Pharmaceutical Industry Audit 2009

54

PHARMACEUTICAL EXECUTIVE

sponsored by

ASTRAZENECA MERCK WYETH BMS L I L LY SCHERING-PLOUGH AMGEN GENENTECH TEVA NOVO NORDISK

GILEAD MYLAN GENZYME ALLERGAN BIOGEN-IDEC FOREST

industry audit PHARM EXEC’S 8 TH ANNUAL

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?

2p7 anies

com ed rank

56

PHARMACEUTICAL EXECUTIVE

I N D U S T R Y A U D I T ’09

SEPTEMBER 2009 www.pharmexec.com

sponsored by

c

FIGURES 1 & 2 PHARMACEUTICAL EXECUTIVE INDUSTRY AUDIT

Sales Rank 2008 1 2 3 4 5 6 6 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Change in Revenues 2008–2007 WEIGHT = 2

J&J

$63.8B

Pfizer

$48.3B

Novartis

$42.6B

Sanofi-Aventis

$40.6B

GSK

$35.3B

Abbott

$29.5B

AstraZeneca

$29.5B

Merck

$23.9B

Wyeth

$22.8B

BMS

$20.6B

Lilly

$20.4B

Schering-Plough $18.5B Amgen

$15.0B

Genentech

$13.4B

Teva

$11.8B

Novo Nordisk

$8.6B

Gilead

$5.3B

Mylan

$5.1B

Genzyme

$4.6B

Allergan

$4.4B

Biogen-Idec

$4.1B

Forest

$3.8B

Celgene

$3.3B

Watson

$2.5B

Cephalon

$2.0B

King

$1.6B

Endo

$1.3B

AVERAGE

$17.7B

27 26 25 24 23 22 21 20 19 18 17 16 16 14 13 12 11 10 9 8 7 6 5 4 3 2 1

Mylan

219%

Celgene

132%

Schering-Plough

45.7%

Biogen-Idec

29.3%

Gilead

25.3%

Genzyme

20.7%

Teva

17.7%

Endo

16.6%

Genentech

14.7%

Abbott

14.0%

Allergan

11.7%

Forest

11.6%

AstraZeneca

11.6%

Cephalon

11.3%

Lilly

9.4%

Novartis

9.3%

BMS

6.4%

Novo Nordisk

4.5%

J&J

4.3%

Wyeth

1.9%

Amgen

1.5%

Watson

1.2%

Pfizer

(-).2%

Sanofi-Aventis

(-)5.6%

Merck

(-)14.5

GSK

(-)23.0

King

(-)27.1

AVERAGE

20.3%

METRICS AND WEIGHTS FOR EVALUATING COMPANY PERFORMANCE METRIC

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

WEIGHT

2 3 3 2 2 2 3 2

ast against a backdrop of global recession and pressure on the business model that is blurring the traditional strategic divide between generic and originator products, St. Joseph’s University 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 Company of the Year honors, with newcomer Gilead Sciences posting a convincing win based on an impressive 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, BiogenIdec, 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 biotech has opened the door to acquisition of products, pipelines, and expertise at bargain prices—suggesting 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 annual basis with the US Securities and Exchange Commission. As in past years, the audit includes a wider array of performance metrics than found in the standard fi nancial and accounting statements. Drawing on this larger set of sources allows for a more meaningful picture of performance, analyzing such key metrics as enterprise value in proportion to sales—a mission-critical driver of future prospects that focuses 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

