15 06 03_ranking pharma

CREARE

Creating Value in the

HEALTHCARE & PHARMAA research on the main European listed Companies

2015

Executive Summary

THE ECONOMIC ENVIRONMENT

THE RESEARCH SAMPLE

HISTORICALPERFORMANCE: PEOPLE-BASEDVIEW

MARKET POINT OF VIEW: SUSTAINING PERFORMANCE OVER TIME

• The global macroeconomic scenario• The European context• Healthcare Outlook• The Healthcare Challenges

• The research activity

• Value performance from a People-Driven point of view

• The Healthcare & Pharma sector analysis

• The market and share prices impli-cit expectations

• Implicit ROIC and goodwill sustai-nability

• The market and its challenges

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Glossary

HISTORICAL PERFORMANCE:THE TRADITIONAL APPROACH

HISTORICALPERFORMANCE: EVA® VIEW

OUR ‘HOT TOPICS’

ACTIVE VALUE ADVISORS.

• Medical Equipment & Supplies• Pharmaceuticals & Biotechnology

• The importance of ‘Quantity’ and ‘Quality’• The managerial leverage to create Value • Structural differences among the Heal-

thcare & Pharma sub-sectors• Champions and “Falling” Angels• Value created and Market Appreciation

• Revenue Management• Its time to manage change and run

effective organizations• Fundamentals of People-Driven

business• Quantitative Easing• Business Intellingence & Analytics

• About Active Value Advisors.• Shareholder Value• Customer Value• People Value• Corporate Value

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Executive Summary

Persisting uncertainity and consequent relatively low consumer spending adversely affected the global macroeconomic scenario also during 2014, leading to growth weaker than expected.

Indeed, the World GDP Growth end year value is very close to that of 2013, nonetheless, positive signals come from the European Mar-kets, which GDP Growth is higher than that of the previous year.

As far as the European Market, the IMF forecasts highlight, in line with the higher 2014 (vs 2013) GDP Growth, a growing trend that will keep featuring the whole European Union untill 2016. Such forecasts are certainly affected by important economic and political factors (i.e. Lower oil prices; Lower interest rates; the “Quantitative Easing”).

This research activity investigates the impact of such a framework on the performances of the Health-care & Pharma industry. This sector dynamics have been recently deeply affected by regulations addressing the rationalization of national budgets through imposed price reductions. It is thus impor-tant to understand the way in which the companies in the sector will face such a challenge as well as the threat of generics and the opportunity of internationalization.

Pharmaceutical companies might address these challenges recurring either to “traditional answers” such as M&As and partnerships, or to new strategic choices pairing pharma with a specific focus on certain related fields. Among the various strategies, three of them are very important to mention, be-ing: pharma + diagnostic, where the complementary diagnostic service is used to leverage customer rewards and fidelization; pharma + consumer, where preventive medicines and wellness services are used as a pivotal strategy; pure pharma + focus on therapeutic areas, where the strategy is to focus

only on the areas providing higher success possibilities.

Active Value Advisors believes that distinguishing performances arise from management quality and from the focus on innovative internal policies, especially with regards to HR, supply chain and Business Intelligence & Analytics.

The research activity involves a basket of 50 European compa-nies in the Healthcare & Pharma sector, which has been further subdivided into two different sub-sectors: “Medical Equipment & Supplies” and “Pharmaceuticals & Biotechnology”.

The threat of budget deficits will lead to

new business definition:

Pharmaeconomy as opportunity

Mixing industries’ boundaries

will envision new strategy definition

4

In the following pages we investigate these companies’ performances according to a traditional ap-proach, thus reporting key data and figures and providing an initial clear idea about the sector.

Hereafter, a less traditional approach is used, the so-called EVA® view. Core to such a view, is the un-derstanding of the key drivers of Value, “Quality” and “Quantity”. This relatively new approach provides clearer and more exhaustive indications about the companies and sector’s performances.

The whole analysis has adopted a “Market View”, indeed we believe that prices always reveal consum-ers’ judgments with which it is fundamental to confront. Moreover, it is valuable to “read” a company’s preformance using the Market and prices as starting points. The following pages provide a snapshot over the Capital Market judgements on the leading European Companies, at May 2015. In addition, they provide a detailed “reading” of the 2014, and expected, Value Creation performances of the basket of companies considered.

Finally, besides the Value Creation approach based on quantity and quality (return) of Invested Capital we focused on a more People oriented approach, the so-called People-Based view. This approach ideally substitutes Capital with Human Capital, thus generating valuable insights. We believe that the understanding of the People-Based view is essential in order to keep Value creation sustainable and durable over time.

In light of the research outcomes, what can firms do to reinforce or enhance their Value Creation Perfor-mances?

To answer this question, Active Value Advisors will provide its view about some recent “Hot Topics” that companies have to deal with when facing challenges relating to profitability, efficiency and organiza-tional flexibility or when they need to exploit the new technological development in the most profitable way (i.e. Big Data, Cloud Computing, Business Intelligence).

People networks and use of

information will enhance Value

creation

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The economic environment

The global macroeconomic scenarioThe 2014 global economic scenario has been characterized by persisting uncertainty and conse-quent relatively low consumer spending and growth weaker than expected and widely differentiated among the different economic sectors. During the first semester of the year, the World Economy was indeed affected by a slowdown in output growth and international trade. After such a deceleration the economic activity re-started growing slowly, reaching end-year values very close to those of 2013 (+3,41% in 2013, +3,39% in 2014)1. More specifically, this is the result of a balancing between a slight growth improvement in Advanced Economies (+1,37% in 2013, +1,80% in 2014) and a slight growth decrease in Emerging Markets (+5,0% in 2013, +4,60% in 2014).

IMF forecasts for the next three half years suggest a possible global improvement and higher growth in both Advanced Econ-omies and Emerging Markets.

This predicted growth improvement is di-rectly related to economic and political fac-tors such as the decrease in oil prices, low inflation rates, and important decisions such as the Quantitative Easing, leading to lower interest rates. Nonetheless a cen-tral aspect to consider is the growth dif-ferential between the U.S. and the other Advanced Economies, which, through the effect of opposite monetary policies, has led to the strenghtening of the U.S. Dollar and which could, eventually, translate into relevant improvement of the Trade Bal-ance, especially in European Countries.

(GDP Growth %) 2013 2014 2015f 2016f

European UnionEuro areaAustriaBelgiumFinlandFranceGermanyGreeceIrelandItalyLuxembourgNetherlandsPortugalSpainDenmarkNorwaySwedenSwitzerlandUnited KingdomEmerging Europe

0,12 1,40 1,85 1,95-0,46 0,88 1,45 1,650,23 0,34 0,86 1,570,28 1,04 1,34 1,50-1,32 -0,11 0,83 1,420,29 0,36 1,16 1,490,21 1,61 1,62 1,67-3,90 0,77 2,52 3,690,17 4,78 3,87 3,28-1,70 -0,42 0,49 1,101,99 2,91 2,52 2,31-0,72 0,88 1,56 1,56-1,61 0,90 1,60 1,54-1,23 1,39 2,46 2,05-0,49 0,99 1,64 2,010,74 2,24 0,97 1,551,28 2,14 2,66 2,831,94 1,99 0,82 1,221,67 2,55 2,72 2,332,86 2,78 2,93 3,21

Figure 1. GDP Growth in Europe

The European contextIn line with the predicted consequences of the global macroecomic forces onto the European Econo-mies, the IMF forecasts highlight a growing trend, between 2014 and 2016, in The European Union as a whole and for the majority of European Advanced Economies. This growing trend will be even more evident in the so-called Emerging Europe (+2,78% in 2014, +3,21 in 2016).

1Data WEO International Monetary Fund - World Economic Outlook Database, April 2015

Healthcare Outlook2

Starting from 2009, the difficult economic scenario has been negatively affecting the Healthcare sec-tor and its dynamics. As a matter of fact, increasing pressures towards rationalization of the national budgets imposed a consistent reduction in public (and therefore total) expenditure on health, mining the growth of the sector and imposing relevant challenges on it.

The graph in Figure 2 highlights the To-tal Expenditure on Health (% of GDP) historical trend. Such an expenditure has considerably increased during the period 2000-2009, while, after 2009 its growth has slowed down, when not be-come negative. However, during the last year some moderately positive recovery signals have been registered.

For what concerns Italy, the 2012 total expenditure on health accounted for the 9,2% of the country’s GDP, thus aligned with the OECD average expend-iture (9,3%), but well below that of oth-er European Countries (Netherlands = 11,8%; France = 11,6%).

With regards to the per capita health expenditure, Italy is placed above the European average (it accounted for € 2.409 in 2012 vs the European average of € 2.193). During the period 2000-2009, the Italian per capita health expenditure (real terms) increased, on average by 1,8%, whilst, during the period 2009-2012 it decreased by 1,1%.

Figure 2. Total Expenditure on Health, % of GDP (Source OECD Health Statistics, 2014)

Policies ofReduction in

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Health challenge the growth of

the sector

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Figure 3. Annual average growth rate (%) in per capita expenditure, real terms, 2000 to 2012 (Source OECD Health Statistics, 2014)

2Sources:OECD Health Statistics, 2014OECD - Health at a Glance, 2014

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The Healthcare challengesLooking at Figure 4, which re-ports the current health ex-penditure by function, there emerge important insights. Health expenditure should be considered as a whole, implying that Medical Goods (including pharmaceuticals and medical equipments) represent only one of the important components of the system, which have to be understood and exploited at best in order to provide compre-hensive solutions aimed on the one hand at satisfying customer

needs, and on the other at efficiently optimizing the Total Expenditure on Health of the country. Given the above premises, it is important to recall, among the many challenges to which the Healthcare & Pharma sector is exposed, the most relevant ones are:

• Blockbusters Decline and Threat of Generics: many large pharmaceutical companies’ blockbust-er drugs went off-patent paving the way to the surge of new actors (within the Generics field) who designed their organizations according to more effective supply chains. These events also imply a bargaining power’s shift from doctors to payers and patients in general;

• Declining R&D Productivity: many researchers have highlighted a decline in approval rates, which in turn affects all the phases of the pipeline, and mostly the clinical testing process. This situ-ation has led many large pharmaceutical firms to switch R&D efforts from real (radical) innovation to incremental improvements on existing drugs;

• Pharmaecoconomic Performance: an increasing number of healthcare payers are measuring the pharmacoeconomic performance of different medicines. A more intensive deployment of elec-tronic medical records may provide them with the information needed to insist on outcome-based pricing;

• Non-homogeneus Demand and Regulators Restrictions: demand for medicines is growing more rapidly in emerging economies than in industrialized economies. To better control the markets, the regulators are becoming more cautions about the approval of “truly innovative medicines”;

• Price Reduction: to the above mentioned challenges, we should add the European-wide auster-ity measures, turning into price reduction policies and translating into decreasing expenditure in pharmaceuticals (Figure 5).

