The great revenue divide
A good way to start any industry evaluation is benchmarking it against the overall macroeconomic picture. We do this based
on the real GDP growth rate in what is still pharma's largest single market: the United States. US GDP last year was modest,
rising about two percent. The surprise is the US pharmaceutical industry fared worse, with IMS Health reporting that revenues
fell into negative territory for the first time in 50 years. Factors behind the drop included post-recession strains on public
budgets and private-sector employment as well as the steepness of the patent cliff from 2010-2012, when iconic blockbusters
like Lipitor went off patent. The contrasting performance between expanding GDP and shrinking industry revenues marks the
end of the historic trend line that left drug industry sales immune from broader economic pressures.
Audit Data Sources & Table Key
On the more narrow measure of returns to shareholders, while the Dow Jones Industrial Average was up 15.2 percent, the pharmaceutical
index trailed this indicator as well, rising only 10.8 percent in 2012. Healthcare services and biotechnology shares performed
relatively better, increasing by 17 and 41 percent, respectively.
These trends are bolstered by the audit's analysis of sales revenues for our 24 target companies, which ranged from top-ranked
Johnson & Johnson, at more than $67 billion, to Endo, in last place, with sales of slightly more than $3 billion. The key
marker here is revenue growth, which is a critical signpost of success in a climate where market pressures are conspiring
to limit gains derived from price increases on existing products. Who is growing and who is not? Are companies introducing
new medicines and expanding the customer base at the same time? There is an apt analogy in Woody Allen's cutting comments
to Diane Keaton in the classic 1977 movie "Annie Hall." "Our love is like a shark. A shark has to stay in constant motion
or it dies. What we got here is a dead shark." The larger message: a shark is a predator and can never relax; the choice is
either kill and grow, or be eaten.
Unfortunately, the read from the 24 suggests an industry that is literally dead in the water. The Annual Sales table shows
average growth for the group fell to negative two percent in 2012; no less than eight companies—all from Big Pharma—were in
the negative, led by BMS at minus 17.04 percent, followed by Astra Zeneca (-16.7) and Pfizer (-13.0). Again, it was the 16
smaller, more nimble "stealth pharma" companies that occupied all the positive territory, with Actavis growing the fastest,
at 29 percent, thanks to the acquisition of the Watson generic business. Celgene also appears solidly positioned for continued
growth, with portfolio depth in important areas like oncology.
Enterprise value growth
Despite the negative sales growth, overall enterprise value in the 24 rose by 13 percent, as shown in the Enterprise Value
table. To put these numbers in perspective, according to Forbes magazine the average major league baseball team posted enterprise value growth of a little more than 23 percent in 2012,
or almost twice the average for our pharma 24.
Enterprise Value to Sales
Gilead exhibited enterprise value growth of nearly 120 percent, followed by Actavis, at 101 percent, and Novo Nordisk, at
slightly more than 38 percent. Gilead is a mainstay on the list for its record of operational efficiency, but also has benefited
from the increasing mandated access to HIV medicines worldwide. Actavis is on an improvised, non-organic growth curve due
its combination with Watson Pharmaceuticals in 2012, making it the world's third largest generic manufacturer, a record slated
to be compounded further by the planned tie up with Warner-Chilcott.
One disconcerting sign of the times is the spinoff of pharmaceuticals from companies that are hybrids, based on the rationale
that the assets remaining will actually be valued higher by Wall Street. Recent examples include Covidien throwing off its
Mallinckrodt drug arm and Abbott's jettisoning its drugs business to pursue bigger margin, high growth areas outside of pharma.
The new Abbvie's stock spinoff, at $56 billion in market cap over annual sales of $18 billion, yields a market cap to sales
ratio of about three to one—less than the enterprise value to sales average among our 24 companies. This suggests marketers
have lower expectations for the new company's long-term growth and earnings.
Net Income to Sales
Enterprise value to sales
This is a critical financial metric. The higher the ratio here, the assumption is there is additional forward momentum—the
company is just getting started; the sky's the limit. A low ratio suggests the opposite: a company's best growth prospects
are behind it; its stock value lies more in the smaller benefits associated with funds for widows and orphans. The Enterprise
Value to Sales table shows that the metric has increased for the entire group, reflecting the better alignment that has taken
place in recent years between the drug development process and areas of unmet medical need. Gilead again cut a big swath through
this ratio, nearly doubling its performance compared to 2011. There was also outstanding performances by Novo Nordisk and