In 2003, US stocks rose across the board, ending three years of decline. The drug industry was not along for the ride. At the end of the year, pharma stocks traded at an average price-to-earnings (P/E) ratio of 9.3, about half the value of the overall market. For the year, pharma generated a 12.6 percent return for shareholders, coming in 74th out of 76 industries, according to LEK Consulting. Soft drinks fared better at 14 percent, but pharma beat out food, which had only a 10 percent return. (See "Industry Group Performance," Wall Street Journal, March 8, 2004.) In calculating these returns, LEK used increases in share price and reinvestment from adjusting for stock splits and any dividend or other cash distributions. Overall corporate profitability increased 18 percent in 2003, but the pharmaceutical industry's shrank by more than$10 billion. Pfizer (the industry's largest company) saw profitability down by 82 percent, and Wyeth's decreased by 54 percent. (See "Best Gains in 31 Years," Business Week, February 23, 2004; "Overall Corporate Profits Increase," Wall Street Journal, March 26, 2004.)
How the mighty have fallen. The most profitable company in the world in 2003 was not a pharma. It was ExxonMobil with profits of $21.5 billion, double the previous year. In 2002, pharma had three of the top 10 corporate earners—Pfizer, Merck, and Johnson & Johnson, coming in sixth, ninth, and 10th, respectively. In 2003, not a single pharma company placed in the top 10 profit makers. (See "Fortune 500: How the Industries Stack Up," Fortune, April 5, 2004.)
In terms of return on sales (net profits/sales), the pharma industry came in third at an average of 14.3 percent. Pharma rated second for return on assets (net profits/assets) at 10.3 percent. The indus-try ranked fourth for return on shareholder equity (22.1 percent). For revenue growth, pharma came in ninth out of 47 industries at 13.6 percent growth, but actual profit showed no growth at all: Pharma came in 35th out of 39 industries with a -4.9 percent growth rate.
Pharma vs. PharmaSo how do pharma companies stack up against one another? Pharm Exec's third annual strategic industry audit analyzed the 2003 financial performance of 16 companies (17 last year; Pfizer acquired Pharmacia) that are publicly traded on stock exchanges and file 10-K reports (domestic) and 20-F reports (foreign).
The surprising news is that Pfizer, which topped the charts for the past two years, slipped to 10th place. Who pushed the industry's highflier off its perch? GlaxoSmithKline, a UK-based company with the second-largest volume of Rx sales, which was ranked third in last year's audit. Rounding out the top performers, J&J ranked second (as it did last year), Merck placed third (up from sixth), and Amgen came in fourth (up from 14th). J&J is the only company to hold one of the top four spots for three years running. (See "Top Performers," page 75.)