The main “traditional” answers to these trends are Mergers & Acquisitions or Strategic Alliances and Partnerships, with other pharmaceutical or biotechnology firms, aimed at gaining economies of scale.

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Inpatient care Outpatient care Long term care Medical Goods (mainly pharmaceuticals) Prevention and administration

Figure 4. Current health expenditure by function. (Source OECD Health Statistics, 2014)

These options, though cer-tainly valid, should be pur-sued according to clear strategic choices, and not only for the sake of dimen-sion. As a matter of fact, the reported challenges, as well as all the others character-izing the Healthcare & Phar-ma sector, impose the need for new growth strategies aimed at growing effectively and revisiting the old busi-ness models in favour of a more valuable one. Some possibilities that pharma-ceutical companies might explore are:

• Pharma + diagnostic. In this scenario, the success of a company’s patented pharmaceutical busi-ness relies on its diagnostics business. The idea stems from thelikelihood that payers and custom-ers will eventually reward proprietary and differentiated clinically effective diagnostic services;

• Pharma + consumer. This scenario assumes the deployment of a more holistic approach to health, or rather the use of preventive medicine, wellness services and non prescription drugs to treat mild symptoms or side effects;

• Pure pharma + focus on therapeutic areas. In this scenario, success stays in the ability to slow down the decline in R&D productivity witnessed during the last few years and potentially overturn it. Companies oriented towards such a scenario would concentrate their capital investments on ther-apeutic areas that offer the highest possibility for technical and commercial success.

Given such a situation, Active Value Advisors believes that more efforts should be placed in:1. being “patient-centric”, or rather considering the patients as core to strategies and operations, and

focusing on health outcomes rather than medicines. This will distinguish the company from the rivals and will create long-lasting value;

2. switching the attention from selling medicines, which accounts for (on average) the 17% of the total health budget, to new opportunities allowing to generate revenues by improving the way in which the remaining 83% of the budget is allocated;

3. building agile and efficient supply chains which support the process of bringing pharmaceutical firms closer to the patient through the active management of value chains and a more comprehen-sive and integrated deployment of Sales Representatives;

4. introducing new systems and tools to support the international and multicultural growth of the organization with enhanced HR capabilities3;

5. improving information for decision making by focusing on data management and analytics.

Figure 5. Average annual growth in pharmaceutical expenditure per capita (real terms), 2000 to 2012. (Source OECD Health Statistics, 2014)

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83See “Hot Topics” (p.26)

The research sample

The research activityThe aim of the research activity has been that of investigating the performance obtained by the Healthcare & Pharma sector in 2014 by analysing a basket of European listed companies.

More specifically, the sample has been selected re-ferring to 50 among the first companies ranked by market capitalization. The companies belonging to the sample have been further chategorized into 2 sub-samples: 16 companies in Medical Equipment & Supplies and 34 companies in Pharmaceuticals & Biotechnology. A brief description of such compa-nies is given by the following table and graphs:

Data Reuters Thomson One, values in €Mln (Data at May 13h 2015)

Figure 6. The research sample per sales %

9

Northern Eu. Sales = 27%

Southern Eu.Sales = 3%Western Eu.

Sales = 70%

ME&S Sales = 15,5%

PH&BT Sales = 84,5%

FRESENIUS SE ESSILOR INTERNATIONAL S.A.SMITH & NEPHEW PLC COLOPLAST A/S SONOVA LTD GETINGE AB WILLIAM DEMANT A/SBIOMERIEUX SASTRAUMANN LTD SARTORIUS STEDIM GN STORE NORD A/S DIASORIN SPA CARL ZEISS MEDITEC GERRESHEIMER AG AMPLIFON SPASORIN SPA

ME&S

Country Cap.on

DEU 29.390 FRA 23.240 GBR 13.959 DNK 13.900 CHE 8.602 SWE 4.902 DNK 4.158 FRA 3.780 CHE 3.773 FRA 3.440 DNK 3.017 ITA 2.270

DEU 1.840 DEU 1.610 ITA 1.600 ITA 1.260

NOVARTIS ROCHE LTD SANOFI S.A.BAYER AGNOVO NORDISK A/S GLAXOSMITHKLINE ASTRAZENECA PLC SHIRE PLCACTELION AG MERCK KGAA UCB SA GRIFOLS SA NOVOZYMES A/S LONZA GROUP AGCHR HANSEN HIKMA PHARMACEUTICAL QIAGEN N.V. MEDA AB IPSEN SAGENMAB A/S ORION OYJ SWEDISH ORPHAN BTG PLC RECORDATI SPA H. LUNDBECK A/SELEKTA PUBL AB ALMIRALL SACOSMO PHARMA GW PHARMACEUTICALS STADA ARZNEIMITTEL VIRBACBOIRON SA MORPHOSYS AG BIOTEST AG

PH&BT

CHE 245.066 CHE 218.820 FRA 116.600 DEU 107.920 DNK 103.233 GBR 98.092 GBR 77.132 GBR 42.561 CHE 13.910 DEU 12.800 BEL 12.160 ESP 11.520 DNK 10.795 CHE 6.586 DNK 5.686 GBR 5.592 DEU 5.230 SWE 5.089 FRA 4.250 DNK 4.196 FIN 4.150

SWE 4.044 GBR 3.974 ITA 3.900

DNK 3.691 SWE 3.009 ESP 2.900 LUX 2.179 GBR 2.106 DEU 1.980 FRA 1.870 FRA 1.850 DEU 1.710 DEU 984

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Historical Performance:the traditional approach

Comparative analysis of the sample performances obtained during 2014 and 2013 shows that, on aggre-gate, sales have only slightly increased, passing from 308 Bn to 310 Bn (+1,0%).

The geographical distribution of sales displays a high sales growth for Southern Europe companies (+20,3%) followed by Western Europe ones (+1,7%), whilst companies located in Nothern Europe has been characterized by a modest sales reduction (-3,4%).

For what concerns marginality and profitabili-ty, the Healthcare & Pharma sector, though still maintaining very good levels (Ebit/Sales equal to 19,8% and Profit/Sales equal to 13,7%), has been affected by a modest worsening of per-formances.

Given the above premises, we believe that these findings are not completely exhaustive: the gath-ered evidences are not univocal and the regis-tered performances differ significantly among the considered sub-sectos, and even more among the single companies of the sample. Thus, the aim of the following reasoning and of the table reported in Figure 11 is to provide the reader with valuable insights, reporting a more detailed anal-ysis of the research sample.

Medical Equipment & SuppliesThe Medical Equipment & Supplies sub-sector’s sales have considerably grown (+9%), from 2013 to 2014, thus boosting the growth of the Healthcare & Pharma sector. The Ebit/Sales ratio has slightly decreased (16,2% in 2013 vs 15,0% in 2014), though the aggregate EBIT (absolute value) has moderately increased as a result of the sales growth. On the other hand, very positive signals come from the increase in aggregate profit (absolute value +13% compared to 2013) and in the Profit/Sales ratio passing from 8,2% to 8,5%.

Finally, it is important to underline that all the companies in ME&S have registered increasing sales and positive profits.

4Figure 9, 10 and 11 Legend: Sales Ebit Profit

14,1%% 13,7%%

+1%

-2%

-3% 20,5% 19,8%

TOT%13% TOT%14%

Figure 8. Performance Healthcare & Pharma (Total)

Figure 7. Sales by geographical area of the companies in the sample, € Mln

9.744

200.213

69.289

10.116

205.310

68.345

Southern Europe

Western Europe

Northern Europe

20142013

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Among the companies of this sub-sector we point out:

• COLOPLAST A/S: the Danish company, engaged in the production of medical equipment for people with very person-al and private medical conditions, has scored a very good performance in 2014. Indeed its sales have grown by 7% and it has the highest, as compared to peers, EBIT/Sales ra-tio (33%), with a consequently excellent profitability (Profit/Sales = 19%).

• DIASORIN S.P.A.: the Italian group providing Immunodi-agnostic and Molecular Diagnostic solutions has registered, in 2014, sales growth (+2%) followed by stable EBIT and slight-ly increasing profits. However its results can be considered excellent with respect to the peers, indeed, with and EBIT/Sales equal to 30% and Profit/Sales equal to 19%, its perfor-mance is among the top of the sub-sector and of the whole sample.

• AMPLIFON S.P.A.: the Italian company providing hear-ing support systems witnessed a considerable sales growth (+8%) with a satisfying (though lower as compared to peers) performance (EBIT/Sales ratio of 10% and Profit/Sales equal to 5%).

Pharmaceuticals & BiotechnologyThis sub-sector, during 2014, has witnessed a negative down-turn (-8%). However such sales dowturn is almost totally due to the decrease in sales of few big players of the sub-sector, whilst for the majority of the other companies, sales have in-creased. Nonetheless, the aggregate performance has been worst than 2013 for both the Ebit/Sales ratio (21,3% in 2013 vs 20,7% in 2014) and profitability (15,1% in 2013 vs 14,6% in 2014). However, it is important to underline that for both the aggregate measures and the single companies’ ones, the results, though not as good as those of 2013, are excellent.

Among the companies included in this sub-sector it is worth to mention ALMIRALL SA, the global Spanish company. Indeed Almirall 2014 results are impressive; the company’s sales

have grown by 70% (from 2013 to 2014) with an EBIT/Sales ratio of 41% and Profit/Sales equal to 32%.

