The Pharmaceutical industry in the Global Economy

Summer 2005

Larry Davidson*and

Gennadiy Greblov

Indiana University Kelley School of BusinessBloomington, Indiana

*Davidson is Professor of Business Economics and Public Policy and Greblov is working towards his MBA degree at the Kelley School of Business

Prepared for the Indiana Economic Development Corporation with the support of the Center for International Business Education and Research at the Indiana University Kelley School of Business. Information Services via the World Trade Atlas, U.S. State Export Edition.

To receive free copies of the export report please contact the Indiana Economic Development Corporation’s Office of International Trade at 317.232.4949. Direct questions to the authors of the report to Larry Davidson at davidso@indiana.edu or 812.855.2773.

Introduction

This paper summarizes the results of our global pharmaceutical industry analysis and is intended to increase awareness of the general public – investors, policy makers, managers, employees of the companies – about its current developments. The paper has the following major goals:

1) To analyze the current situation, major challenges and the prospects of the pharmaceutical industry;

2) To identify major players of the global pharmaceutical industry and make a comparative analysis of their business practices and financial results;

3) To determine the relative position of the U.S. pharmaceutical companies in the global pharmaceutical industry, as well as to reveal opportunities for further strengthening of their positions.

The paper consists of three major parts. In the first part we present an overview of the pharmaceutical industry as a whole – its major players, current trends and challenges. The second part focuses on a more detailed analysis of major pharmaceutical companies. These major companies are divided into two major groups: a) companies with headquarters in the U.S., b) foreign pharmaceutical companies with headquarters outside of the U.S. Pharmaceutical companies are compared with other companies in the same group; and major trends within each group are analyzed. Part 3 sums up our findings.

Part 1. Pharmaceutical industry overview.

Major players of the world pharmaceutical industry

The pharmaceutical industry is characterized by a high level of concentration with fifteen multinational companies dominating the industry. Table 1.1 contains information about these major pharmaceutical companies that are sorted in the order of their 2004 revenues from the sales of pharmaceutical products. Numbers provided in this table include sales of all subsidiaries and affiliated companies that are consolidated in annual reports of the corresponding companies. In order to facilitate a comparison of different companies revenues of all of them are shown in US dollars; financial data of the companies with headquarters outside of the U.S. was converted to US dollars using average 2004 rates provided in Table 1.2.

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Table 1.1. Major pharmaceutical companies.

CompanyHQ

location

Revenue of pharmaceutical

segment, mln USD

Total sales, mln USD

Share of pharmaceutical

segment, %Pfizer NY, U.S. 46,133 52,516 87.85%GlaxoSmithKline UK 31,434 37,324 84.22%Johnson & Johnson NJ, U.S. 22,190 47,348 46.87%Merck NJ, U.S. 21,494 22,939 93.70%AstraZeneca UK 21,426 21,426 100.00%Novartis Switzerland 18,497 28,247 65.48%Sanofi-Aventis France 17,861 18,711 95.46%Roche Switzerland 17,460 25,168 69.37%Bristol-Myers Squibb NY, U.S. 15,482 19,380 79.89%Wyeth NJ, U.S. 13,964 17,358 80.45%Abbott IL, U.S. 13,600 19,680 69.11%Eli Lilly IN, U.S. 13,059 13,858 94.23%Takeda Japan 8,648 10,046 86.09%Schering-Plough NJ, U.S. 6,417 8,272 77.57%Bayer Germany 5,458 37,013 14.75%

Source: 2004 Annual Reports of the companies    

As Table 1.1 shows, the majority of the largest pharmaceutical companies are not diversified. They are either concentrated exclusively on pharmaceutical products (Eli Lilly and AstraZeneca are good examples with virtually 100% of their revenues coming from sales of pharmaceutical products) or, although they develop and manufacture other health care products, they still have pharmaceutical divisions as the core of their business that provide more than 50% of their revenues. Other products manufactured by these companies usually include medical devices, nutritional products, consumer healthcare products and products for animal health.

Only two out of these 15 major pharmaceutical companies have revenues from sales of pharmaceutical products that are lower than 50% of their total sales. These companies are world giants Johnson & Johnson (which besides pharmaceutical products manufactures consumer goods and medical devices) and Bayer which has only about 15% of its revenues from the sales of pharmaceutical products.

Eli Lilly’s $13.1 billion sales figure made it the twelfth largest company – with Pharmaceutical sales considerably larger than Bayer’s $5.5 billion but a lot less than Pfizer’s $46.1 billion.

Geographical headquarters of major pharmaceutical companies are approximately evenly distributed between the U.S. and Western Europe with only one Asian company in the list. Indiana is home to one of these companies, Eli Lilly. More detailed analysis of these companies will be made in the second part of this paper.

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Table 1.2. Average 2004 exchange rates.Currency Exchange rate

EUR / USD 1.2438GBP / USD 1.8333USD / JPY 108.1508USD / CHF 1.2426

Source: calculated using Federal Reserve daily data

Industry Trends

Here we examine structural changes causing significant transformations, major factors leading to strong future sales growth, and point out the industry’s strong reliance on research and development.

