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SL a N E W S Le Tte R #3 Introduction Page 2 R&D Outsourcing Page 3 Business Case Pages 4-8 This article is focused on Building top performing Acquisition of Covance those business models R&D (outsourcing) by Laboratory that could match with the services portfolio. Corporation of America main principles of value (LH). investment concept, SLA Newsletter Value Investment and Business Model Prototypes Abstract The article is focused on the What kind of operational Which operational steps have to be application of the main principles of characteristics of candidates for taken in pre-feasibility and post- value investment concept in the acquisition would be the most acquisition phases to achieve top pharmaceutical research and attractive for value investors efficiency of the acquisition process development (R&D) industry sector. according to principles formulated by itself? Continuing mergers and acquisitions Benjamin Graham? Article discusses the most used process among the R&D outsourcing Is there any specific characteristic of working approach to valuation of providers reveals resource based pharmaceutical R&D sector that merging companies. theory framework use in order to distinguish this industry from other achieve optimal selection of markets and have to be considered Keywords: business model, research retrievable business model on all phases of acquisition process? and development, prototypes, prototypes for their multiplication Article is focused on pharmaceutical mergers and acquisitions, financial within the window of the opportunity. R&D sector and evaluates the recent performance. This article has an objective to candidate that fit the principles of answer following questions. growing by acquisition corporations. Introduction This article is focused on those business models that could match with the main principles of value investment concept, brilliantly developed by Warren Buffett, William J. Ruane, Irving Kahn and Walter J. Schloss, the most prominent followers of value investing guru Benjamin Graham. All References are located at the end of the article. This article is focused on those Failures are happening mainly due to business models that could match overoptimistic appraisal of synergies - Which operational steps have to be with the main principles of value and market potential, skepticism taken in pre-feasibility and post- investment concept, brilliantly about rebound from a cyclical slump acquisition phases to achieve top developed by Warren Buffett, William and rapid growth continuity. Other efficiency of the acquisition process J. Ruane, Irving Kahn and Walter J. reasons are: overlooking due itself? Schloss, the most prominent diligence problems, overbidding with - What is the most used working followers of value investing guru escalation commitment, and poor approach to valuation of merging Benjamin Graham (Buffett & Clark, post-acquisition integration. In companies? 2006; Miles, 2004]. addition, managerial hubris, beliefs - Is there any specific characteristic In different industrial sectors two that acquiring company’s managers of pharmaceutical R&D sector that following Graham’s principles were are good at identifying undervalued distinguish this industry from other explored by value investment targets are resulting in acquiring markets and have to be considered apologists: first, investing in companies overpay. on all phases of acquisition process? businesses within the “circle of Above principles are interesting from competence” around the businesses, the point of view of research and understandable and secure enough development (R&D) companies that Failures are happening to forecast and grow economic may join the group of candidates for mainly due to performance of earnings rate on value investment acquisition. This overoptimistic equity capital even under article has an objective to answer appraisal of synergies and market potential, extraordinary adverse conditions; following questions: skepticism about second, avoiding risk reward and - What operational characteristics of rebound from a cyclical periodic acceptance of occasional candidates for acquisition would be slump and rapid inactivity even in successful investing the most attractive for value growth continuity. (Berkshire Hathaway Inc., 2012). investors according to principles Evidence on value creation in M&A formulated by Benjamin Graham? transactions in Pharma R&D - How to define in Pharma R&D becomes clear when the combined sector of Contract Research value of companies engaged in Organizations (CROs) the candidate mergers and tender offers increases that would fit the principles of actively by about seven percent around growing by acquisitions corporations takeover announcements (Food and as Laboratory Corporation of Drug Administration, 2013). Usually, America (LabCorp)? targets get the bulk of value shared, while acquirers get roughly zero. 2 12 Building Top Performing R&D Outsourcing Portfolio Pharmaceutical firms are forced to balance competing (technologic or geographic, etc.) oligopoly in the industry economic and scientific priorities before the start of is critical for the financial leverage business model, which research in a climate that is becoming more stressed by was confirmed by Labcorp in laboratory testing sector. increased regulatory standards, high and inflexible cost Viability of business model could be tested against its structures, depleting product pipeline and increased generic copying multiplication as an evaluation of complexities of clinical trials (Kaitin, 2010). Reduction in sustainability of its intrinsic value identity. Ideal business research and development productivity makes only one in model prototype has no generic analog with tangible asset 13 compounds to reach the market (Khanna, 2012). value and brand identity. Mergers and acquisitions, outsourcing, combined with Although short-term, built on common sense generic downsizing and strategic alliances, have become the new prototype may compete against seemingly reliable norm (Lowman et al., 2012). CROs industry offers broad context-built business models, engineered under Labcorp range of research and development services for brand and leadership architecture of post-investment pharmaceutical and biotech sponsors, including product development assures continuous cash flows, including development and formulation, clinical trial management, following acquisitions. central laboratory services, and data management for Acquisition candidates pipeline appreciate “came-to-stay” regulatory Investigational New Drug (IND) and New Drug image of LH: Labcorp offers after acquisition not only Application (NDA) filings (Nigro et al., 2012). reputation of its owners, but also its brand and solid The literature on clinical trials suggests that CROs are resource for specialized niche campaign. able to conduct clinical trials up to 30% faster than Availability of attractive market sectors with the high average pharmaceutical firms (Korieth, 2013). Pharma intrinsic value candidates determines future investment executives are using CROs more than ever to reduce portfolio that will be used for retrieval as soon as price costs while maintaining quality and improving operational volatility or other critical will trigger next acquisition. efficiency (KPMG, 2011). Laboratory Corporation of America (LH), better known as Labcorp, presents example of such performance by leveraging in laboratory testing sector assets of companies that were never considered as a “star” by their “internal DNA” or internal marketing and personnel engagement. However, Kirchmer & Scheer (2003) found that relative 3 435 (Fortsetzung) cash flows (Barney, 1991). Armed with RBT we’ll review the case of Labcorp’s Business Case: Acquisition acquisition of Covance in order to come with optimized business model prototype that will be used for CROs in of Covance by Labcorp Pharma R&D and potential Total market capitalization of same time achieving the new sources multiplication in the whole Pharma Laboratory Corporation of America, of revenue, broader payer mix, and industry. Changes in stock price for according to Yahoo Finance (as on greater international presence to Labcorp and Covance Inc. (CVD) on Nov. 4th, 2014) exceeded 8.5 billion expand in the $141 billion the day of the acquisition USD. After the merger of National biopharmaceutical research & announcement was following: Health Laboratories and Roche development market. As an Market had different perceptions of Biomedical Laboratories in 1995 alternative, Labcorp has the right to value creation in the deal with a during the last 14 years LabCorp has create a centralized R&D lab positive effect on CVD and negative continued to expand its esoteric and powerhouse. on LH. For transaction price $4.3 specialty laboratory testing capabilities Taking in consideration that Covance billion in cash and $1.8 billion in stock by acquiring scientific leaders in the released its third quarter 2014 paid by LabCorp compensated loss of genomics, anatomic pathology, and earnings, reporting strong quarterly Covance’s earning streams and personalized medicine arenas results; it can bring Labcorp almost $ increased CVD’s market capitalization (Laboratory Corporation of America, 250 million net profit. by $1.3 billion. 2014). However, continue having major Simply put, assuming constant P/E Total Labcorp’s post-merger restructuring costs in post-acquisition ratio for CVD, sold Covance Inc. had investment plan included more than period similar to 70 billion dollars in an intrinsic value of $4.8
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