Moreover, RECORDATI S.P.A. performance is noticeable, with consistent sales growth and very good levels of EBIT and Profit (resepectively 24% and 16% of sales).

The table in Figure 11 reports the performances of the considered sample (Sales, EBIT, Profit).

Figure 9. Performance Healthcare & Pharma (ME&S)

Divergent performances for

the two Healthcare sub-sectors

8,2% 8,5%

+9%

+13%

+1% 16,2% 15,0%

ME&S%13% ME&S%14%

Figure 10. Performance Healthcare & Pharma (PH&BT)

15,1% 14,6%

-8%

-11%

-10% 21,3% 20,7%

PH&BT 13 PH&BT 14

4Figure 9, 10 and 11 Legend: Sales Ebit Profit


ME

&S

2013 2014 Δ % 2013 2014 % Sales 2013 2014 % Sales

20.545 23.231 +13% 2.989 3.114 +13% 988 1.067 +5%5.065 5.670 +12% 861 752 +13% 593 929 +16%3.445 3.480 +1% 712 727 +21% 440 378 +11%1.561 1.667 +7% 487 551 +33% 364 321 +19%1.478 1.607 +9% 297 333 +21% 91 281 +17%2.780 2.932 +5% 444 413 +14% 251 158 +5%1.235 1.254 +1% 239 227 +18% 176 178 +14%1.588 1.698 +7% 231 186 +11% 164 135 +8%

560 585 +4% 93 120 +21% 83 130 +22%588 684 +16% 98 115 +17% 66 72 +11%911 985 +8% 166 161 +16% 99 106 +11%435 444 +2% 132 132 +30% 83 84 +19%906 909 ≈ 134 121 +13% 94 75 +8%

1.266 1.290 +2% 129 127 +10% 62 66 +5%829 891 +8% 74 92 +10% 13 46 +5%738 747 +1% 53 43 +6% 49 52 +7%

43.931 48.072 +9% 7.138 7.214 +15% 3.616 4.078 +8%

Sales EBIT Profit


PH

&B

T

44.754 40.552 -9% 7.260 7.333 +18% 6.980 7.720 +19%38.516 39.078 +1% 12.808 12.002 +31% 9.192 7.683 +20%33.306 34.109 +2% 5.788 6.201 +18% 3.717 4.390 +13%40.157 42.239 +5% 4.535 5.298 +13% 3.189 3.426 +8%11.210 11.912 +6% 4.118 4.507 +38% 3.378 3.552 +30%32.879 28.539 -13% 8.753 6.738 +24% 6.743 3.419 +12%20.358 19.667 -3% 4.788 3.066 +16% 2.024 929 +5%

3.907 4.824 +23% 1.345 1.682 +35% 527 2.567 +53%1.470 1.612 +10% 408 469 +29% 373 489 +30%

11.095 11.501 +4% 2.136 1.843 +16% 1.202 1.157 +10%3.411 3.344 -2% 434 366 +11% 207 209 +6%2.742 3.355 +22% 736 858 +26% 346 470 +14%1.576 1.671 +6% 387 419 +25% 295 339 +20%2.951 2.997 +2% 173 311 +10% 72 195 +7%

739 757 +2% 190 201 +27% 138 132 +17%1.081 1.122 +4% 315 322 +29% 168 210 +19%

979 1.018 +4% 137 150 +15% 52 88 +9%1.442 1.688 +17% 170 228 +14% 89 44 +3%1.282 1.332 +4% 198 251 +19% 153 154 +12%

89 114 +28% 9 36 +31% 15 40 +35%1.007 1.015 +1% 262 270 +27% 206 211 +21%

239 287 +20% 8- 36 - -12% 10- 29- -10%290 360 +24% 30 53 +15% 20 30 +8%942 987 +5% 208 234 +24% 134 161 +16%

2.047 1.807 -12% 248 43 +2% 115 21- -1%1.137 1.176 +3% 224 199 +17% 147 126 +11%

825 1.407 +70% 16 575 +41% 34- 448 +32%56 80 +41% 12 22 +28% 69 73 +92%34 37 +10% 13- 28 - -76% 6- 18- -49%

2.014 2.062 +2% 257 452 +22% 121 65 +3%736 773 +5% 100 104 +13% 61 64 +8%618 610 -1% 130 136 +22% 82 89 +15%

78 64 -18% 10 2 - -3% 13 3- -5%501 582 +16% 41 47 +8% 32 19 +3%

264.467 262.680 -1% 56.203 54.349 +21% 39.808 38.429 +15%

5

Figure 11. Historical Performance: traditional approach (Data Reuters Thomson One, values in € Mln)

125This value includes the financial gain on sale of a Group Company’s shares

Historical Performance: EVA® view

The analysis of the historical performance through the traditional approach has neither highlighted a specific pattern representing the 2014 performance of the Healthcare & Pharma sector, nor fully grasped the impact of the current economic scenario over such a performance. However, whether the economic resources invested in a company are gradually losing value, the “fault” might not (only) be appointable to exogenous factors or to the uncertainity characterizing the times we are living.

Sometimes, the adoption of a traditional approach might make us short-sighted and does not allow us to detect and highlight potential problems in the adopted strategy, as well as potential solutions to such problems. A clear and shared vision of what is needed to create Value, and of the levers that can be used in order to do it, might certainly help both the Management and the investors. But first...

- Do we really know what influences the companies’ ability to create Value and generate Wealth? -

In order to generate Value - i.e. positive Economic Profit (EVA®) - both Quality and Quantity are important. This is exactly the reason why “small” firms can generate an enormous wealth, whilst “large” firms can destroy a lot of Value.

The importance of “Quantity” and “Quality”Quality refers to a relative measure that identifies something of a higher level compared to a given hurdle rate. Thus, from an investor point of view, a quality investment is an investment that generetes higher returns than that obtained with other equally risky investments.

In order to measure the Quality of each company in our sample we have computed the Invested Capital Return Rate (ROIC6) and compared it with what investors would expect to get in order to sustain anal-

ogous risk levels (WACC7). In a company, the Quantity of Invest-ed Capital8, able to ensure returns higher than its Opportunity Cost, is the second lever needed to create Value. Being a growth driver, the more Capital will be employed with a high return rate, the higher the wealth created will be.

Figure 12 shows graphically and on aggregate the determinants of the Healthcare & Pharma 2014 performance. It is thus evident that an increasing Quantity has been paired with a slightly decreasing Quality (-2%). Nonetheless, a positive contribution to Value Cre-ation comes from the WACC reduction. As a result, compared to 2013, the aggregate performance is slightly better (41,50 Bn in 2013 vs 41,62 Bn in 2014).

The ability of generating Value

depends on the Quantity of Capital yielding more than its opportunity cost Quality)

Figure 12. EVA performance determinants 13-14, values in € Mln

6ROIC = Return on Invested Capital; 7WACC = Weighted Average Cost of Capital; 8IC = Invested Capital (Sum of Debt and Equity accounting values)

13

29%27%

5,8% 5,2%

181.591& 192.555&

1%#

6%#

11%#

16%#

21%#

26%#

31%#

0200400600800

1.0001.2001.4001.6001.8002.000

2013 2014

CIROICWACC

14

The managerial leverage to create Value Quantity and Quality are certainly the unique pillars sustaining Value creation, but at the same time, there are multiple levers to be used by the management in order to influence these pillars.

Quality might be pursued through:

• An Economical Efficiency improvement. This occurs when an equal level of Invested Capital is associated with higher returns (Positive ∆ ROIC);

• A contractual/market conditions improvement (Negative ∆ Wacc) referred to the company’s In-vested Capital source of financing.

Quantity might be pursued through:

• An Invested Capital growth (∆ Growth). Or rather, how much new Capital has been allocated with an equal Quality performance;

• A better Capital Efficiency. i.e. the amount of new Capital allocated with an higher Quality perfor-mance.

Figure 13 graphically represents the contribution of each managerial lever to the Healthcare & Pharma sector ∆ performance (2014 vs 2013).

The first clear insight is that the improvement of the EVA® perfor-mance is mainly due to the wide gap between the ROIC and the WACC, which enlarges the effect of an increase in Invested Capital. This implies a positive effect of the ∆ Growth over the ∆ EVA® (2.506 €Mln). Moreover, the WACC reduction (favoured by the Quantitative Easing), leading to a consitently positive ∆ WACC (1.143 €Mln), contributes to the ∆ EVA. On the other hand, a lower Economical efficiency has mitigated the former positive effects. This is due to the fact that profitability and capital have moved in opposite directions (NOPAT -0,75%, Invested Capital +6,0%). Fi-nally, the new investments characterized by a lower ROIC imply a modest reduction in Capital Efficiency.

Figure 13. ∆ EVA 13-14 Managerial Levers (Values in €Mln)

Figure 14. ∆ EVA 13-14 Components (Values in €Mln)

The Invested Capital

growth has driven the

2014 performance improvement

1.143

2.506

-3.333 -201

115

∆ WACC ∆ Growth ∆ Eco. Efficiency

∆ Cap. Efficiency

∆ EVA

-1.778

-1.388

-809 304

115

∆ NOPBT ∆ Taxes ∆ W.C. Cost

∆ F.A. Cost ∆ EVA

Figure 16. P&B 2014 performance

Figure 14 highlights the influence of Taxes reduction (mostly due to lower aggregate Operating Profits) over the ∆EVA®, as well as, once again, the impact of lower WACC rates (favoured by the Quantitative Easing), which contributed to lower capital charges on the Working Capital.

Structural differences among the Healthcare & Pharma sub-sectorsA more detailed anaysis of the sample performance can be provided by identifying whether there exist some structural differences among the two Healthcare & Pharma sub-sectors analyzed:

Medical Equipment & SuppliesThe “traditional approach” correctly underlined the high profit-ability of this sub-sector. Indeed, its aggregate operating costs are equal to 77%.Consequently, the 2014 positive EVA® performance is not surpris-ing (EVA/Sales = 9,5%). Such a result is even better if compared with the Invested Capital (EVA/IC = 19,5%), which indeed has a low incidence on Sales (IC/Sales = 0,49 vs Healthcare & Pharma average = 0,57). Among the companies of this sub-sector we point out:

• COLOPLAST A/S: in line with the evidences emerged through the adoption of the traditional approach, the Danish company results, in light of an EVA® view, are excellent (EVA/Sales = 22% and EVA/IC = 86%).

