2005 Industry Audit - Pharmaceutical Executive


2005 Industry Audit
For the fourth year in a row, Pharmaceutical Executive slices and dices the numbers to learn who's really on top.

Pharmaceutical Executive

Metrics The following 15 metrics were used to determine each company's total score:

  • Enterprise Value, 2004 Versus 2003
  • Enterprise Value to Sales
  • R&D Spend
  • R&D to Sales
  • Earnings Per Share
  • Price to Earnings
  • Growth
  • Gross Margin
  • Profit to Sales
  • Sales to Assets
  • Profit to Assets
  • Assets to Net Worth
  • Profit to Net Worth
  • US Sales Per Domestic Rep
  • Sales Per Employee
  • Percentage of Revenue From New Products
  • Return on Invested Capital

Other rankings, such as prescription sales and R&D spend, are presented in graphic form but were not included in the final score.

Readers who feel comfortable with the full range of business metrics may want to head straight for the charts. For others, here is a summary of how the various numbers are calculated, and why they matter.

Enterprise Value (EV) 2004 Versus 2003 Enterprise value is a relatively new metric that has become popular because it includes the impact of a firm's debt on its capital structure. It is calculated as follows: Market cap plus net debt divided by EBITDA (earnings before interest, taxes, depreciation, and amortization). Net debt is a company's total debt minus its holdings of cash and marketable securities. Enterprise value is arguably the acid test of all metrics because it focuses on shareholder value: EV reflects what a buyer would have to spend to buy the enterprise. Sanofi-Aventis has no horse in this year's race, because there is no point of comparison. The winner was Genentech, with a growth of more than 56 percent, followed by Abbott, J&J, Wyeth, Amgen, and Schering-Plough. But note the negative growth in enterprise value for AstraZeneca, Lilly, Pfizer, Forest, Merck, and Biogen. For these pharmas, shareholder value was destroyed.

Enterprise Value to Sales This metric is the equalizer, the normalizer. One would expect a huge operation like Pfizer to have an absolutely large EV number, just as Muhammad Ali at 210 pounds stood head and shoulders above all heavyweight fighters. But pound-for-pound, arguably the best fighter of all time, at middleweight 160 pounds, was Sugar Ray Robinson. Analogously, EV/Sales normalizes this assessment. And we see that the biotechs with the lowest sales volume are the highest values among the Big Pharmas. And big things are expected from Sanofi-Aventis, which came in fifth.

R&D Spend to Sales 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 Schering-Plough and Lilly in third and fourth, both at a bit more than 19 percent.

Earnings Per Share (EPS) and Price to Earnings (P/E) These are bellwether financial performance metrics, but they are easily manipulated, so they carry the lowest weighting.


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