Stealth Pharmas - Pharmaceutical Executive


Stealth Pharmas

Pharmaceutical Executive

R&D spend in and of itself tells us little about a company. For example, Apple, arguably the most innovative company in the world, spends about 3 percent of its annual revenue on R&D. But it's interesting to compare firms based on their investment in developing new products, and the metric we use is R&D Spend to Sales (top right, page 48). R&D does not appear to be directly associated with economic performance. Gilead's 13.5 percent is below average for major pharmas, let alone biotechs, yet the HIV powerhouse outperformed all the Stealths for the third year in a row.

Gross Margin (middle right, page 48), or markup, reflects whether a firm has pricing power; generally, the higher the margin, the better—and it should always be rising. In today's hostile environment, the ability to maintain—and even increase—prices is impressive. Only four companies had enough power to accomplish this: Cephalon, Novo Nordisk, Teva, and Watson. But note the eye-popping margins of Celgene and Allergan; and still their prices moved down.

There are two basic ways a firm makes money: Profit to Sales, or margin management, and Sales to Assets, or asset management. Profit to Sales (bottom right, page 48), also known as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), is important—but it can be easily manipulated with financial smoke and mirrors. The profit margin reflects not just pricing power but how a firm controls its expenses. Note how effective Gilead is at cost control, offsetting a middling gross margin. Also, compare Celgene's nosebleed pricing with its lackluster ability to control expenses.

Sales to Assets (top far right, page 48) is the Rodney Dangerfield of metrics—this measure of how well a firm is at managing its assets gets no respect. You are in business not to own but to use assets. Only two Stealths went backwards in terms of asset productivity: Teva and Watson.

When you multiply P/S and S/A, you get one of the most significant measures of performance: Profit to Assets (middle far right, this page), or return on assets. And here, once again, Gilead combines its double-threat prowess on both margin management and asset management to rise to the top.

Sales per Employee (bottom far right, this page) measures the productivity of employees. (Higher is better. Duh.) Gilead, Endo, and Celgene would rank up with biotech behemoths Biogen-Idec, Genentech, and Amgen in terms of employee productivity.

And the year's best-in-class Stealth Pharma? As in 2007, Gilead rules the Stealth category with another stellar performance. It is number one in the two ways to make money: managing margin and managing assets. Excelling at just one of these metrics is hard enough, but to nail both displays truly exceptional management.

All the same, Gilead's drop in Enterprise Value is a concern. While its HIV franchise remains the 800-pound gorilla—and while diagnosis and treatment are expanding—competitors are on the horizon. Bill Trombetta is a professor of pharmaceutical marketing at St Joseph's University in Philadelphia. He can be reached at


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