• DIASORIN S.P.A.: the company has obtained very good results, confirming the evidences arising from the tradi-tional analysis - EVA/Sales equal to 17,8% (second highest in its sub-sector) and EVA/IC equal to 31,7%.

• AMPLIFON S.P.A.: in line with the traditional analysis, the EVA® view highlights a not particularly noticeable perfor-mance in terms of EVA/Sales (7,3%), even though comparing such a result with the level of Invested Capital some positive evidences arise (EVA/IC equal to 43,3%).

Pharmaceuticals & BiotechnologyThe Pharmaceuticals & Biotechnology higher profitability, compared to Medical Equipment & Sup-plies, highlighted by the “traditional approach” is once again confirmed. Operating costs account for the 73% of sales and therefore the performances in terms of EVA®, though worst than 2013, are very good (EVA/Sales equal to 13,9% and EVA/IC equal to 21,5%).

Already pointed out by the traditional analysis, the excellent performance of ALMIRALL SA, is particu-larly evident under an EVA® View. Its EVA/Sales ratio is indeed the highest of the whole sample (36,6%) and the ratio between EVA and Invested Capital is impressive (91,1%).

The Italian RECORDATI S.P.A., in light of the EVA® approach, record an even better performance, with respect to what previously pointed out by the “traditional approach”. Indeed, its EVA/Sales ratio is excellent (16,61%), with an EVA/IC considerably above average (32,4%).

15

100%

9,5% -77%

-5% -1% -6%

Sales Op. Cost Taxes W.C. Cost F.A. Cost EVA

Medical Equipment & Supplies

100%

13,9%

-73% -4% -1% -7%

Sales Op. Cost Taxes W.C. Cost F.A. Cost EVA

Pharma &

Biotech

Figure 15. ME&S 2014 performance

Champions and “Falling” AngelsSince the performances of the single companies are not necessarily reflected by those of the sector and of the sub-sectors, Figure 19, through a simplified view of such performances (EVA, ∆ EVA and ∆ Sales), aims at providing some tips for their systemic categorization:

• Champion: growing and unexceptionable performance. Both in terms of sales growth and under an EVA® view;

• Focusing: slower growth but better and more focused Value creation performance;

• “Falling” Angel: companies, which have once been champions, but are now facing decreasing performances;

• Need for Rebirth: now declining or affected by heavy difficulties. They are witnessing a complete and generalized Value destruction;

• What after Growth?: companies only or mainly growth oriented. It is necessary to verify or redefine their goals;

• Need for control: companies featuring a temporary downturn.

Value created and Market AppreciationCapital Markets perform the important role of quantifying, daily and dynamically, the Value created by companies.

Consequently, through the analysis of share prices, it is possible to measure the differential between the value recognized to the company’s Invested Capital by the market (EV) and the ac-counting value of such capital (IC). This differential reflects a company’s market appreciation higher (or lower) than the capital actually invested in such a company.

Figure 18 graphically explains that the MVA appreciation is pos-itively related to the EVA® performance Value: indeed the MVA is equal to the present value of all the future expected Economic Value Added (EVA®).

Figure 18. MVA and EVA: an overall view

Figure 17. MVA and Invested Capital 13 - 14 (Values in € Mln)

16

1.016.2091.185.715

172.784 182.317

843.425

1.003.398

2013 2014

MVA

IC

EV

Lower Appreciationvs the H&P sector

Higher Appreciationvs the H&P sector

!1,0%x%

1,0%x%

3,0%x%

5,0%x%

7,0%x%

9,0%x%

-10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40%

MVA

/Invested,Ca

pital,

EVA/Invested,Capital,

Figure 19. Historical Performance: EVA® view

9 Legend to the table in Figure 19:Champion ! ! !Focusing ! ! "Falling angel ! " "

Need for rebirth ! ! !What after growth? ! ! "Need for control " ! "

17


ME&

S

EVA (+/-)

Δ EVA (+/-)

Δ SALES (+/-) Status

8,77% ! ! ! Champion7,47% ! " ! Need for control

10,79% ! " ! Need for control25,05% ! ! ! Champion16,95% ! ! ! Champion

9,74% ! ! ! Champion11,86% ! " ! Need for control4,34% ! " ! Need for control

15,43% ! ! ! Champion9,92% ! ! ! Champion9,45% ! " ! Need for control

17,80% ! ! ! Champion5,95% ! ! ! Champion

5,33% ! " ! Need for control7,29% ! ! ! Champion2,23% ! " ! Need for control

Performance AnalysisEVA /SALES


PH&

BT

9,11% ! ! " Focusing21,34% ! " ! Need for control10,80% ! ! ! Champion

6,96% ! ! ! Champion27,09% ! ! ! Champion19,54% ! " " Falling angel13,22% ! " " Falling angel29,71% ! ! ! Champion29,39% ! ! ! Champion

9,67% ! " ! Need for control8,25% ! ! " Focusing

17,42% ! ! ! Champion14,77% ! ! ! Champion

4,01% ! ! ! Champion17,37% ! ! ! Champion18,09% ! ! ! Champion10,18% ! " ! Need for control

5,27% ! ! ! Champion13,05% ! ! ! Champion36,32% ! ! ! Champion18,51% ! ! ! Champion

-19,27% " " ! What after growth?4,14% ! ! ! Champion

16,61% ! ! ! Champion-0,87% " " " Need for rebirth11,91% ! " ! Need for control36,62% ! ! ! Champion

-24,51% " " ! What after growth?-58,02% " " ! What after growth?15,83% ! ! ! Champion

6,63% ! ! ! Champion12,52% ! ! " Focusing

-16,27% " " " Need for rebirth-0,47% " " ! What after growth?

18

Historical Performance:People-Based view

One of the most important features of the EVA® approach is the ability to provide alternative interpre-tations of a company’s management performances and to link the Value created by such company with its determinants.

Therefore, by applying a simple algebraic decomposition to the traditional formulation of this metric10, we can obtain an EVA® People-Based computed as the difference between the Human Resources Productivity and their Average Cost (Quality), multiplied by the number of Internal Resources (Quan-tity).

Stating it in another way, we can determine the Economic Profit using “People” rather than “Cap-ital”, thus identifying, under a People-Driven perspective, the different (and maybe more important) levers through which the company’s Value might be enhanced.

Value performance from a People-Driven perspectiveAs it is true that a company, in order to generate Value, needs its Capital to be:

• Profitable;

• Adequately remunerated with respect to its Opportunity Cost.

From a People-Driven perspective, a company in order to generate Value needs its Internal Resources to be:

• Productive;

• Adequately remunerated for the activities they carry out;

• Properly managed and displaced within the Structure.

As a matter of fact, people represent a competence and specificity “Capital” that should be made as much profitable as possible and that should implement a company’s ability to create Value.

The Healthcare & Pharma sector analysisFigure 20 shows that the People-Based view might be applied to both the two sub-sectors, being the extent of personnel cost considerable for each of them.

Figure 21 provides, for each company, a detailed view of the determinants of the People-Driven performance. Moreover it cor-relates such performances with those of the relative sub-sectors (Columns 2, 4 and 6). Thus, it highlights that, among the sub-sec-tors and the companies, not only the resources productivity is disomogeneous, but also their cost.

We can refer to Capital as the

Human Capital. This implies the identification of new levers to

exploit in order to enhance Value

Figure 20. Composition of Operating Costs

10 “Traditional” Economic Profit = (ROIC - WACC) * Invested Capital;“People-Based” Economic Profit = (Res. Productivity - Average Labour Cost) * N°Res.To get the People-Based Economic Profit we should algebraically decompose its “Traditional” formulation. The first step consists in the identification of the Sales per employee, net of Cost (Including Amortization, Taxes and Capital Charge deployed to cover Financing and Capital Costs). Therefore we obtain a measure of the Productivity per employee, from which, substracting the Average Labour Costs and multiplying by the number of Internal Resources, we obtain the People-Based Economic Profit.

0% 20% 40% 60% 80% 100%


Pharmaceuticals & Biotechnology

TOT 14

Other Opera)ng Costs Capital Cost Personnel Cost


ME&

S

216.275 51 0,9 x 42 0,9 x 9 0,8 x58.032 37 0,7 x 30 0,7 x 7 0,6 x13.468 107 1,9 x 79 1,8 x 28 2,3 x

9.071 96 1,7 x 50 1,1 x 46 3,8 x9.529 87 1,5 x 58 1,3 x 29 2,4 x

15.747 77 1,4 x 59 1,3 x 18 1,5 x10.175 57 1,0 x 43 1,0 x 15 1,2 x

7.890 77 1,4 x 68 1,5 x 9 0,8 x2.387 137 2,4 x 99 2,2 x 38 3,1 x3.666 75 1,3 x 56 1,3 x 18 1,5 x5.075 80 1,4 x 62 1,4 x 18 1,5 x1.620 121 2,1 x 72 1,6 x 49 4,0 x2.970 95 1,7 x 77 1,7 x 18 1,5 x

11.096 43 0,8 x 37 0,8 x 6 0,5 x5.606 60 1,1 x 49 1,1 x 12 1,0 x3.911 78 1,4 x 74 1,7 x 4 0,4 x

57 45 12

Employees Productivity per employee

Cost per employee

EVA per employee


PH&

BT

133.413 122 0,9 x 94 1,1 x 28 0,6 x88.509 205 1,5 x 111 1,3 x 94 2,1 x

113.496 109 0,8 x 76 0,9 x 32 0,7 x118.888 108 0,8 x 83 1,0 x 25 0,5 x40.957 164 1,2 x 85 1,0 x 79 1,7 x98.702 151 1,1 x 95 1,1 x 56 1,2 x57.500 128 1,0 x 82 0,9 x 45 1,0 x

