Pharmaceutical Industry Audit 2009

PHARMACEUTICAL EXECUTIVE

A S T R A Z E N E C AM E R C KW Y E T HB M SL I L L YS C H E R I N G - P L O U G HA M G E NG E N E N T E C HT E V AN O V O N O R D I S K

G I L E A DM Y L A NG E N Z Y M EA L L E R G A NB I O G E N - I D E CF O R E S T

54

Professor Bill Trombetta expands his annual guide to stellar performance with the ‘Heavenly 27,’ including the shining lights in biotech and generics. Which star will shine brightest this year?

industry audit

PHARM EXEC’S 8TH ANNUAL

sponsored by

27companies

ranked

PHARMACEUTICAL EXECUTIVE I N D U S T R Y A U D I T ’09 SEPTEMBER 2009 www.pharmexec.com56

c ast against a backdrop of global recession and pressure on the business model that is blur-ring the traditional strategic divide between

generic and originator products, St. Joseph’s Uni-versity Professor Bill Trombetta presents our Eighth Annual Pharma Industry Audit, which this year digs deeper into current business trends by adding 11 new companies to the survey.

The highlights: “Stealth Pharma” takes the Com-pany of the Year honors, with newcomer Gilead Sciences posting a convincing win based on an im-pressive profit-to-sales ratio reinforced by strong management of its asset portfolio. In second place is Genentech, with an exclusive product franchise in oncology that continues to deliver premium prices. Meanwhile, the 2007 Company of the Year, Biogen-Idec, falls to third on the heels of a steep drop in one key metric: shareholder value.

The lesson from this year’s Audit is that it’s how you grow that counts. And the organic growth that drives long term profitability is in scarce supply among the industry’s standard bearers, with four of the top 10 companies in terms of sales—Pfizer, Sanofi-Aventis, GSK, and Merck—offering negative growth to shareholders. Still, with its enormous cash hoard, Big Pharma has the capacity to buy what it cannot build, and the current capital crunch in bio-tech has opened the door to acquisition of products, pipelines, and expertise at bargain prices—suggest-ing that the major players in the industry are slowly repositioning for better days ahead.

—William Looney, Editor-in-Chief

Pharmaceutical Executive’s Eighth Annual Industry Audit analyzes the 2007–2008 performance of 27 publicly traded companies that fi le 10-K or 20-F reports on an annu-al basis with the US Securities and Exchange Commission. As in past years, the audit includes a wider array of perfor-mance metrics than found in the standard fi nancial and ac-counting statements. Drawing on this larger set of sources allows for a more meaningful picture of performance, ana-lyzing such key metrics as enterprise value in proportion to sales—a mission-critical driver of future prospects that fo-cuses on profi tability growth through product and process innovation. In addition to the 10-K and 20-F reports, the audit relies on proprietary and non-proprietary databases, as well as a broad array of secondary sources ranging from

Sales Rank 2008

1 J&J $63.8B

2 Pfi zer $48.3B

3 Novartis $42.6B

4 Sanofi -Aventis $40.6B

5 GSK $35.3B

6 Abbott $29.5B

6 AstraZeneca $29.5B

8 Merck $23.9B

9 Wyeth $22.8B

10 BMS $20.6B

11 Lilly $20.4B

12 Schering-Plough $18.5B

13 Amgen $15.0B

14 Genentech $13.4B

15 Teva $11.8B

16 Novo Nordisk $8.6B

17 Gilead $5.3B

18 Mylan $5.1B

19 Genzyme $4.6B

20 Allergan $4.4B

21 Biogen-Idec $4.1B

22 Forest $3.8B

23 Celgene $3.3B

24 Watson $2.5B

25 Cephalon $2.0B

26 King $1.6B

27 Endo $1.3B

AVERAGE $17.7B

Change in Revenues2008–2007WEIGHT = 2

27 Mylan 219%

26 Celgene 132%

25 Schering-Plough 45.7%

24 Biogen-Idec 29.3%

23 Gilead 25.3%

22 Genzyme 20.7%

21 Teva 17.7%

20 Endo 16.6%

19 Genentech 14.7%

18 Abbott 14.0%

17 Allergan 11.7%

16 Forest 11.6%

16 AstraZeneca 11.6%

14 Cephalon 11.3%

13 Lilly 9.4%

12 Novartis 9.3%

11 BMS 6.4%

10 Novo Nordisk 4.5%

9 J&J 4.3%

8 Wyeth 1.9%

7 Amgen 1.5%

6 Watson 1.2%

5 Pfi zer (-).2%

4 Sanofi -Aventis (-)5.6%

3 Merck (-)14.5

2 GSK (-)23.0

1 King (-)27.1

AVERAGE 20.3%

PHARMACEUTICAL EXECUTIVE INDUSTRY AUDIT

FIGURES 1 & 2

METRICS AND WEIGHTS FOR EVALUATING COMPANY PERFORMANCE METRIC WEIGHT

CHANGE IN REVENUE 2CHANGE IN ENTERPRISE VALUE 3ENTERPRISE VALUE TO SALES 3GROSS MARGIN 2EBITDA (PROFIT) TO SALES 2SALES TO ASSETS 2PROFIT TO ASSETS 3SALES REVENUE PER EMPLOYEE 2

