Shareholder returns

Recovery of costs by successful marketing of products is essential in order to maximise shareholder return. As R D costs continue to increase by between 8% and 11% per annum, and sales turnover increases by between 5% and 7% per annum, R D takes up an increasing proportion of the pharmaceutical budget, and for the largest pharmaceutical companies it is about 17% of turnover. 

Historical capital market performance at first glance, historical shareholder returns often appear rather erratic. However, it takes only a little math to create transparency for the key drivers historical shareholder returns can be decomposed into components such as peer group performance and company-specific (excess) performance. 

Finally, the company s own estimation of fundamental value will frequently be more or less in line with the capital market valuation. This would mean that if the corporate plans are realized in the succeeding years, a shareholder return can be expected of exactly the level of the cost of equity, i.e., roughly the industry average. Here, the valuation logic can be used to set more ambitious objectives in relation to capital market performance, and to translate these into operational targets for profit improvement. 

To begin with, though the percentage of overall economic activity accounted for by the industry continues to shrink - in the United States, down from four percent to less than two percent over the past 25 years - shareholder returns were roughly on a par with those of the broad market indexes in the United States and Europe over the same period. In the United States, for example, both the chemical industry and the broad market returned roughly thirteen percent a year to shareholders,3 a more robust rate than that of other asset-heavy mature industries, such as steel, automotive, and pulp and paper. This is certainly quite an accomplishment. 

Fig. 2.2 Total change in CEO wealth relative to annual shareholder return...

Good communication with the investment community is essential for a company that wishes to increase its market value. Our analysis of a sample of German companies found a significant correlation between the quality of investor relations (judged by the quahty of annual reports, analyst conferences and other investor events) and shareholder returns. The sample covered a broad spread of industries and included several chemical companies. 

The advantages of increased focus are apparent in other process-intensive industries. In pulp and paper, for example, there is a strong correlation between a company s degree of focus and its financial performance. None of the industry s top performers (as measured by shareholder returns) competes in more than five different segments. 

Fig. 16.8 Comparison of total shareholder returns and market/invested capital ratios for less cyclical and more cyclical chemical companies, 1987-98 Source McKinsey...

People would need to be convinced of the value of this approach. There was a need to demonstrate that the best way of serving shareholders is, paradoxically, not to focus exclusively on the shareholder. There was a need to make the case that the best way of maximizing long-term total shareholder returns is by taking a wider perspective of the expectations placed on a company - and thus avoiding risks that destroy value - and grasping future opportunities that create value. 

Nalco s strategy proved so successful that the company was little affected by the industry crisis at the end of the 1970s. In 1984, Fortune named Nalco one of the thirteen corporate stars of the decade, with a 22 percent shareholder return to equity during the previous ten years. In 1989 Nalco reported sales of over 1 billion and still held virtually no debt. 

Lack of economic pressure due to pharmaceutical companies pattern of sustained prosperity and total shareholder return. 

For new essential medicines it is not acceptable for low-income countries and poor populations to pay the same price as the industriahzed countries. The poor simply cannot be expected to contribute equally to research, marketing, and shareholder returns, especially as it is unhkely that the return will be used for drug research and development for neglected diseases the prices will in any case render these vital items largely inaccessible. During 2000, the endeavour known as Accelerating Access to Care and Treatment , in which UNAIDS and other partners are involved, has stimulated discussions with five pharmaceutical companies to achieve equity or differential pricing of new essential medicines for low-income countries [20]. 

Pfizer Announces Priorities to Drive Improved Performance, Position Company for Future Success and Enhance Total Shareholder Return , Pfizer press release January 22, 2007. Available at http //mediaroom. pfizer.com/index.php s=press releases item=142. 

Global business units (GBUs) focus solely on consumers, brands, and competitors around the world. They are responsible for the innovation pipeline, profitability, and shareholder returns from their businesses. 

Whereas ROE measures the return on investment made by a firm s shareholders, return on assets (ROA) measures the return earned on each dollar invested by the firm in assets. 

Suppliers Assurances on payment and future orders Shareholders Return on Share Capital Lenders Security Assurance on Lending Employees Assurances on future employment... 

---