SG&A: The Tool You Can Control
Our final metric, found in Table Nine, is Sales, General, and Administrative Expenses (SG&A). Although no weight is assigned
to this metric, it is becoming more important as an indicator of how well a company manages its overhead costs. And as payers
get tougher in shaping the demand for medicines, this is one area where companies have the freedom to act in a way that can
make a difference on the balance sheet. Ideally, therefore, SG&A should never increase faster than sales growth. If that happens,
earnings will suffer. However, companies often confront the need to balance the urge to go lean here against the strategic
imperative to invest to grow for the long-term. Organic growth is the sine qua non for long-term success, and in that case
there is a rationale for prudent increases in SG&A, around an "invest to win" strategy.
9: Selling, General, and Administrative Expenses
The 2009 leads in this category are Watson and Gilead, with the leanest proportion of SG&A to sales. Watson, for example,
pushed up sales by 23 percent while keeping SG&A growth under 10 percent. Allergan, Cephalon, and Forest were comparatively
top heavy on SG&A due to the costs associated with expanded portfolio indications and new product introductions.
And the Winner is ...
A Final Look at the Winners
When all is said and done, the key differentiating factor in delivering superior performance to shareholders is good management.
Gilead continues to shine on that score, with strong ratings on both of the Audit's top-weighted metrics: Sales to Assets and Profit to Sales. No other company in the annual survey has accomplished
this feat. To its credit, Gilead has consistently demonstrated the internal capabilities to invest efficiently and grow wisely,
in a way that enhances overall Enterprise Value. But as our cover feature shows, there are troubles ahead as the company confronts
the administration burdens imposed by accelerated growth, higher investor expectations around its diversification model, and
the arrival of new competitors in the HIV therapy area.
Runner-up Celgene has to be seen as the fresh "up and comer" in the industry and is actually the best performer on an across-the-board
basis. Its cash cow, Revlimid, continues to sparkle with additional life in the franchise from possible new indications. Celgene
also recorded the Audit's highest Enterprise Value to Sales ratio, of over nine-to-one. With stable management, it may be
well-positioned to take top honors next year.