Industry Audit - Pharmaceutical Executive

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Industry Audit
The Company of the Year: Our fifth annual report dives deep into the numbers and comes up with the industry's true top performers.


Pharmaceutical Executive


So although Pfizer's EV is huge, its shareholder value has decreased by 13.8 percent from 2004. AstraZeneca (with a 15.5 percent increase) and Novartis (13.4 percent) led the industry in creating shareholder value. Abbott and J&J tied for the last place. Each destroyed 15.8 percent of shareholder value. Eleven firms added to or created shareholder value between 2004 and 2005; five firms destroyed it.


From one year to the next...
We expect bigger companies to have higher EVs. One way to normalize differences in scale is to divide EV by EBIDTA (earnings before interest, depreciation, taxes, and amortization).

But here we divide EV by Sales, which is the great equalizer for comparing large and small companies. Genentech takes first place with a ratio of 12.93, followed by Amgen with 6.57. The interesting point: Though Amgen has almost twice Genentech's sales, Genentech's EV to Sales ratio is almost twice as high as Amgen's, which may mean that investors believe Amgen's drug portfolio will provide slower growth than Genentech's.

Biogen Idec, Forest Labs, and Lilly achieved noteworthy EV to Sales performances in 2005, finishing in the top third of the field.

Earnings per Share and Price to Earnings Multiple J&J comes in with the highest Earnings per Share ratio at $3.46; Biogen-Idec had the second lowest EPS ($0.47) and by far the highest Price to Earnings Multiple: 95.2. Genentech again scored high, with a P/E of 68.8. Among the conventional pharma companies, Schering-Plough led the pack with a P/E of 66.7.




Gross Margin This is an important metric because it shows who can command premium pricing. In an environment hostile to high prices, the ability to charge them is associated with innovation. Biogen Idec achieved the best pricing in 2005 with a gross margin of 85.4, followed closely by Genentech at 85.2 percent and Amgen at 83.5 percent. In that fast pack is Pfizer, the only non-biotech with a gross margin over 80 percent.

Profit to Sales The profit margin shows net profit before taxes after cost of goods sold and operating expenses are deducted. Amgen is head and shoulders above its competitors at 29.6 percent. Number two in profitability is Forest Labs at 23.8 percent. Merck and J&J both topped 20 percent, while Biogen Idec and Schering-Plough were the only companies to dip below 10 percent.

Sales to Assets This important metric measures how productive a firm is in managing its assets. As in the last four years, J&J stands out on asset management, followed by Forest and Abbott. The bottom of the list, meanwhile, is an interesting mix of giants and biotechs: Pfizer, Amgen, GSK, Sanofi-Aventis, and Biogen Idec.








Profit to Assets Multiplying the profit margin (Profit to Sales) by asset turnover (Sales to Assets) results in Profit to Assets or return on assets. This metric shows which firms excel at margin management (Profit to Sales) and asset management (Sales to Assets). Excelling at both is the Holy Grail. Forest finished in second place on both metrics. GSK, AstraZeneca, J&J, and Forest take the top spots in the Profit-to-Assets metric.


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