Stealth Pharmas - Pharmaceutical Executive


Stealth Pharmas

Pharmaceutical Executive

Cephalon, which saw its revenue jump 44 percent in 2006, faces the industry's common dilemma of coming up with new products. Generics are eating into pain drug Actiq's profits, and the biotech is being investigated for signing authorized-generic deals to protect profits of its star: wakefulness drug Provigil. The good news is that Cephalon is entering the oncology market, and its first cancer drug, Treanda, was approved in March; the bad news is that every other drugmaker is also piling into the cancer category.

Allergan, the aesthetics-lifestyle maven, is in the best of all worlds. It competes in a non-Medicare, non-Managed Care market, and its growth and gross margin reflect the Botox booster's nice little niche.

Gross Margin measures how well a firm prices its products (the higher, the better). Celgene, Gilead, and Allergan can all compete with the big three biotechs of Big Pharma—Genentech, Biogen Idec, and Amgen. In fact, Celgene shows a nose-bleeding markup of over 90 percent based on its multiple myeloma treatment, Revlimid, which costs patients about $50,000 a year, yet costs the company only pennies to make.

The surprises here are Endo, Cephalon, and King, with gross margin levels at or better than Big Pharmas' 2006 numbers.

Profit to Sales shows how a company manages its margin from sales minus cost of goods sold minus operating expenses, netting out to P/S (before taxes). Except for Gilead, which boasted a 52 percent P/S—exceeding Merck, Amgen, and Genentech—the other 11 stealths are at or below Big Pharma's 2006 average. This suggests that despite a handful of gaudy Gross Margins, stealths are not doing well at controlling margin or SGA (selling, general, and administrative) spend—and that includes marketing spend.

Sales to Assets is the Rodney Dangerfield of metrics—it gets no respect. Profit to Sales has to do with margin management; Sales to Assets has to do with asset management. Big Pharma's 2006 average S/A was 0.60. In other words, it took $1 invested in assets to generate 60 cents in revenue. Forest was number one with 1.04 (not listed here), while Novo Nordisk came in second with 0.883.

The simple calculation of P/S multiplied by S/A produces a sleeper—but very powerful—metric: Profit to Assets (aka Return on Assets or Asset Management). The average P/A for the Big Pharmas in 2006 was 8.7 percent. As for the stealths in 2007, Gilead once again shines with 0.379, besting even a formidable marketer like Forest (0.346 in 2006). Celgene, Cephalon, Barr, Teva, and Mylan need to scrutinize their respective asset-productivity lines.


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