5.016 486 3,7 x 200 2,3 x 286 6,3 x2.400 235 1,8 x 38 0,4 x 197 4,4 x

39.639 108 0,8 x 80 0,9 x 28 0,6 x8.684 154 1,2 x 122 1,4 x 32 0,7 x

13.993 99 0,7 x 57 0,7 x 42 0,9 x6.454 88 0,7 x 50 0,6 x 38 0,8 x9.809 95 0,7 x 83 1,0 x 12 0,3 x2.510 126 0,9 x 73 0,8 x 52 1,2 x7.139 65 0,5 x 36 0,4 x 28 0,6 x4.339 94 0,7 x 70 0,8 x 24 0,5 x3.482 104 0,8 x 79 0,9 x 26 0,6 x4.531 130 1,0 x 92 1,1 x 38 0,8 x

173 274 2,1 x 35 0,4 x 240 5,3 x3.450 118 0,9 x 64 0,7 x 54 1,2 x

589 43 0,3 x 136 1,6 x 94- -2,1 x776 121 0,9 x 102 1,2 x 19 0,4 x

3.923 101 0,8 x 59 0,7 x 42 0,9 x5.811 91 0,7 x 94 1,1 x 3- -0,1 x3.775 118 0,9 x 81 0,9 x 37 0,8 x2.920 264 2,0 x 88 1,0 x 177 3,9 x

178 8 0,1 x 118 1,4 x 110- -2,4 x265 1 0,0 x 83 1,0 x 82- -1,8 x

10.363 61 0,5 x 29 0,3 x 32 0,7 x4.478 59 0,4 x 47 0,5 x 11 0,3 x3.681 86 0,6 x 65 0,7 x 21 0,5 x

329 63 0,5 x 94 1,1 x 32- -0,7 x2.158 63 0,5 x 64 0,7 x 1- 0,0 x

132 87 45

Figure 21. Historical Performance: People-Based view (Data Reuters Thomson One, values in €/000) 19


Pharmaceuticals & Biotechnology

20

Market Point of View: sustaining performance over time

Creating wealth and value through a “Quality” and “Quantity” improvement is one of the core aspects of “doing business”; nevertheless ensuring the business Sustainability over time is certainly not less important.

Therefore, analyzing the current performances is a very good starting point, but equally important is to understand the market expectations about the future performances of the company:

- Is it likely that a positive EVA® performance will repeat in the future? -

- Does the market believe in a possible turnaround for negative EVA® performances? -

The Market and share prices implicit expectationsThe Capital Market has the important role of quantifying, through the daily quotations, the expectations of multiple investors and operators about the future performances of a given company. Therefore, the analysis of share prices provides valuable indications about the sustainability of the current perfor-mance.

As a matter of fact, the company’s market appreciation (Market Value Added) is a measure of the Value Created and can be seen as the sum of all the future expected (by the Market) EVA® perfor-mances. The MVA could be decomposed into:

• EVA® Perpetuity

It represents the portion of MVA explained considering the hypothesis that the last performance (2013) will remain constant in the future. Adding such a component to the Invested Capital we can obtain a proxy of the Current Value of the company (COV11).

• Future Growth Value

Computed by difference, it represents the portion of MVA expressing the value of performance im-provements/downgrades expected by the market, with respect to recent results obtained.

EV 1.185 Bn

COV928 Bn

Net IC182 Bn

Net IC182 Bn

MVA1.003 Bn EP

746 Bn

∆EVAFGV257 Bn

Figure 22. EVA Methodology: an overall view12

11COV = Current Operation Value12AVA reworking on Data Reuters Thomson One. Market data at May 2015

Companies’s goal is to generate

Value, but it has to be sustainable over

time

21

The May 2015 FGV positive value (for the Healthcare & Pharma sector as a whole) implied an aggre-gate EVA® performance expected improvement. Such a result is reflected, though to different ex-tents, by both the sub-sectors. As a matter of fact, they have both generated positive expectations. However these expectations are more evident for Pharmaceuticals & Biotechnology (Positive FGV, FGV/IC = 1,5x), while more ”neutral” for Medical Equipment & Supplies (Positive FGV, FGV/IC = 0,1x).

Significant differences could instead be observed among the single companies composing the sample. Generally, optimistic expectations are associated with poor current perfomances, whilst pessimistic ex-pectations are associated with particularly positive performances. Nonetheless, we can observe excep-tions to this rule of thumb.

In order to capture the extent of each company’s FGV in a more prag-matic and precise way, the table in figure 23 reports the current share prices and the following measures:

• BV13: the price component explained by the Tangible Book Value;

• MVA: the price component explained by the Market Value Added.

Then:

• BV + EP: the price component explained by the sum of the Tangible Book Value and the last EVA® performance hypothesized as remain-ing constant over time (EVA® Perpetuity);

• FGV: the price component explained by the Market Expectations about the future improvements/downgrades of the last performance (Future Growth Value).

The table is easy to interpret and answers the question:

- What affects the share prices? Is it the acquired performances or the prospective ones? -

Implicit ROIC and Goodwill sustainabilityThe Market associates current performance improvements, reached through “Quantity” (Growth) or “Quality” (Efficiency), to positive expectations (FGV > 0). And viceversa for negative expectations.

Linking such expectations to the second component (Quality) it has been possible to compute a ROIC adjusted_Expected Performance, which incorporates the implicit expectations in the current stock market prices. For a considerable portion of the analyzed companies, such a value is lower than the return obtained during the last year. This is a clue about the pessimism of the Market.

Performance sustainability is eventually related to intangibles: the goodwill indeed captures incremen-tal performance expectations, which, whether not achieved imply a written off of the latter.

If we hypothesize to exploit only the Quality component (and not Quantity), the use of a ROIC adjusted_Minimum Performance, reflecting the minimum level to be reached so that the goodwill value is adequate, allows us to understand the market believes about its sustainability. The ROIC thus obtained, whether higher than the one expressed by market expectations, indicates a too optimistic judgement of the “expectations” reported in the financial statements. The table in figure 23 reports a judgment about goodwill sustainability ( / ). Whether this judgment happens to be negative, the Board should think about starting an impairment process.

13Computed net of Goodwill (Reason why some of the Book Values obtained are negative)

Markets associate current performance

improvements to positive

expectations

22

Figure 23. Share Prices, Expectations and Performance Sustainability (Data Reuters Thomson One, values in € Mln)14

14AVA reworking on Data Reuters Thomson One. Market data at May 2015

Price

13 May BV (price) MVA (price) BV+EP (price) FGV (price) 2014 Expected 2014FRESENIUS SE € 54,04 -€ 24,35 € 78,39 € 109,21 -€ 55,17 22,7% 14,8% 19.868 !

ESSILOR INTERNATIONAL S.A. € 107,40 € 1,18 € 106,22 € 41,08 € 66,32 24,0% 54,3% 4.699 !!!

SMITH & NEPHEW PLC € 15,60 € 1,90 € 13,70 € 8,52 € 7,08 19,3% 33,0% 1.660 !!

COLOPLAST A/S € 68,81 € 3,65 € 65,17 € 42,54 € 26,28 91,7% 150,1% 104 !!!

SONOVA LTD € 126,14 € 10,00 € 116,15 € 82,00 € 44,14 91,1% 142,9% 879 !!!

GETINGE AB € 22,16 -€ 1,83 € 23,99 € 32,99 -€ 10,82 21,1% 15,8% 2.299 !

WILLIAM DEMANT A/S € 74,32 € 5,11 € 69,22 € 75,04 -€ 0,72 27,6% 27,3% 515 !!

BIOMERIEUX SA € 95,40 € 26,60 € 68,80 € 68,02 € 27,38 11,2% 15,2% 438 !

STRAUMANN LTD € 242,88 € 34,00 € 208,87 € 150,00 € 92,87 43,5% 73,7% 157 !!!

SARTORIUS STEDIM € 226,80 € 19,96 € 206,84 € 141,46 € 85,34 26,9% 42,2% 314 !!

GN STORE NORD A/S € 18,94 € 2,11 € 16,82 € 15,31 € 3,62 21,8% 26,5% 439 !!

DIASORIN SPA € 41,83 € 9,59 € 32,24 € 58,70 -€ 16,87 35,4% 24,5% 68 !!

CARL ZEISS MEDITEC € 22,64 € 6,73 € 15,91 € 19,56 € 3,08 14,0% 16,1% 159 !

GERRESHEIMER AG € 51,41 € 3,15 € 48,26 € 47,68 € 3,73 18,0% 19,0% 458 !

AMPLIFON SPA € 7,23 -€ 0,63 € 7,86 € 8,43 -€ 1,20 48,1% 42,4% 535 !!

SORIN SPA € 2,60 € 1,27 € 1,33 € 2,82 -€ 0,22 6,0% 5,6% 196 !

ME&

S

Mkt. Appreciation Mkt. Expectation ROIC Goodwill

NOVARTIS € 91,25 € 16,80 € 74,45 € 45,96 € 45,28 15,7% 30,3% 24.572 !

ROCHE LTD € 257,28 € 9,21 € 248,07 € 194,92 € 62,36 47,9% 61,9% 9.460 !!!

SANOFI S.A. € 88,09 € 15,02 € 73,07 € 74,10 € 13,99 20,7% 24,3% 39.222 !

BAYER AG € 128,40 € 5,41 € 122,99 € 76,63 € 51,77 18,7% 28,2% 16.168 !!

NOVO NORDISK A/S € 49,71 € 2,97 € 46,75 € 26,09 € 23,62 103,4% 201,2% n.a.GLAXOSMITHKLINE € 20,23 € 0,16 € 20,07 € 26,37 -€ 6,14 33,3% 26,7% 4.758 !!

ASTRAZENECA PLC € 61,37 € 5,31 € 56,05 € 49,85 € 11,51 32,6% 39,7% 9.735 !!

SHIRE PLC € 72,45 € 10,84 € 61,61 € 59,98 € 12,46 48,3% 59,0% 1.916 !!!

ACTELION AG € 123,17 € 16,72 € 106,45 € 101,69 € 21,48 76,3% 94,0% 111 !!!

