Stealth Pharmas - Pharmaceutical Executive


Stealth Pharmas

Pharmaceutical Executive

Enterprise Value to Sales may be the mother of all metrics. Why? Because EV to Sales adjusts for the influence of scale—it's the normalizer. As noted, Teva and Novo Nordisk are the top two in terms of revenue, so we would expect their EVs to reflect their revenue scale—just as Pfizer's EV tracks its $50 billion in sales. But on the EV/S metric, the generics juggernaut comes in only at number six. While Teva and Novo Nordisk are solid performers, their future sales and profits potential are not viewed with as anywhere near the optimism for future performance as powerhouses Celgene and Gilead.

In a class by themselves, Celgene, the cancer specialist, and Gilead, the infectious disease innovator, have a higher EV/S than even the best of Big Pharma (2006 numbers—last year's audit is not in yet), Genentech and Biogen Idec.

Despite King Pharmaceutical's impressive showing on a number of metrics, its EV and EV/S are at the bottom of the 12 stealths. For its board, this might raise a question of strategy: whether in-licensing castoff drugs to the general exclusion of in-house R&D is souring investors on its stock. Mylan, which was close to buying King in 2004 before Carl Icahn nixed the $4 billion deal, isn't doing much better, but the generic firm's recent acquisitions of Merck KGAA's generics and Matrix Labs have vaulted it into top-tier competition with Teva and Novartis' Sandoz. Mylan's lackluster EV showing may be explained partly by the view that it paid too much for these shops. As the Wall Street Journal's Robert Cyran and Rob Cox recently reported, Mylan's return on investment (ROI) is likely to be only about 7 percent, compared to its internal weighted average cost of capital (WACC) of 8 percent.

What's WACC? It's a number to watch, now that deal making is leading industry enterprise. WACC reflects the cost a firm incurs in raising capital. It's a weighted combination of debt plus common stock in a firm's capital structure. Mylan's WACC exceeds its ROI, which means the company is currently destroying shareholder value. This is reflected in the market's perspective on the rough road ahead for Mylan.

Grow or die is the law of every industry, and it's measured by Change in Revenue. While growing (generally defined as beating last year's numbers) is good, growing organically—through innovation rather than acquisition or merger—is better. According to IMS, in 2007, Big Pharma grew about 6.4 percent. No big whoop. By comparison, the stealths were on a tear last year (Barr tops our list with 63 percent), with only Cephalon and King missing double digits —or for that matter, even single digits.


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