Structural changes

The pharmaceutical industry is currently undergoing a period of very significant transformation. The majority of “Big Pharma” companies generate high returns, thus providing them with excess cash for further rapid growth – whether organic, or through mergers and acquisitions. Although size of the company on its own does not guarantee success, it gives a significant advantage, especially in pharmaceutical industry. Besides economies of scale in manufacturing, clinical trials and marketing, bigger companies can allow investments in more research and development (R&D) projects that diversify their future drugs portfolio and make them much more stable in the long term. As the result, top-companies in the industry were active participants of mergers and acquisitions (M&A), new joint ventures and spin-offs of non-core businesses.

The largest acquisitions in the industry during last years were the acquisition of Pharmacia by Pfizer (purchase price $58 billion), and acquisition of Guidant by Johnson & Johnson (purchase price $25 billion). Both acquisitions allowed these two U.S.-based companies to solidify their places among the elite of the pharmaceutical industry. European companies were even more aggressive in M&A activity than their American competitors – 3 out of 6 major European companies underwent mergers during the last several years: GlaxoSmithKline (merger of Glaxo Wellcome and SmithKline Beecham), AstraZeneca (merger of Astra and Zeneca) and Sanofi-Aventis (merger of Sanofi-Synthelabo and Aventis).

Another form of structural change in the industry was establishing of new strategic alliances and joint ventures. So far as the research and development process for each drug take many years and requires significant investments, and the outcome of these investments of time and financial resources remains unclear until the final approval of the drug, “Big Pharma” companies are constantly looking for synergies that they can get from cooperation with their competitors. Last years gave multiple examples of such initiatives. For example, cooperation of Sanofi-Aventis and Bristol-Myers Squibb resulted in production of Plavix, which is currently one of the top-selling products for each of these companies.

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Finally, “Big Pharma” companies in order to maintain strong sales growth and meet profitability expectations of their shareholders were actively selling low-profitability or non-core businesses. For example, in 2003 Merck sold its low-profitability Medco Health Solutions that helped to increase its profitability margin. Massive sales of non-pharmaceutical businesses by Takeda also were compatible with its strategy to concentrate its financial resources on its core pharmaceutical business.

Major factors of future growth

The pharmaceutical industry showed high sales growth rates in the recent past, and a number of factors suggest that this trend will continue in the future.

First, due to numerous advancements in science and technology, including those in the health care industry, life expectancy in the developed countries has been steadily growing. As the result, growing proportion of elderly people promises further growth of demand for healthcare products.

Moreover, according to various studies, a significant portion of elderly population in the United States and other countries does not receive proper treatment. For example, only about one third of the U.S. population who requires medical therapy for high cholesterol is actually receiving adequate treatment. As it is expected, the Medicare Prescription Drug Improvement and Modernization Act starting from the beginning of 2006 will increase access of senior citizens to the prescription drug coverage, thus increasing pharmaceutical sales.

Although developing countries at the moment have a small portion of world pharmaceutical sales, these countries also have a significant potential for the pharmaceutical industry in the future. Fast growing economies in Asia, South America and Central & Eastern Europe suggest an increasing solvency of population and make these markets more and more attractive for “Big Pharma” companies. Further reforms of legislation systems in the countries of these regions, especially regarding patent protection issues, will inevitably result in growing pharmaceutical sales.

Strong emphasis on R&D

One of the distinctive characteristics of the “Big Pharma” companies is a very high level of investments in research and development. On average, it takes about 10-15 years, and millions of dollars to develop a new medicine. According to industry statistics, only about one in ten thousand chemical compounds discovered by pharmaceutical industry researchers proves to be both medically effective and safe enough to become an approved medicine, and about half of all new medicines fail in the late stages of clinical trials. Not surprisingly, according to “Research and Development in Industry: 2001” report of the National Science Foundation, in 2001 the pharmaceutical industry had one of the highest

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R&D expenditures as percentage of net sales. More detailed information on this issue is provided in the second part of this paper.

Key Challenges

The main challenges for drug companies come from four areas. First, they must deal with competition from within and without. Second, they must manage within a world of price controls that dictate a wide range of prices from place to place. Third, companies must be constantly on guard for patent violations and seek legal protection in new and growing global markets. Finally, they must manage their product pipelines so that patent expirations do not leave them without protection for their investment.

Competition

The pharmaceutical industry currently represents a highly competitive environment. One can distinguish three layers of competition for “Big Pharma” companies:

First, obviously, “Big Pharma” companies compete among themselves. Although not all leading pharmaceutical companies cover all segments of pharmaceutical market, almost all of them are active in R&D and production of drugs in the segments with the highest potential – such as treatment of infectious, cardiovascular, psychiatric or oncology diseases.

