Salto Partners

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Shifting From Cash Preservation to Investing

During this slow U.S. economic recovery companies tended to preserve cash rather than using it to hire or invest. However, last Thursday’s “flow of funds” report released by the Fed showed that the trend might be changing. The Fed revised (down nearly $500 billion) its estimates of how much cash companies are holding on their balance sheets. Before the revision, the Fed projected that corporate cash piles grew almost every quarter since the end of the recession. However, after the revision, corporations’ cash pile shrank: $1.74 trillion in Q1 2012 vs. $2.2 trillion in Q4 2011. Meanwhile, data from the BEA showed that corporate profits in Q1 2012 grew to $1.67 trillion annualized, compared to $1.5 trillion in the prior quarter. Corporate profits on a year-on-year basis grew 14.7 percent, compared to up 11.7 percent in the fourth quarter. This data is based on an analysis of Moran Zhang of the International Business Times.

According to our own survey earlier this year, here are some key take-aways:

  1. During the recession companies have become very lean. Now, those lean organizations are the “new normal”.
  2. Companies are looking for growth. The catch is that CEO’s are very careful adding new headcount. Executives are rather investing in productivity enhancing tools and processes.
  3. Growth starts with success in Sales. Smart growth means to allow top performers to excel while finding ways to bring underperforming parts of the sales and business development organizations to the next level. Only if this occurs, does it make sense to ramp up other parts of their operation.  

There is still a lot of uncertainty in the market. The European Crisis is still unresolved. We have a potentially slowing down Chinese Economy. Our national economy is moving slowly as well. Things will change gradually for the better. And that should be considered ‘good news’.

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Lessons Learned from the Facebook IPO

After months of media hype we sobered up rather quickly. The Facebook IPO revealed some surprising lessons learned about the US stock market system.

  1. We learned that the NASDAQ, a trading platform that is in business since 1971 and that supposedly has more trading volume than any other electronic stock exchange in the world, can be overwhelmed. And it was.
  2. We learned that a social media company is in the end not that social. Facebook optimized their short-term gains. They leveraged the hype maximizing both the share price as well as the number of shares sold in the market place. They got a premium for their IPO shares. They also traded their short term gains for a publicity disaster.
  3. We also learned that apparently after ten years of Sarbanes-Oxley there is still room for clubby information exchanges among the few true insiders. In the aftermath of the Facebook IPO Morgan Stanley (MS), Goldman Sachs Group (GS) and J.P. Morgan Chase along with other underwriters and Facebook were sued by investors who claimed they were misled in the purchase of the social network firm’s stock. The courts will have to decide about the appropriateness of any pre-IPO disclosures.

Now the JOBS Act is supposedly making it easier for companies to raise money and to file for an IPO. We are officially in the Grace Period after President Obama signed the law on April 5, 2012. Lawmakers and regulators alike will have to deal with the fall-out from the Facebook IPO. While innovators and entrepreneurs want less bureaucratic hurdles in their business pursuits, nobody has an interest in an ill-defined process that creates mistrust, public uproar and law-suits.

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Bubble 2.0: Is It Happening Again?

Facebook bought Instagram for $1 billion. It paid that kind of money for a photo sharing app that can be used for free. Instagram has no revenue. For those of us who have been around the block for a while, deals like this are like déjà vu. We have seen this all before, way back in late 90s. The Internet was beginning to boom. New web-based businesses were supposed to defy gravity. Earnings didn’t matter. All of a sudden we talked about eyeballs and clickthrough rate as the measures of success, without even considering any financial data. The question is, are we seeing this exact same bubble – again?

Here are a few data points from the old bubble, for those of you who have forgotten:

Boo.com spent $188 million in half a year attempting to create a global online fashion store. They went bankrupt in May 2000.

Pets.com sold pet supplies to retail customers. Although sales rose dramatically, the company was weak on fundamentals and actually lost money on most of its sales. This was a fundamental flaw that the company couldn’t make up in volume.

During this first tech bubble several large companies had similar stories. There was WorldCom’s rise and fall:  The company filed for bankruptcy in 2002 and former CEO Bernard Ebbers was convicted of fraud and conspiracy.

In the late 1990s it was enough for a company to have .com in the name, perhaps enriched by a leading “e” prefix. The market rewarded companies that were hardly more than a website with no revenue-producing business. Investors as lost money in the bubble because it turned out that many of these companies had no sustainable business model.

This time around, LinkedIn and Groupon are “real” companies. They have a business model. They have real revenues and profits.

Today’s start-ups are smaller and require less up-front funding because of cloud computing. In the late 1990s Venture Capitalists dominated the investment landscape and very often provided the fuel for some of the excesses. This time around Venture Capitalists come into a deal at a later point in time and have a lesser role.

Still, the similarities are striking enough to remain concerned. The social media hype leads to companies that try to “jump” on the social media bandwagon. If you throw a stone on a street corner it’s hard not to hit a social media expert. The job market in Silicon Valley is red-hot again. And certainly valuations have sky-rocketed. LinkedIn went public as one of the most expensive companies in America based on the ratio of its market value to its annual sales. Facebook is on a similar trajectory.

While today’s companies such as LinkedIn, Groupon, and Facebook are real companies, investors can still lose real money just like they did in the 90s tech bubble.

