It's way too soon to break out the bubbly to celebrate the apparent recovery in pharma's innovation pipeline and the leveling
down of history's steepest patent cliff. The limitations of the traditional industry business model no longer represent a
temporary phase, to be papered over by the appeal of a bumper crop of new product introductions. Something more profound,
and permanent, is at work. The assumption that good medicines will find markets with the appropriate push from a blitzkrieg
of promotional firepower is yielding to a mindset in which novelty ranks a distant second to another, more bracing metric:
GETTY IMAGES/SPXCHROME; GETTY IMAGES/TRAFFIC_ANALYZER
Unless a new drug can evidence real progression against the current standard of care, market uptake is likely to proceed at
a snail's pace. Many therapies are finding that registration by itself is a false window where access to live, paying patients
is concerned. Numerous additional hurdles now block the way to all those covered benefit lives. These range from practice-driven
clinical treatment guidelines that drive formulary coverage to post-approval risk management obligations to health economics.
Significantly, none have much to do with scientific innovation, the traditional benchmark of industry success. Each relies
instead on stakeholder or societal value, reflected in the incremental cost of therapy, as the decisive criteria in allocating
resources stretched by the demographic burden of an aging population, which also happens to be less productive in generating
the government taxes that fund a rising proportion of healthcare services. Hence the margin for error in meeting these "value"
expectations is very thin.
In this destabilizing environment, companies must do three things to maintain the growth that shareholders expect. The first
is to discern: what matters most to providers and patients in those therapy areas where you choose to engage? The second is to differentiate, with a proposition that transcends the existing competitive set—not simply by demonstrating superior clinical or product
characteristics, but also with process, delivery, and service innovations that carefully define the disease category and the
mix of patients able to access the drug. The third is to document, at an early stage of drug development and extending well beyond registration, that evidence which is most clinically relevant
in securing a positive treatment outcome, one that gives payers a clear path in allocating their limited pharmacy spend.
Even if a company succeeds on all three scores, revenue growth—and the higher margins that once seemed to follow in tandem—is
not a given. The opportunities presented in today's market for medicine tend to be short-lived and are subject to constant
challenge because there is so much new competition, often coming from adjacent sectors like bioengineering and retail. This
model is the antithesis of the still dominant approach to business innovation in Big Pharma, where large, expensive R&D projects
dependent on fixed overhead are spun out over long periods of time. Innovation today takes a different form: when you can't
anticipate market cycles precisely and the motivations of your customers and the competition are unclear, there is an advantage
in being able to scale up a new idea quickly or, alternatively, to abandon it just as fast.
In other words, today's race to the top of the league charts belongs to the swift, where you claim your destiny by controlling
the ability to price. That's the signal message in our 12th Annual Industry Audit of the highs and lows of performance among
24 of the largest publicly traded companies prepared by Professor Bill Trombetta of the St. Joseph University Haub School
—William Looney, Editor in Chief.
The Pharm Exec Industry Audit holds a unique position in the increasingly crowded field of data sets tracking industry performance. First
published in 2002, the audit adheres to a simple objective: to identify how well companies are doing in advancing shareholder
value. It is a measure open to interpretation, particularly because there is no other standard accepted reference point that
looks at performance from this perspective. Also, our approach is idiosyncratic, but it does reveal the importance of metrics
that often escape the attention of the major investor rating institutions. One example is the return on assets against profits,
which allows for the valuation of intangibles like patent holdings. Shareholder value is also a good indicator of long-term
success because of its association with stability; when the investment community is happy, there is less pressure for changes
in the c-suite and management has some leverage to place riskier bets on investments that may play out only over time.
Methodology: eight benchmarks
The 2012 scorecard relies on data from the 24 companies' 2011-2012 reporting periods. As in years past, we rely on 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 (a key measure 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).
Each metric is weighted, with the highest score of three given to enterprise value growth; enterprise value to sales; and
EBITDA (profit) to assets. The other five metrics are weighted at two.
The higher a company scores on each metric, the better the performance. For example, when a company ranks 1st on a metric,
that is the highest achievement. Each ranking is then multiplied by a weight to arrive at total points. For example, if a
company comes in 1st on enterprise value to sales, that ranking (24, reflecting the number of companies in the audit) is multiplied
by a weight of three for that metric, resulting in a score of 72 points. Each company's data is then compiled over the eight
metrics along with their respective weights to arrive at a total number of points. The company with the highest point total
achieves the status of top performer for the year.
We also include one metric that is not weighted: sales, general, and administrative (SG&A) expenses to sales. SG&A is a statistic
that by itself is neither good nor bad. If a firm is growing, launching new products, and entering new markets, then a rise
in SG&A is good. The problem is when SG&A grows faster than sales or profits. Over time, this reflects a bloated overhead
structure and operational inefficiencies.