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

Gross Margin

Gross Margin tells you how good you are at pricing. The higher it is, the better. And no industry sports higher gross margins than the drug industry. Biogen Idec serves as the yardstick for 2007, with a GM of almost 89 percent, followed by Genentech and Amgen. No surprise here, with the three classic biotechs capitalizing on super-high-priced biologics. And then Pfizer—noted for never, ever competing on price—comes in at number four. With the average GM for the Sweet Sixteen at 75 percent, note how Abbott and Schering-Plough continue to struggle in pricing.

But the interesting pattern here is how stiff the rankings are from year to year. That is, the placements are almost identical from 2005 to 2006 with minor flip-flops here and there. The significance of this is that there is no price competition among the big pharmas. If I can spot this, so can the Department of Justice and every state antitrust section very concerned over very high drug prices and the absence of any price competition (except for the generics). The recent conviction of three drug firms on reimbursement overcharges should be a wake-up call to the industry to make pricing a strategic priority and not just a tactical routine.

Return on Assets

When you multiply the profit margin (Profit/Sales) by Sales/Assets, you get a very important metric: Return on Assets, or Profit to Assets (P/A). Remember the old chestnut about a triple threat in football: someone who was good at passing, running, and kicking? The point is that it is difficult to excel in any one of these skills, let alone two or three. Pharma should look for the Double Threat: excellence in margin management (P/S) and asset management (S/A). It is tough enough to excel in just one of these metrics, so special recognition should go to those firms that do well in both, resulting in superior performance.

Forest is in a class by itself in asset management and just average on margin management, but the strong performance on Sales to Assets propels it into first place overall on Profit to Assets.

Genentech has really kicked up performance in Sales to Assets since last year, along with its high gross margin and margin management, placing the company third in Profits to Assets.

Johnson & Johnson is mediocre at margin management and weighed down a bit by lower margins on the 30-plus percent of revenues accounted for by OTC. But its strong second-place ranking on S/A take it to number four on Profit to Assets.


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