So, did Mark Zuckerberg do the right thing? Instagram has grown to over 40 million users. It went from 30 to 40 million users in only 10 days in early April of this year. It recently launched on the Android platform. Now it has access to another half a billion users. There is plenty of room to grow.  Facebook saved itself time and headaches. It bought the competition while it was able to do so. Mark did what Mark had to do. The rest of us, including Facebook’s board, will watch what’s happening next.

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CEO Compensation: Why A Lot Is Not Too Much!

There is an never ending discussion on what the right level for executive compensation is. The public is sometimes shocked to learn that CEOs of very successful companies earn seven or eight digit salaries. Is this too much? The simple answer is. No. CEO jobs are one of the most competitive positions in the industry. On that level the market functions well. So, what are the talents that are required to succeed?

Successful CEOs have typically at least one of two characteristics:
a. Superior market understanding providing leadership when it comes to the development of superior products and/or services. Think Steve Jobs.
b. They have a relentless passion for execution when it comes to Marketing, Sales, Customer Acquisition and Retention. Think Steve Balmer.

It’s hard to find someone who is great in one area. It’s very difficult to find someone who excels in both. These salary levels are a function of supply and demand. Only a few can keep a multi-billion dollar empire on track.

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M&A in Big Pharma: Holy Grail Or Buying Time

We have seen a number of major mergers and acquisitions among pharmaceutical companies over the last few years. The question arises, is M&A the ultimate answer for Big Pharma? Is long term success in this industry an issue of size? This article will take a look at the reasons why mergers are so tempting. But it also discusses why becoming bigger is not enough.

The pharmaceutical industry is changing rapidly. There is an ever increasing demand world-wide for new treatments of diseases such as cancer, diabetes, Alzheimer’s etc. The world-wide pharmaceuticals market was estimated to be $825 B in 2010 and will break the one trillion barrier soon. This growth is driven by stronger near-term growth in the US market and the expansion of drug consumption in other parts of the world. At the same time, pharmaceutical companies are working hard to make a business model work that relies heavily on their ability to launch block buster drugs. These need to hit the market in time to finance the infrastructure necessary to invent, develop, manufacture, distribute and market new drugs.

 

Acquirer Acquire

t

€/$
Schering Plough Organon 03/2007

€11 B
GSK Reliant Pharma 07/2007

$1.65 B
Shionogi Sciele Pharma 08/2008

$1.42 B
Eli Lilly ImClone 10/2008

$6.5 B
Pfizer Wyeth 01/2009

$68 B
Roche Genentech 03/2009

$46.8 B
Johnson & Johnson Cougar Biotech 05/2009

$1 B
Dainippon Sumitomo Sepracor 09/2009

$2.6 B
Merck Schering Plough 11/2009

$41.1 B
GSK Stiefel 07/2009

$3.6 B
Abbott Solvay 02/2010

$4.5 B
Abbott Piramal’s Healthcare unit 05/2010

$3.72 B
Pfizer King Pharma 10/2010

$3.6 B
Novatis Alcon 12/2010

$51 B
Forest Lab Clinical Data 01/2011

$1.2 B
Teva Taiyo 05/2011

$460 M
Takeda Nycomed 05/2011

$9.6 B
Gilead Sciences Pharmasset Inc. 11/2011

$11 B
Dainippon Sumitomo Boston Biomedical 02/2012

$200 M

Fig 1: M&A Deals in Pharma between 03/2007 and 02/2012

Over the last few years we have seen a strong level of M&A activity across the globe (see fig 1 for key M&A deals between 2007 and February of 2012. Is M&A the Holy Grail for big pharma? Is size the ultimate path to long-term success? Without any question, one of the driving forces is the never-ending quest to improve the pipeline of these major players. The hope is that post-merger, the acquiring company will have a stronger pipeline of drugs that can be carried forward in their R&D organization. Additional benefits are an enhanced worldwide distribution system. In some cases, companies can retire plants because of redundant manufacturing infrastructure. These are the main reasons why it is so tempting for CEOs to look at M&A.

But there is a catch. It’s one thing to put an M&A deal together. It’s another to make a deal work. Overcoming post-merger integration issues is a non-trivial task. First, there are cultural issues between the two companies starting at the executive level down to the lab level. It takes years for companies to fully develop a combined culture, and sometimes it really doesn’t happen at all. Second, the promise of a solid pipeline of drugs could be overestimated. In other words: 1+1 < 2. Third, post-merger integration slows down a business considerably. The day a deal is announced people begin to worry about their future instead of being focused on the task at hand. What will happen to my organization? What will happen to me? Should I start looking for a new job? This kind of thinking happens on both sides – the acquiring company as well as the acquired one. During the integration phase, organizations spend a lot of time making it all work. Who is in charge? Who is part of the go-forward team? What should our process be?

In an industry where speed of drug development is everything, given that there is only a limited amount of time to benefit from a patent, slowing down the ability of an organization to execute is probably one of the least desired consequences of an M&A deal. It’s a hidden cost that is potentially in the billions of dollars and is not seen on any P&L statement. One thing is for sure. When the deal making is over, the ability to execute is essential. The fundamental necessity to drive execution from the board room level down to each and every project team will decide over the success or failure of a merger. Post-merger, it’s vital to gain traction quickly. Some will argue that a relentless focus on operational excellence early on would have made some of these M&A moves unnecessary.

This article was also published with Contract Pharma.