In the midst of a late summer economic chill, Pharm Exec's 10th Annual Pharma Industry Audit looks at the balance sheets to find who leads and lags in the push to execute the harsh
medicine of Spartan-like cost discipline. Prepared by Professor Bill Trombetta of the Erivan K. Haub School of Business at
St. Joseph's University, our diagnosis seems to follow the first clause of a long-standing health maxim: starve a cold. Those
companies who managed to increase value for shareholders while keeping costs down at the same time—even better without the
challenges associated with a big acquisition—received top honors from Trombetta this year.
Getty images: Hiroshi Watanabe
Top-line measures like Enterprise Value growth, foretelling stock trajectory, and Profit to Sales provide a clear assessment
of financial health, but the under-the-radar Sales, General and Administrative (SG&A) Expenses to Sales measure uncovers total
overhead against sales income, getting to that all important ability to lower administrative costs, without harming sales
performance. Surprisingly, sales and marketing represent a relatively low portion of SG&A, which includes day-to-day expenses
such as legal and accounting fees, utilities, and rent. Average SG&A spend, measured against sales income, was 30.4 percent
in 2010, up from 28.1 percent in 2009. While companies spent a little more on average, sales went up 11 percent, and SG&A
spend increased by 8.2 percent—overall, companies have been able to reduce overhead, a sign that industry is adapting successfully
to new cost pressures.
Audit Data Sources and Key
Biogen Idec and Gilead are two notable examples on the low end of the SG&A Expenses to Sales measure; both companies spent
relatively less on marketing and promotion. The calculations are prescient: Moody's raised Biogen Idec's outlook in mid-August
of this year, citing a strong operating performance and cost reductions like consolidated facilities, and a narrowed focus
on multiple sclerosis; 75 percent of the company's revenues now come from the MS category. Biogen Idec grew Tysabri's worldwide
sales by 31 percent ($389 million) in the second quarter of 2011, compared with 2Q 2010.
Gilead made a strategic decision in 2010 to close its R&D operations in Durham, N.C., choosing to consolidate R&D work on
hepatitis B and C in Foster City, Calif. That move wiped over 100 employees off the books and consolidated operations—and
overhead costs—on the West Coast. While the Industry Audit doesn't weigh SG&A Expenses to Sales as a factor for determining
winners, it's a statistic worth considering. Companies looking to increase margins on top of a large sales base will have
to look at all costs, not just sales forces and promotional spend, to locate efficiencies and react to unforeseen regulatory
events and external price controls.
1: Annual Sales
The average Enterprise Value to Sales, the top weighted measure assessing sales growth and earnings growth for shareholders,
was at a dismal 3.18 for 2010, down from 3.24 in 2009. Investors eying an Enterprise Value to Sales ratio in the low threes
would be advised to pick up hamburger and soda stocks as an alternative: McDonald's and Coca-Cola had a better performance
last year. However, this year's Audit winner—diabetes giant Novo Nordisk—sported a ratio of 6.27, second only to Celgene's
7.39 Enterprise Value to Sales ratio. Ultimately, Novo posted a 33 percent increase in shareholder value, without a significant
merger or acquisition, and increased its gross margin by more than 7 percent, from 2009 to 2010. If diabetes rates continue
to grow worldwide, as the World Health Organization has forecasted they will, Novo is uniquely positioned to capture sales
overseas, and to benefit from next-generation synthetic insulin products like Victoza (liraglutide). Company execs have said
the drug will reach blockbuster status by this year's end. If companies can starve a cold, without giving into a "feed a fever"
return to excess operational costs on new, big-selling, innovative drugs, they'll be able to continue providing profit margins—and
value for stakeholders—at a rate in keeping with the most lucrative industries in the world.
2: Enterprise Value