Secondly, “Big Pharma” companies experience significant profit losses due to competition from the generic drug manufacturers. Opposite to the research-oriented pharmaceutical companies, which invest significant financial resources and time to develop new medicines, generic drug manufacturers spend minimum resources on R&D, and start manufacturing already developed by other companies drugs after their patent expiration. Because generic drug manufacturers do not have to recoup high R&D costs, prices of their products are usually much lower then those of major pharmaceutical companies; as the result, after patent expiration, generic drugs manufacturers capture significant market share, dramatically decreasing revenues of the “Big Pharma” companies.

Finally, the whole pharmaceutical industry competes with other health care industries. In this case, pharmaceutical companies should not only demonstrate high efficiency of their products, but also provide obvious proof of cost advantages in comparison with other forms of care.

Price control

Pharmaceutical companies have to operate in a highly regulated environment; the degree of regulation to a significant extent depends on the country and type of the product.

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One of the most important aspects of government regulation for pharmaceutical companies is price regulation, and different countries have different policies on this issue.

In the United States – the largest and the most attractive pharmaceutical market – currently there is no direct price control for non-government drug sales. At the same time, it is expected that Medicare Prescription Drug Improvement and Modernization Act will potentially increase downward price pressure.

The majority of European countries control drug prices, and this downward pressure on prices has been increasing during last years. Japan has even stricter price controls than European countries; all prices are controlled by the government, and they are subject to a periodic price review.

As the result of price control, prices of the same products can significantly differ in different countries.

Protection of patents

Generic drugs manufacturers represent a significant threat to research-based pharmaceutical companies. For example, Schering-Plough’s Claritin patent expired in 2002; as the result of generic drug competition, sales of Claritin by Schering-Plough declined from $3.2 billion in 2001 to $1.8 billion in 2002 and to $0.37 billion in 2003.

Moreover, generic drugs manufacturers sometimes start production of patent-protected drug analogues even before a patent expires. Although research-oriented companies in many cases are able to protect their patents, they do suffer from lost revenues.

Therefore, protection of patents is one of the key conditions necessary for further development of the pharmaceutical industry. At the same time, non-efficient legislation that does not provide the necessary level of patent protection is one of the factors that hamper expansion of “Big Pharma” companies to the developing countries.

Drugs portfolio management

Drug portfolio management is one of the most important determinants of long-term prosperity of research-oriented pharmaceutical companies.

First, it takes an extremely long time to develop a new drug, and only a very small portion of all projects is successful. Projects that the company starts today will determine its financial performance 10-15 years later. Therefore, careful planning of R&D projects is very important for the long-term stability of the company.

Second, insofar as patents keep exclusivity of drugs only during a limited time, and soon after the expiration of the patent the sales of the drug sharply go down, the company has to carefully monitor its patent expiration dates, and insure that new products become available by that date. Otherwise, we are reminded of the case of Shering-Plough, when

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after expiration of its major drug patent the company did not have a new product of similar value and the company experienced losses in 2003 and 2004.

Definitely, planning errors or rapidly changing demand in the industry can be corrected by acquisition of smaller research companies or patents from competitors, but in any of these cases the company will have to pay a premium price, thus reducing its profitability.

Prospects for international expansion

According to IMS Health as restated in the 2004 AstraZeneca Annual Report, the United States, the European Union and Japan comprise the three major pharmaceutical markets which together represent 88% of world sales; and the U.S. market alone accounts for about 47% of world sales. Not surprisingly, all “Big Pharma” companies to a significant extent concentrate their resources on these markets, especially on the U.S. market.

At the same time, although the share of world pharmaceutical sales in developing countries at this point of time is much lower, they show much faster growth rate than developed countries do. For example, the China, 9th largest world market, showed a 26% sales increase in 2004, followed by Thailand (16% growth) and Egypt (15%). Some Latin American countries, such as Mexico, Brazil, Argentina and Venezuela also show much faster sales growth rate than average worldwide. Therefore, developing countries contain a significant potential for further expansion of pharmaceutical industry in the future.

Indiana in the World Market for Pharmaceuticals

In 2004 Indiana’s Pharmaceutical exports reached $971 million. That made it Indiana’s sixth largest export industry – accounting for about 5% of all Indiana exports. Between 2002 and 2004, Indiana Pharmaceutical exports increased by $425 million – an increase of 78%. The key components are described as medications, hormones, and antibiotics. Indiana exports most of these products to Europe – the leading destinations in 2004 were France, Spain, the UK, and Germany. Those four countries took almost 59% of Indiana’s Pharmaceutical exports that year. The remaining top 10 destinations were Canada, the Netherlands, Switzerland, Ireland, Mexico, and Austria. Indiana’s Pharmaceutical export profile is very similar to the nation’s – the United States and Indiana are almost totally focused on NAFTA partners and Europe.

