More important, the ranking indicates that generics companies can build an alternative future from that of commodity producers
condemned to a life of pumping volume sales to accommodate razor-thin margins. Producers are staking out a role in higher
end specialty medicines and aggressively engaging around biosimilars, which if approved by regulators can command higher price
points. Three key generics companies—Endo, King, and Teva—are doing better than half of the 27 in terms of profitability.
Endo itself posts a profitability performance superior to Big Pharma players like Wyeth, Merck, Lilly, Johnson & Johnson,
Abbott, and BMS.
Sales per assets Figure 10 sets the benchmark for company productivity in managing assets. It shows how a firm's productivity changed from
2007 to 2008 in terms of sales revenue divided by the assets held on its books. The higher the ratio, the more productive
a firm is over the course of the year. Roughly half of the 27 companies in this year's audit posted modest improvements in
2008 over 2007. This metric is unique in that the company can produce results from actions it can initiate and execute under
its own control. This should be a key management priority now that it's harder to wrest profits by unilaterally raising prices.
Ranking of overall productivity is highlighted in Figure 11 with Novo Nordisk in the top spot. Its .900 ratio means that for
every dollar Novo Nordisk invests in assets, it generates 90 cents in revenue. Hence, there is another way to generate profit:
by not only focusing on margins, but also on how well assets are managed.
FIGURES 11 & 12
Profit to assets or return on assets When we combine Profit to Sales with Sales to Assets, we get a very important metric: Return on Assets. The higher this ratio
is, the more impressive a firm's performance. Figure 12 shows Gilead and GSK at the top of the ranking, reflecting stellar
management of assets to maximize profit margins. But it's profits, of course, that drive the returns to shareholders, which
is why Gilead Sciences, paced by its emergence as the industry leader in advanced HIV therapies, has been an attractive purchase
for institutional investors for some time.
Sales revenue per employee How productive is the company's work force? Figure 13 highlights this increasingly important metric. GSK, Abbott, Genentech,
Teva, Novo Nordisk, and Cephalon were the laggards, posting lower sales per employee in 2008 against 2007.
FIGURES 13 & 14
Figure 14 shows firm employee productivity against sales for 2008. Gilead once again is on top with an impressive $1.53 million
in sales per employee—roughly three times the ratio for industry giants like Pfizer and Johnson & Johnson. A key question
for Pfizer is whether more cost-cutting from job reductions will yield increased productivity per worker employed. The record
from past mergers suggests that payoff will take years to accomplish.
Selling, general, and administrative expenses This is a metric much in vogue in the current era of declining demand. With industry revenues more or less flat, management
needs to scrutinize its overhead in terms of selling, general, and administrative expenses. Figure 15 compares the extent
that a firm either increases or decreases its SG&A compared to whether its sales revenue increased or decreased. In general,
it is better for a firm to increase its sales more than its overhead even if the latter is necessary to help establish a new
medicine for success in the market. SG&A increases higher than sales increases are not good for a company, particularly over
the long term.
FIGURES 15 & 16
For example, Gilead increased sales over the year 25.3 percent, but increased SG&A at half that rate. Meanwhile, Amgen's sales
increased by only a meager 1.5 percent— and SG&A rose by more than 22 per cent.