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

Growth You grow or you die, so this is an important metric. The better way is to grow organically, internally, rather than the Tyco way: buying everything that isn't nailed down. It seems that some pharmas merge and acquire to make a tortured fit on earnings and sales projections, while others seem to merge and acquire to make more strategic fits, like J&J's acquisitions of Alza, Centocor, and—maybe—Guidant.

Gross Margin This metric says a lot about how good a company is at pricing. The higher the gross margin the better. Note Forest, which had to come in at a discount with Lexapro (escitalopram), a me-too drug to Celexa (citalopram), and yet its pricing is strong—coming in at about the same level as Merck, Lilly, and GSK. Surprisingly low is Abbott. One would have thought after jettisoning its hospital supply subsidiary, Hospira, with its lower margins, Abbott's gross margin would have improved.

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. P/S is another metric that can be manipulated through smoke-and-mirror accounting/finance machinations, but it is still important. Forest comes in at number one, a tribute to its marketing prowess. Forest has a high gross margin, despite having to discount an undifferentiated drug, and the company appears to have strong control of its operating expenses to come in at number one on P/S. Genentech, number two in gross margins, is in the middle of the pack in this metric. Merck's shedding of the Medco baggage vastly improved its operating margin.

What The Dupont Long-Term Return-On-Investment Model Tells Us
Sales to Assets (S/A) This is an extremely important ratio. It shows how efficient and productive a firm's operations are. For example, the average for the 16 pharmas in this report is 52 cents. That means it takes $1 of assets to generate 52 cents of revenue on average for these companies. The higher the ratio, the better a firm is at using—not owning—its assets. It is fascinating to observe that the three so-called biotechs (Amgen, Genentech, and Biogen) are all in the bottom half—and two are in the bottom quartile—at using their assets productively.

Profit to Assets (P/A) When you multiply Sales to Assets by Profit to Sales, you get Profit to Assets, or return on assets—a much more meaningful metric. Here is where Sales-to-Assets turnover productivity pays off. For example, J&J is only number seven for Profit to Sales but its strong showing in Sales to Assets places the company at number two for Profit to Assets.


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