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

Return on Invested Capital (ROIC) tracks Return on Shareholders' Equity but will always be a bit lower since it includes debt in the capital structure as well as shareholders' equity. It is a more meaningful metric than shareholders' equity because return should cover the entire cost of capital, both debt and common stock. It is apparent from the ROIC table that a number of firms are not covering their cost of capital, or WACC (weighted average cost of capital). The average return on shareholders equity for the industry is 17 percent. Anything lower than, say, 20 percent, would most likely not be enough to cover the cost of capital.

The Winners Circle

For the first time in the four years of dong the annual strategic audit of the pharmaceutical industry, we have a tie. Amgen and Genentech share first place, followed by Forest and J&J.

The results may be a bit misleading. Though Genentech and Amgen had the same final score, they are very different companies—and this was in many ways Genentech's year to shine. Look at the data: Amgen has more sales, and scores well on a number of other metrics, but fascinatingly, Genentech's enterprise value is greater. The market is saying that this company has a great future ahead of it. You can see the same phenomenon elsewhere. Microsoft has annual sales of $20 billion to IBM's $80 billion, but Microsoft's valuation is ten times higher. It's all about Bill Gates' brain.

When you think about the future, there are questions about Amgen. The company had to buy Enbrel (etanercept). And the rest of its product line consists mostly of Epogen (erythropoietin alfa) and Neuopgen (filgastrim)—and two reformulations of those important products. Genentech, meanwhile, is going like wildfire. It has some negatives—it stumbled getting into rheumatoid arthritis and psoriasis—but overall the perception is one of great strength.

J&J is always there. This is the fourth year of this report, and Johnson & Johnson has been there all four years—as well as on the Fortune and BusinessWeek lists of top companies. It has been a solid performer for a hundred years. What's most exciting about J&J today is the notion of making products that are more like services—putting drugs, diagnostics, and devices together. Roche was there first. But J&J has been present all along too. Stents, orthopedic products, healthcare management systems—they're doing a good job of putting together the whole package of solutions.

Forest is a sort of one-trick pony but excellently managed. The company doesn't waste money on DTC. It doesn't spend an extra nickel on R&D, its science may not be cutting-edge, but Forest is focused and formidable in the way it executes.

These top companies are a reminder that there are many ways to achieve success in pharma, but strong, smart management and execution are the core of all of them. That's a lesson more companies will need to learn in the years ahead.

Data provided by Bill Trombetta, professor of pharmaceutical marketing and strategy at the Erivan K. Haub School of Business at St. Joseph's University in Philadelphia. He can be reached at


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