Who buys the world’s Pharmaceutical products? The United Nation’s Statistics Division publishes annual values for Pharmaceutical imports and exports for most countries. The key world importers include the United States and Europe. Below we report statistics for 2003 for these two areas as well as for other key areas and countries. There are several things to note from this table. First, the United States is the largest importer of Pharmaceutical products followed by EU15 (the fifteen countries that comprised the European Union before the recent expansion to 25 countries) and Switzerland. Japan and Canada are important destinations but each import less than Switzerland. China imported

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less than $2 billion in 2003 but remains an interesting destination because of its remarkable growth and development.

Table 1.3. Pharmaceutical industry – international trade

Importer2003 imports,

thousands ExporterUSA 31,739,624 79% from Europe; 13% from Asia; 7% from North AmericaEU15 28,351,731 52% from North American; 35% from EuropeSwitzerland 9,718,628 88% from Europe; 10% from North AmericanJapan 6,193,127 69% from Europe; 23% from North AmericaCanada 6,064,628 49% from Europe; 48% from North AmericaChina 1,705,632 65% from Europe;8% from North America

Table note: These data refer to Standard Industrial Trade Classification (SITC Rev: 3) data for codes 54.1 and 54.2. These two codes cover what is traditionally thought of as Pharmaceutical products. EU15 refers to the 15 members of the European Union – those that were members before the increase to 25 members. Europe refers to a very large and wide definition of countries in western and east/central Europe. Switzerland is part of Europe but is not a member of the EU. The data is in thousands of dollars.

The next table shows the largest changes that occurred in Pharmaceutical imports between 1995 and 2003. The largest change was the almost $22 billion increase of imports to the United States from Europe. The United States also received large inflows of Pharmaceutical products from Asia ($3.5 billion) and North America ($1.9 billion). EU15 also shows up three times in the table with a total of about $28 billion – from N. America, Europe, and Asia. Canada has two entries showing increased Pharmaceutical imports from Europe ($2.5 billion) and the N. America ($2 billion). Switzerland, Japan, and China’s largest imports came from Europe.

Table 1.4. Changes in pharmaceutical imports between 1995 and 2003, dollar changeImports to Imports from Dollar Change In thousands, 1995 to 2003

USA Europe 21,968,851EU15 N. America 14,786,491EU15 Europe 10,041,165Switzerland Europe 6,853,882USA Asia 3,518,057EU15 Asia 3,024,816Canada Europe 2,465,464Canada N. America 1,969,847USA N. America 1,904,983Japan Europe 1,601,565China Europe 859,540

While the above table shows where most of the goods are going, the next one features the hot flows – those that have grown the fastest between 1995 and 2003. Notice that this list is a lot different from the one above. Japanese imports from Africa showed huge percentage growth, as did China’s imports from Central & South America and Africa. The United States is listed four times with triple digit import growth from Europe, North America, Asia, and Oceana. It is interesting that Europe15 is not on this list. Switzerland is mentioned once with rapidly growing imports from Asia.

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A look at the second column is instructive. Africa shows up three times – suggesting that Africa is becoming a more important exporter of Pharmaceutical products. Africa has had good luck selling to Japan, China, and Canada. Asia is also included with strong exports – primarily to the U.S. and Switzerland.

Table 1.5. Changes in pharmaceutical imports between 1995 and 2003, percent changeImporter Exporter Percent Change, 1995 to 2003Japan Africa 270,477

ChinaC&S

America 16,370China Africa 11,256

Canada Africa 1,036USA Europe 487USA N. America 431USA Asia 395China N. America 386

Switzerland Asia 382USA Oceana 367

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Part 2. Major players of pharmaceutical industry

U.S. pharmaceutical companies

U.S. companies play a key role in the world pharmaceutical industry – 8 out of 15 leaders of this market are headquartered in the United States; moreover, the largest world pharmaceutical company, NJ-based Pfizer, has sales of pharmaceutical products that are approximately 1.5 times higher than those of its closest competitor.

Table 2.1 provides a segment decomposition of the largest U.S. pharmaceutical companies. Segment shares were calculated on the basis of 2004 sales as stated in annual financial reports.

Several factors are worth mentioning. First, for almost all companies presented in the table, the pharmaceutical segment is the largest; and only for one of them, world giant Johnson & Johnson, sales of pharmaceutical segment are below 50%.

Second, only two companies, Merck and Eli Lilly, concentrate their resources almost exclusively on pharmaceutical industry; each of these two companies has about 94% of sales from this business segment. Although this approach potentially can reward shareholders of these two companies because of using capital in the business segment with one of the highest returns, lack of diversification (especially in less risky segments) requires even more thorough planning of the new medicines pipeline.

Finally, the majority of leading pharmaceutical companies also work in Consumer Health, Animal Health, Nutritional Products or Medical Devices / Diagnostics business segments. This approach allows not only achieving synergies of working in these segments, but also smoothening a highly volatile pattern of revenues in the pharmaceutical industry.