MERCK KGAA € 99,56 € 17,66 € 81,90 € 75,47 € 24,09 24,0% 31,7% 5.694 !!

UCB SA € 61,54 -€ 0,89 € 62,43 € 24,81 € 36,73 23,4% 48,9% 4.882 !!

GRIFOLS SA € 36,51 -€ 1,67 € 38,18 € 31,99 € 4,52 27,3% 30,2% 3.175 !

NOVOZYMES A/S € 41,80 € 5,30 € 36,50 € 22,50 € 19,29 25,1% 47,0% 150 !!!

LONZA GROUP AG € 124,32 € 21,15 € 103,17 € 70,23 € 54,09 11,1% 16,4% 945 !

CHR HANSEN € 42,78 € 0,50 € 42,28 € 30,81 € 11,97 33,6% 45,1% 610 !!!

HIKMA PHARMACEUTICAL € 28,47 € 4,09 € 24,38 € 23,02 € 5,45 27,1% 33,2% 258 !!

QIAGEN N.V. € 21,63 € 3,07 € 18,56 € 15,20 € 6,43 13,5% 18,5% 1.553 !

MEDA AB € 13,91 -€ 1,58 € 15,49 € 3,73 € 10,19 9,4% 17,1% 2.669 !

IPSEN SA € 50,85 € 10,54 € 40,31 € 71,59 -€ 20,74 34,6% 24,3% 334 !!

GENMAB A/S € 75,33 € 7,46 € 67,87 € 25,34 € 49,99 -42,8% -180,2% n.a.ORION OYJ € 29,42 € 4,07 € 25,35 € 32,70 -€ 3,28 44,8% 40,3% 14 !!!

SWEDISH ORPHAN € 15,05 € 2,11 € 12,94 -€ 3,01 € 18,06 -8,8% 47,8% 164 !!

BTG PLC € 10,57 € 2,19 € 8,38 € 3,27 € 7,30 9,0% 30,7% 158 !!

RECORDATI SPA € 18,61 € 2,30 € 16,31 € 37,62 -€ 19,01 35,7% 18,2% 463 !!

H. LUNDBECK A/S € 18,68 € 7,32 € 11,36 € 4,89 € 13,79 2,5% 9,7% 548 !

ELEKTA PUBL AB € 6,34 € 0,31 € 6,03 € 5,18 € 1,16 39,6% 47,8% 479 !!!

ALMIRALL SA € 16,85 € 7,09 € 9,76 € 87,07 -€ 70,22 95,6% 15,7% 339 !

COSMO PHARMA € 156,50 € 13,83 € 142,67 -€ 16,09 € 172,59 -12,9% 95,7% 0 !!!

GW PHARMACEUTICALS € 8,29 € 1,23 € 7,06 -€ 1,44 € 9,73 188,9% -480,9% 7 "

STADA ARZNEIMITTEL € 32,35 € 8,26 € 24,09 € 174,32 -€ 141,97 23,3% 6,9% 446 !

VIRBAC € 221,45 € 35,88 € 185,57 € 195,60 € 25,85 15,4% 17,1% 142 !

BOIRON SA € 95,04 € 21,34 € 73,70 € 129,50 -€ 34,46 59,3% 42,0% 88 !!!

MORPHOSYS AG € 64,67 € 11,08 € 53,59 € 4,18 € 60,49 -0,4% 46,1% 7 !!!

BIOTEST AG € 72,61 € 26,14 € 46,47 € 22,20 € 50,41 3,5% 9,9% 34 !

PH&

BT

We have computed the value creation performance using the Tangible Invested Capital. What does this mean? It means that we have subtracted, to each company’s Invested Capital, the Goodwill reported in its balance sheet. Why substracting Goodwill? The Goodwill reported in the balance sheet represents the val-ue of growth/performance/synergies expectations arising from M&A operations. Such extraordinary operations might differ from one company to the other. Therefore the Goodwill value could be extremely different among our sample companies, in-fluencing the computation of their value creation performances. Substracting the Goodwill to the Invested Capital we have ob-tained comparable values and an homogeneous sample. Does this mean that we don’t consider firm’s expectations of performance improvement or decline? Not actually. Each company’s Market Value Added (MVA) contains performance expectations already included in stock prices. As a matter of fact, such a model provides that the value created by the company is a function of the expected managerial results expressed in terms of EVA. The higher the expected results, the higher the company’s value.Therefore, through this model we can understand the extent to which a company’s stock prices are influenced by its obtained results and by market expectations about possible improvements of the latter.

23

The Future Growth Value (FGV) corresponds to the actualized value of the EVA improvements (or worsening) that the market expects will occur in the future. Therefore it is possible to quantify the performance improvements that the management should real-ize so that the company, with its operations, can reflect the value assigned to it by the market.The following graphs report data referred to the companies which were included in the research sample of the comparable 2013 Healthcare & Pharma research and are still part of the sample in the actual 2015 research.

FOCUS ON TANGIBLE BOOK VALUE

!100$

0$

100$

200$

300$

400$

500$

600$

700$

!5000$ 0$ 5000$ 10000$ 15000$ 20000$

∆ EV

A

FGV 2013

Figure 24. ∆ EVA (2014 - 2012) and FGV (2012)

As FGV grows, the ∆EVA increases +

- -+

∆ EVAFGV

As FGV decreases, the ∆EVA decreases

MVA includes all the expectations

about a company’s future

performance

FOCUS ON ∆EVA, FUTURE GROWTH VALUE (FGV) AND STOCK PRICES

24

As we can see, there exists a direct correlation between the FGV and the variation of the EVA® perfor-mances from one year to others (∆). This implies that, in order to sustain current share prices, to high FGVs must be associated positive ∆EVA, otherwise such current prices are exposed to the risk of a downward trend.

What happens to the stock price of a company recording a high FGV?

Figure 25 shows the positioning of the sample companies in a bi-dimensional graph: on the vertical axis it is reported the com-panies’ stock market trend from June 2013 to May 2015; on the horizontal axis it is reported the FGV/Market Cap ratio. The different companies are displaced along the downward slop-ing trend line. The graph suggests that, for a company having high FGV expecta-tions it is difficult to register increasing share prices, unless it will be able to further increase its EVA performance.This is due to the higher expectations the market has on companies with high FGVs, and therefore to the difficulty that such companies face in further improving their performances.

What does this mean for companies?

It means that they have to confront with ∆EVA which are implicit in the current FGV expectations, and thus they have to provide incentives to the management in order to obtain an even better EVA performance and beat the expectations. Through appropriate technicalities, these implied in stock prices expectations can be declined in achievable management objectives*. Should this happen, the prices could further increase.In our case it means that the equities, which implicit performance growth expectations where very high two years ago (FGV>0), have witnessed decreasing share prices: the market, during the last two years, has revised its estimates about the companies’ possibility of realizing the EVA® improvement already discounted in share prices.

!30%%

!20%%

!10%%

0%%

10%%

20%%

30%%

40%%

50%%

60%%

70%%

!100%% !50%% 0%% 50%% 100%% 150%%

∆ Pr

ice

FGV/MRKT CAP

Figure 25. ∆ price (2015 May 13 - 2013 June 28) and FGV (2012) / MRKT CAP (2013 June 28)

As FGV grows, stock market performance becomes worst +

--+

∆ Stock PriceFGV

As FGV decreases, stock market performance improves

FGV is related to both future

prices’ variation and future

performances’ variation

*See “Hot Topics” (p.32)

Management can invert this trend overtaking the Market Expectations

!6,0%x%

!4,0%x%

!2,0%x%

0,0%x%

2,0%x%

4,0%x%

6,0%x%

8,0%x%

10,0%x%

-10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

FGV/

Invested

,Cap

ital,

EVA/Invested,Capital,

The Market and its challengesAnalysing the implicit expectations embedded in share prices is extremely important in order to understand whether the companies’ strategies are appreciated by the market and whether such strategies provide the right answers to expectations. Creating a matrix with two axis (EVA/IC and FGV/IC) we can identify 4 different clusters, characterized by different expected performances and challenges (Figure 26).

Communication Challenges

Companies having good or excellent performances and negative FGV values. The market is pessimistic and con-siders their current performances unsustainable.

Development Challenges

Companies having poor or negative performances and positive FGV values. The market is optimistic and believes in a possible turnaround.

Lost Causes

Companies having negative performances and negative FGV values. In the sample considered none of the compa-nies can be classified in such cluster.

Excellences

Companies having good performances and positive FGV values. They represents the “gems” of the sector. The mar-ket considers their current performance sustainable, since these companies are maintaining a long lasting leadership position.

Figure 26. FGV and EVA: an overall view


Lost Causes

CommunicationChallenges

Excellences

“Reading” Stock Prices may help the

management in understanding and

quantifying the challenges of the

market

Figure 27. Companies in the clusters

Excellences


Communication Challenges

25

EVA/IC FGV/ICALMIRALL SA 91% -17,5 xRECORDATI SPA 32% -5,3 xDIASORIN SPA 32% -2,9 x

EVA/IC FGV/ICSWEDISH ORPHAN !16% 7,8 xMORPHOSYS AG !5% 9,5 xH. LUNDBECK A/S !1% 2,0 x

EVA/IC FGV/ICNOVO NORDISK A/S 96% 12,8 xCOLOPLAST A/S 86% 11,0 xSONOVA LTD 84% 7,8 x

26

Our ‘Hot Topics’

Revenue ManagementA wide range of opportunities to increase Value

The economic environment has profoundly changed over the past few years and the on-going structural shifts are shaping a competitive landscape in which it is becoming increasingly difficult to maintain satisfactory profit margins. This is because Companies face important decisions regarding what to sell, when to sell, to whom to sell, and for how much.Why don’t you manage data-driven tactics and strategy to an-swer these questions in order to increase Revenues? The primary aim of Revenue Management is selling the right prod-uct to the right customer at the right time for the right price and with the right pack. The essence of this discipline is in understanding Customers’ per-ception of product Value and accurately aligning product Prices, Placement and availability with each Customer Segment. Revenue Management absorbs a wide range of opportunities to in-crease revenue. A company can utilize different categories like a series of levers but principally one may drive profits in a given direction.

