Financial Myths: 80% of Success is Showing Up – Part III

Michael McTague |

profit versus market share, financial myths, market leaders, meaning of success

Could it really be true that 80% of Success is Showing Up? This is the third in this series on challenging this myth. In the first two pieces, we found compelling evidence to support the myth but equally powerful facts to suggest that merely showing up might actually cause problems. This third and final investigation considers the raw power of a sizeable presence in the market – just being there as a market leader.

Here is a brain twister: Are companies better off with excellent market share or pure profit? Profit is the ultimate proof of success. But just being there – in the market with a lot of products – may prove more significant than pure profit.

The healthcare industry stacks up this way: Cigna (CI) accounts for $32.7 B of annual revenue according to Yahoo Finance; UnitedHealth Group Inc. (UNH) comes in at $123.9 B; while WellPoint (WLT) totals $71.3 B and Aetna (AET) garners $51.8 B. If market share is the most critical element, is UnitedHealth Group more impressive than its competitors? The company ranked first in the insurance and managed care sector on Fortune’s 2013 “World’s Most Admired Companies” list. For the third straight year, UnitedHealth Group ranked No. 1 overall in its sector and for the fourth year in a row, the company has been rated No. 1 in innovation. So, size, or in this case showing up in a large way, matters.

The great power of market share is no secret. Consider how lite beer developed. The major (regular) beer companies -- Miller (SAB.L), Budweiser (BUD) and Coors (TAP) -- launched lite beer, which now exceeds regular beer in total sales. Market share gives evidence of the overall popularity and resiliency of the product. Harvard University could replace all of its successful applicants with others who are also in the top 1% of their high school classes several times over. By contrast, Apple (AAPL) has small market share and high profits. Its Iphone comes at a high price. Even though Samsung (SSNLF) is the market share leader, Apple is tops in profit.

Seeking the Next Blockbuster

According to Bloomberg, Amgen (AMGN) checks in as the Biotech industry leader with 23% of the market, followed by Gilead Sciences (GILD) with 13%. Amgen is rolling out a number of new products and is moving forward with several others in the later stages of testing prior to FDA approval. New products are key to maintaining market share in a dynamic industry that witnesses frequent product launches. The company spends $4 billion a year on research and development (R&D), which is 22% of total revenue. Wary investors will note that the company has negative Retained Earnings exceeding $7 billion. So, here is where the market share leader in this industry stands: recent profits, long-term losses, large market share and hefty R&D expenses. In terms of the myth, “showing up” in this environment means large market share that generates enough cash flow to stimulate R&D expenses that will create new products. Profits are less certain.

Gilead’s recent product launch, Sovaldi, treats hepatitis C. According to Investors.com, the drug brought in $3.48 billion in the second quarter, helping to boost the company's per-share earnings by 372% to $2.36 and revenue by 136% to $6.53 billion. Its operating margin last quarter was a hefty 67.5%. Gilead also won a battle with Roche (RHHBY) over Sovaldi drug rights. So, this market share leader (second behind Amgen) is also reaping new-found profits.

The market share aspect of “showing up” confirms the myth and provides an interesting insight for investors. All pharmaceutical companies would love to find another blockbuster – an incredible breakthrough that yields massive profit based on use by millions, such as Viagra. Investors hope for breakthroughs in such major healthcare areas as cancer, heart disease and diabetes. But, the larger the number of people suffering from a disease, the stiffer the competition among pharmaceutical companies. It is also more difficult to maintain exclusivity. Pfizer (PFE) and Merck (MRK) had the leading Cox2 inhibitors, which were later withdrawn.

Leading in a Market Segment

Looking for a mini-blockbuster or maintaining a strong presence in one strong area of the market may be wiser strategies. In fact, this concept is booming right now. The Wall Street Journal reported (August 25, 2014) on Roche planning to pay $8.3 billion for InterMune (ITMN) , which has launched a product that treats lung disease. This will expand Roche’s presence in treating respiratory disorders. Treatment of certain illnesses has found reasonable success. These include schizophrenia, Alzheimer’s Disease, depression, leukemia and hypertension.

In early September, Merck’s pembrolizumab, which teats melanoma, was cleared by the FDA. The product name will be Keytruda. This breakthrough and others that are expected will create a new market of drugs designed to stimulate the body’s immune system to fight cancer.

Market share leaders who also specialize in one or more financially attractive areas are more likely to recognize the medicinal value of their research efforts. If a company already holds a stake in treating a disease, it is more likely to know what is missing and which areas of research are most promising. This extends to attractive acquisitions.

An intriguing myth: “80% of Success is Showing Up.” Some market share leaders roll out excellent products for decades with little competition. Their products just “show up.” However, inactive boards with members who tank up on liquor and reach for the rubber stamp do not succeed. Market leaders are prone to identify research needs and launch effective products. This is how Procter & Gamble (PG) developed 25 products that each bring in more than $1 billion a year. It is also how they launched thirty-six very successful Global Beauty products. Only a market share leader could recognize an attractive market for so many variations. Next month the Myth Buster will investigate another perplexing business myth.

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Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
CI Cigna Corporation 133.44 -1.06 -0.79 1,386,371
UNH UnitedHealth Group Incorporated (DE) 160.73 -0.21 -0.13 3,480,032
PG Procter & Gamble Company (The) 82.40 0.54 0.66 9,079,412
AAPL Apple Inc. 109.90 0.41 0.37 26,527,997
GILD Gilead Sciences Inc. 72.42 -0.42 -0.58 9,227,901
AET Aetna Inc. 133.49 -1.41 -1.05 3,522,666
BUD Anheuser-Busch Inbev SA Sponsored ADR (Belgium) 101.39 1.48 1.48 2,559,242
PFE Pfizer Inc. 31.63 0.17 0.54 19,007,839
MRK Merck & Company Inc. (new) 61.13 0.37 0.61 7,993,092
TAP Molson Coors Brewing Company Class B 95.63 0.97 1.02 1,796,031

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