Three firms—Bristol-Myers Squibb, Abbott, and Forest—dropped in drug revenue, and another five failed to hit the average growth
rate of 8.3 percent. It is important to note that the Price to Earnings Ratio reflects expectations of future earnings growth
(see page 90). That growth can come from higher sales, increased profit, or both. But today's investors seek evidence of top-line
growth and the quality of those top-line sales numbers. Profits that come from cost cutting and ever-increasing efficiency
are not as valuable as earnings that come from internal, organic sales growth, because sales revenue increases are considered
more sustainable.
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You might think it's tough to produce revenue growth if you are Pfizer at $45 billion in sales or GSK or Sanofi-Aventis. Consider
GE and Procter & Gamble, at $160 billion and $72 billion revenues, respectively. Yet each company seeks, and is achieving,
organic growth: GE at about 8 percent and P&G at 4 to 6 percent. That means that GE has to come up with $13 billion of new
revenue a year and P&G, almost $4 billion. That makes Pfizer's and GSK's situations look like a day at the beach.
It is a breath of fresh air to see how Jeffrey Immelt, the CEO of GE, imagines growth: GE has a $17 billion healthcare business
that competes in a $4 trillion industry that's growing 8 percent a year; he thinks GE Healthcare can grow 8 percent a year.
In the United States' $13 trillion economy, Pfizer's $45 billion is a grain of sand in the desert.
Enterprise Value
If you were alone on an island and could bring only one metric with you, Enterprise Value would be it: The Mother of All Metrics.
Enterprise Value takes into account a firm's market capitalization (number of shares outstanding multiplied by the price of
the stock on a given day) plus liabilities minus cash, or about what it would take to buy a company. Enterprise Value to Sales
(that is, Enterprise Value normalized for scale) and Change in Enterprise Value are critical metrics.
Schering-Plough, Merck, and Abbott set the pace in Change in Enterprise Value, while seven of the Sweet Sixteen saw shareholder
value erode in 2006.
Meanwhile, in Enterprise Value to Sales, Genentech—at 9.39—is double most of its peers.
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