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

Property, plant, and equipment over the years, net of depreciation, gets a similar treatment. They earn, on average, 7 percent. So 7 percent times the value of property, plant, and equipment gives you the income driven by these assets. To calculate the Return on Intellectual Property, take net income before taxes, subtract the return on income due to cash assets and income due to property, plant, and equipment, and divide by net income before taxes.

For 2006, the average percentage of earnings or EBITDA driven by brands, pipeline, or just sheer innovative ways of doing business is about 85 percent. Sanofi-Aventis, Forest, GSK, and J&J set the pace on this very important metric.

Some Final Comments

What explains superior performance? Well, we know what doesn't:

Scale and size Only Merck and AstraZeneca made the top five.

Top-down or decentralized model Yes, J&J is decentralized, but so is Schering-Plough.

R&D Pfizer spends the most on R&D, and the cupboard is bare. Amgen outspends Genentech, but Amgen has nothing to show for it, with the possible exception of denosumab (but a fire-breathing Roche is waiting in the wings to launch a competitive erythropoietin). Forest spends the least on R&D and yet continues to ride high. And this R&D impact, or lack of impact, should not come as a surprise. Even Apple has one of the lowest ratios of R&D spend.

Merger and acquisition This remains a siren song. But better to grow organically. Just ask Apple, Toyota, GE, and P&G.

Enterprise Value throws everything into a cocked hat. For example, Amgen is almost double Genentech's size. Amgen is a very profitable company, but growth will be hard to come by for Amgen, while Genentech is rolling it up. But Genentech's EV to Sales is double Amgen's. What is going on? Big used to mean superior. Until the mid-1990s a firm's market value usually tracked its sales. But then Microsoft came along with a market cap higher than IBM, even though Microsoft's sales were 5 percent of IBM's in 1993.

What's not to like about J&J? What were you doing in 1944? I was around then, but I was just getting potty-trained. Had I been precocious, I might have purchased one share of J&J when it went public in 1944 for $37.50. That one share is now worth about $950,000.

Novartis is also very frustrating. In terms of new drug introductions, Novartis is the innovator: From 2000 to January 2005, Novartis gained 13 new drug approvals. The only companies that even came close were Pfizer and Sanofi-Aventis, with nine each. And yet Novartis gets no respect. To quote Seinfeld's Frank Costanza, Merck seems to be back, baby: It launched five new drugs in 2006, with substantial run-ups in key metrics for 2006.

We'll be back same time next year with a new, improved Pharmaceutical Executive Industry Audit for 2007.

Bill Trombetta is professor of pharmaceutical marketing and strategy at St. Joseph's University. He can be reached at


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