Table 2.1 Business segments of major U.S. pharmaceutical companies  Pfizer J&J Merck BMS Wyeth Lilly* Abbott Schering-PloughPharmaceutical 87.8% 46.9% 93.7% 80.0% 80.4% 94.2% 69.0% 77.6%Consumer Health & Nutritional products 6.7% 17.6% 10.0% 14.7% 13.1%Animal Health 3.7% 4.8% 5.8% 9.3%Medical Devices and Diagnostics 35.5% 31.0%Other Healthcare 10.0%Other 1.8%   6.3%          Source: Annual Reports of the companies*In Financial statements Animal Health products are not stated as separate segment

Table 2.2 summarizes major areas of focus of U.S. pharmaceutical companies in which they have either highly successful products or significant investments in research and development. It is obvious that areas that have a huge market and promise high rewards,

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such as anti-bacterial/anti-infection, anti-inflammatory/analgesics, cardiovascular diseases, neurology/psychiatric disorders, and oncology attract the majority of leading pharmaceutical companies and create a fierce competition among them.

Table 2.2. Major area of focus of U.S. pharmaceutical companies  Pfizer J&J Merck BMS Wyeth Lilly Abbott Schering-PloughAllergies X XAnti-bacterial / anti-fungal / infections X X X X X X X XAnti-inflammatory / analgesics X X X X X XCardiovascular diseases X X X X X X XDermatology XEndocrine disorders X XEye diseases X XGastrointestinal X XHematology XImmunology X X X XMetabolic diseases X X X XNeurology / psychiatric disorders X X X X X X XOncology X X X X X X X XRespiratory diseases X X XUrogenital conditions X X XVirology (including HIV) X X XSource: Annual Reports of the companies

Tables 2.3 and 2.4 present sales and total assets dynamics of selected pharmaceutical companies. More detailed analysis revealed three major drivers of sales and total assets dynamics on micro-level: acquisitions and reorganizations of the companies, research and development of new medicines and ability of the company to protect exclusivity and patent rights of medicines available for sale. Each of these 3 drivers will be discussed below in more detail.

Table 2.3. Sales growth of U.S. pharmaceutical companies, 2002-20042002 2003 2004

Pfizer 11.3% 38.5% 17.4%Johnson & Johnson 12.3% 15.3% 13.1%Merck 8.5% -56.6% 2.0%Bristol-Myers Squibb 0.3% 15.4% -7.2%Wyeth 4.3% 8.7% 9.5%Eli Lilly -4.0% 13.6% 10.1%Abbott 8.6% 11.3% 0.0%Schering-Plough 4.3% -18.1% -0.7%Source: calculations, data used from Annual Reports of the companies

Table 2.4. Total Assets growth of U.S. pharmaceutical companies, 2002-2004

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2002 2003 2004Pfizer 18.4% 151.9% 5.9%Johnson & Johnson 5.4% 19.0% 10.5%Merck 8.0% -14.7% 4.9%Bristol-Myers Squibb -10.0% 9.8% 10.8%Wyeth 13.2% 19.4% 8.4%Eli Lilly 15.9% 13.9% 14.7%Abbott 4.1% 10.1% 7.7%Schering-Plough 16.1% 8.0% 4.2%Source: calculations, data used from Annual Reports of the companies

The pharmaceutical industry is currently undergoing a period of active transformation lead by the largest companies in the industry. The recent acquisition of Pharmacia by Pfizer (before acquisition Pharmacia on its own was among largest pharmaceutical companies of the world) in 2003 led to an even stronger position of Pfizer as the largest company in pharmaceutical industry. As the result of this acquisition that was valued at $56 billion Pfizer increased its total assets by 152% and its sales by 38.5% (see Tables 2.3, 2.4).

Another example of ongoing consolidation in the industry is the acquisition of Guidant by Johnson & Johnson (transaction is valued at $25.4 billion). So far as this acquisition was not completed by year-end 2004 it did not have an impact on total assets and sales of the company provided in Tables 2.3 and 2.4.

It is worth emphasizing the importance of multiple smaller acquisitions of start-ups and patents by leading pharmaceutical companies. As it was discussed in Part 1 of this paper, the pharmaceutical industry bears higher-than-average level of risk to a significant extent because of the high level of uncertainty regarding the success or failure of any particular drug development. Therefore, by acquiring small companies that are on their last stages of developing new medicines, leading pharmaceutical companies reduce their own risk.

Major recent acquisitions by U.S. pharmaceutical companies are summarized in Table 2.5.

