As in the past two years, the audit went beyond standard accounting and financial statements to assess company performance.
(See "Industry Audit," Pharm Exec, September 2002 and Sep-tember 2003.) It takes into account new marketing metrics such as brand power, sales per domestic
rep, and percentageof revenues coming from new products that were not on the market five years ago. The report also includes
rankingsof qualities such as public respect and admiration and the relationship between CEO compensation and company performance,
especially how shareholders fared compared with the executives.
The additional perspectives are not factored into the final score because a complete set of data is not available, but the
information nonetheless adds to the overall picture of how companies com-pare and compete. Unless otherwise noted, data came
from 2003 industry reports, company SEC and tax filings, Yahoo! Finance, and FDA.
Measuring Up
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Why They Score
How did the top companies earn their rankings? Merck and Amgen are in the top quartile in the all-important metric of enterprise
value to sales. Given each company's sales, they are valued by the market at a premium. J&J and Amgen have very high R&D spend
in relation to their sales, which results in new product revenue as well as high margins and growth. GSK and Amgen are the
best at getting better prices for their drugs and controlling their cost of goods sold.
GSK and Amgen are the best, along with AstraZeneca, at generating revenues from products they did not have five years ago.
All of the top four are in the top quartile in generating earnings. This may be especially true for Merck, which excels in
controlling operating expenses after gross margin. GSK and J&J are superior in asset turnover. The higher the sales-to-assets
ratio, the more positive impact on profitability.
The top four companies' sales reps are also among the best. They generate more dollars than their peers. Amgen is second only
to Biogen-Idec at generating sales per employee. As a percentage of enterprise value, GSK, Merck, and J&J are in the top quartile.
Brand power and knowledge capital, in which Merck and J&J excel, drive earnings, especially for the pharma industry.
pharmaceutical executive industry audit
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GlaxoSmithKline made it to the top by placing in the top quartiles in half of the metrics. It has the highest gross margin, indicating solid
pricing. GSK derives growth from new products more than any of the other companies in this report. Its profit margin (profit/sales)
follows strong gross margin but also reflects control of operating expenses. It uses its assets wisely, reflected by the highest
sales-to-asset turnover. Its reps are among the most productive. It has the highest return on shareholder value, and its knowledge
capital equity is in the top quartile.
But GSK has gotten off to a rocky start in 2004. More competition from generics, especially for Paxil (paroxetine) and Wellbutrin
(bupropion), and a weak dollar have hurt its profitability. New York Attorney General Eliot Spitzer's investigation alleging
that GSK was hiding negative data on Paxil's impacton suicidal behavior on some patientshas not helped. (See "Glaxo's Earnings
Decline 13 Percent," Wall Street Journal, July 28, 2004.)
Johnson & Johnson continues to impress. As a hybrid, diversified, decentralized pharma, it does well across the entire spectrum of industry
segments. Its R&D spend to sales is third, beaten only by two biotechs. Its gross margin is relatively low, but its profit-to-sales
marginis above average, indicating that the company controls operating expenses very well. J&J's sales-to-assets ratio and
its return on shareholder equity are second only to GSK.
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