58

PHARMACEUTICAL EXECUTIVE

I N D U S T R Y A U D I T ’09

SEPTEMBER 2009 www.pharmexec.com

sponsored by

FIGURES 3 & 4 PHARMACEUTICAL EXECUTIVE INDUSTRY AUDIT

Enterprise Value & Rank

Change in Enterprise Value 2008–2007 WEIGHT = 3

1 2 3 4 4 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

J&J

$142.0B

GSK

$106.4B

Genentech

$95.4B

Sanofi-Aventis

$86.8B

Novartis

$86.8B

Pfizer Abbott

$85.6B $79.8B

Merck

$57.1B

AstraZeneca

$55.1B

Wyeth

$53.2B

Amgen

$50.9B

Schering-Plough $45.7B Teva Lilly

$45.7B $40.2B

Gilead

$39.9B

BMS

$39.0B

Novo Nordisk

$25.8B

Celgene

$18.7B

Biogen-Idec

$14.5B

Genzyme

$13.8B

Allergan

$12.6B

Mylan

$8.4B

Cephalon

$5.1B

Forest

$4.2B

Watson

$3.2B

King

$2.8B

Endo

$1.6B

AVERAGE

$45.2B

27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 12 10 9 8 7 6 5 4 3 2 1

King

140.0%

Mylan

137.0%

Genentech

51.8%

Teva

20.9%

Schering-Plough

10.4%

Cephalon

5.6%

Amgen

4.3%

Wyeth

(-)8.7%

Watson

(-)12.4%

Abbott

(-)15.3%

Celgene

(-)15.8%

BMS

(-)16.3%

Gilead

(-)16.9%

GSK

(-)17.1%

Novartis

(-)20.1%

Sanofi-Aventis

(-)21.6%

Biogen-Idec

(-)21.6%

AstraZeneca

(-)22.4%

Lilly

(-)24.0%

J&J

(-)25.2%

Merck

(-)28.0%

Allergan

(-)29.0%

Genzyme

(-)30.3%

Pfizer

(-)31.1%

Novo Nordisk

(-)37.9%

Endo

(-)40.4%

Forest

(-)52.3%

AVERAGE

(-)4.3%

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?

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 actually 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 refocus on fundamentals. In the case of management, the measurement 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 capitalization plus liabilities minus cash, or about what it would take to buy the fi rm on the open market. “Return on Assets” is another worthy exemplar of a commitment to long term profitability, 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 metrics, 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 (covering value recognition and asset performance) weighted at 3 and the remaining five 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 company 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 Company of the Year.

60

PHARMACEUTICAL EXECUTIVE

I N D U S T R Y A U D I T ’09

SEPTEMBER 2009 www.pharmexec.com

sponsored by

FIGURES 5 & 6

Macro Benchmarks: Recession Spins Record Low Sales Growth

PHARMACEUTICAL EXECUTIVE INDUSTRY AUDIT

Enterprise Value to Sales 2008–2007

Enterprise Value to Sales Rank 2008 WEIGHT =3

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

J&J Pfizer

2008

2007

2.22

3.06

1.77

2.60

Genentech

2.04

2.76

Sanofi-Aventis

2.14

2.36

GSK

2.54

2.88

Abbott

2.70

3.52

AstraZeneca

1.74

2.35

Merck

2.39

3.27

Wyeth

2.33

2.56

BMS

1.90

2.30

Lilly

1.97

2.72

Schering-Plough

2.47

2.88

Amgen

3.39

3.32

Genentech

7.11

5.84

Teva

4.11

4.02

Novo Nordisk

3.13

4.72

Gilead Mylan

7.48 1.68

11.30 2.20

Genzyme

3.00

5.20

Allergan

2.85

4.50

Biogen-Idec Forest

3.47 1.09

5.44 2.36

Celgene

8.3

15.8

Watson

1.28

1.49

Cephalon

2.57

2.69

King

1.8

0.55

Endo

1.23

2.35

EV/S 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1

Celgene

8.30

Gilead

7.48

Genentech

7.11

Teva

4.11

Biogen-Idec

3.47

Amgen

3.39

Novo Nordisk

3.13

Genzyme

3.00

Allergan

2.85

Abbott

2.70

Cephalon

2.57

GSK

2.54

Schering-Plough

2.47

Merck

2.39

Wyeth

2.33

J&J

2.22

Sanofi-Aventis

2.14

Novartis

2.04

Lilly

1.97

BMS

1.90

King

1.80

Pfizer

1.77

AstraZeneca

1.74

Mylan

1.68

Watson

1.28

Endo

1.23

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 rarified 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 contention for a second run at the top slot. The reversal in these key metrics are reflective of the upfront costs, risks, and management challenges in diversifying the portfolio for long term success.