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Table 2.5. Recent acquisitions by major U.S. pharmaceutical companiesCompany acquired*

Core business of targetPurchase price,

bln. USD

PfizerPharmacia

Prescription pharmaceutical products, consumer healthcare products and animal

healthcare products$56.0

Esperion Therapeutics

Biopharmaceutical company with no approved products

$1.3

Johnson & Johnson

Guidant Treatment of cardiac and vascular disease $25.4

Consumer Pharmaceuticals

Non-prescription pharmaceutical products (former JV of J&J and Merck)

$0.6

Egea Biosciences

R&D in synthesis of DNA sequences, gene assembly and construction of large

synthetic gene libraries

Biapharm SAS Skin care products

Micomed Spinal implants

Merck 

Aton PharmaDevelopment of novel treatments for

cancer and other diseases$0.1

Banyu Pharmaceutical

R&D, manufacturing and sales of drugs for cardiovascular diseases and antibiotics

$1.5

Bristol-Myers Squibb

Acordis Materials for Wound Therapies products $0.2

Eli LillyApplied

Molecular Evolution

Treatment of non-Hodgkin's lymphoma and rheumatoid arthritis

$0.4

Abbott 

TheraSenseAdvanced diabetes management

technology

$2.3 i-Stat Diagnostic testing

Spine Next SA Spine-care business

Source: Annual Reports of the companies*Acquisitions of patents only is not included in this table

On the other hand, during recent years several companies sold some of their businesses with lower profit margins to concentrate their resources on their core business. For example, in 2003 Merck sold its Medco Health, business that provides pharmacy benefits services in the United States. This transaction lead to a reduction in sales and total assets in 2003 by 56.6% and 14.7% respectively, but on the other hand, as it will be shown below, allowed it to significantly improve its profit margin.

Other examples of spin-off were Oncology Therapeutics Network by BMS in 2004, core hospital products business by Abbott in 2003, and others.

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For leading pharmaceutical companies, investments in research and development are crucially important for survival and prosperity; not surprisingly the pharmaceutical industry is characterized by a very high level of R&D cost as percent of total revenues. Table 2.6 contains data regarding investments in R&D during last 4 years.

So far as it usually takes a long time to develop a new medicine (usually 10-15 years), and there is a high level of uncertainty whether this particular R&D project will be successful, many companies have a policy of investing in R&D an approximately stable share of company revenue.

It is also worth mentioning that some sharp fluctuations of R&D costs as a percent of total revenues provided in Table 2.6 can be explained by current acquisitions or spin-offs.

Table 2.6. R&D costs, % of total revenues2001 2002 2003 2004

Pfizer 16.5% 16.1% 16.7% 14.6%Johnson & Johnson 11.1% 10.9% 11.2% 11.0%Merck 5.1% 5.2% 14.6% 17.5%Bristol-Myers Squibb 11.8% 12.2% 10.9% 12.9%Wyeth 13.4% 14.3% 13.2% 14.2%Eli Lilly 19.4% 19.4% 18.7% 19.4%Abbott 9.7% 8.3% 8.3% 8.6%Schering-Plough 13.4% 14.0% 17.6% 19.4%Source: Annual Reports of the companies

Another very important factor that determines stability of sales is composition of its drugs portfolio and ability of the company to protect exclusivity of its drugs. The rule of thumb in the pharmaceutical industry is that a major portion of revenue from any drug comes before the expiration date of its patent. As soon as a patent expires other companies start manufacturing generic analogues of the drug thus causing significant reduction of its sales. To illustrate this, sales of Claritin (medicine developed by Schering-Plough) in 2001 were $3.2 billion; in 2002 its patent expired; sales of Claritin in 2002 and 2003 were $1.8 billion and $0.37 billion accordingly.

Therefore, to insure stable sales, a pharmaceutical company constantly has to start selling new drugs to replace those whose patents will expire soon. Table 2.7 contains information regarding top-5 drugs for each company according to sales in 2004.

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Table 2.7. Top 5 pharmaceutical products for each company based on the sales in 2004Sales, mln

USD% of total

salesSales, mln

USD% of total

sales

Pfizer WyethLipitor $10,862 20.7% Effexor $3,347 19.3%Norvasc $4,463 8.5% Protonix $1,591 9.2%Zoloft $3,361 6.4% Prevnar $1,054 6.1%Celebrex $3,302 6.3% Premarin family $880 5.1%Neurontin $2,723 5.2% Zosyn / Tazocin $760 4.4%

J&J Eli LillyProcrit / Eprex $3,589 7.6% Zyprexa $4,420 31.9%Risperdal $3,050 6.4% Gemzar $1,214 8.8%Remicade $2,145 4.5% Humalog $1,102 8.0%Duragesic $2,083 4.4% Evista $1,013 7.3%Topamax $1,410 3.0% Humilin $998 7.2%

Merck Schering-PloughZocor $5,200 22.7% Remicade $746 9.0%Fosamax $3,200 14.0% Clarinex / Aerius $692 8.4%Cozaar $2,800 12.2% Nasonex $594 7.2%Singulair $2,600 11.3% Peg-intron $563 6.8%AZLP $1,500 6.5% Temodar $459 5.5%

BMSPlavix $3,327 17.2%Pravachol $2,635 13.6%Taxol $991 5.1%Avapro / Avalide $930 4.8%Paraplatin $673 3.5%

Lipitor developed by Pfizer is a fantastic success and is the only drug that on its own had sales of more than $10 billion in 2004. At the same time it is necessary to understand a drawback of the situation when one drug has 20-30% in total revenues of the company: the whole company becomes vulnerable in case of any negative dynamics of its sales, caused for example, by appearance of a competing drug, found with negative side effects, etc. This is the case of Lilly’s Zyprexa which is the best selling drug of the company. When concerns about potential weight gain and hyperglycemia appeared, it led to much lower-than-expected sales of this drug and was one of the major reasons of declining Lilly’s stock price in 2004 by 19%.

