Pharm Exec's 11th Annual Industry Audit: A Snapshot

Compiled by Bill Trombetta, Professor of Pharmaceutical & Healthcare Marketing at St. Joseph University, Pharm Exec’s 11th Annual Industry aims to provide a snapshot of how well companies are doing in advancing shareholder value.

Pharm Exec’s 2012 Industry Audit relies on 2011 data to compare performance against 2010. As in years past, we use eight metrics to assess performance: sales growth; enterprise value growth; enterprise value to sales; gross margins; earnings before interest, taxes, depreciation, and amortization [EBITDA] to sales (an indicator of profit margin); sales to assets (or asset turnover); EBITDA to assets (a measure of the profitability of individual assets); and sales to employees (a ratio to assess productivity).

The revenue picture
Surprisingly, turmoil in the biopharmaceutical market has not forced a change in the revenue ranking of the 24 companies.

In fact, we see a remarkable level of stability, with the specialty firm Shire and Abbott’s injectable generics spinoff, Hospira, joining the group this year to replace Genzyme and Cephalon, which were acquired by Sanofi and Teva, respectively. Leadership in the top 10 of sales changed not at all, except for the inclusion for the first time of Roche in the survey, which pushed Bristol Myers Squibb down a notch, to number 11. Top-ranked Pfizer maintained its perch, with $67.4 billion in sales, or more than 25 times the $2.7billion sales of the smallest of the 24, Endo Pharmaceuticals.

Ironically, Pfizer was alone in recording a slight drop in sales against the previous year, while Endo, in spite of its small size, earned the top spot in revenue growth, gaining 58 percent over 2010. In fact, the biggest growth spurt took place towards the bottom of the chart, with Endo’s blistering pace nearly matched by the niche players Celgene, Watson, and Shire. The contrast proves the adage that the bigger you are, the harder it gets to move the revenue needle forward.

Gross margin
Gross margin (GM) represents sales revenue minus the cost of goods (COG) sold on the P&L statement. This metric is heavily influenced by the pricing conditions faced by each of our companies. The higher the GM and a track record of strong GM performance over time suggests a healthy degree of market power in obtaining good prices from the customer base. What is less well known-but increasingly important in this new era of biologics-is that GM also reflects the ability to get good prices on API and other materials required to manufacture a drug: the cost of goods sold.

Here again, past is prologue, with companies having a strong specialty franchise and a selective customer base doing the best (Gross Margin table), where placement ranking goes from high (24) to low (1). Biogen-Idec, Celgene, Allergan, Amgen, and Shire take the top five spots because of their ability to wrest nosebleed prices. Significantly, we do see a slight drop in margins over 2010 for all of these companies, save Allergan. This suggests a slow market trend toward more crowded competition in the specialty space and thus greater price resistance from payers.

Sales to assets
Building on the profit margin, which is facilitated by how well a company maximizes revenues while maintaining tight control of operating expenses, sales to assets (Sales to Assets table) is an indicator of the ways a company deploys its assets. It is vital to recall that a firm is in business to use assets, not just to own them. The more a firm can keep assets off of its balance sheet, the higher the turnover on sales to assets. On this measure, Novo Nordisk comes in at the top, at 1.09, i.e., for every dollar Novo Nordisk invests in assets, it generates $1.09 in revenue. Roche, Lilly and Hospira follow, respectively. Amgen brings up the rear, with 32 cents spent on assets to generate every dollar in revenue.

Sales/employees
The ratio of sales to the number of employees is a basic measure of productivity: it links the revenue to the size of the company’s employee base. The key is not necessarily to have the fewest workers but to maximize the revenue that each of these workers generates in the course of a year. The Sales to Employee table shows that Gilead generates about $1.9 million in revenue for every employee, followed by Celgene, Biogen-Idec, and Amgen. The differential between high and low is startling. The Gilead employee produces about eight times the revenue that a worker at Hospira or Mylan does-both are mired in commoditized business lines with low margins. It is another indicator of the importance today of smaller, highly trained, and focused sales teams able to target segmented therapeutic areas where there is the opportunity to charge premium prices because of the high unmet medical need.

General sales and administrative expenses (GSA)
GSA has to do with the expenses a firm incurs day-to-day in operating. GSA includes marketing and sales spend but does not normally include R&D spend. We do not include it in the survey as a metric to be weighted because in any given year a company may be launching a new drug or retraining its sales force and these expenses will be outsized at pre-launch and early launch. But over time, GSA should not exceed sales growth or profit growth. The norm shows that significant progress remains to be made. While sales for the 24 companies increased by 12 percent, GSA expenses rose by an average 28.6 percent. Allergan spent the most on GSA, but this is expected given its reliance on aesthetic products based on cash out of pocket payments. Only five firms showed a decrease in GSA for the year: Pfizer, Roche, Watson, Hospira, and Celgene. Looking over the years, Gilead, Mylan, Watson, and Hospira do more with less than the other companies in the survey.

And the winner is…
To find out who’s topped the 2012 list and coverage of each metric, click here for the full version of the 11th Pharm Exec Industry Audit.