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The pharmaceutical and biotechnology industry produces drugs and other products that help people and animals live healthier lives, recover from injuries, and fight illnesses. The major market players are Bayer AG, Novartis, Pfizer, Roche, Merck & Co, Johnson & Johnson, SANOFI, Amgen, and AbbVie.
Today approximately 100 major companies make up the traditional U.S. pharmaceutical industry, according to Pharmaceutical Research and Manufacturers of America. The worldwide pharmaceutical market was worth about USD 1.3 trillion in 2019, according to market research cited by The Pharma Letter. The 10 largest pharmaceutical companies in terms of sales are referred to as “Big Pharma” and accounted 30.19% of the total sales ($392.5 billion in revenue).
By revenue, Pfizer ranked first with USD 51.75 billion, followed by Roche with USD 50 billion and in third place Novartis with USD 47.45 billion. Over the five years to 2025, industry revenue is forecast to grow an annualized 2.3% to $1.4 trillion amid an anticipated persistence of global demand for industry products.
In 2020, industry profit, measured as earnings before interest and taxes, is expected to account for 14.6% of revenue, down from 15.4% in 2015.
This industry has been booming since 1984 by drug price competition and patent terms, increasing generic drug manufacturers’ access to the marketplace.
Pharma/biotech companies produce three types of products:
Bayer, Novartis, and Pfizer
This study aims to analyze the first quarter results of the year of three different major companies in the industry:
– Pfizer (PFE), based in New York, is one of the leading companies in the biotechnology and pharmaceutical industry. Their portfolio includes prescription products and over-the-counter products, such as Advil and Robitussin.
– Novartis AG (NVS), based in Switzerland, is one of the pharmaceutical industry’s world leaders in sales. According to an article published by Fierce Pharma, Novartis is projected to become the biggest drug maker in the world by 2024.
– Bayer AG (BAYN), based in Germany, the company produces and markets healthcare and agricultural products. They manufacture products that include aspirin, antibiotics, anti-invective’s, cardiovascular, oncology, central nervous system drugs, over-the-counter medications, as well as crop protection products, plastics, and polyurethanes.
Group sales in the first quarter of 2020 for Bayer and Novartis grew 4.84% and 10.07% vs 1Q 2019 driven by strong growth in Europe for both companies and the good development of the division “Crop Science (agriculture products) of Bayer.
Bayer sales depend on three different divisions: Crop Science posted a 5.7% sales increase to €6,834 million, with all regions contributing to growth, Pharmaceuticals advanced by 3.9% to €4,546 million, mainly due to the sales gains for Xarelto™ and Consumer Health grew sales by 13.5to €1,398 million, driven primarily by a substantial increase in demand due to the COVID-19 pandemic. Group EBITDA before special items rose by 10.2% due to a positive currency effect and higher volumes in the Crop Science division.
Novartis sales in the first quarter were driven by volume growth of 17 percentage points (pp), mainly from Entresto, Zolgensma, Cosentyx, and Promacta/Revolade. Volume growth also benefited from COVID-19 related forward purchasing. Operating income was USD 2.7 billion (+22%) mainly driven by higher sales, partly offset by launch investments and higher legal expenses.
On the contrary, Pfizer reported a decrease in their sales of 8.31% vs 1Q 2019 primarily driven for the loss of the exclusivity on one of their brands “Lyrica” at the end of 2019.
Speaking of liquidity, Novartis does not hedge its short-term liabilities with its assets, if sales fall more than the expected this will be a risk for the company. Their ROE and ROA are lower than their revenues, which means, they are financed with debt, this explains why their short-term liabilities are greater than their assets in the current ratio (Table below).
| Financial Results 1Q 2020 | BAYER | Novartis | Pfizer |
| Financial Statement | |||
| Revenue Growth | 4.84% | 10.07% | -8.31% |
| COGS of Revenue | 36.25% | 29.29% | 19.77% |
| Operating Expenses | 44.30% | 52.94% | 47.99% |
| Liquitidy | |||
| Current Ratio | 1.48 | 0.74 | N/A |
| Acid Test Ratio | 0.81 | 0.42 | N/A |
| Cash Ratio | 0.10 | 0.14 | N/A |
| Profitability | |||
| ROA | 1.19% | 1.8% | N/A |
| ROE | 3.05% | 4.3% | N/A |
| Operation Margin | 19.46% | 22.34% | 32.29% |
| Net Profit Margin | 11.59% | 17.69% | 28.27% |
(Financial Ratios of Pharma/biotech companies; Source: Own Analysis with 1st quarter 2020 results of Bayer, Novartis and Pfizer)
Today´s challenge for this industry is to develop new medicines that can prevent or cure currently incurable diseases, clearly, this is a huge opportunity for this market. Pharma’s output has remained at a stable level for the past decade. Using the same discovering and developing processes, today we have the COVID-19. So, in the short term the industry productivity will soar.
According to IBISWorld, OECD countries expect to increase their health expenditure at an annualized rate of 3.0% over the five years to 2025, undergirding industry expansion in upcoming years. Meanwhile, global research and development (R&D) funding is estimated to rise an annualized 3.6% over the next five years, supporting the R&D activity of major operators. Furthermore, the challenge posed to industry operators by COVID-19 (coronavirus) may ultimately increase the industry’s revenue overall in the long run, as the industry’s pharmaceutical manufacturers will likely focus on developing new and effective treatments to combat the spread of the novel coronavirus, considering the lack of treatment for the coronavirus at present aside from simply providing supportive care to those affected patients.
Almudena Bernús,
Financial Analyst.
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