Gross margin (GM) represents sales revenue minus the cost of goods (COG) sold on the P&L statement. This metric is heavily
influenced by the pricing conditions faced by each of our companies. The higher the GM and a track record of strong GM performance
over time suggests a healthy degree of market power in obtaining good prices from the customer base. What is less well known—but
increasingly important in this new era of biologics—is that GM also reflects the ability to get good prices on API and other
materials required to manufacture a drug: the cost of goods sold.
Here again, past is prologue, with companies having a strong specialty franchise and a selective customer base doing the best
(Gross Margin table), where placement ranking goes from high (24) to low (1). Biogen-Idec, Celgene, Allergan, Amgen, and Shire
take the top five spots because of their ability to wrest nosebleed prices. Significantly, we do see a slight drop in margins
over 2010 for all of these companies, save Allergan. This suggests a slow market trend toward more crowded competition in
the specialty space and thus greater price resistance from payers.
EBITDA/sales: net income
The EBITDA (earnings before interest, taxes, depreciation, and amortization) to sales metric (Net Income to Sales table) is
a simple way of demonstrating a company's basic profitability. It is the net income from operating the firm as a business
before accounting and finance issues create more smoke and mirrors. Gilead comes in first with a ratio of earnings to sales
ratio of over 49 percent—which is actually down from last year—followed by Biogen-Idec and then Pfizer, which benefited handsomely
from aggressive cuts in operating expenses. Forest Labs had the steepest decline in profit performance of the group as it
confronted the expiry earlier this year of the US patent on its biggest blockbuster drug, Lexapro.
To put both the gross margin and EBITDA/sales rankings in perspective, compare our audit's high flyers to Apple, arguably
the most innovative firm in the world. Interestingly, Apple spends only 2.2 percent of its sales on R&D, far less than the
norm for Big Pharma. Apple's gross margin for 2011 was 40.5 percent with a profit margin of 35.6 percent; this is small change
compared to Biogen-Idec's gross margin of 86.8 percent and an EBITDA to sales ratio of 42 percent. The data shows overall
that biopharmaceuticals remains one of the most profitable business sectors, with consistent high returns close to the 20
percent range. However, it is an open question whether in the long term these big margins in pharma can be sustained, even
for products with small eligible populations for which there is a real medical need.
Sales to assets
Building on the profit margin, which is facilitated by how well a company maximizes revenues while maintaining tight control
of operating expenses, sales to assets (Sales to Assets table) is an indicator of the ways a company deploys its assets. It
is vital to recall that a firm is in business to use assets, not just to own them. The more a firm can keep assets off of its balance sheet, the higher the turnover on sales to assets. On this measure,
Novo Nordisk comes in at the top, at 1.09, i.e., for every dollar Novo Nordisk invests in assets, it generates $1.09 in revenue.
Roche, Lilly and Hospira follow, respectively. Amgen brings up the rear, with 32 cents spent on assets to generate every dollar
Sales to Assets
EBITDA/assets: return on assets
The EBITDA (or net profit before taxes) to assets ratio is a critical measure. It reflects how good a firm is at the two basic
ways to make money: margin management and asset management. Novo Nordisk, AstraZeneca, Roche, Biogen-Idec, and Gilead shine
in the Income to Assets table. All have a reputation for high levels of efficiency in using their in-house resources while
working the customer base to maximize pricing opportunities. The surprise here is Teva, which scored lowest on this measure
and appears to be having trouble absorbing the spate of recent acquisitions designed to diversify its offerings beyond generics.
The ratio of sales to the number of employees is a basic measure of productivity: it links the revenue to the size of the
company's employee base. The key is not necessarily to have the fewest workers but to maximize the revenue that each of these
workers generates in the course of a year. The Sales to Employee table shows that Gilead generates about $1.9 million in revenue
for every employee, followed by Celgene, Biogen-Idec, and Amgen. The differential between high and low is startling. The Gilead
employee produces about eight times the revenue that a worker at Hospira or Mylan does—both are mired in commoditized business
lines with low margins. It is another indicator of the importance today of smaller, highly trained, and focused sales teams
able to target segmented therapeutic areas where there is the opportunity to charge premium prices because of the high unmet