No performance audit is complete without an overall 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 benefits 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 pharmaceutical sales to less than 3 percent (topping $750 billion), down from nearly 5 percent in 2008. A significant pullback has been underway for several years in the US market, with sales growth for this year pegged at around one percent, or approximately $300 billion, down from 3.8 percent. The steep shortfall in demand has been accompanied 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 analysis of the macroeconomic environment. First, the industry is no longer immune to broader structural 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 proportion to the overall economy. Second, the US is no longer the growth driver for the industry worldwide, a trend that could be accentuated if comprehensive health reform legislation is enacted later this year. Third, the capacity of the industry to exert pricing power against a consolidating payer base is shrinking fast, suggesting that future growth is going to depend on a much more robust value proposition for products competing in crowded therapeutic fields. With this as the essential context, let’s review the details driving results for the 27 surveyed companies. 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 significant, from Johnson & Johnson, the poster child for decentralized diversification, 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,

62

PHARMACEUTICAL EXECUTIVE

I N D U S T R Y A U D I T ’09

SEPTEMBER 2009 www.pharmexec.com

sponsored by

FIGURES 7 & 8 PHARMACEUTICAL EXECUTIVE INDUSTRY AUDIT

Gross Margin 2008–2007

Gross Margin Rank 2008 WEIGHT = 2

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

J&J

2008

2007

71%

70.9%

Pfizer

83.2%

76.8%

Novartis

73.1%

71.7%

Sanofi-Aventis

74.5%

74.1%

GSK Abbott

73.6% 57.3%

76.8% 55.9%

AstraZeneca

77.4%

79.o%

Merck

76.6%

74.6%

Wyeth

72.6%

71.8%

BMS

68.9%

67.9%

Lilly

78.5%

77.2%

Schering-Plough

60.5%

65.3%

Amgen

84.7%

82.7%

Genentech

87.0%

86.6%

Teva

53.8%

51.8%

Novo Nordisk

77.8%

76.6%

Gilead

78.9%

82.3%

Mylan

40.3%

52.3%

Genzyme

76.7%

75.7%

Allergan

82.7%

82.9%

Biogen-Idec Forest

90.2% 79.1%

89.4% 78.3%

Celgene

88.3%

90.7%

Watson

40.7%

39.7%

Cephalon King Endo

79.1% 74.8% 78.8%

80.7% 73.5% 80.0%

27 26 25 24 23 22 21 21 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1

Biogen-Idec

90.2%

Celgene

88.3%

Genentech

87.0%

Amgen

84.7%

Pfizer

83.2%

Allergan

82.7%

Cephalon

79.1%

Forest

79.1%

Gilead

78.9%

Endo

78.8%

Lilly

78.5%

Novo Nordisk

77.8%

AstraZeneca

77.4%

Genzyme

76.7%

Merck

76.6%

King

74.8%

Sanofi-Aventis

74.5%

GSK

73.6%

Novartis

73.1%

Wyeth

72.6%

J&J

71.6%

BMS

68.9%

Schering-Plough

60.5%

Abbott

57.3%

Teva

53.8%

Watson

40.7%

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 flip side is bureaucratic confusion

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 billion—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 maxim “grow or die.” In a hostile demand environment, 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 runner-up Celgene nearly two to one. Mylan’s success highlights the importance of how you grow. The company has a global strategy 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 profi 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 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, 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 intensely 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: Companies either create shareholder value or destroy it.

64

PHARMACEUTICAL EXECUTIVE

I N D U S T R Y A U D I T ’09

SEPTEMBER 2009 www.pharmexec.com

sponsored by

FIGURES 9 & 10 PHARMACEUTICAL EXECUTIVE INDUSTRY AUDIT

Profit (EBITDA) to Sales Rank 2008

Sales to Assets 2008–2007

WEIGHT = 2

27 26 25 24 23 22 21 20 19 18 18 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1