Pricing is the most important Revenue Management leverThis category of Revenue Management involves redefining pricing strategy and developing disciplined pricing tactics. The key objective of a pricing strategy is anticipating the value created for customers and then setting specific prices to capture that value. A structured approach to the utilization of the Price factor favours the optimization of the offer without affecting the long-term growth potential.

Revenue Management

includes a wide range of

opportunities to increase Revenue

and Profit

REVENUE

FIXED COSTS

VARIABLE COSTS

EBIT

100

66

26

89

+ 1% Price = + 12% ProfitWhat is important to define correct

Prices? Knowing the

Willingness to Pay for each

Customer Segment

27

Towards the Pricing ExcellenceValue Pricing means a structured approach in the Price lever management as element of balance be-tween Shareholder Value and Customer Value. This means at the same time: 1) Ensure that Sharehold-ers obtain an adequate Return on Invested Capital, maximizing the profitability of enterprises in the long run; 2) Meet the expectations of Customers, in differential terms compared to the competition, about how much they should pay for the value they get. The Value Pricing also needs to be an expression of the Value Perceived by Customers for different categories of Products or Services. The Value Perceived by Customers changes for different customer segments, but also for customer segments that live in different Countries. For this reason, same types of Goods/Services can differently cost in different Markets or Countries.The path towards the Pricing Excellence is a process that requires the involvement of different business departments and the transformation of important internal governance mechanisms.

Pricing & Economic Value to the Customer More and more Companies stop selling products to selling solutions instead.It’s a way to maximize the willingness to pay of Customers by offering an answer to their needs. It’s a way to enhance their differentiation from competitors.To do this it’s important to understand how each Product/Service impacts on the overall economy of each Customer Segment. The Economic Value to the Customer framework helps to gain maximum price for your products and hence not leave money on the table. According to this the Total Economic Value of your Product/Service is equal to the sum of competitive Reference Value (competitors price) plus Positive Differentiation Value minus the Negative Differentiation Value.

VALUE PRICING STRATEGIES AND MODELSactivevalue.eu

RATE YOUR PRICING EXCELLENCE!

!

INEFFECTIVE

CONTROLLED

VALUE BASED

OPTIMIZATION

EXCELLENCE

30% of Companies

35%-40% of Companies

20% of Companies

<10% of Companies

POOR GOVERNANCE OF PRICING

PRICE CONTROL

VALUE BASED PRICES

STREAMLINING

TOTALECONOMIC VALUE

POSITIVE DIFFERENTIATION VALUE

COMPETITIVE REFERENCE VALUE

Your unique value delivery

Price of next best competitive alternative

NEGATIVE DIFFERENTIATION VALUE

Unique costs related to Company

28

It’s time to Manage Change and run effective Organizations

Organizations must learn and adapt at an ever-increasing pace. Technological change, shrinking product life cycles, increasing customer expectations, and the never-ending search for efficiency all demand that executives respond not only by constantly revisiting product and service offerings, but also by realigning strategy, structure, and processes. We have all been inundated with volumes written on ways to manage change through leadership, partici-pation, and organizational alignment. Yet while the flood tide of advice grows, success in implementing change does not appear to be improved. It’s said that although 90% of companies surveyed had undertaken significant organizational change with-in the previous two years, only 5% had avoided substantial disruptions and finished on time. Such delays can prove costly for firms engaged in major strategic initiatives. Corporate restructurings - a trend that has intensified recently - have often under-performed due to the substantial but often hidden costs of transition. Similarly, Mergers and Acquisitions often fail to deliver the expected financial results precisely because it is difficult to integrate different cultures in a timely manner.Managing change is so difficult because organizations resist change initiatives.Unfortunately, there is a vast difference between knowing that resistance might occur and understand-ing where and why it will emerge. Resistance is so difficult to diagnose and confront because it usually emanates from the two sources, an organization’s culture and its informal structure, which are most difficult to see. These forces influence the success of change initiatives in a dramat-ic, but invisible ways. Fortunately, informal structure and organizational culture are not entirely invisible.The Organizational Network Analysis (ONA) offers way to move beyond organizational charts and to understand how people ac-tually interact in an organization. Research shows that appropriate connectivity in networks with-in organizations can have substantial impacts on performance, learning, innovation and benefits also accrue from well-connect-ed networks between organizations.Of course Network Analysis is not a new subject. This approach has enjoyed a rich research tradition within anthropology, sociology, psychology and also management studies. Consequently, a vast body of knowledge on techniques for the analysis of social networks has been ac-cumulated.

Managing Change

is so difficult because

organizations resist change

initiatives

29ORGANIZATIONAL NETWORK ANALYSISactivevalue.eu

Approaches to perform an ONA are innumerable, but not always effectiveThe analytic side of the social network subject has become so rich that one of the most widely read primers on social network analysis is more than eight hundred pages long! Yet although network analytics have advanced substantially over the past decades, the managerial appli-cations of the ideas have not kept pace. Then, several approaches have spread in practice to identify the hidden networks of relationships within the organizational structure of the company but not always they re-vealed feasibility and effectiveness. Some examples are long and complex questionnaires submitted to resources (but often difficult to interpret in an objective manner and with the right methodology of analysis) or methods of reading available e-data (such as email traffic data) with consequent problems of privacy, accuracy and completeness of information. Active Value Advisors, in partnership with DNA7, has developed a simple, fast but extremely effective methodology to deepen the Value of an organization through a network perspective.

The ONA makes visible the

connections between People and provides a complete

X-ray of the real functioning of the

organizationCarl

Pat

John

FredAlex

Bill

Sue

Steve

Lee

JuliaPeter

Sally

David

Sam

Paul

Marketing

Finance

Strategy

DNA7DNA7 is a powerful tool that allows to perform Organizational Network Analyses in an efficient, but extremely deepen way. DNA7 allows organizations to map complex networks of communication between internal resources and their informal relationships. So it will be possible to carry out a comprehensive assessment of the organization from a ‘Network Perspective’ providing at least 3 organizational views: 1. Employees, 2. Units, 3. Company as a whole.

Diagnostic AnalysisRealize a web-based analysis in order to obtain a snapshot of the organization through diagnostic indicators and different organizational views

Define scope and organizational focus

Administer a web-based survey (4-6 questions)

Read and analyze results

Provide evidences and detailed reports

Internal Network MapExtend some features of the platform to groups of resources in order to support internal processes, facilitate interaction and continuously monitor the organization

Define scope and main features

Open web-based survey to selected groups

Collect profiles and internal expertise

Launch & Training

30

Fundamentals of People-Driven businessThinking of Human Resources as a ‘Capital’

People-Driven Companies provide a unique feature: their success is driven by People who represent the main value driver and the strategic axis bearing achieved Results and corporate Profitability. In these companies the Strategic management of Human Resource focuses on specific Tools and Meth-odologies for planning, measuring and valuing the Human Capital support to the corporate Value cre-ation process. Then, the Human Resources Department plays a key role.It is a department that holds important secrets of the organization thanks to valuable information on in-ternal resources that should be emphasized to enable the HR managers to play a more pervasive role in decision making.What does this mean? Where do we have to start to meet this chal-lenge? A first step consists in translating their own set of information on inter-nal resources (skills, performance, expertise, etc.) in useful elements to communicate with Financial departments.Economic Profit, unlike many other different metrics and measurements conventionally used in management practice, can be redefined in order to highlight the following: • Internal Resource’s contribution to Enterprise Value, • On which levers should we focus in order to increase it in companies

where People represent the main driver of Profitability and Value crea-tion.

Economic Profit may, in fact, be calculated as so as to highlight the difference between the Cost of Em-ployees and their Productivity rather than the difference between Cost and Return on Invested Capital in the Enterprise. You will find out that in Capital-Intensive enterprises increased Return on Invested Capital or new eco-nomic resources investments in activities that provide higher Return against Cost of Invested Capital gen-erates a Value increase, whereas in People-Driven companies the value drivers to act on are mainly two: monitoring Resource Productivity and optimization of their Cost. It’s possible to deepen these determinants:• Productivity: one of the central element at the basis of the Productivity of Resources is how they col-

laborate and interact. This helps to be faster, more effective at work and, therefore, more productive. Precisely the Organizational Network Analysis is a methodology that can be applied within the Compa-ny to increase the Productivity of Resources. This analysis, in addition, can also give useful indications in terms of optimal organizational sizing of people.

• Cost of Personnel: analysing properly the Remuneration policies, the Organizational Roles and the Capabilities of Human Resources (information and data that almost all the Companies have, but that they don’t fully utilize) it’s possible to get at least 3 different Cost of Personnel that differently impact on the ability to create Value:

Thanks to a specific

methodology it is possible to calculate the

People-Based view Economic

Profit

31PEOPLE VALUEactivevalue.eu

‘TRADITIONAL’ ECONOMIC PROFIT

Return on Capital Employed

Cost of Capital Employed

CapitalEmployed = - x( )

‘PEOPLE-BASED’ECONOMIC PROFIT

Resource Productivity

Cost of Personnel per Resource

Number of Resources= - x( )

ORGANIZATIONAL NETWORK ANALYSIS

The collaboration and the efficiency in the interaction between Resources, especially in complex organizations, are the central elements that determine the Productivity and may represent, therefore, an opportunity to create Value.

SALARY OPTIMIZATION AND STRATEGIC MANAGEMENT OF RESOURCES

Analysing properly the Remuneration and Compensation policies, the Organizational Roles and the Capabilities of Human Resources you can get at least 3 different Cost of Personnel that differently impact on the ability to create Value.

‘PEOPLE-BASED’ECONOMIC PROFIT

Resource Productivity

Cost of Personnel per Resource

Number of Resources= - x( )

INTRINSIC COST OF PERSONNEL

IDEAL COST OF PERSONNEL

EFFECTIVE COST OF PERSONNEL

Estimating the impact of different arrangement of the Cost of

Personnel on the Value creation of the Company

• EFFECTIVE COST OF PERSONNEL: it’s obtained from Salary that Resources received annually,• IDEAL COST OF PERSONNEL: it’s obtained by evaluating the organizational Roles according to

the existing strategic Project/Design,• INTRINSIC COST OF PERSONNEL: it’s obtained by analysing people skills, expertise and com-

petencies.

