Pharm Exec's Ninth Annual Industry Audit - Pharmaceutical Executive


Pharm Exec's Ninth Annual Industry Audit

Pharmaceutical Executive

Gross Margin: Free to Price is Key

4: Gross Margin
Gross Margin is cited in Table Four for each of the 24, along with the rate of increase between 2008 and 2009. Gross Margin is important as it portrays a firm's pricing power, in terms of the ability to increase prices or maintain them against an increasingly powerful and demanding payer base. In other words, the higher the Gross Margin, the better handle the company has in managing the market and keeping shareholders happy through solid profit growth.

Teva: The Big Disrupt
Overall, the numbers show companies with a focus on specialty medicines that encounter little competition in their therapeutic category can continue to reap very high rewards. Once again, the best firms in 2008—Celgene and Biogen-Idec—came out on top, with Gross Margins in excess of 90 percent. Both are heavily focused on niche specialty markets. Ten of the 24 posted lower Gross Margins this year against 2008, reflecting the growing ability of payers to dictate the terms on pricing in therapeutic areas characterized by numerous follow-on products.

But the real surprise is the still hefty 53 percent performance of the leading generic producer, Teva. Even though the number was slightly down against 2008, it serves as a counter to the notion that the generics segment is a low-margin business—a view clearly not shared by Teva management.

Profit Metrics

5: Profit to Assets
Next, we move to Profits (Table Five)—mother's milk to shareholders. Profits tend to show what remains after operating expenses are subtracted from gross margins. Thus, Profits can be positively influenced by effective control of costs. This in turn drives larger financial performance measures built around 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 the investor community. Table Six shows that, all told, the 24 averaged a Profit Ratio of around 34 percent—not as high as in the past, but an enviable benchmark against other industries. Again, Teva refutes the idea that generic company margins are razor thin in comparison to the innovative sector, with a Profit Margin of 30.8 percent, or just below the average—and surpassing the performance of Big Pharma innovators like Novartis, Abbott, and Merck. However, most of the Big Pharma players did well in the category too, including Pfizer, Sanofi-Aventis, and especially GSK.


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