicators of revenue, margins & subscriber additions, 3G and the promised data play were supposed to be major game changers. But evidently, it won’t be a moment too soon

When we look at service provider market share between the end of September 2010 and June 2011, the top 6 players who really lord over the market with double digit shares each – Bharti, RCOM, Idea, Vodafone, Tata & BSNL – had a combined market share of 88.37% last September. This combined market share has gone down to 86.15% by June 2011. A number of times, there is talk of consolidation to improve market share. Even if M&As happen between players beyond this coterie of 6, that can give valuable gains on a circle by circle basis. But consolidation is currently a difficult end considering that the norms are still not conducive for it. So the one way of getting rid of their performance blues is to look at ways to grow market share and aggressively grab customers from each other.

So far, they have been trying to achieve that through the ‘famous’ (for customers, at least!) price wars. However, the game may now significantly move away from pricing. Recently, Bharti Airtel, Vodafone, Idea and RCOM have all announced phased increase in tariffs of a minimum of 20%. Tata DOCOMO announced a price increase by 25-67% across various circles (see related story on price rise in this issue). RCOM also announced that it would no longer offer minute-based mobile schemes, which would offer unlimited minutes over a period. The costs of laying out network infrastructure and the heavy debt loads are the reasons for the same and it may be also be conjectured that larger players are colluding in recognition of the fact that price wars are helping no one. The constraints of a high amount of debt on their balance sheets has already lead them to cut down significantly on expansion plans. From Rs.298 billion in CY 2008, Bharti, RCOM and Idea together have brought down their capex drastically to Rs.95 billion in CY 2010 (COAI-PwC report).

In the short term, ARPUs and VAS share of revenue may fluctuate quite consistently. But as Stefan Zehle, CEO, Coleago Consulting tells us from UK, “When you are analysing post-3G impact and how it will change competitive dynamics in the sector, the most important criteria is the kind of customers each player is attracting.” While that gives more impetus to players like Bharti and Vodafone who got the cream, MNP subscriber movements post-3G will be an interesting statistic to watch out for. All leading players have reported decline in per month subscriber additions this year. Both Bharti & Vodafone had net subscriber additions of 3.1 million in December 2010, but the numbers have tapered off over the months to around 2.1 million in June, according to data from Angel Broking. For BSNL, the figure has dropped from 3.2 million to 0.8 million. Idea added 1.4 million in June 2011 compared to 3 million in December 2010, while the corresponding figures for Aircel are 0.9 million and 1.4 million respectively. RCOM had lost over a million customers to MNP till May (COAI), though the company claims that it has been gaining a sizeable number of high value clients as well.

So what will work for them in this battle for margins and not volumes? As far as 3G is concerned, a lot of the emphasis will now have to be on quality of service. The greatest gain from any M&A activity they undertake will ostensibly the one that they paid through their teeth for – spectrum. If India reaches the projected 1 billion wireless subscriber figures by 2014, the requirement of spectrum will be as high as 800 Mhz. according to TRAI. Post MNP, service will be a significant differentiating factor to avoid churn of high value customers in particular. On a benchmark basis, Indian mobile operators are working on a 3G spectrum of 5MHz. (compared to global benchmarks of 2x10 MHz. and 2x15 MHz.), which is very miniscule in terms of offering high quality data services. Incumbents are waiting for M&A norms to be eased, and a number of the new players are also reportedly sitting on spectrum waiting for the right time. Spectrum wars may get even more intense in the coming months. Another important aspect that players have to look out for more aggressively is enterprise services. At present, the market is estimated at around Rs.230 billion, and at a CAGR of around 12-13%, is estimated to be worth around $10 billion in another five years.

While 3G winners have discovered a blue ocean for themselves to revel in, the challenges in the short term towards revival of revenues and margins are pretty daunting. According to estimates by a JP Morgan report, 3G subscribers would grow to around 240 million by 2015 and operators would cumulatively earn revenues of Rs.899 billion by then. Yet, they would fall short of the expenditure incurred along with the interest rate on the debt they have accumulated (include cost of network roll out & the break even dates push back even further). Also, 240 million is a highly positive projection compared to the E&Y-FICCI report, that projects 142 million 3G users by 2015 and just over 300 million by 2020. The telecom space is well into an air pocket. On one end, players have to look at how they can best milk the investments that they have made rather than looking at making new ones. On the other, they have to look for ways to manage demand in higher value segments to their benefit, so that they can have the cream and eat it too!


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Saturday, July 28, 2012

The Globe this year and analysis on Major Sectors of India that are ripe for M&A

B&E & IIPM Think Tank present the M&A update 2011-12, Including a Primer on M&As across The Globe this year and analysis on Major Sectors of India that are ripe for M&A

The fact is that whether M&As are used for survival or for growth, they’ll remain one of the most glamorous strategies a CEO could ever employ.