The secret to determine these three cost configurations resides in grading, a dear and widely used concept in HR departments.

The grading is not only the way to strategically weigh roles and positions within Companies, but it can also be used to pool performance, skills, ability to create value.

32

Quantitative EasingA (not only financial) discontinuity that influences lots of management levers and decisions

The European Central Bank has started action aimed at stimulating the troubled Eurozone economy in the face of deflation and recession.It seems a purely financial issue. Actually, for Companies, there are many aspects and decisions to govern. But let’s go in order.

What is it about?One of the main tools Governments and central banks have to control growth is raising or lowering interest rates. Lower interest rates encourage people or companies to spend money, rather than save.But when interest rates are almost at zero, central banks need to adopt different tactics - such as pumping money directly into the economy.This process is known as quantitative easing or QE. The central bank buys assets, usually government bonds, with money it has “printed” - or created electronically.It then uses this money to buy bonds from investors such as banks or pension funds using this “new” money, which increases the amount of cash in the financial system, encouraging financial institutions to lend more to businesses and individuals. This in turn should allow them to invest and spend more, hopefully increasing growth.

What does it mean for Companies?For companies this is a management issue and there are various factors that impact and influence each managerial decision.What changes is the “value” of the Company.If interest rates fall and prices rise, the greater wealth generated moves toward riskier assets such as shares.Capitalizations of the companies grow.For companies also financing capacity, capital expenditure pol-icies and gearing decisions change.If you are a manager, are you able to define, with a good degree of reasonableness, annual (and future!) goals for your Compa-ny?Also incentive plans will be affected.

Quantitative Easing represents a discontinuity

that influences manymanagerial levers

33TARGET SETTING ‘OUTSIDE IN’activevalue.eu

WHAT RISES AND FALLS WHAT PRINCIPALLY CHANGES

PRICES

CAPITALIZATION

FINANCIAL CAPACITY

INTEREST RATES

CAPEX POLICIES

GEARING DECISIONS

VALUE CREATED

INCENTIVE PLANS

However, these are just transitory phenomena. For this reason, it’s essential for Companies to have methods and technicalities to manage and master these levers in order not to make bad or partial decisions.Through Target Setting modeling and simulation, you can tie the implicit expectations in the stock mar-ket prices to the operating results that represent the fundamental Values of the Company. Similarly, thanks to appropriate models, you can define and decline management objectives to be linked to an Incentive Plan in relation to specific Enterprise Values.Why does it make sense?• To master and model relevant managerial levers taking into ac-

count external discontinuities that could lead to partial or wrong decisions

• To assess the level of challenge of Business Plans, consist-ently with the ‘true’ Value of the Company

• To make possible innovative - and especially meritocratic - Governance Systems.

Target Setting technicalities help managers to define

management objectives linked to the ‘real’ Value of

the Company

TARGET SETTING TECNICALITIES TO DEFINE/MODELING MANAGEMENT OBJECTIVES

ENTERPRISE VALUE

CURRENT OPERATIONS VALUE

FUTURE GROWTH VALUE

BREAK DOWN OF EXPECTATIONS PER YEAR

34

Business Intelligence & Analytics

The one thing we know about data is that they will continue to grow. In the main, they change rapidly.We also know that they contain many valuable information as historical evidences, market trends, or cus-tomer preferences that can lead to more effective marketing, new revenue opportunities, better customer service, improved operational efficiency, competitive advantages and other business benefits.Since the term ‘Business Intelligence’ was coined, new technologies have greatly expanded our under-standing on how Companies can gain advantage from their data and their representation.The role of IT in business has changed radically in recent years, thanks to the boom of the available data and simply provide a technological infrastructure today is not enough to implement a strategy.In this context the term “Business Intelligence” is a concept that expresses the need to think beyond the paradigm of data analysis as isolated from business goals.In fact, with the Business Intelligence, technology and business objectives must blend into a harmonious set of operations so that the business strategy can drive the IT in providing useful information to help companies in their growth.Adapting the data providing to business needs has always been difficult, and many companies have great difficulty in assessing exactly what information is needed to achieve specific objectives. This type of business analysis requires clarity of vision and objec-tives, solid framework of reasoning.In the past, Business Intelligence projects were limited ‘by technology’ because of the inability to have deepen information and make them available. Today new technologies, such as Big Data, Analytics, Mo-bile and Cloud computing are able to acquire massive and detailed streams of data, in a relatively easy and convenient way.But having everything is equal to have nothing if we don’t know what to do and, certainly, is not just a matter of tools.Now the role of Management is to know what to look for and maxi-mize the use of data to support strategic decisions.

User friendly tools allow

management to independently

interact with a lot of data

BUSINESS INTELLIGENCE APPLICATIONS FOR COMPANIES

MEASUREMENT

ANALYTICS

REPORTING

COLLABORATION PLATFORM

For management, the real challenge is cultural.It’s necessary to convince managers to the autonomous use of technology, even those not used to work-ing with data.

35

What should raise is the level of professionalism by passing the message that the phenomena are detailed and that it’s not only important understanding how to do, but also what to do.It is a real change of cultural paradigm.

WHAT COMPANIES ARE LEAVING

DATA INFORMATION TECHNOLOGY END USERS

CUSTOMER VALUEactivevalue.eu

1. Limited data available

2. Data not always updated

3. Difficulty in producing drill down analyses

4. No uniqueness of data

5. Report made with the eye (and help!) of IT

6. Limited output, difficulty to customized

WHAT COMPANIES ARE FACING

DATA BUSINESS INTELLIGENCE APPS END USERS

1. Multitude of available data

2. Data always updated

3. Ease of analysis and disaggregation

4. Uniqueness and data centralization

5. Report directly created by End Users

6. Many customizable output

INFORMATION TECHNOLOGY OTHER DEPARTMENTS

INTERNAL

EXTERNAL

36

Active Value Advisors.

4 Competence Centres

Active Value Advisors is an independent management consulting firm that acts as a partner for Compa-nies who need to strengthen their Governance System and for those Companies who want to pursue a path of growth through solutions consistent with the objective of creating sustainable Value.The professionals of Active Value Advisors have long experience in assisting major Italian listed groups in the development of Business Plans, in the selection of actions to improve Value performance and in the assistance to the change process that the competitive dynamics and market opportunities require.In carrying out the mandates we use a common language declined in many professional services pertain-ing to various management issues: Shareholder Value, Customer Value, People Value and Corporate Value. Each centre of competences responds to a fundamental dimension of the management system: the Shareholder, the Customer, the Internal Resources, the value of the Assets. Thanks to the collaboration with accredited professionals in the area of Strategic Pricing, Active Value Advisors has enriched their skills and professional methods with innovative models and tools of Value Pricing.

SHAREHOLDER VALUE

• Family Constitution• Target Setting ‘Outside In’• Alternative Strategies• Business Unit Strategies• Performance Improvement• Value Benchmarking

PEOPLE VALUE

• Organizational Network Analysis• Action Learning for Change Management• People Audit• Roles and Responsibilities• Rewarding Systems• Incentive Mechanisms

CUSTOMER VALUE

• Customer Satisfaction Survey• Social Media Intelligence• Demand Curve Analysis and Segmentation• CRM System Development• Commercial Policies Enhancement• Value Pricing Models and Strategies

CORPORATE VALUE

• Complex Evaluations• Transaction Services• Capital Allocation• Sources of Funding Mix• Impairment of Goodwill

37

Glossary

ECONOMIC VALUE ADDED or ECONOMIC PROFIT (EVA®)Economic Value Added (EVA), is a measure that enables managers to see whether they are earning an adequate return. Where returns are lower than might reasonably be expected for investments of similar risk (i.e. they are below the cost of capital), EVA is negative, and the firm faces the flight of capital and a lower stock price. Quite simply, EVA is a measure of profit less the cost of all capital employed. It is the one measure that properly accounts for all the complex trade-offs, often between the income statement and balance sheet, involved in creating value. EVA is also the spread between a company’s return on and cost of capital, multiplied by the invested capital. According to this model - equivalent to the DCF - the Enterprise Value is equal to the Invested Capital plus the Present Value of EVA performance that Management will generate in the future (Market Value Added - MVA). Therefore the Enterprise Val-ue is related to the EVA performance. The greater the EVA expectations performance for the Company, the greater the Value of the Company.

MARKET VALUE ADDED (MVA)It’s the Value that, at a certain date, shareholders of a company have than originally invested.

It is calculated as the difference between the Enterprise Value and the Capital Invested in the Company (Debt + Equity), goodwill included. MVA can be further broken down into Future Growth Value (FGV) and Value of current performance.

FUTURE GROWTH VALUE (FGV)FGV is the summation of Present Value of future expected EVA improvements. To put it simply, FGV is the capitalized value of present value of future stream of expected improvements in EVA.

EVA PERPETUITY (EP)Present value of an EVA performance assumed to be constant.

WEIGHTED AVERAGE COST OF CAPITAL (WACC)Weighted average cost of capital (WACC) is a calculation of a firm’s cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. The WACC equation is the cost of each capital component multiplied by its proportional weight and then summed.

RETURN ON INVESTED CAPITAL (ROIC)It’s used to assess a company’s efficiency at allocating the capital under its control to profitable investments. The return on invested capital measure gives a sense of how well a company is using its money to generate returns. Comparing a company’s return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively. The general equation for ROIC is: NOPAT/TANGIBLE INVESTED CAPITAL.

DISCLAIMER

Active Value Advisors does not take any responsibility concerning the reliability, thoroughness and/or accuracy of information, data, analyses, and opinions shown in this report.Active Value Advisors reserves the right to change information content without prior notice. The Information is not a form of solicitation to invest in financial instruments. Active Value Advisors and its employees do not take any responsibility for any damage stemming from the use of the Information. The Information reported cannot in any way be reproduced and/or transmitted to third parties.

Active Value Advisors.

T +39 02 36697100

F +39 02 36697101

E [email protected]

I www.activevalue.eu

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