sponsored by

PHARMACEUTICAL EXECUTIVE I N D U S T R Y A U D I T ’0958 SEPTEMBER 2009 www.pharmexec.com

the business press to investor reports.The key difference in this year’s audit is an expansion in

the number of companies examined, including those listed in Pharm Exec’s separate survey of the 10 “stealth pharma” fi rms, last profi led in our June issue (“Stealth Pharma,” June 2009, page 45). These include most of the emerging players in the biotech, orphan drugs and generics sectors, which were chosen for their high profi le in the investment and scientifi c communities. Many are future leaders in the industry, with the scale, fl exibility, and sophistication to fi ll the gaps exposed by the bureaucratization of Big Pharma brought on by two decades of consolidation.

The Pharma Industry Audit is also uniquely positioned to demonstrate whether a company’s business strategy is actu-ally enhancing shareholder value. If there’s one metric that is the equivalent to food and water on a desert island, it’s Enterprise Value. The market tempest of the past 18 months does carry a silver lining in that it forces investors to refo-cus on fundamentals. In the case of management, the mea-surement for success is simple: Do you create shareholder value or destroy it? For this reason, the audit gives highest priority to “Change in Enterprise Value” and “Enterprise Value to Sales.” These numbers refl ect a fi rm’s market capi-talization plus liabilities minus cash, or about what it would take to buy the fi rm on the open market. “Return on As-sets” is another worthy exemplar of a commitment to long term profi tability, and thus is given a signifi cant weighting in the audit.

To accommodate the expanded sector profi le, we’ve done some streamlining in the number of performance met-rics, eliminating the earnings per share, price to earnings multiple, and R&D spend to sales indices. This allows a more focused examination of the indicators that matter most to investors.

With only eight metrics, the weighting formula of the audit has also been changed, with three of the metrics (cov-ering value recognition and asset performance) weighted at 3 and the remaining fi ve metrics weighted at 2. (The prior division of weights was set at 3, 5, and 7.) The audit retains the non-metric macro indicators on a scale and size that allow for viewing company performance in the context of overall industry trends.

Thus, determination of the fi nal standing for each com-pany relies entirely on the metrics—but not all metrics are equal. For instance, if a company places 10th out of 27 on a metric weighted at three, it receives (10 x 3) 30 points. Each company’s points across all of the metrics are then totaled for a fi nal score, with the company receiving the highest number of points overall designated as the Com-pany of the Year.

Enterprise Value & Rank

1 J&J $142.0B

2 GSK $106.4B

3 Genentech $95.4B

4 Sanofi -Aventis $86.8B

4 Novartis $86.8B

6 Pfi zer $85.6B

7 Abbott $79.8B

8 Merck $57.1B

9 AstraZeneca $55.1B

10 Wyeth $53.2B

11 Amgen $50.9B

12 Schering-Plough $45.7B

13 Teva $45.7B

14 Lilly $40.2B

15 Gilead $39.9B

16 BMS $39.0B

17 Novo Nordisk $25.8B

18 Celgene $18.7B

19 Biogen-Idec $14.5B

20 Genzyme $13.8B

21 Allergan $12.6B

22 Mylan $8.4B

23 Cephalon $5.1B

24 Forest $4.2B

25 Watson $3.2B

26 King $2.8B

27 Endo $1.6B

AVERAGE $45.2B

Change in Enterprise Value 2008–2007WEIGHT = 3

27 King 140.0%

26 Mylan 137.0%

25 Genentech 51.8%

24 Teva 20.9%


22 Cephalon 5.6%

21 Amgen 4.3%

20 Wyeth (-)8.7%

19 Watson (-)12.4%

18 Abbott (-)15.3%

17 Celgene (-)15.8%

16 BMS (-)16.3%

15 Gilead (-)16.9%

14 GSK (-)17.1%

13 Novartis (-)20.1%

12 Sanofi -Aventis (-)21.6%

12 Biogen-Idec (-)21.6%

10 AstraZeneca (-)22.4%

9 Lilly (-)24.0%

8 J&J (-)25.2%

7 Merck (-)28.0%

6 Allergan (-)29.0%

5 Genzyme (-)30.3%

4 Pfi zer (-)31.1%

3 Novo Nordisk (-)37.9%

2 Endo (-)40.4%

1 Forest (-)52.3%

AVERAGE (-)4.3%


FIGURES 3 & 4

The market tempest of the past 18 months

does carry a silver lining in that it forces

investors to focus on fundamentals. In the

case of management, the measurement for

success is simple: Do you create shareholder

value or destroy it?

sponsored by


Macro Benchmarks: Recession Spins Record Low Sales Growth No performance audit is complete without an over-all picture of the macroeconomic environment that all pharma competitors must confront. Medicines have been a key casualty of the worsening global economy, particularly as public budgets face the strain of higher unemployment and the increasing costs of benefi ts in aging societies.

