Industry Audit 2009 Sponsored By: - Pharmaceutical Executive


Industry Audit 2009
Sponsored By:

Pharmaceutical Executive

The second metric weighted at level 3 is Enterprise Value to Sales. This metric normalizes the differences in scale due to absolute dollar revenue. Figure 5 places each of the 27 surveyed companies, and indicates which direction the ratio went from 2007 to 2008. Success in this metric is harder to achieve in a climate marked by intensive pricing pressures, economic disarray, and significant regulatory concerns about safety and risk. Only Amgen, Genentech, Teva, and King were able to wrest an EV to Sales increase in 2007–2008.

The placing of firms relative to EV to Sales is shown in Figure 6 and makes for our second 3-weight metric. Celgene is the clear winner in this metric due to the fact that its shares have been heavily discounted despite its strong therapeutic franchise in multiple myeloma, where it enjoys an unusual amount of pricing freedom due to a state-of-the-art treatment.

This metric is also an indicator of market perceptions that firms are on the upswing—or, alternatively, that their best days are behind them. The higher the ratio, the greater the likelihood that a firm's growth will outpace its peers in both sales and profit.

Gross margin Figure 7 shows gross margin for each firm, along with an indication of increase or decrease in 2007–2008. Gross margin reflects a firm's pricing power, in terms of the ability to get price increases or at least maintain prices. The lesson behind these numbers is: the higher the gross margin, the better.

Eight of the 27 audited companies show a decrease in gross margin from 2007, a trend reflective of the capacity of payers to dictate terms on pricing. Biogen-Idec displayed the most aggressive pricing prowess in the critical US market, allowing it to reach a gross margin of over 90 percent—highest of the group. This is largely due to its therapeutic dominance in areas of high medical need, like MS.

Figure 8 ranks companies on the basis of gross margins for 2008. As noted, this ranges from Biogen-Idec's 90.2 percent down to the "stealth generic" off-patent companies with limited protection on prices. Endo, with an impressive markup ratio of 78.8 per cent, is the notable exception here—a consequence of the company's position in generics that are difficult to manufacture. Allowance of a regulatory pathway for biosimilars in the US may even out this trend somewhat.

FIGURES 9 & 10
Profit margin or margin management High profit margins are a function of good management, with particular attention paid to cost control. This in turn drives the larger financial performance measure of EBITDA: earnings before interest, taxes, depreciation, and amortization. In essence, EBITDA determines the level of profit against sales. The higher this ratio, the more impressive a firm looks to shareholders and the investment community. Figure 9 shows Gilead Sciences at a very impressive P/S ratio of 52.6 percent.


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