Enterprise Value: The Indispensible Metric
2: Enterprise Value
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As noted, this is the Holy Grail in the race to improve the kind of performance that moves share price. Enterprise Value reflects
the true value of a company based on its market capitalization—expressed as common stock shares outstanding—at the posted
stock price, plus cash assets minus debt. It closely tracks the size of a firm's gross sales. (See Table Two for Enterprise
Value rankings of the 24 Audited companies.)
The important caveat in presenting a true picture of performance is how that value is created—or destroyed. For example, Pfizer and Merck scored the biggest gains in Enterprise Value over 2008,
moving up from fifth to second and from seventh to fourth, respectively. But most of this was linked to the one-time boost
in sales associated with merger activity rather than the kind of permanent organic growth driven by new products, improved
business processes, or other changes that demonstrate real added value to the customer.
Teva, BMS, Allergan, Watson, and Endo notched progress on this metric, though not at the pace of Pfizer and Merck. As these
companies moved forward, GSK suffered the biggest downward shift, from second in 2008 to fifth place this year, followed by
Sanofi-Aventis, which went from fourth to sixth. Both companies have hassled with regulators over key portfolio products that
depressed share price to the point where, at least for now, neither is considered a "growth" stock. Significantly, the only
two among the 24 to score an actual negative in Enterprise Value were in the stealth pharma segment: Cephalon and King, declining
4.2 percent and 10.1 percent, respectively, against their 2008 performance. Through much of the past year, the two companies
faced generic threats due to pending patent expirations and enforcement disputes.
3: Enterprise Value to Sales
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The second metric weighted at a hefty three is Enterprise Value to Sales, listed here as Table Three. This metric normalizes
the differences in scale due to absolute dollar revenues and is thus a more accurate barometer of future capacity to grow
sales and profits—the higher the ratio, the more impressive the performance. Celgene and Gilead posted the best ratio, retaining
their leads from last year. Celgene, in particular, has a stiff wind in its sails with a strong oncology portfolio led by
its $2 billion-plus blockbuster Revlimid, for multiple myeloma. Strategically savvy acquisitions promise to expand this therapeutic
franchise, and investors have been slow to discover the advantages in the stock. Gilead, while retaining its No. 2 position
on this key metric, did less well in 2009 than previously—its EVS ratio fell from 7.48 to 6.03—due to the financial impact
of costly investments in portfolio diversification. It's a possible indicator of trouble ahead as generic challengers contest
its leadership position in HIV.
Pfizer, in contrast, scored a dramatic gain in the overall ranking, moving up the list from 19 in 2008 to ninth this year,
but this is largely due to the temporary windfall impact of the merger with Wyeth. Merck evidenced a similar, but not as dramatic,
jump.
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