In contrast to previous downturns, the pharma industry has proved not to be a “safe haven” against recession. The IMS forecast for 2009 indicates the global recession will push growth in pharmaceuti-cal sales to less than 3 percent (topping $750 bil-lion), down from nearly 5 percent in 2008.

A signifi cant pullback has been underway for several years in the US market, with sales growth for this year pegged at around one percent, or ap-proximately $300 billion, down from 3.8 percent. The steep shortfall in demand has been accompa-nied by stiffer resistance to price increases among US payers, with prescription unit growth forecast to rise by only 0.9 percent over 2008.

Three key conclusions can be drawn from anal-ysis of the macroeconomic environment. First, the industry is no longer immune to broader structur-al pressures confronting the global economy and can be expected to be a target for cost-cutting as the size of the health sector increases in propor-tion to the overall economy. Second, the US is no longer the growth driver for the industry world-wide, a trend that could be accentuated if compre-hensive health reform legislation is enacted later this year. Third, the capacity of the industry to exert pricing power against a consolidating pay-er base is shrinking fast, suggesting that future growth is going to depend on a much more ro-bust value proposition for products competing in crowded therapeutic fi elds.

With this as the essential context, let’s review the details driving results for the 27 surveyed com-panies.

SALES & SALES GROWTH

Figure 1 (page 56, left side) ranks our “Heaven 27” from highest dollar sales to lowest dollar sales in 2008. The gap is signifi cant, from Johnson & Johnson, the poster child for decentralized diver-sifi cation, at $63.8 billion; to Endo, a specialty drugmaker focused on pain management, at $1.3 billion. This metric illustrates how the industry’s current “Big Five” are in fact a statistical anomaly,

Enterprise Value to Sales 2008–2007

2008 2007

1 J&J 2.22 3.06

2 Pfi zer 1.77 2.60

3 Genentech 2.04 2.76

4 Sanofi -Aventis 2.14 2.36

5 GSK 2.54 2.88

6 Abbott 2.70 3.52

7 AstraZeneca 1.74 2.35

8 Merck 2.39 3.27

9 Wyeth 2.33 2.56

10 BMS 1.90 2.30

11 Lilly 1.97 2.72

12 Schering-Plough 2.47 2.88

13 Amgen 3.39 3.32

14 Genentech 7.11 5.84

15 Teva 4.11 4.02

16 Novo Nordisk 3.13 4.72

17 Gilead 7.48 11.30

18 Mylan 1.68 2.20

19 Genzyme 3.00 5.20

20 Allergan 2.85 4.50

21 Biogen-Idec 3.47 5.44

22 Forest 1.09 2.36

23 Celgene 8.3 15.8

24 Watson 1.28 1.49

25 Cephalon 2.57 2.69

26 King 1.8 0.55

27 Endo 1.23 2.35

Enterprise Value to Sales Rank 2008WEIGHT =3

EV/S

27 Celgene 8.30

26 Gilead 7.48

25 Genentech 7.11

24 Teva 4.11

23 Biogen-Idec 3.47

22 Amgen 3.39

21 Novo Nordisk 3.13

20 Genzyme 3.00

19 Allergan 2.85

18 Abbott 2.70

17 Cephalon 2.57

16 GSK 2.54

15 Schering-Plough 2.47

14 Merck 2.39

13 Wyeth 2.33

12 J&J 2.22

11 Sanofi -Aventis 2.14

10 Novartis 2.04

9 Lilly 1.97

8 BMS 1.90

7 King 1.80

6 Pfi zer 1.77

5 AstraZeneca 1.74

4 Mylan 1.68

3 Watson 1.28

2 Endo 1.23

1 Forest 1.09

AVERAGE 2.91


WHAT’S THE STORY ON BIOGEN-IDEC? Our number one performer for 2007 dropped to third in 2008. The company’s key strength has been the ability to raise prices, with its benchmark Avonex therapy for MS rising 22 percent, according to The Wall Street Journal. Its dominant position in a few key therapeutic areas accounts for its 90 percent margins, the only company in this year’s Audit to occupy that rarifi ed space. But despite its pricing prowess, shareholder value at Biogen-Idec still slumped more than 20 percent, as did Enterprise Value to Sales, to a modest 3.47, knocking the company out of con-tention for a second run at the top slot. The reversal in these key metrics are refl ective of the upfront costs, risks, and management challenges in diversifying the portfolio for long term success.

