Welcome to our yearly look at the industry's Stealth Pharmas. As with previous reports, we aim to examine a handful of pharmas
and biotechs that generally fly under the radar (ergo "stealth") of the mainstream media. We define Stealth Pharmas as any
company that is not a major pharma; biotechs, generics, and orphan drug firms are all in play. Not strictly the top 10 performers,
these Stealths were chosen based on the slippery metric of "newsworthiness." They earn the most ink from the business press—if
not always the most money. So consider this analysis a soufflé, a light dish to tide you over until September, when our main-course
annual "Industry Audit" arrives to scrutinize the sales-revenue metrics of the top 16 publicly traded pharmas, and rank them
( Chris Thomaidis/getty images)
What the Metrics Mean
Revenue (top right, this page), or sales in dollars, is the post position that we start from. More importantly, sales growth (top
right of table) is a key metric in the current marketplace, where growth is hard to come by. Once again, Teva comes in number
one in terms of annual dollar revenue. But Mylan's revenue growth of 221 percent rings up the largest annual increase, followed
by an impressive 57 percent for Celgene.
(All financial data were taken from Finance.Yahoo.com. Income statements and balance sheets represent fiscal year ending December 31, 2008. All other metrics were pulled on April
Enterprise Value (middle right, this page) is the clincher: Either you create shareholder value or you destroy it. At the end of the day,
nothing else matters. So we look critically at whether shareholder value has increased or decreased.
And to normalize absolute shareholder value—a function of size and scale—we use the powerful metric Enterprise Value to Sales (bottom right, this page). Since Teva sports the biggest revenue annually, it is not surprising to see it rank number one
in Enterprise Value. But which Stealths created shareholder value? Only three: Teva, Mylan, and Cephalon. The other seven
destroyed shareholder value in 2008.
EV/S is the great equalizer: It adjusts for size and scale. Celgene and Gilead score numbers one and two, respectively. Nota
bene: All Stealths declined on this metric, with one exception—Teva. Also, a score of 3.00 or less on this metric indicates
marginal value in terms of potential to grow sales and earnings.
R&D spend in and of itself tells us little about a company. For example, Apple, arguably the most innovative company in the
world, spends about 3 percent of its annual revenue on R&D. But it's interesting to compare firms based on their investment
in developing new products, and the metric we use is R&D Spend to Sales (top right, page 48). R&D does not appear to be directly associated with economic performance. Gilead's 13.5 percent is below
average for major pharmas, let alone biotechs, yet the HIV powerhouse outperformed all the Stealths for the third year in
Gross Margin (middle right, page 48), or markup, reflects whether a firm has pricing power; generally, the higher the margin, the better—and
it should always be rising. In today's hostile environment, the ability to maintain—and even increase—prices is impressive.
Only four companies had enough power to accomplish this: Cephalon, Novo Nordisk, Teva, and Watson. But note the eye-popping
margins of Celgene and Allergan; and still their prices moved down.
There are two basic ways a firm makes money: Profit to Sales, or margin management, and Sales to Assets, or asset management. Profit to Sales (bottom right, page 48), also known as EBITDA (Earnings Before Interest, Taxes, Depreciation,
and Amortization), is important—but it can be easily manipulated with financial smoke and mirrors. The profit margin reflects
not just pricing power but how a firm controls its expenses. Note how effective Gilead is at cost control, offsetting a middling
gross margin. Also, compare Celgene's nosebleed pricing with its lackluster ability to control expenses.
Sales to Assets (top far right, page 48) is the Rodney Dangerfield of metrics—this measure of how well a firm is at managing
its assets gets no respect. You are in business not to own but to use assets. Only two Stealths went backwards in terms of
asset productivity: Teva and Watson.
When you multiply P/S and S/A, you get one of the most significant measures of performance: Profit to Assets (middle far right, this page), or return on assets. And here, once again, Gilead combines its double-threat prowess on both
margin management and asset management to rise to the top.
Sales per Employee (bottom far right, this page) measures the productivity of employees. (Higher is better. Duh.) Gilead, Endo, and Celgene
would rank up with biotech behemoths Biogen-Idec, Genentech, and Amgen in terms of employee productivity.
And the year's best-in-class Stealth Pharma? As in 2007, Gilead rules the Stealth category with another stellar performance.
It is number one in the two ways to make money: managing margin and managing assets. Excelling at just one of these metrics
is hard enough, but to nail both displays truly exceptional management.
All the same, Gilead's drop in Enterprise Value is a concern. While its HIV franchise remains the 800-pound gorilla—and while
diagnosis and treatment are expanding—competitors are on the horizon. Bill Trombetta is a professor of pharmaceutical marketing
at St Joseph's University in Philadelphia. He can be reached at email@example.com