Industry Audit 2007 - Pharmaceutical Executive


Industry Audit 2007
Our sixth annual report dives deep into the numbers to discover the industry's true top performers—and how the cookie really crumbles

Pharmaceutical Executive

Sales Per Employee

This metric is difficult to manipulate—there's no smoke and mirrors here. Just a basic ranking of which company does the best job at getting the most out of its employees. The biotechs win hands-down here, with their 80 percent markups and $50,000-a-year biologics using small sales forces to call on niche specialty physicians. Having said that, note Forest's outstanding performance coming in third. Pfizer is the best major pharma in productive employees at fifth place, followed by J&J. Just as an interesting point of comparison, IMS's employee productivity is approximately $400,000 per employee.

Return on Invested Capital

If you were stranded on your island but you could have a second metric, it would be return on invested capital (ROIC). Return on Investment is a lot like family values. It is in the eye of the beholder and just as difficult to measure. But ROIC does cover some hard measures, like the cost of debt and of stock (like the classic Stern Stewart Economic Value-Added rationale). In other words, if you put EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) over total debt plus value of common stock, that return should at least cover the Weighted Average Cost of Capital (WACC). Given the approximate WACC at around 12 percent, a number of the Sweet Sixteen are not enhancing shareholder value. The average ROIC of the Sweet Sixteen is 12.7 percent for 2006. Forest is out front at double WACC, followed closely by J&J and Pfizer. If a company is not at least covering the weighted average cost of capital, it is destroying shareholder value.

Which Big Pharma Is the "Smartest"?

In an industry driven by innovation, we need a metric that takes into account a company's intellectual capital. Such a metric would encompass the value of drug brands, the corporate brand, the pipeline, and other indicators of innovation that may not be limited to technology or science.

One such approach is based on the work of Baruch Lev, an accounting professor at New York University's Stern School of Business (see "Accounting Gets Radical," Fortune, April 16, 2001, for an excellent, user-friendly article on his methodology).

Lev starts with a firm's net income before taxes. Then he allocates how this income is derived over the three basic kinds of assets that produce sales: cash assets; property, plant, and equipment; and intellectual property. According to Lev, cash assets earn an average of 4.5 percent. So 4.5 percent multiplied by a firm's cash assets gives an approximation of income due to cash assets.


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