FIGURES 5 & 6

sponsored by


considering the more modest size of most of the companies in the audit. Of the “Stealth 10” now added to the survey, only one—Teva, at $11.8 bil-lion—has revenues of more than $10 billion.

Much more important than total sales is the capacity to grow revenues, particularly in the current ravaged economy, with its fi scal defi cits and steep budget cuts for reimbursed medicines. Figure 2 (page 56, right side) illustrates the max-im “grow or die.” In a hostile demand environ-ment, achieving real growth based on customer acceptance of value is no easy feat. Mylan Labs, a leader in generic and specialty drugs, snared the number one spot in revenue growth for 2008—and by a large margin, outpointing run-ner-up Celgene nearly two to one.

Mylan’s success highlights the importance of how you grow. The company has a global strate-gy for generics, and is building a strong presence in 13 of the largest emerging markets to leverage its number two position in US scrips.

By contrast, the industry’s historic, high pro-fi le symbols of global innovation—Pfi zer, Merck, GSK, and Sanofi -Aventis—each scored negative growth in 2008. Schering-Plough was the notable exception among Big Pharmas, ranking number three with a 45.7 percent surge in revenue due to a strong international market presence and new product introductions. This ranking indicates how important the planned combination with Schering-Plough is to Merck in expanding its therapeutic portfolio and geographic footprint outside the US.

Nevertheless, Big Pharma’s reliance on merg-ers and acquisitions provides little evidence that it will serve as a sustainable alternative to or-ganic growth. The attraction is capturing a vi-able product portfolio and lower expenses, but the fl ip side is the deadly bureaucratic confusion that diverts attention and effort from what really counts. This is the focus on the customer rather than your fellow combatants in the struggle to create a new internal hierarchy. You can count the mergers that are truly a strategic fi t, and hence worth risking the disruption in an intense-ly human business, on just one hand—and you won’t need all your fi ngers. Pfi zer’s big move in bidding for Wyeth is not (in the opinion of many analysts) one of them.

Enterprise value and change in enterprise value As noted, this is the Holy Grail of metrics: Com-panies either create shareholder value or destroy it.

Gross Margin 2008–2007

2008 2007

1 J&J 71% 70.9%

2 Pfi zer 83.2% 76.8%

3 Novartis 73.1% 71.7%

4 Sanofi -Aventis 74.5% 74.1%

5 GSK 73.6% 76.8%

6 Abbott 57.3% 55.9%

7 AstraZeneca 77.4% 79.o%

8 Merck 76.6% 74.6%

9 Wyeth 72.6% 71.8%

10 BMS 68.9% 67.9%

11 Lilly 78.5% 77.2%

12 Schering-Plough 60.5% 65.3%

13 Amgen 84.7% 82.7%

14 Genentech 87.0% 86.6%

15 Teva 53.8% 51.8%

16 Novo Nordisk 77.8% 76.6%

17 Gilead 78.9% 82.3%

18 Mylan 40.3% 52.3%

19 Genzyme 76.7% 75.7%

20 Allergan 82.7% 82.9%

21 Biogen-Idec 90.2% 89.4%

22 Forest 79.1% 78.3%

23 Celgene 88.3% 90.7%

24 Watson 40.7% 39.7%

25 Cephalon 79.1% 80.7%

26 King 74.8% 73.5%

27 Endo 78.8% 80.0%

Gross Margin Rank 2008WEIGHT = 2


26 Celgene 88.3%

25 Genentech 87.0%

24 Amgen 84.7%

23 Pfi zer 83.2%

22 Allergan 82.7%

21 Cephalon 79.1%

21 Forest 79.1%

19 Gilead 78.9%

18 Endo 78.8%

17 Lilly 78.5%



14 Genzyme 76.7%

13 Merck 76.6%

12 King 74.8%

11 Sanofi -Aventis 74.5%

10 GSK 73.6%

9 Novartis 73.1%

8 Wyeth 72.6%

7 J&J 71.6%

6 BMS 68.9%


4 Abbott 57.3%

3 Teva 53.8%

2 Watson 40.7%

1 Mylan 40.3%

AVERAGE 70.4%


Big Pharma’s reliance on mergers and acquisitions

provides little evidence that it will serve as a

sustainable alternative to organic growth. The

attraction is capturing a viable product portfolio

and lower expenses. The fl ip side is

bureaucratic confusion

FIGURES 7 & 8

sponsored by


Similar to absolute level of sales, the absolute value of an enterprise is a function of the sales level. We would expect a fi rm like Johnson & Johnson, at $64 billion in sales, to have a much higher enter-prise value than a fi rm like Cephalon, with only $2 billion. Figure 3 (page 58, left side) shows the enterprise value ranking of our fi rms.

Change in Enterprise Value from 2007 to 2008

provides a snapshot of which of our 27 companies have their best days ahead. (See Figure 4, page 58, right side.) For this reason, Change in Enterprise Value is weighted at 3, as over time the Industry Audit has shown that it is a nearly foolproof indi-cator that shareholders are getting what they ex-pect from the stock.

