20th Annual Industry Audit: Year of the Pandemic


Welcome to Pharm Exec’s 20th Annual Pharmaceutical Industry Audit, covering the Year of the Pandemic. We present a unique financial performance analysis of the top 18 publicly traded biopharmaceutical companies based on 2020 sales revenue. As in our previous Audit, this total of 18 organizations reflects the acquisitions of Celgene by Bristol Myers Squibb (BMS) and Allergan by AbbVie. The Audit is focused on a number of financial performance metrics, particularly critical metrics such as growth in shareholder enterprise value, enterprise value to sales (EV/S), and return on invested capital (ROIC). Regarding the last metric, we introduced the impact of weighted average cost of capital (WACC) in September 2019. WACC adjusts ROIC by assessing the difference between ROIC and WACC.


This year’s Audit relies on secondary reported information for the 2019–2020 time period. The metrics are also weighted reflecting their relative importance in assessing a company’s performance. Some metrics are more important than others. For example, sales growth is important, but sales growth can occur as a result of mergers and acquisitions and in-licensing. So it takes a back seat to more critical metrics such as ROIC, which measures how well a company is managed, including margin management (the profit and loss or income statement) and asset management (the use of assets on the balance sheet), and most importantly, whether ROIC exceeds the cost of capital (the cost of debt and the opportunity cost of stock equity, which are reflected by WACC).

Two metrics are included that are not weighted: sales, general, & administrative (SG&A) expenses, or overhead; and profit per employee.

The higher a company performs on a metric is reflected in a ranking based on the number of points it receives per metric. The highest metric for this year’s Audit is 18 based on the number of firms in our Audit. For example, if a company places 17th (second highest) on the critical metric EV/S, it receives 51 points on the metric (17 rank x weight of 3). In another example, if a company comes in at a ranking of five (five places from the bottom), on the metric gross margin (pricing power), its total points would be 10 (5 rank x weight of 2).


Basic indices are the growth of the US economy and inflation. An organization has to be able to grow faster than the US economy: around 3% in 2019 and higher than inflation as measured by the Consumer Price Index (CPI), about 2% for 2019. Other important benchmark metrics for 2020 include:

  • Nasdaq Composite: up 44%
  • Dow Jones Industrial Average: up 7.25%
  • Standard & Poor’s (S&P) 500: up 16%
  • S&P 500 Health Care: up 11.43%
  • And, according to Evaluate Vantage:
  • Dow Jones Medical Equipment Index: up 22%
  • S&P Composite 1500 Health Care Equipment & Supplies Industry Index: up 17%

Sales growth

Table 1 shows sales in US dollars along with sales growth for 2019–2020. It is good to grow, especially organically, compared to just acquiring companies. But that’s easier said than done for companies at high sales levels such as Johnson & Johnson (J&J), Novartis, and Roche.

The average dollar sales for our 18 companies was $35.9 billion in 2020, vs. $31.3 billion the previous year: a growth rate increase of 12.9%, outpacing the US economy growth rate (3.4%) and inflation (1.4%). Our 18 pharmas also outperformed the Fortune 500 for 2020 (Fortune 500 sales growth: 3.72%). The key metric in Table 1 is sales growth, with BMS increasing the fastest, due in part to the Celgene acquisition, which was completed in November 2019. AbbVie’s sales growth comes in second, again, with lingering impact of its acquisition of Allergan in 2019. Of our 18 companies, four showed a sales decrease for the pandemic year.

Enterprise or shareholder value and growth

This is the first of the three crunch metrics; EV/S and ROIC are the others. There are other worthy performance metrics (e.g., corporate responsibility, sustainability, the best places for women and minorities to work, etc.), but our focus is financial performance and enterprise value and growth. Did a company create or add to shareholder (enterprise) value or destroy shareholder value?

EV is the sum of an organization’s market capitalization; then add in debt and adjust for cash and other current assets. Simply put, EV is the market value or market capitalization of a company. At present, two firms are fighting it out for the highest company value on earth: Microsoft and Amazon, both at company market caps of more than $1 trillion.

Table 2 shows the pharma with the highest EV is J&J at $471.5 billion, with an average growth for the year of 11.6%. The company that grew its EV the most was Viatris (the Mylan plus Pfizer’s Upjohn spin-off), with a spike of 101%. To put that in perspective, the average EV for our 18 pharmas in 2020 was $176.8 billion, up 12.8%; average EV jumped 18.9% the previous year. Only three companies dropped in this metric.

Enterprise, or shareholder, value for this year’s pharma crop averages $176.8 billion, a 12.8% increase over 2019’s $156.3 billion. This is lower than 2019’s EV growth of 19%.

Enterprise value to sales

EV and EV growth are very important performance metrics. EV/S supplements that metric by assessing which firms are still climbing vis-à-vis so-called “value” stocks—stocks for widow and orphans that, if not growing in upside market cap, still pay noteworthy dividends and are solid businesses.

Table 3 lists EV/S. The average EV/S for 2020 is 4.6, the same as 2019. At the top is Novo Nordisk at 7.6, an increase from the drugmaker’s 5.7 EV/S in 2019. Coming in a close second is Eli Lilly at 7.1. Only seven pharmas posted increases in EV/S, compared to 12 in 2019. The higher the EV/S ratio, the more likelihood the company’s performance is going to get better.

Gross margin

Yes, there is net-net and list price vs. net price, but at the end of the day, there is gross margin, which is tantamount to markup. As Warren Buffet would call it, “the moat around your castle.” Gross margin reflects an organization’s power to maintain or, even better, increase price.

This metric represents total revenue minus cost of goods sold from the income statement. This is quintessential margin management: how price is managed while simultaneously managing operating costs to produce net income. The higher the gross margin is, the more a company is able to cover operating expenses, including SG&A. Table 4 below shows Novo Nordisk at the top with a gross margin of 81.8%, a slight decrease from 2019, which followed another price decrease in 2018. The biotechs rule pricing as they have ever since the first Pharm Exec Industry Audit in September 2002. But note the significant drop in gross margin average for our 18 pharmas in recent years, from 77.7% in 2018 to 68% in 2019, and for 2020, down to 67%. Nine firms were able to increase their gross margin in 2020, with Lilly, Novartis, Gilead, Biogen, and Amgen raising it the most.

Pre-tax income margin

Staying with margin management, Table 5 shows pre-tax operating income, or profit to sales. Again, the higher the gross margin is, the more that contributes to improving pre-tax operating income. Operating income consists of total revenues minus cost of goods sold and minus operating expenses related to a firm’s typical business. It excludes one-time gains and losses, dividend income, and interest income.

At the top in this metric is Novo Nordisk with pre-tax operating income of 41.7%. The average figure for 2020 was 16%, a significant four-digit drop from 20.3% in 2019. Only seven of our 18 companies saw their pre-tax operating incomes increase for the year.

Sales to assets

Gross margin and pre-tax operating income have to do with margin management; sales to assets has to do with asset management. If a firm is at $70 billion in sales, for example, it won’t be doubling revenue anytime soon. If the company has also curtailed SG&A and disposed of assets, it won’t be cutting operating expenses in half anytime soon either. Then it turns to asset management to do a better job making use of, not necessarily owning, assets.

When you multiply profit to sales (pre-tax operating income) by sales to assets (asset management), you get a far more important measure: return on assets. A company can have a relatively low profit margin with a relatively high sales-to-assets ratio that will result in a better performance in terms of ROIC.

As seen in Table 6, Novo…


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