Industry Audit - Pharmaceutical Executive


Industry Audit
Running the Numbers on Pharma's Top Performers

Pharmaceutical Executive

Enterprise value to sales. Not surprisingly, when adjusted for scale, the three biotechs in the audit command premiums regarding what their companies are worth in the market. The surprise is Biogen-Idec's place at the top of this metric (with a ratio of 19-to-1), given the company's negative net income for 2003. Genentech, which ranked second in this metric, is likely to have a breakout year in 2004 with three, possibly four, new launches, and it seems the market is antici-pating that growth.

pharmaceutical executive industry audit
Another surprise is Amgen in third, but with only half the enterprise value ratios of Biogen-Idec and Genentech. Forest comes in at number four, indicating that the market appreciates smaller firms that have the capacity to grow faster than big pharmas. That notion is further reinforced with fifth place being held by Lilly, the big drug company that acts like a specialty pharma by targeting niche markets.

R&D spend. As with enterprise value, major pharmas like Pfizer and GSK are expected to spend more in absolute dollars than smaller competitors. So R&D also needs to be normalized to show who spends more in proportion to their sales. Not surprisingly, the biotechs hold three of the top five rankings with the highest percentage of sales reinvested in R&D. Even more impressive, then, are the ratios for major pharmas like J&J and Schering-Plough in third and fourth, respectively, with 24 percent and 21.8 percent.

Earnings per share (EPS) and price to earnings (P/E). These are bellwether financial performance metrics. It is interesting that Merck ranks number one in EPS ($3.03) but only 12th for its P/E ratio. Merck may well be undervalued. Its pipeline has come up short recently, but the company has several strong prospects in the combination cardiovascular area. Merck, in fact, made its numbers for 2003.

On the other hand, Genentech has the best P/E (86.16) but rates 13th in EPS. It seems the market expects big things from the big biotechs, with the exception of Biogen-Idec. Also, Pfizer's P/E at 65.43 is quite lofty for a big ship.

pharmaceutical executive industry audit
Grow or Die The market rewards growth. Pfizer's anemic profitability in 2003 is offset by having the second-highest growth rate in the industry at 40 percent—subject to some disillusionment in that most of that growth was the result of the Pharmacia pickup. Of concern are the lackluster growth rates of Wyeth, AZ, GSK, Bristol-Myers Squibb, Aventis, and Schering-Plough, which did not even keep pace with the overall pharma industry average growth of 12.6 percent.

Gross margin. This metric is an indicator of how a company prices its products. GSK's top performance of 83 percent gross margin is all the more impressive given that it does not focus on biologics—which are priced much higher than most oral drugs—as Amgen and Genentech do.

Similarly, Merck's high margin (81 percent) and Lilly's (79 percent), with its history of mostly big-molecule drugs, ring up impressive markups. Abbott is expected to look better in the future, now that it has spun off its hospital supply business. Schering-Plough and BMS are having difficulty in even getting to average.


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