Industry Audit - Pharmaceutical Executive


Industry Audit
Running the Numbers on Pharma's Top Performers

Pharmaceutical Executive

pharmaceutical executive industry audit
Revenue from new products. The per-centage of revenue coming from products not on the market five years ago is a crucial metric. It was first introduced about 30 years ago by Black & Decker. Patents and pipelines don't amount to a hill of beans without demonstration of commercialization. For a drug to be considered in this year's new-product revenue table, it had to have been approved between 1999 and 2003. The per-company revenue from those products was then added and divided by the company's total drug sales for 2003.

Amgen is at the top of the pile in revenue from products not on the market five years ago. AZ comes in a strong second, with Novartis and GSK tied for third. Genentech places low this year, but with three launches already in 2004, this may be Genentech's breakout year.

Profits to sales (P/S). Profit margin measures how good a firm is at margin management. It shows, after subtracting the cost of goods sold, what is left after gross margin to cover operating expenses and contribute to net profit before income taxes. As predicted in last year's report, Merck's profitability returned to the heights (ranked first at 29.3 percent) after shedding the low-margin business of Medco. GSK had the highest absolute net profit of any pharma in 2003 at $7.35 billion. Schering-Plough and Biogen-Idec were not profitable in 2003 and are not listed in these metrics.

Patent Productivity
Assets, Assets, Assets According to the Dupont formula (profit/sales x sales/assets x assets/net worth = net profit/net worth), which has been around since the 1920s, assets are a key factor in a company's performance.

Sales to assets (S/A). This is one of the most important strategic metrics. It shows how productive a company is in managing its assets. The higher the ratio, the better. In other words, GSK—at the top of this chart—produced $1.10 in revenues for every $1 it invested in assets. At the other end, Genentech's $1 investment produced only 30 cents in revenues. It is not surprising that GSK and J&J placed first and second, respectively, given that they have strong consumer franchises. AZ's third-place finish is therefore all that more impressive as a pure play performance. Surprisingly, Schering-Plough, which also has a strong consumer franchise, had a low S/A ratio of 55 cents.

Profit to assets (P/A). Multiplying profit/sales by sales/assets produces another important profitability metric: return on assets or P/A. This ratio adds to an understanding of just how profitable a firm really is.

For example, note that J&J places eighth in profit to sales at 17.1 percent. This is largely because it has a significant over-the-counter and consumer side, and although the profit margins on Tylenol and Band-Aids are relatively good, they suffer in comparison with higher margins on drugs and medical devices like J&J's drug-eluting stent. But J&J ranks second in sales to assets at .94, resulting in a superior P/A ratio of 16.1 percent, giving the company a fourth-place rank.

Similarly, Amgen posts the third-highest profit-to-sales margin, but its anemic sales-to-assets ratio of .31 results in a 10th place spot for P/A at only 8.4 percent.


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