King and Mylan sport the highest shareholder value creation, at 140 percent and 137 percent, re-spectively, with Genentech and Teva next in line. Again, Schering-Plough is the only Big Pharma that did not destroy value for shareholders from 2007 to 2008. Among the biotechs, Cephalon and Amgen did relatively well for shareholders as well. The rest of the 27 companies contributed to the erosion of shareholder wealth found throughout the equity markets in 2008. Forest Labs came in last in this metric, with a 52.3 percent reduction in shareholder value for the year due to an increas-ingly fragile position for its in-patent portfolio.

The second metric weighted at level 3 is Enter-

prise Value to Sales. This metric normalizes the differences in scale due to absolute dollar revenue. Figure 5 (page 60, left side) places each of the 27 surveyed companies, and indicates which direc-tion the ratio went from 2007 to 2008. Success in this metric is harder to achieve in a climate marked by intensive pricing pressures, economic disarray, and signifi cant regulatory concerns about safety and risk. Only Amgen, Genentech, Teva, and King were able to wrest an EV to Sales increase in 2007–2008.

The placing of fi rms relative to EV to Sales is shown in Figure 6 (page 60, right side) and makes for our second 3-weight metric. Celgene is the clear winner in this metric due to the fact that its shares have been heavily discounted despite its strong therapeutic franchise in multiple myeloma, where it enjoys an unusual amount of pricing freedom due to a state-of-the-art treatment.

This metric is also an indicator of market per-ceptions that fi rms are on the upswing—or, alter-natively, that their best days are behind them. The higher the ratio, the greater the likelihood that a

Sales to Assets 2008–2007

2008 2007

1 J&J 0.742 0.76

2 Pfi zer 0.432 0.42

3 Novartis 0.538 0.52

4 Sanofi -Aventis 0.400 0.38

5 GSK 0.740 0.74

6 Abbott 0.696 0.65

7 AstraZeneca 0.616 0.54

8 Merck 0.504 0.50

9 Wyeth 0.518 0.52

10 BMS 0.698 0.74

11 Lilly 0.699 0.70

12 Schering-Plough 0.658 0.44

13 Amgen 0.412 0.43

14 Genentech 0.616 0.61

15 Teva 0.337 0.40

16 Novo Nordisk 0.900 0.88

17 Gilead 0.754 0.72

18 Mylan 0.494 0.37

19 Genzyme 0.535 0.46

20 Allergan 0.648 0.60

21 Biogen-Idec 0.482 0.37

22 Forest 0.844 0.94

23 Celgene 0.507 0.39

24 Watson 0.689 0.71

25 Cephalon 0.623 0.64

26 King 0.368 0.61

27 Endo 0.646 0.64

Profi t (EBITDA) to Sales Rank 2008WEIGHT = 2

27 Gilead 52.6%

26 GSK 48.6%

25 Pfi zer 45.3%

24 Amgen 44.7%


22 Genentech 41.8%


20 Endo 36.1%

19 Wyeth 34.6%

18 Merck 32.8%

18 Lilly 32.8%

16 King 31.2%


14 J&J 29.8%

13 Teva 28.5%

12 Forest 27.9%

11 Abbott 27.4%

10 Novartis 27.2%

9 Cephalon 26.7%

8 BMS 26.5%

7 Allergan 23.4%

6 Mylan 23.1%

5 Watson 22.4%

4 Genzyme 20.7%

3 Celgene 19.9%


1 Sanofi -Aventis 15.5%

AVERAGE 31.4%


THE URGE TO GET SMALL The audit results suggest that BMS and Lilly are aiming to become pure biotechs, with an emphasis on oncology. Yet their size and the complexity of administering a diverse portfolio of medicines could hamper their efforts to match the nimble, entrepre-neurial footing and focused orientation of a biotech. Enterprise Value to Sales decreased for both companies in 2008, to levels that don’t refl ect any future prospects as hosts for a range of fl edgling biotechs, and at less than 70 percent, BMS’ gross margin falls short of the margins posted by the best biotechs. While both Lilly and BMS saw improvement in Sales per Employee productivity, their respective levels do not ap-proach biotech levels. The rankings indicate that signifi cant operational and philosophical changes are needed if either company is to achieve the transformation from a small-molecule major to long term success as a biotech powerhouse.

FIGURES 9 & 10

sponsored by


fi rm’s growth will outpace its peers in both sales and profi t. Gross margin Figure 7 (page 62, left side) shows gross

margin for each fi rm, along with an indication of increase or decrease in 2007–2008. Gross margin refl ects a fi rm’s pricing power, in terms of the ability to get price increases or at least maintain prices. The lesson behind these num-bers is: the higher the gross margin, the better.

