Still Spinning Profit
Net Profit (EBITDA) to Sales: This ratio is the profit margin. It shows what is left after subtracting cost of goods sold and operating expenses from sales
revenue off the profit and loss statement. Again, the higher it is, the better a firm's performance. The average profit margin
in 2010 was: 17.2 percent, reflecting the fact that the drug industry is still one of the most profitable industries in the
world, at the levels of investment banking and energy.
8: Income To Assets
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Sales to Assets: This is an under-the-radar metric. It reflects how well a firm manages its assets. Companies are in business to use assets—not
simply own assets—productively and efficiently. The average Sales to Assets ratio for 2010 was 0.533. This means that every
$1 invested in assets for our companies generates 53 cents in sales revenue. The metric, however, varies by industry; industries
that are capital intensive like steel manufacturing will have relatively low ratios. Industries that tend to rely more on
intellectual capital will show relatively high ratios. For 2010, Novo Nordisk was the most productive and efficient drug firm,
followed by AstraZeneca, Gilead, and GSK.
Return on Assets: Return on Assets is one of our three most critical metrics, the other two being Change in Enterprise Value and Enterprise
Value to Sales. The reason why Return on Assets is so important is that it combines the two basic ways to make money: Margin
Management and Asset Management. When you multiply Profit to Sales (P/S) by Sales to Assets (S/A) you get Profit to Assets
(P/A). Most people simply fall back in desperation to Profit to Sales: Double sales! ... Cut my expenses in half! ... If your sales are in the $30 billion-plus range, it will be difficult to double sales any time soon. If you are merging and
acquiring and simply firing/laying off people and closing plants, there is no one left to fire except the executives at the
top with their inflated golden parachutes. But when you combine the dozens of line items on the income statement along with
the line items on the balance sheet, you don't need to dramatically change one statement or the other; indeed, substantial
changes in performance can be achieved with relatively minor changes to each line item. When Sales to Assets is multiplied
by Profit to Assets, Profit to Assets reflects a much more meaningful measure of performance.
Strong Management Counts
To that point, we see the following leaders in the Dr. Bill Trombetta Hall of Fame, which cites those companies that, over
time, have tended to excel in managing assets as well as margins:
Sales to Employee: This is another metric that reflects productivity and efficiency. As with Sales to Assets, the company that can do more with
less, or is more productive and efficient with the same level of assets, performs better than its peers. The average Sales
to Employee ratio for 2010 was: $629,316. That is, each employee of every company in our lineup produced, on average, $629,316
in revenues. The higher the ratio, the more productive and efficient the firm is; the lower the ratio is an indication that
the firm is overstaffed and/or it needs to increase its sales given its work force.
9: Sales To Employee
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As per all our former audits, we see that the biotechs are at another level in terms of sales force productivity. Thanks to
high drug prices, lower-sized sales forces, and more targeted markets, sales for biotechs need relatively fewer employees.
Setting a torrid pace is Gilead with close to $2 million in sales per employee.
SG&A to Sales: The final metric is Sales, General and Administrative Expenses (SG&A) to Sales. We do not weight this metric because it may
be a temporary year-to-year situation where a company introduces or launches a new drug or needs to train a new sales force.
But over time, it is important that growth in SG& A does not exceed sales growth. Another term for SG&A is overhead, or burden.
This metric appears on a firm's profit and loss statement or income statement. So it is an operating expense that includes
marketing and sales spend but substantially more items than just sales and marketing. SG&A includes all expenses necessary
to run the business on a day-to-day basis, including leasing, legal, and accounting fees, utilities, rent, etc. Sales and
marketing spend is a relatively low portion of SG&A.
For the period 2010 – 2009, the average SG&A spend to sales for our lineup is 30.4 percent percent, compared to 28.1 percent,
respectively. Sales growth averaged about 11 percent, with growth in SGA averaging 8.2 percent. So the pattern for 2010 moved
in the right direction. But there are situations that call for comment. Noteworthy are the biotechs such as Gilead and Biogen-Idec
that have relatively little need to spend on marketing and promotion. It is not clear why GSK's numbers are so far out of
line, at 45 percent, for 2010; with sales growth negative for the period, the 36 percent in SG&A is counterintuitive. This
may be associated with hybrid firms that offer more than just pharmaceuticals. For example, Allergan's cosmetic franchise
relying on out-of-pocket spend seems to line up with more of a need to market. Again, this metric does not merit weighting
as a force associated with successful performance. But as drug companies see restraints on sales growth and the ability to
raise price, the ability to control SG&A will affect performance. This is certainly a judgment that Wall Street is prepared
to make, as the perception is that Big Pharma in particular has only begun to get its expenses in line with the new market
realities imposed by price competition and patent expires.
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