Sales, general, and administrative expenses
SG&A is an important metric but we do not weight it because in any one or two years, a firm might be in the middle of a growth
cycle, launching new products and entering new markets. For example, Gilead and Biogen-Idec show increases in SG&A, but the
former is revving up for its oral hepatitis C line introduction and the latter is launching a new multiple sclerosis drug.
In such cases, SG&A is more an investment than a cost.
However, this ratio, which remains the basic measure of corporate overhead, should not exceed sales or profit growth for an
extended period of time. The General Administrative Expenses to Sales table shows that on a group basis SG&A is increasing,
from 42.13 perent of sales in 2011 to 43.04 percent in 2012, despite the corresponding negative growth in sales for the industry.
It's a ratio that is clearly heading in the wrong direction in so far as future profitability is concerned, and accounts for
some of the urgency expressed by investment analysts about changing the basic pharma business model. In this regard, it is
worth mentioning that workforce restructuring—firing and laying off employees—shows up as an expense under SG&A, suggesting
that the industry record in doing that is better than increasing sales or locking in growth. The figure also includes litigation
reserves, another bureaucratic drain on the culture of growth.
Sales to Employee
And the winner is…
Novo Nordisk ranks top of the league. The Danish market leader in the diabetes franchise is followed by Gilead; Biogen-Idec;
Celgene; and Roche, all lean and mean specialty biotech/pharmas.
How did Novo Nordisk do it? It was simple: by running the table on key metrics, and scoring consistently well—if not always
the highest—in all areas. The company came in third on creating shareholder value and on enterprise value to sales, both important
indicators that reveal future growth and earnings potential. It ranked fourth on gross margin, paced by a long and strong
track record in being able to raise prices. A focused commitment to a high potential therapy helps as well: diabetes is a
lucrative segment with an enormous well of unmet medical need, particularly from a global perspective. US healthcare spend
on diabetes agents increased by 11 percent over the past year; utilization rose by 1.5 percent, while prices posted a gain
of 9.5 percent. Not surprisingly, given its broad exposure to the field, Novo Nordisk came in second on profit to sales, pushing
up that performance metric by over two basis points.
However, diabetes is an increasingly crowded field, with more room for price discounting. Yet Novo bought some insurance through
its surge on asset management (sales to assets), where it achieved a rate of performance not seen since we launched the annual
audit. With very high margin management (profit to sales) and asset management (sales to assets), the company ran away with
the key metric, return on assets. Finally, Novo Nordisk's employee productivity proved spectacular compared to the rest of
the field. And it achieved all this with a SG&A that was actually lower than in 2011.
Dr. Bill’s Hall of Fame
The audit is also experiencing some flux, which is to be expected given the pace of change in the industry—half of the current
24 companies on the list are newcomers since this project was launched in 2002. Surprising as it may seem today, then the
list lacked a single generic supplier. Two of our current generic companies are a case in point: Mylan and Actavis, far from
being mired in a commoditized race to the bottom, experienced substantial increases in shareholder value this year. Mylan's
purchase of India's Agila Specialties adds to its expertise in difficult-to-manufacture injectable drugs, while Actavis joined
up with Amgen to strengthen its hand in biosimilars. Adding to the aura of Actavis' performance on shareholder value creation,
in addition to the Watson tie-in, is the glowing portrait of its growth and earnings potential going forward. Actavis came
in at number one on the Bloomberg Business Week's "Nifty Fifty" stocks for 2012, with a surge of 231 percent in its shares over the past year, putting it well ahead of our
audit runner ups, Gilead and Biogen-Idec—fast company indeed.
Our newest member of the audit, Hospira, presents an equally interesting case, on the side of adversity. With its manufacturing
problems apparently on the mend, the company has only one way to go: up. Like Actavis, it is focusing on difficult to manufacture
drugs; more success here may also change its outlook. The company has its sights on the biosimilar market, readying a challenge
to the Johnson & Johnson blockbuster Remicade in Europe.
General Administrative Expenses to Sales
Ultimately, the audit is a reflection of the diversity of strategies that are now being employed toward the holy grail of
growing sales in a challenging market climate. The ability to do this is the vital differentiator between those companies
destined to thrive and those with fading prospects. Our top performing companies price as if the term "price competition"
is a street vulgarity; a phrase not to be uttered in polite company. Not only are they superior in pricing to win, with great
price elasticity, they are prodigious in controlling costs and managing their physical assets. The companies' employees tend
to out produce their counterparts in terms of efficiency and productivity. And these best performers grow sales at a rate
much faster than SG&A expenses. As noted, higher SG&A than average over time reflects bloated overhead and administrative
inefficiency. Failure to stem that trait means we won't likely be seeing you in the audit five years from now.
And the winner is…
Reinforcing the previous paragraph, let's expand our "Fab Five" to the "Heavenly Seven" by adding two others on this year's
list: Amgen and Allergan. Both stood out from the majority by notching up some good numbers on sales growth. While Amgen created
shareholder value, coming in fifth, Allergan increased it only slightly, but the modest change was still in the right direction.
And Allergan came in third, compared to Amgen, at fifth place, in gross margin performance. Both companies are well above
average in profitability (profit to sales) even though Amgen had a bad year managing its assets. Both companies combined
an increased profit to assets metric with rising employee productivity. Imagine how Amgen's performance would have been if
it had only a modest or average sales to assets ratio. Our conclusion from all the math? It's the ability to externalize exclusivity
in the therapy segment and wrest premium pricing from a reluctant payer base that confers the halo to the Heavenly Seven.
Bill Trombetta, PhD, is Professor of Pharmaceutical & Healthcare Marketing at St. Joseph University, Haub School of Business. He can be reached