Analyzing financial performance of major pharmaceutical companies we concentrate on two major factors – profitability and risk analysis. Table 2.8 contains calculated rate of return on assets (ROA ratio) and its components – profit margin, total assets turnover ratio. Chart 2.1 shows the data regarding short- and long-term liquidity of companies, as well as their debt-equity structure.

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Table 2.8. Profitability analysis2002 2003 2004

Pfizer ROA 21.3% 4.8% 9.4%Profit margin 28.3% 8.7% 21.6%Total Assets Turnover Ratio 0.76 0.55 0.44

Johnson & JohnsonROA 16.7% 16.2% 16.8%Profit margin 18.2% 17.2% 18.0%Total Assets Turnover Ratio 0.92 0.94 0.93

MerckROA 15.6% 15.5% 14.0%Profit margin 13.8% 30.4% 25.3%Total Assets Turnover Ratio 1.13 0.51 0.55

Bristol-Myers SquibbROA 8.1% 11.8% 8.2%Profit margin 11.8% 14.9% 12.3%Total Assets Turnover Ratio 0.69 0.80 0.67

WyethROA 18.2% 7.2% 3.8%Profit margin 30.5% 12.9% 7.1%Total Assets Turnover Ratio 0.60 0.56 0.54

Eli LillyROA 15.3% 12.6% 7.8%Profit margin 24.4% 20.4% 13.1%Total Assets Turnover Ratio 0.62 0.62 0.60

AbbottROA 11.8% 10.8% 11.7%Profit margin 15.8% 14.0% 16.4%Total Assets Turnover Ratio 0.74 0.77 0.71

Schering-PloughROA 15.0% -0.6% -6.1%Profit margin 19.4% -1.1% -11.4%Total Assets Turnover Ratio 0.77 0.57 0.53

Source: calculations, data used from Annual Reports of the companies

Several comments should be made regarding profitability analysis. First, regardless of their very active acquisition policy, Johnson & Johnson manages to keep its ROA, profit margin, and total assets turnover stable. Unlike J&J, Pfizer experienced significant fluctuations in all three of these parameters which definitely can be connected with its acquisition of Pharmacia.

Spin-off of the low margin Medco business in 2003 allowed Merck to significantly increase profit margin from 13.8% in 2002 to 30.4% in 2003; however, this positive effect was totally destroyed by the significant reduction of its total assets turnover ratio. As the result, ROA did not changed significantly.

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Current litigation charges of Wyeth (company paid in litigation charges $1.4 billion in 2002, $2 billion in 2003 and $4.5 billion in 2004) lead to decline of ROA from 18.2% in 2002 to just 3.8% in 2004.

Due to expiration of Claritin’s patent in 2002 (and immediate significant decline of sales as the result of competition from generic analogues of this product), as well as absence of other products to insure adequate level of revenues, Schering-Plough experienced losses during 2003-2004.

Chart 2.1. Liquidity analysis

Liquidity ratios

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

Pfizer J&J Merck BMS Wyeth Eli Lilly Abbott Schering-Plough

Current Ratio CF from operations to Total Liabilities Debt-Equity Ratio

All companies have high enough level of Current Ratio, showing the ability of the company to cover its short-term liabilities with it current assets. At the same time several companies have Cash Flows from operations to Total Liabilities ratio at the level below 20% which is considered as a minimum safe level for financially healthy company. For Wyeth and Schering-Plough – companies that experienced significant reduction in profitability during the last years as it was mentioned above – the inability to satisfy long-term liquidity requirement is especially alarming.

Analysis of geographical distribution of sales in 2004 revealed that 7 out of 8 major U.S. pharmaceutical companies have more than 50% of their sales from the U.S. market; and only Schering-Plough in 2004 was the exception to this rule. Most important international markets for U.S. companies remain Japan and Western Europe.

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Chart 2.2. Geographical distribution of sales, 2004

Geographical distribution of sales in 2004

58%68%

59% 55% 57% 55% 57%

39%

42%32%

41% 45% 43% 45% 43%

61%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Pfizer J&J Merck* BMS Wyeth* Lilly Abbott* Schering-Plough*

USA International

Source: Annual Reports of the companies*No geographical distribution of pharmaceutical segment is available. Proportions calculated on geographical distribution of total sales.

Pharmaceutical companies outside the U.S.

Seven out of 15 largest pharmaceutical companies are headquartered outside of the U.S. : this is British GlaxoSmithKline and AstraZeneca, Swiss Novartis and Roche, French Sanofi-Aventis, Japanese Takeda and German Bayer.