Gilead

52.6%

GSK

48.6%

Pfizer

45.3%

Amgen

44.7%

Biogen-Idec

42.4%

Genentech

41.8%

AstraZeneca

38.6%

Endo

36.1%

Wyeth

34.6%

Merck

32.8%

Lilly

32.8%

King

31.2%

Novo Nordisk

30.9%

J&J

29.8%

Teva

28.5%

Forest

27.9%

Abbott

27.4%

Novartis

27.2%

Cephalon

26.7%

BMS

26.5%

Allergan

23.4%

Mylan

23.1%

Watson

22.4%

Genzyme

20.7%

Celgene

19.9%

Schering-Plough

15.8%

Sanofi-Aventis

15.5%

AVERAGE

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

2008

2007

J&J

0.742

0.76

Pfizer

0.432

0.42

Novartis

0.538

0.52

Sanofi-Aventis

0.400

0.38

GSK

0.740

0.74

Abbott

0.696

0.65

AstraZeneca

0.616

0.54

Merck

0.504

0.50

Wyeth

0.518

0.52

BMS

0.698

0.74

Lilly

0.699

0.70

Schering-Plough

0.658

0.44

Amgen

0.412

0.43

Genentech

0.616

0.61

Teva

0.337

0.40

Novo Nordisk

0.900

0.88

Gilead

0.754

0.72

Mylan

0.494

0.37

Genzyme

0.535

0.46

Allergan

0.648

0.60

Biogen-Idec

0.482

0.37

Forest

0.844

0.94

Celgene

0.507

0.39

Watson

0.689

0.71

Cephalon

0.623

0.64

King

0.368

0.61

Endo

0.646

0.64

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, entrepreneurial footing and focused orientation of a biotech. Enterprise Value to Sales decreased for both companies in 2008, to levels that don’t reflect any future prospects as hosts for a range of fledgling 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 approach biotech levels. The rankings indicate that significant 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.

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 enterprise 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 indicator that shareholders are getting what they expect from the stock. King and Mylan sport the highest shareholder value creation, at 140 percent and 137 percent, respectively, 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 increasingly fragile position for its in-patent portfolio. The second metric weighted at level 3 is Enterprise 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 direction 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 significant 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 firms 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 perceptions that fi rms are on the upswing—or, alternatively, that their best days are behind them. The higher the ratio, the greater the likelihood that a

66

PHARMACEUTICAL EXECUTIVE

I N D U S T R Y A U D I T ’09

SEPTEMBER 2009 www.pharmexec.com

sponsored by

FIGURES 11 & 12 PHARMACEUTICAL EXECUTIVE INDUSTRY AUDIT

Sales to Assets Rank 2008

Profit to Assets Rank 2008

WEIGHT = 2

WEIGHT = 3

27 26 25 24 23 22 21 20 19 18 17 16 15 14 14 12 11 10 9 8 7 6 5 4 3 2 1

Merck

0.504

Mylan

0.494

Biogen-Idec

0.482

Pfizer

0.432

Amgen

0.412

Sanofi-Aventis

0.400

King

0.368

Teva

0.337

27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1

AVERAGE

0.596

AVERAGE

Novo Nordisk

0.900

Forest

0.844

Gilead

0.754

J&J

0.742

GSK

0.740

Lilly

0.699

BMS

0.698

Abbott

0.696

Watson

0.689

Schering-Plough

0.658

Allergan

0.648

Endo

0.646

Cephalon

0.623

Genentech

0.616

AstraZeneca

0.616

Novartis

0.538

Genzyme

0.535

Wyeth

0.518

Celgene

0.507

Gilead

0.397

GSK

0.359

Novo Nordisk

0.278

Genentech

0.257

AstraZeneca

0.238

Forest

0.235

Endo

0.233

Lilly

0.229

J&J

0.221

Biogen-Idec

0.204

Pfizer

0.196

Abbott

0.191

BMS

0.185

Amgen

0.184

Wyeth

0.179

Cephalon

0.166

Merck

0.165

Allergan

0.152

Novartis

0.146

Watson

0.143

King

0.115

Mylan

0.114

Genzyme

0.111

Schering-Plough

0.104

Celgene

0.101

Teva

0.096

Sanofi-Aventis

0.062 0.184

PFIZER’S UNTAPPED MEDICINE CABINET The world’s topselling pharmaceutical company has had a rough decade, especially in terms of shareholder value. But Pfizer is taking steps to reposition, including a pending merger to consolidate its hold on the top sales rank and a plan to offset the 2011 patent expiration of flagship 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 Pfizer 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.

