VALUE CREATION IN THE PHARMACEUTICAL INDUSTRY

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UNLOCKING THE MAGIC OF NUMBERS 2 = 3-1+ 4 2 -22+3 2 -3 DR. GEORGE WEBSTER EXECUTIVE EDUCATION PHARMACEUTICAL MARKETING ST. JOSEPH’S UNIVERSITY. VALUE CREATION IN THE PHARMACEUTICAL INDUSTRY. What is value creation? What are the drivers of value creation ? - PowerPoint PPT Presentation

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  • UNLOCKINGTHEMAGIC OF NUMBERS

    2 = 3-1+ 42-22+32-3DR. GEORGE WEBSTER EXECUTIVE EDUCATION PHARMACEUTICAL MARKETING ST. JOSEPHS UNIVERSITY

  • VALUE CREATION INTHE PHARMACEUTICALINDUSTRY

    What is value creation?What are the drivers of value creation ?How do we measure value creation?

  • WHAT IS VALUE CREATION?ProcessInvolves decision makingFinancingInvestingOperating Includes all stakeholders

  • THE F-I-O MODELFINANCING - the process of obtaining capital for the businessINVESTING - the process of asset acquisition to operate the businessOPERATING - using resources to maximize shareholder wealth

  • THE SCORECARDSBALANCE SHEET - a statement of position at a point in timeShows what we own and what we oweOf particular interest to the CFOINCOME STATEMENT - a statement of value creation over timeMeasures how well we operatedOf particular interest to the CEOCASH FLOW STATEMENT - puts operations on a cash basisGives sources and uses of cashOf particular interest to the COO

  • BALANCE SHEET- FACSIMILE COMPANY DECEMBER 31, 19XX

    ASSETS LIABILITIES & O.E.CURRENT ASSETS CURRENT LIABILITIES Cash 3000 Accts. Payable 2000 Accts. Rec. 2000 Wages Payable 1000 Inventory 8000 13000 Rent 1000 4000

    LONG TERM LONG TERM P & E 25000 Long Term Debt 7000 Other 4000 OWNERS EQUITYTOTAL 29000 Common Stock 5000 Ret. Earnings 26000 TOTAL 31000

    TOTAL ASSETS 42000 TOTAL LIAB. & OE 42000

  • INCOME STATEMENT- FASCIMILE CO.FOR THE YEAR ENDED 12/31/XXNET SALES 55000LESS: COST OF GOODS 35000GROSS MARGIN 20000LESS: OPERATING EXPENSES Salaries 5000 Rent Expense 1000 S.,G., & A. 4000 10000OPERATING PROFIT 10000LESS: INCOME TAX (.40) 4000NET INCOME AFTER TAX 6000

  • STATEMENT OF CASH FLOWS-FASCIMILE CO.FOR THE YEAR ENDED 12/31/XXCASH FROM OPERATIONS Net Income 2000 Depreciation 500 2500CASH FROM INVESTING ACTIVITIES Capital Expenditures 5000 Acquisitions 15000 20000CASH FROM FINANCING ACTIVITIES Issuance of Long Term Debt 700 Sale of Common Stock 11500 Cash Dividends 400 11800NET CHANGE IN CASH -5700

  • WHAT ARE THE DRIVERS OF VALUE?EFFECTIVENESS - How much revenue do we generate from the assets we have?EFFICIENCY - How well do we use the assets we own?LEVERAGE - How much debt do we have in the capital structure?

  • EFFECTIVENESSBMS - 1998 Effectiveness is 1.12BMS - 1996 Effectiveness is 1.03

  • EFFICIENCYBMS - 1998 Efficiency is .167BMS - 1996 Efficiency is .187

  • LEVERAGEBMS - 1998 Leverage is 2.15BMS - 1996 Leverage is 2.24

  • HOW WE MEASURE VALUE CREATIONROI - Return on investmentROE - Return on equityEPS - Earnings per shareEVA - Economic value added

  • RETURN ON INVESTMENTROI = Net Margin X Asset TurnoverBMS 1998 ROI = .167 X 1.12 = .187BMS 1996 ROI = .187 X 1.03 = .193

  • RETURN ON EQUITY(Effectiveness) X (Efficiency) X (Leverage)BMS 1998 ROE = $3,052,000,000 / $7,576,000,000 = .40= 1.12 X .167 X 2.15 = .40

  • THE F-I-O MODELFINANCING - the process of obtaining capital for the businessINVESTING - the process of asset acquisition to operate the businessOPERATING - using resources to maximize shareholder wealth

  • HOW WE MEASURE VALUE CREATION(Effectiveness) X (Efficiency) X (Leverage)FIO MODEL

  • EARNINGS PER SHAREBMS 1998 EPS = $1.54BMS 1996 EPS = $2.81Market MeasureExternal to the FirmUnambiguousRepresents per Share Value Creation

  • ACTIVITY/PERFORMANCE/LEVERAGE MEASURESBMS SCHERING P&GACTIVITY Total Asset Turnover 1.12 1.03 1.20PERFORMANCE Net Margin (%) 16.7 21.7 10Return on Equity (%) 40 44 31LEVERAGE Total Assets/ Equity 2.15 1.96 2.53

  • ECONOMIC VALUE ADDEDMeasures real profitably- on a cash basisMeasures the cost of equity- not shown on balance sheetsCost of equity is its opportunity cost- what the investors could do in their next best alternativeCapital includes long term debt, preferred stock, and common stockCost of capital is its weighted average

  • ECONOMIC VALUE ADDEDECONOMIC VALUE ADDED =[Net Operating Profit After Tax - After Tax Dollar Cost of Capital]Net Operating Profit After Tax = Operating Profit - Income TaxCost of Capital = Weighted After Tax Cost of Capital Capital = Total Capital Employed = Common and Preferred Stock + Long Term DebtAfter Tax Dollar Cost of Capital= Cost of Capital (%) X Capital

  • Economic Value Added ExampleBMS, 1998NOPATOperating Profit 14026Less: Income Tax -1127Equals: NOPAT =12889EVAEVA = NOPAT - $ CC = 12889-1394 =11495