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  • Smaller companies win in most valuable race  0 comments
    Jun 30, 2009 12:20 PM | about stocks: ALKS, AMGN, GILD, PDLI, WYE, SGP, SNY, JNJ, LLY, VPHM, PFE, MRK, CELG

    Think of the industry’s most profitable companies and the usual suspects such as Johnson & Johnson or  Pfizer come flooding to mind, but put aside the idea of measuring solely on the size of profits and focus on margins, then the list becomes a lot more interesting.  

    A recent analysis of net margins by EvaluatePharma (World Preview 2014) shows that rather than a big hitter the most profitable company last year was PDL BioPharma, with extremely impressive net margins of 68.9%, a figure that is way in excess of the next most profitable company, Leo Pharma, with still fat looking margins of 44.3% (see table below).
     
    The analysis is based on dividing normalised net income (excluding exceptional items) by the total revenues, to generate a net margin percentage. It only includes companies that have reported two consecutive years of profit, with incomes in excess of $50m in 2008.

     
     
    Net Margin 
     
    Net Income - Normalised 
    Rank  
    Company 
    2007 
    2008 
    Chg. (+/-) 
     
    2007 
    2008 
    % Growth 
     1  
    PDL BioPharma 
     87.4%  
     68.9%  
     -18.4%  
     
     197  
     203  
     +3%  
     2  
    Leo Pharma 
     45.1%  
     44.3%  
     -0.8%  
     
     435  
     498  
     +14%  
     3  
    Warner Chilcott 
     30.7%  
     38.8%  
     +8.1%  
     
     276  
     364  
     +32%  
     4  
    Gilead Sciences 
     38.2%  
     37.8%  
     -0.3%  
     
     1,615  
     2,019  
     +25%  
     5  
    Sun Pharmaceutical Industries*  
     42.6%  
     36.3%  
     -6.3%  
     
     367  
     272  
     -26%  
     6  
    OSI Pharmaceuticals 
     32.2%  
     35.3%  
     +3.1%  
     
     110  
     134  
     +22%  
     7  
    Pfizer 
     31.3%  
     33.9%  
     +2.5%  
     
     15,113  
     16,366  
     +8%  
     8  
    Alkermes*  
     6.5%  
     33.1%  
     +26.6%  
     
     16  
     97  
     +516%  
     9  
    Merck & Co 
     31.5%  
     32.2%  
     +0.7%  
     
     7,624  
     7,670  
     +1%  
     10  
    Amgen 
     31.3%  
     32.1%  
     +0.8%  
     
     4,623  
     4,817  
     +4%  
     11  
    Biovail 
     31.1%  
     30.3%  
     -0.8%  
     
     262  
     230  
     -12%  
     12  
    ViroPharma 
     46.8%  
     29.1%  
     -17.7%  
     
     95  
     68  
     -29%  
     13  
    Alcon 
     29.1%  
     28.8%  
     -0.4%  
     
     1,627  
     1,811  
     +11%  
     14  
    Pharmstandard*  
     29.5%  
     28.4%  
     -1.2%  
     
     132  
     192  
     +46%  
     15  
    Celgene 
     18.6%  
     27.7%  
     +9.2%  
     
     261  
     621  
     +138%  
     16  
    Octapharma*  
     27.5%  
     27.5%  
     +0.0%  
     
     284  
     350  
     +23%  
     17  
    Glenmark Pharmaceuticals*  
     31.6%  
     26.9%  
     -4.7%  
     
     158  
     138  
     -13%  
     18  
    Sanofi-Aventis 
     25.0%  
     26.8%  
     +1.8%  
     
     9,603  
     10,855  
     +13%  
     19  
    Biogen Idec 
     26.8%  
     25.9%  
     -1.0%  
     
     851  
     1,060  
     +25%  
     20  
    Cubist Pharmaceuticals 
     19.7%  
     25.6%  
     +5.9%  
     
     58  
     111  
     +91%  
    * based on forecast data for 2008 

    PDL’s generous margins stem from its decision to hive off its riskier drug development business into a separate company, Facet Biotech, leaving it as a thinly staffed, listed company, collecting the royalty streams from a number of highly profitable drugs including Avastin, Herceptin and  Tysabri.
     
    The money will initially be used to pay off the group’s debt of $500m. However, the fact that it is forecast to earn $469m in 2014, long after it should have paid off its debt, and the growing royalties from the recent approvals of Cimzia and  Actemra, means that it looks like a highly attractive asset that could warrant the attention of a company looking for a revenue stream. 
     
    Other than its highly profitable psoriasis and anti-coagulant franchise led by products Daivobet and  Innohep, the other reason why Danish Leo Pharma may have made it into the number two position is that the company is owned by the not-for-profit  Leo Foundation, meaning that costs are likely to be kept to a minimum.
     
    Big not always better
     
    Surprisingly few of the cost heavy big pharma companies make it into the top 10, with only Pfizer and  Merck & Co left to represent this sector of the market. This might, however, change given that the mega mergers that both have indulged in, wedding themselves to  Wyeth and  Schering-Plough respectively.  
    Looking beyond the top 10 to the top 20 and only Sanofi-Aventis makes it into the list, with big biotech  Amgen coming in at number 10 thanks to its high value biologics portfolio.  
     
    Generic Indian companies Sun Pharmaceutical Industries and  Glenmark Pharmaceuticals make it into the top 20 again, showing that their model of keeping costs low prove that generics do not necessarily mean low margin. But since last year the two have slipped down the rankings, Sun has moved from two to five and Glenmark is now at 17 from six (Surprises in the industry's most profitable companies, June 20, 2008). 
     
    Changing margins
     
    While many of the companies have experienced falls in net margins between 2007 and 2008, the company that has grown margins the most over 12 months is Alkermes, which has benefited from its proprietary drug delivery technology used in Johnson & Johnson’s Risperdal Consta, and its own alcohol dependency drug, Vivitrol. The group has also recorded the highest percentage rise in net income, with a six fold rise to $97m.  
     
    Alkermes could also remain among the companies with the highest margins as the group is set to receive more royalties if  Eli Lilly’s once weekly Byetta LAR is approved. According to consensus forecasts from EvaluatePharma, royalties from  Byetta LAR could hit $199m by 2014.  

    In contrast, ViroPharma is second only to  PDL BioPharma in recording a fall in net margins over the last 12 months. The company retains its position in the top 15 thanks solely to sales of its anti-bacterial agent  Vancocin, but margins are likely to continue to fall following the clinical failure of the group’s anti-infective drug maribavir, which was set to be the biggest growth driver at the company (ViroPharma's maribavir disappointment will sharpen focus , Februrary 10, 2009). Vancocin is also squaring up to generic competition.  

    Disclosure: No positions

    Themes: Healthcare Stocks: ALKS, AMGN, GILD, PDLI, WYE, SGP, SNY, JNJ, LLY, VPHM, PFE, MRK, CELG
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