fi rm’s growth will outpace its peers in both sales and profit. 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 numbers 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 market, 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 company’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 profit margins are a function of good management, with particular attention paid to cost control. This in turn drives the larger financial performance measure of EBITDA: earnings before interest, taxes, depreciation, and amortization. In essence, EBITDA determines the level of profit against sales. The higher this ratio, the more impressive a fi rm looks to shareholders 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 commodity 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 aggressively engaging around biosimilars, which if approved by regulators can command higher price points. Three key generics companies—Endo, King, and Teva—are doing better 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, Abbott, and BMS. Sales per assets Figure 10 (page 64, right side) sets the benchmark for company productivity in managing assets. It shows how a firm’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 firm is over the course of the year. Roughly half of the 27 companies in this year’s audit posted modest improvements in 2008 over 2007. This metric is unique in

68

PHARMACEUTICAL EXECUTIVE

I N D U S T R Y A U D I T ’09

SEPTEMBER 2009 www.pharmexec.com

sponsored by

FIGURES 13 & 14 PHARMACEUTICAL EXECUTIVE INDUSTRY AUDIT

Sales/Employee 2008–2007

Sales/Employee Rank 2008 WEIGHT = 2

2008 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

2007

J&J

537K

503K

Pfizer

590K

560K

Novartis

440K

399K

Sanofi-Aventis

413K

400K

GSK

353K

446K

Abbott

312K

380K

AstraZeneca

453K

399K

Merck

431K

405K

Wyeth

481K

440K

BMS

588K

460K

Lilly

503K

466K

Schering-Plough

362K

230K

Amgen

898K

849K

Genentech

1.11M

1.46M

Teva

298K

336K

Novo Nordisk

320K

322K

Gilead

1.53M

1.4M

Mylan

429K

NA

Genzyme

418K

380K

Allergan

503K

500K

Biogen-Idec

872K

737K

Forest

730K

671K

Celgene

923K

824K

Watson

498K

446K

Cephalon

710K

900K

King

463K

Endo

1.05M

NA 900K

27 26 25 24 23 22 21 20 19 18 17 16 16 14 13 12 11 10 9 8 7 6 5 4 3 2 1

Gilead

1.53M

Genentech

1.11M

Endo

1.05M

Celgene

924K

Amgen

898K

Biogen-Idec

872K

Forest

730K

Cephalon

710K

Pfizer

590K

BMS

588K

J&J

537K

Lilly

503K

Allergan

503K

Watson

498K

Wyeth

481K

King

463K

AstraZeneca

453K

Novartis

440K

Merck

431K

Mylan

429K

Genzyme

418K

Sanofi-Aventis

413K

Schering-Plough

362K

GSK

353K

Novo Nordisk

320K

Abbott

312K

Teva

298K

AVERAGE

601K

BRIDGING THE “SUPERMARKET SPREAD” Reinforcing Big Pharma’s interest in generics and fast-growing emerging markets is the message behind Procter & Gamble’s pullout from the drugs sector. In a blog in FinancialTimes.com posted in February, then-CEO A.G. Lafley 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.

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 profits 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 profit: by not only focusing on margins, but also on how well assets are managed. Profit to assets or return on assets When we combine Profit 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, reflecting stellar management of assets to maximize profit margins. But it’s profits, of course, that drive the returns to shareholders, which is why Gilead Sciences, 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 employee productivity against sales for 2008. Gilead once again is on top with an impressive $1.53 million 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 flat, management needs to scrutinize its overhead in terms of selling, general, and administrative 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 increase 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,

70

PHARMACEUTICAL EXECUTIVE

I N D U S T R Y A U D I T ’09

SEPTEMBER 2009 www.pharmexec.com

sponsored by

FIGURES 15 & 16 PHARMACEUTICAL EXECUTIVE INDUSTRY AUDIT

And the Winner is...

