The Rupp Report: Marketing And R&D Vital For Survival

For some decades now, when problems occur or the turnover is dropping, most companies have been
following the same procedure: to reduce costs at any price. From the beginning of 2008 up to the
first quarter of 2010, global industry was suffering deeply for several reasons that everybody
knows today. And, of course, the textile and the textile machinery industry were heavily affected
as well.

Cost Reduction

Over the past 18 months, the Rupp Report has reported many times about the problems and
worries of the global textile machinery industry in particular. Obviously, almost all machinery
manufacturers acted the same way: reducing costs at any price. Just to name a few consequences,
this means fewer people employed, reduced production output and marketing budgets cut virtually to
zero. In many, sometimes discreet, discussions, R&D people have confirmed the fact that even
research and development has been cut down to marginal levels.

These words are hard to understand: In good times, it’s easy to sell, but in times of
trouble, efforts to survive should be increased, to work in a so-called “anti-cyclical” manner.
This word is probably the most hated by all CFOs in the world. Some companies have done their
homework. Here is the latest example of a company doing its homework: however, it’s from the
pharmaceutical industry.

R&D Pays Off

Switzerland-based Novartis International AG provides healthcare solutions. In 2009, net sales
from the group’s continuing operations totaled $44.3 billion, while approximately $7.5 billion were
invested in R&D activities throughout the group. Now, the group has delivered its
second-quarter results: double-digit growth with excellent contributions from all divisions. Net
sales were up 11 percent — or 12 percent in constant currencies (cc) — to $11.7 billion; and
first-half sales were up 18 percent — 15 percent in cc — to $23.8 billion. Operating income grew
by 25 percent — 24 percent in cc — to $3.0 billion; the core operating income was up 23 percent
— also 23 percent in cc — to $3.3 billion.

The figures in this report are not that important; what is important is the fact that
Novartis says the “strong performance was driven by continued portfolio rejuvenation and
innovation.” The company is convinced that its market success in the second quarter of 2010 is
based on three strategic priorities:

•    to extend its lead in innovation;

•    to accelerate growth across all divisions through tailored commercial
models that leverage the broad portfolio and expansion in emerging markets; and

•    to drive productivity to continue improving margins and reinvesting for
future growth.

Yes, Novartis is a very big company. However, it reports, consistent R&D investment,
differentiated new medicines and an industry-leading number of product approvals have driven
innovation at the company. Its development pipeline is impressive and very competitive; at the
moment, 136 new products are under development. One may say this is not the textile industry:
However, note that Novartis is investing 5.6 percent of net sales in R&D. New products are
vital for sustainable growth of every manufacturer.

Show Your Presence

Novartis reports that “at the core of this success is a sustained commitment to innovation,
which has resulted in breakthrough products across the portfolio. The ability to thrive in a
challenging environment is consistent with the goal of becoming the world’s most successful and
respected healthcare company.”

In November 2009, the Rupp Report reported on a press conference at Stäubli and, to some
extent, the strange reaction of the people prior to the event
(See ”
Rupp Report: Show Me Your Flag
,” November 24, 2009)
. The guess was that the company
probably wants to show that it is still around and does its homework: research and development
resulting in new or enhanced products for the industry — and, last, but not least, so it will be
ready when the upswing truly starts.

And, after the presentation, the guess changed into a confirmation: The management welcomed
all attendees and mentioned that they want to show the will and the ability of the company to carry
on work even in a difficult market environment.

Ready For The Future

The successful ITMA Asia CITME 2010 provided positive results of the companies that did their
homework at all levels of their organizations, but also in R&D and marketing. However, some
delivery problems are already occurring on the horizon, but that is another story.

In his comments on the results of the second quarter, Novartis CEO Joseph Jimenez said: “I am
pleased that Novartis once again delivered strong above-market, double-digit growth in the second
quarter of 2010. Our results were driven by our success in innovation across the portfolio, as
recently launched products comprised 21 percent of Group sales. We are making great progress on all
three strategic priorities of innovation, growth and productivity.”

Is there anything to add to this?

July 20, 2010