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

In Vivo magazine looked at growth in market capitalization from December 1999 through December 2004, breaking it down among six healthcare sectors. Big Pharma came in at the bottom:
Diversified (hybrid firms)......... 30%
Medical Devices......... 87%
Big Biotech......... 26%
Small Biotech......... 47%
Specialty Pharma......... 36%
Big Pharma......... - 24%

In market value alone, Big Pharma lost $153 billion in 2004.

An ironic twist regarding these figures: As In Vivo points out, Big Pharma at one time owned much of these sectors:

  • Pfizer sold Howmedica (to Stryker in 1998)
  • Lilly owned Guidant in 1994, when the company was spun off at a market capitalization of $1 billion; today J&J values Guidant at $25 billion
  • BMS had Hall Surgical and Linvatec.


Pharm Exec's fourth annual strategic Industry Audit analyzes the 2004 financial performance of 16 companies that are publicly traded on stock exchanges and file 10-K reports with the Securities and Exchange Commission (or 20-F reports, in the case of foreign companies).

As in past years, the audit goes beyond standard accounting and financial statements to assess company performance. (See "Industry Audit," Pharm Exec, September 2002, 2003, and 2004.) It takes into account new marketing metrics, such as sales per domestic rep, and percentage of revenues coming from new products that were not on the market five years ago. The information in this report was gathered primarily from 10-Ks and 20-Fs . Databases, such as Yahoo! Finance.com and secondary sources, such as Fortune, Forbes, BusinessWeek, In Vivo, and Pharmaceutical Executive were consulted.

Overall Rankings
Universe Because the goal is to compare companies' performance, this report omits a few companies that are (or in some cases, appear to be) publicly traded but are not comparable with the rest of the group: extremely diversified companies in which pharmaceuticals are not clearly dominant (such as Baxter Laboratories), extremely narrow-focus companies (such as Novo Nordisk), companies that manufacture primarily generic drugs (such as Teva), companies with unconventional ownership structures (such as Roche), and companies whose financial reporting doesn't live up to US and European standards (such as many Japanese companies).

Methodology To arrive at the "Fab Four" and the Company of the Year, the following methodology was used. Companies were assigned scores based on their rankings in 15 key metrics—16 points for first place, 15 for second, and so forth. These scores were weighted by relative importance; thus, Enterprise Value to Sales and Growth in Enterprise Value, along with Percentage of Revenue from New Products were weighted the highest at 7. Mid-metrics such as Gross Margin and Return on Invested Capital (Debt and Equity in the denominator) were weighted 5. Metrics such as Profit to Sales and Price to Earnings, albeit important, can be easily manipulated and easily managed through "smoke-and-mirrors" accounting/financial manipulations. So they were weighted 3.

For example, the highest Enterprise Value to Sales ratio was achieved by Genentech at 18.33, which gave Genentech 16 points for this metric. Weighted at 7, Genentech got a total of 112 points on Enterprise Value to Sales (16 x 7). Forest came in 10th so its total points on this metric were 49 (7 x 7), and so forth. Then all scores over all metrics were summed to arrive at a total number. The highest to the lowest scores were then ranked.


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