And to that extent, it has been an interesting first half of the year 2011, which just about took us through everything the world (read: corporate) has been through over the last 3-4 years. From prosperity at the bourses, to shareholders suddenly crying out for mercy; from an economic boom to a devastating recession, the world has been through a roller-coaster ride all these years. Needless to say, the scenario had also affected the appetite for mergers & acquisitions (M&As) across the globe. After all, investor sentiment, consumer demand, and most importantly financing was simply not there for deals to happen. But, as US corporate profits reach 60-year highs and global economies start accelerating, M&As are definitely coming back with a bang. In fact, financial investors have already started flexing their muscles as new capital starts flowing in their funds. But is the corporate world ready for consolidation – across geographies, across industries – once again? And if yes, which sectors are ripe for consolidation? Or, are these moves by companies just add-on efforts to stay relevant amidst yet another recession (a double dip) that has not only started haunting the US, but also several economies across the euro zone and is also giving sleepless nights to the world at large?

The numbers look stunning. Global M&A deal value reached $1.16 trillion in the first half of this year, registering a 27.9% increase from last year levels. Although the deal volume was down by 2.7%, from 5,843 announced deals in H1 2010 to 5,684 announced deals in H1 2011, the ongoing trend suggests that while the larger, cash-rich buyers are prepared to spend, their smaller counterparts are playing a waiting game, sceptical of making commitments in an uncertain economic climate. But despite the dip in the volume of deals, there’s potentially good news on the supply side, as previously frustrated sellers recognise that the market is now open for business – even if it is not quite as hot as they would like. These sellers include private equity (PE) players, which need to sell assets (which they have been holding for long) in order to move forward. In fact, the first half of 2011 was the busiest six-month period since H1 2008 with closed deals worth $1,266.1 billion. While the largest deal so far this year is Deutsche Telecom’s $39 billion disposal of T-Mobile USA to AT&T (the largest corporate deal since ExxonMobil’s $40.6 billion acquisition of XTO Energy in December 2009), Johnson & Johnson’s $21.2 billion acquisition of Switzerland-based Synthes GmbH stood a distant second. Even cross-border M&As saw the busiest six months since 2008. Deals by individual countries announced in the first half of 2011 added up to $468.1 billion; registering a whopping 53.3% increase since H1 2010.


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Tuesday, July 24, 2012

Stratagem-INTERNATIONAL : WALT DISNEY COMPANY- RIGHTS AND WRONGS

The Walt Disney Company has been one of The Most Iconic Corporate Turnarounds in Business History. Robert Iger has been Strategically Leading The Company since 2005, but The Challenge lies in reducing dependence on a Specific Business Segment. Is Disney up to it?

Nevertheless, Walt Disney Company is a much steadier ship today. In 2003, revenue stood at $26.48 billion and it grew to $38.06 billion in 2010, implying a CAGR of 5.31%. It isn’t the 20% growth rate that Eisner targeted yet, but the company is showing a reasonably healthy financial position despite the global financial meltdown. The man behind this success is Robert Iger, President and CEO. When he took over the office in 2005, Disney was a bottomless spiral of bureaucratic traps. Employees were afraid of decision making, which was largely centralised. His first priority was to undo the damage, which Disney had endured mostly on part of Eisner’s egoistic pursuits. He started off by patching up with Steve Jobs’ Pixar Animation, a relationship which Eisner had destroyed. According to Michael Corty, CFA Stock Analyst, Morningstar “Iger knew the importance of animation to its studio entertainment business, so he quickly patched up with Steve Jobs”. On January 24, 2006, Disney acquired Pixar for $7.4 billion in stocks. Although the move made Jobs the largest shareholder in Disney, it has proved to be one of the best acquisition that has bolstered Disney’s animation division. In 2010, the studio released Toy Story 3. Produced at a budget of $200 million, the movie grossed $1.06 billion; becoming the highest grossing movie of 2010 worldwide and the 5th highest grossing film of all time. The acquisition of Marvel entertainment couldn’t have come at a better time. Despite being in the movie business for ages, Disney always felt restricted with respect to its target audience. With more than 5000 characters under its label, Marvel has given Disney access to an array of inventory, which presents enormous franchising opportunities (properties can be exploited across segments). Disney is making considerable investments in the Parks and Resorts business. It has already started construction of the Shanghai Disney Resort. Conceptualised on a budget of $4.4 billion, the media giant holds a 43% stake in the venture. Although this is a late cycle business, the company will realise formidable earnings riding on the back of economic recovery and the 260 million viewers of its TV shows in the mainland.

One of the areas where Disney needs to work extensively is the interactive media segment. The business has been incurring operating losses for the past three years. Till last year, the Interactive Media Group had an employee base of 700. After the announcement of the results for 2010 wherein the division posted losses of $234 million, around 30% of the workforce was laid off.

Disney is on the right track so far and Iger seems to be playing all his cards right. The risk however lies in the fact that revenues are centralised. A segmental analysis of Disney’s business reveals that the Media Networks business generates 45% of all revenues. The remainder, which includes Parks & Resorts, Studio Entertainment and Consumer Products contribute 28.27%, 17% and 6.83% respectively. The media network business forms the backbone, and ESPN contributes 75% of cable network sales. But the growth of live streaming providers like Netflix can threaten that in the future.

Disney needs to extensively work on reducing its dependence on one business. Currently, the business is doing well, but then, the problem with good times is that they may ignore potential problems on the way. Moreover, with the kind of opportunities that he now has, Iger needs to push for higher growth in revenues and a return to the legendary days of lore.

Read more...

Source : IIPM Editorial, 2012.

An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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