Eight of the 27 audited companies show a decrease in gross margin from 2007, a trend refl ective of the capacity of payers to dictate terms on pricing. Biogen-Idec displayed the most aggressive pricing prowess in the critical US mar-ket, allowing it to reach a gross margin of over 90 percent—highest of the group. This is largely due to its therapeutic dominance in areas of high medical need, like MS.

Figure 8 (page 62, right side) ranks companies on the basis of gross margins for 2008. As noted, this ranges from Biogen-Idec’s 90.2 percent down to the “stealth generic” off-patent companies with limited protection on prices. Endo, with an impressive markup ratio of 78.8 per cent, is the notable exception here—a consequence of the compa-ny’s position in generics that are diffi cult to manufacture. Allowance of a regulatory pathway for biosimilars in the US may even out this trend somewhat.

Profi t margin or margin management High profi t margins are a function of good management, with particular atten-tion paid to cost control. This in turn drives the larger fi -nancial performance measure of EBITDA: earnings before interest, taxes, depreciation, and amortization. In essence, EBITDA determines the level of profi t against sales. The higher this ratio, the more impressive a fi rm looks to share-holders and the investment community. Figure 9 (page 64, left side) shows Gilead Sciences at a very impressive P/S ratio of 52.6 percent.

More important, the ranking indicates that generics companies can build an alternative future from that of com-modity producers condemned to a life of pumping volume sales to accommodate razor-thin margins. Producers are staking out a role in higher end specialty medicines and ag-gressively engaging around biosimilars, which if approved by regulators can command higher price points. Three key generics companies—Endo, King, and Teva—are doing bet-ter than half of the 27 in terms of profi tability. Endo itself posts a profi tability performance superior to Big Pharma players like Wyeth, Merck, Lilly, Johnson & Johnson, Ab-bott, and BMS.

Sales per assets Figure 10 (page 64, right side) sets the bench-mark for company productivity in managing assets. It shows how a fi rm’s productivity changed from 2007 to 2008 in terms of sales revenue divided by the assets held on its books. The higher the ratio, the more productive a fi rm is over the course of the year. Roughly half of the 27 companies in this year’s audit posted mod-est improvements in 2008 over 2007. This metric is unique in

Sales to Assets Rank 2008WEIGHT = 2


26 Forest 0.844

25 Gilead 0.754

24 J&J 0.742

23 GSK 0.740

22 Lilly 0.699

21 BMS 0.698

20 Abbott 0.696

19 Watson 0.689


17 Allergan 0.648

16 Endo 0.646

15 Cephalon 0.623

14 Genentech 0.616

14 AstraZeneca 0.616

12 Novartis 0.538

11 Genzyme 0.535

10 Wyeth 0.518

9 Celgene 0.507

8 Merck 0.504

7 Mylan 0.494

6 Biogen-Idec 0.482

5 Pfi zer 0.432

4 Amgen 0.412


2 King 0.368

1 Teva 0.337

AVERAGE 0.596

Profi t to Assets Rank 2008WEIGHT = 3

27 Gilead 0.397

26 GSK 0.359


24 Genentech 0.257

23 AstraZeneca 0.238

22 Forest 0.235

21 Endo 0.233

20 Lilly 0.229

19 J&J 0.221

18 Biogen-Idec 0.204

17 Pfi zer 0.196

16 Abbott 0.191

15 BMS 0.185

14 Amgen 0.184

13 Wyeth 0.179

12 Cephalon 0.166

11 Merck 0.165

10 Allergan 0.152

9 Novartis 0.146

8 Watson 0.143

7 King 0.115

6 Mylan 0.114

5 Genzyme 0.111


3 Celgene 0.101

2 Teva 0.096


AVERAGE 0.184


PFIZER’S UNTAPPED MEDICINE CABINET The world’s top-selling pharmaceutical company has had a rough decade, especially in terms of shareholder value. But Pfi zer is taking steps to reposition, including a pending merger to consoli-date its hold on the top sales rank and a plan to offset the 2011 patent expiration of fl agship drug Lipitor with a new focus on emerging markets. But the company’s most intriguing move is its move toward generics. Wendy Diller, in a March 2009 In Vivo article, lays out a smorgasbord of older patent-expired drugs Pfi zer owns that together make up as much in sales as Lipitor, including one drug, Medrol, which has been on the market for 50 years, with peak sales of $400 million in 2008.

FIGURES 11 & 12

sponsored by

PHARMACEUTICAL EXECUTIVE SEPTEMBER 2009 www.pharmexec.com68

that the company can produce results from actions it can initiate and execute under its own control. This should be a key management priority now that it’s harder to wrest profi ts by unilaterally raising prices.

Ranking of overall productivity is highlighted in Figure 11 (page 66, left side), with Novo Nordisk in the top spot. Its .900 ratio means that for every dollar Novo Nordisk invests in assets, it generates 90 cents in revenue. Hence, there is another way to generate profi t: by not only focusing on margins, but also on how well assets are managed.

