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Industry Audit 2009

Sep 01, 2009

What’s the best managed pharma company?

Cast 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, 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 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 file 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 financial 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 profitability 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 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" firms, last profiled in our June issue ("Stealth Pharma," June 2009). These include most of the emerging players in the biotech, orphan drugs and generics sectors, which were chosen for their high profile in the investment and scientific communities. Many are future leaders in the industry, with the scale, flexibility, and sophistication to fill 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 reflect a firm's market capitalization plus liabilities minus cash, or about what it would take to buy the firm on the open market. "Return on Assets" is another worthy exemplar of a commitment to long term profitability, and thus is given a significant weighting in the audit.

To accommodate the expanded sector profile, 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 final 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 final score, with the company receiving the highest number of points overall designated as the Company of the Year.

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