Gross Margin: Free to Price is Key
4: Gross Margin
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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
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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
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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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