Profi t to assets or return on assets When we combine Profi t to Sales with Sales to Assets, we get a very important metric: Return on Assets. The higher this ratio is, the more impressive a fi rm’s performance. Figure 12 (page 66, right side) shows Gilead and GSK at the top of the ranking, refl ect-ing stellar management of assets to maximize prof-it margins. But it’s profi ts, of course, that drive the returns to shareholders, which is why Gilead Sci-ences, paced by its emergence as the industry leader in advanced HIV therapies, has been an attractive purchase for institutional investors for some time.

Sales revenue per employee How productive is the company’s work force? Figure 13 (this page, left side) highlights this increasingly important metric. GSK, Abbott, Genentech, Teva, Novo Nordisk, and Cephalon were the laggards, posting lower sales per employee in 2008 against 2007.

Figure 14 (this page, right side) shows fi rm em-ployee productivity against sales for 2008. Gilead once again is on top with an impressive $1.53 mil-lion in sales per employee—roughly three times the ratio for industry giants like Pfi zer and Johnson & Johnson. A key question for Pfi zer is whether more cost-cutting from job reductions will yield increased productivity per worker employed. The record from past mergers suggests that payoff will take years to accomplish.

Selling, general, and administrative expenses This is a metric much in vogue in the current era of declining demand. With industry revenues more or less fl at, management needs to scrutinize its overhead in terms of selling, general, and admin-istrative expenses. Figure 15 compares the extent that a fi rm either increases or decreases its SG&A compared to whether its sales revenue increased or decreased. In general, it is better for a fi rm to in-crease its sales more than its overhead even if the latter is necessary to help establish a new medicine for success in the market. SG&A increases higher than sales increases are not good for a company,

Sales/Employee 2008–2007

2008 2007

1 J&J 537K 503K

2 Pfi zer 590K 560K

3 Novartis 440K 399K

4 Sanofi -Aventis 413K 400K

5 GSK 353K 446K

6 Abbott 312K 380K

7 AstraZeneca 453K 399K

8 Merck 431K 405K

9 Wyeth 481K 440K

10 BMS 588K 460K

11 Lilly 503K 466K

12 Schering-Plough 362K 230K

13 Amgen 898K 849K

14 Genentech 1.11M 1.46M

15 Teva 298K 336K

16 Novo Nordisk 320K 322K

17 Gilead 1.53M 1.4M

18 Mylan 429K NA

19 Genzyme 418K 380K

20 Allergan 503K 500K

21 Biogen-Idec 872K 737K

22 Forest 730K 671K

23 Celgene 923K 824K

24 Watson 498K 446K

25 Cephalon 710K 900K

26 King 463K NA

27 Endo 1.05M 900K

Sales/Employee Rank 2008WEIGHT = 2

27 Gilead 1.53M

26 Genentech 1.11M

25 Endo 1.05M

24 Celgene 924K

23 Amgen 898K

22 Biogen-Idec 872K

21 Forest 730K

20 Cephalon 710K

19 Pfi zer 590K

18 BMS 588K

17 J&J 537K

16 Lilly 503K

16 Allergan 503K

14 Watson 498K

13 Wyeth 481K

12 King 463K

11 AstraZeneca 453K

10 Novartis 440K

9 Merck 431K

8 Mylan 429K

7 Genzyme 418K

6 Sanofi -Aventis 413K

5 Schering-Plough 362K

4 GSK 353K

3 Novo Nordisk 320K

2 Abbott 312K

1 Teva 298K

AVERAGE 601K


BRIDGING THE “SUPERMARKET SPREAD” Reinforcing Big Pharma’s interest in generics and fast-growing emerging markets is the mes-sage behind Procter & Gamble’s pullout from the drugs sector. In a blog in FinancialTimes.com posted in February, then-CEO A.G. Lafl ey remarked: “Today, shares in pharma companies trade at multiples at or below most of our consumer staple products.” Put another way, shareholder value is likely to be enhanced more by investing in Tide, Swiffer, Crest, and Pampers, than in prescription pharmaceuticals.

FIGURES 13 & 14

I N D U S T R Y A U D I T ’09

sponsored by


particularly over the long term. For example, Gilead increased sales over

the year 25.3 percent, but increased SG&A at half that rate. Meanwhile, Amgen’s sales increased by only a meager 1.5 percent— and SG&A rose by more than 22 per cent.

And the winner is...Gilead Sciences followed by Genentech and Biogen-Idec.

Stripped of weights and looking at things from a more intuitive perspective—who came in fi rst, second, third, etc., and who came in last, 26th and 25th from top to bot-

tom—consider the strength of Gilead’s per-formance: it scored in single digits on 7 of the 8 metrics, by defi nition in the top third of performance. The only metric Gilead comes up short on is its asset management. On the other hand, note how consistent some fi rms are at displaying mediocre performance, by being disproportionately ranked in the bot-tom third placements, from 20 to 27.