Selling, General Administrative Expenses 2008–2007 2008 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

2007

SALES CHANGE

SG%A CHANGE

J&J

21.5B

20.4B

4.3%

5.4%

Pfizer

14.5B

15.6B

(-)0.2%

(-)0.7%

Novartis

15.0B

13.6B

9.3%

10.3%

Sanofi-Aventis

10.6B

10.7B

(-)5.6%

N/A

GSK

11.1B

11.8B

(-)23.0%

(-)5.9%

Abbott

8.4B

7.4B

14.0%

13.5%

AstraZeneca

9.6B

9.5B

11.6%

2.1%

Merck

7.4B

7.6B

(-)14.5%

(-)2.3%

Wyeth

6.8B

6.8B

1.9%

1.2%

BMS

6.3B

6.3B

6.4%

N/A

Lilly

6.6B

6.1B

9.4%

8.9%

Schering-Plough

6.8B

5.5B

45.7%

23.6%

Amgen

4.2B

3.4B

1.5%

22.6%

Genentech

3.6B

3.3B

14.5%

9.0%

Teva

2.5B

1.9B

17.7%

32.0%

Novo Nordisk

2.9B

2.9B

4.5%

N/A

Gilead

797K

706K

25.3%

12.7%

Mylan

1.1B

216K

219.0%

390.0%

Genzyme

1.3B

1.2B

20.7%

12.6%

Allergan

1.9B

1.7B

11.7%

10.5%

Biogen-Idec

925K

776K

29.3%

19.2%

Forest

1.1B

1.1B

11.6%

N/A

Celgene

685K

452K

132.0%

52.0%

Watson

422K

422K

1.2%

N/A

Cephalon

841K

736K

11.3%

10.2%

King

446K

691K

(-)27.1%

(-)35.4%

Endo

488K

412K

16.6%

18.7%

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 first, second, third, etc., and who came in last, 26th and 25th from top to bot-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 22 24 25 26 27

GILEAD

446

Genentech

434

Biogen-Idec

363

Amgen

335

Celgene

317

Cephalon

311

GSK

298

Novo Nordisk

289

Lilly

286

Endo

273

AstraZeneca

268

Abbott

266

Forest

264

Allergan

263

J&J

259

Wyeth

254

BMS

245

Schering-Plough

236

Pfizer

235

Teva

228

King

210

Genzyme

206

Mylan

206

Novartis

202

Merck

198

Watson

181

Sanofi-Aventis

122

tom—consider the strength of Gilead’s performance: it scored in single digits on 7 of the 8 metrics, by definition 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 bottom third placements, from 20 to 27.

Strategy: The Forgotten Buzzword Besides its strong management metrics, Gilead Sciences earns the top nod with a novel strategic focus on what is arguably today’s

72

PHARMACEUTICAL EXECUTIVE

I N D U S T R Y A U D I T ’09

SEPTEMBER 2009 www.pharmexec.com

sponsored by

DR. BILL’S HALL OF FAME

A

s 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 (Profit or EBITDA to Sales) and Asset Management (Sales to Assets). When these two ratios are combined they result in Return on Assets or Profit to Assets, a most important metric. It is difficult enough for a company to excel in one of these key metrics, let alone two. For example, Amgen’s profit to sales ratio is an impressive 44.7 percent, placing fourth out of 27 firms. But its lackluster performance in asset management places it 24th out of 27 firms. BMS comes in seventh out of 27 on asset management, but only places 22nd on profitability. 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 first in profitability 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 fifth 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 anticipating changes in the profile of HIV/ AIDS, as a priority disease and as a driver of social policy—both of which affect the climate for reimbursement. Where others have encountered only reputa-

tional risks, Gilead has earned the confidence of the specialist clinicians that determine success in the HIV space. In turn, management has leveraged its weight in HIV to branch out in other therapeutic areas, including hepatitis B, and cardiovascular and respiratory conditions. The strategy is not without costs, as building

global market share is a challenge for all the smaller “stealth pharma” companies and Gilead is no exception, as evidenced by recent pressure on the share price. Bill Trombetta is professor of pharmaceutical marketing and strategy at the Erivan K. Haub School of Business at St. Joseph’s University in Philadelphia. He can be reached at [email protected]