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

US Sales Per Domestic Rep
Assets to Net Worth (A/NW) Assets to Net Worth is used to calculate other metrics. Unweighted in the audit, it measures how much debt is in a firm's capital structure. The higher the ratio, the more aggressive a company is in using debt in its capital structure. As can be seen from the chart , the drug industry is extremely conservative when it comes to using debt. These ratios are very low. The author has more debt on his personal credit card than do Forest and Biogen. This is an industry that has not needed to go to the equity markets or borrow money to grow—up until now anyway. The last time a major pharma had to go to Wall Street seeking additional equity was sometime in the mid–1970s; the firm was Abbott. This ratio does have meaning, however, when we incorporate it into the Dupont Long-Term Return-on-Investment Model to arrive at Profit to Net Worth.

Profit to Net Worth This metric is affected by the amount of debt in the capital structure. With more debt, Return on Net Worth is leveraged upward. At the top of the list are Merck and J&J, but Forest follows close behind.

Sales Per Employee
US Sales Per Domestic Rep This metric reflects the productivity of the sales force. The methodology used to calculate this ratio started with total drug sales. That number was adjusted for domestic US sales and then divided by number of US reps. The very high sales productivity of the three major biotechs can possibly be explained by their relatively small sales forces combined with relatively high prices for big molecule drugs. Schering-Plough's numbers should improve as its sales force has more drugs to sell by taking on Bayer's drug lines.

Sales Per Employee In addition to sales per rep, the overall productivity of a company's employees is worth noting. Is the company top heavy? How efficient is the firm in terms of its entire employee base? This ratio is similar to Sales to Assets in that employees are assets. Again, the three biotechs' employee productivity places in the top quartile. And as noted in the previous table, Schering-Plough's ratio should improve with taking on Bayer's drug lines.

Percentage of Revenues From New Products This very important metric was first introduced in the mid–1970s, when a new management team turned around Black & Decker. One of the metrics they revitalized was percentage of revenue coming from products that were not on the market prior to the most recent three years. For this report, drugs that were approved between 2000 and 2004 and that had minimum sales of $300 million for 2004 were included in calculating this ratio. Forest's ratio is a bit misleading because of its reliance on one drug, Lexapro, that was in-licensed from Lundbeck.


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