Strategy: The Forgotten BuzzwordBesides its strong management metrics, Gil-ead Sciences earns the top nod with a novel strategic focus on what is arguably today’s

And the Winner is...

1 GILEAD 446

2 Genentech 434

3 Biogen-Idec 363

4 Amgen 335

5 Celgene 317

6 Cephalon 311

7 GSK 298

8 Novo Nordisk 289

9 Lilly 286

10 Endo 273

11 AstraZeneca 268

12 Abbott 266

13 Forest 264

14 Allergan 263

15 J&J 259

16 Wyeth 254

17 BMS 245

18 Schering-Plough 236

19 Pfi zer 235

20 Teva 228

21 King 210

22 Genzyme 206

22 Mylan 206

24 Novartis 202

25 Merck 198

26 Watson 181

27 Sanofi -Aventis 122

FIGURES 15 & 16

Selling, General Administrative Expenses 2008–2007

2008 2007 SALES CHANGE SG%A CHANGE

1 J&J 21.5B 20.4B 4.3% 5.4%

2 Pfi zer 14.5B 15.6B (-)0.2% (-)0.7%

3 Novartis 15.0B 13.6B 9.3% 10.3%

4 Sanofi -Aventis 10.6B 10.7B (-)5.6% N/A

5 GSK 11.1B 11.8B (-)23.0% (-)5.9%

6 Abbott 8.4B 7.4B 14.0% 13.5%

7 AstraZeneca 9.6B 9.5B 11.6% 2.1%

8 Merck 7.4B 7.6B (-)14.5% (-)2.3%

9 Wyeth 6.8B 6.8B 1.9% 1.2%

10 BMS 6.3B 6.3B 6.4% N/A

11 Lilly 6.6B 6.1B 9.4% 8.9%

12 Schering-Plough 6.8B 5.5B 45.7% 23.6%

13 Amgen 4.2B 3.4B 1.5% 22.6%

14 Genentech 3.6B 3.3B 14.5% 9.0%

15 Teva 2.5B 1.9B 17.7% 32.0%

16 Novo Nordisk 2.9B 2.9B 4.5% N/A

17 Gilead 797K 706K 25.3% 12.7%

18 Mylan 1.1B 216K 219.0% 390.0%

19 Genzyme 1.3B 1.2B 20.7% 12.6%

20 Allergan 1.9B 1.7B 11.7% 10.5%

21 Biogen-Idec 925K 776K 29.3% 19.2%

22 Forest 1.1B 1.1B 11.6% N/A

23 Celgene 685K 452K 132.0% 52.0%

24 Watson 422K 422K 1.2% N/A

25 Cephalon 841K 736K 11.3% 10.2%

26 King 446K 691K (-)27.1% (-)35.4%

27 Endo 488K 412K 16.6% 18.7%


sponsored by


DR. BILL’S HALL OF FAME

As we do each year, we recognize the vital role of outstanding management in mustering top performance. And as we have stated many times before, there are two ways to make money: Margin Management (Profi t or EBITDA to Sales) and Asset Management (Sales to Assets). When these two ratios are combined they result in Return on As-

sets or Profi t to Assets, a most important metric. It is diffi cult enough for a company to excel in one of these key metrics, let alone two. For example, Amgen’s profi t to sales ratio is an impressive 44.7 percent, placing fourth out of 27 fi rms. But its lackluster performance in asset management places it 24th out of 27 fi rms. BMS comes in seventh out of 27 on asset management, but only places 22nd on profi tability. So when companies excel in both metrics, “attention must be paid,” as Biff Loman says in Death of a Salesman.

Gilead is in a class by itself, placing fi rst in profi tability at 52.6 percent and third in asset management, generating 75 cents in sales for every dollar invested in assets. GSK places second in margin management at 48.6 percent while placing fi fth in asset management Hence, we salute these two pharmas for excellence in management for 2008.

most challenging therapeutic category: HIV/AIDS. In a short two decades as a publicly traded company, Gilead has prevailed over the competition by an-ticipating changes in the profi le of HIV/AIDS, as a priority disease and as a driv-er of social policy—both of which affect the climate for reimbursement. Where others have encountered only reputa-

tional risks, Gilead has earned the con-fi dence of the specialist clinicians that determine success in the HIV space.

In turn, management has lever-aged its weight in HIV to branch out in other therapeutic areas, including hepatitis B, and cardiovascular and respiratory conditions. The strat-egy is not without costs, as building

global market share is a challenge for all the smaller “stealth pharma” com-panies and Gilead is no exception, as evidenced by recent pressure on the share price.

Bill Trombetta is professor of pharmaceutical mar-keting and strategy at the Erivan K. Haub School of Business at St. Joseph’s University in Philadelphia. He can be reached at [email protected]

sponsored by

Documents

Pharmaceutical Industry Audit 2009