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June 17, 2010
Checking the Business Ratios
Jim Edwards has a good post up about financial efficiency among the big drug companies. If you plot out their revenue versus expenses (S,G&A), you see that all the big outfits are basically the same (here's an enlarged version of the graph). Abbott's a bit toward the top end of the narrow range, and AstraZeneca's toward the bottom, but there's not much to choose from. This despite several of the companies on the chart having done whalloping huge mergers during the period shown, mergers which were supposed to improve efficiency. As Edwards shows, though, the best that can be said so far is that (in some cases) things have moved from a bit below average all the way up to. . .average.
It's interesting to compare that ratio to those found at other companies and in other industries. The rule of thumb is that a dollar of SG&A is worth three in revenue. The big drug companies look to have ratios of about 3.2 to 3.5 or so. For apples versus oranges comparisons, Pier 1 is at 3, Best Buy is at 4.2, and Dollar General is at 4.4. Tiffany is 2.4, and CVS is an impressive 7.1.
Another thing to check is the trend over a longer time period. This Nature Reviews article suggests (in its table 1) that the overall ratio for all publicly traded drug companies has been deteriorating slowly since 1975, going from above 3 down to 2.6 or 2.7. (And there are indeed some companies who bring down the average - Genzyme, for example, is at 1.9, partly because of its recent troubles, and Shire is around 2 as well).
Another interesting thing is how Amgen is included on the graph. Perhaps it's an artifact, but what it looks like is that the company starts out like a high flier, and gradually sinks into the same mire as the rest of the big pharma companies. Parallels between that and Amgen's real situation are, I hope, coincidental.
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