There are two factors that make comparison of these 7 companies more complicated than that for US-based companies. First, these companies consolidate their financial statements using different currencies (see Table 2.9). Influence of currency exchange fluctuations is significant and in some cases complicates direct comparison of financial indicators. In this section all ratios were calculated on the basis of financial statements in original currencies; for comparison purposes in some cases financial indicators were also translated into US dollars.

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Table 2.9. Currency used in annual reports by major non-US based pharmaceutical companies

Company Currency used in consolidated annual reportsGlaxoSmithKline British Pound

AstraZeneca US dollarNovartis Swiss Frank before 2002 and US Dollar starting from 2002

Sanofi-Aventis EuroRoche Swiss FrankTakeda Japanese YenBayer Euro

Secondly, companies headquartered in different countries use different national accounting standards which in some cases can give very different results. For example, recent merger of Astra and Zeneca is reported as a merger under UK GAAP, but has been accounted as acquisition of Astra by Zeneca under U.S. GAAP resulting in significant differences in financial statements of this company under these two accounting standards. So far as not all data is reported in U.S. GAAP in financial statement of the companies, to keep integrity of data financial reports in national standards were used for ratio calculations.

Table 2.10 summarizes major business segments of non-US based pharmaceutical companies calculated on the basis of 2004 sales.

Table 2.10. Business segments of major non-US pharmaceutical companies  GlaxoSmithKline AstraZeneca1 Novartis2 Roche3 Sanofi-Aventis4 Takeda5 BayerPharmaceutical 84.2% 100.0% 65.5% 69.4% 95.5% 86.1% 14.7%Consumer Health & Nutritional products 15.8% 31.4% 11.1%Animal Health 3.1% 2.6%Medical Devices and Diagnostics 25.0% 6.6%Other HealthcareOther       5.6% 4.5% 13.9% 65.0%Source: Annual Reports of the companies1 Although AstraZeneca has minor non-pharmaceutical businesses (for example, Astra Tech is engaged in the R&D, manufacture and marketing of medical devices and implants), the company does not report any other business segments than pharmaceutical2 In financial statements Animal Health products are included in Consumer Health business segment3 By ‘Other’ Roche reports results of discontinuing operations4 Sanofi-Aventis reports two business segments: Pharmaceutical and Human vaccines (the latter one is shown in this table as ‘Other’).5 Starting from 2003 Takeda reports both pharmaceutical and consumer healthcare businesses as Pharmaceutical segment. In 'Other' segment Takeda reports sales of vitamins, reagents, activated carbon and wood preservatives.

Business segment decomposition for non-US pharmaceutical companies is very similar to that of major US-based pharmaceutical companies. The pharmaceutical segment of almost all of these companies is the largest one; the only exception is Bayer pharmaceutical sales of which was just about 14.7% of total sales in 2004. AstraZeneca

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and Sanofi-Aventis, both of which underwent recent merger processes, almost totally concentrate their resources on pharmaceutical industry.

According to recent restructuring efforts of Japanese Takeda the company has a similar strategy of concentrating on almost exclusively the pharmaceutical segment: during the last few years Takeda sold a number of its non-pharmaceutical businesses (agricultural chemicals business, latex business, food business, numerous chemicals business) that increased its pharmaceutical segment share in total sales. Moreover, the company during last years significantly increased its level of outsourcing (from 30% in 2000 to about 65% in 2003). These moves allow Takeda to concentrate all its resources on the most profitable part of its business and are intended to increase the market share of the company on the world pharmaceutical market.

Roche and Novartis follow another strategy that assumes diversification of highly risky pharmaceutical business by other segments of Health Care industry: Novartis has about one third of its sales from the Consumer Health segment, and Roche has about one quarter of its sales from Medical Devices and Diagnostics business.

As mentioned above, German Bayer stands apart from all other companies presented in Table 2.10 with only 14.7% of its sales from pharmaceutical segment and 35% of its sales from all Health Care businesses. Besides the Health Care segment Bayer also works in Crop Science, Material Science and Chemical business segments. Because of extremely low share of its pharmaceutical segment it is difficult to call Bayer a pharmaceutical company; nevertheless, with total sales of about 30 billion euro even the small share of the pharmaceutical segment gives Bayer about 4.4 billion euro of revenues from sales of pharmaceuticals products.

As Table 2.11 shows, non-US pharmaceutical companies, in a similar way to U.S. companies, mainly concentrate their resources on areas with the highest market size – anti-bacterial / anti-infections, cardiovascular diseases, neurology / psychiatric disorders and oncology. Obviously, such giants as GlaxoSmithKline and Novartis with 2004 R&D expenditures of $5.2 and $4.2 billion respectively cover almost all areas, while companies with much lower levels of R&D spending, such as Takeda and Bayer with 2004 R&D expenditures of $1.2 and $2.6 billion respectively, concentrate on some specific areas.

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Table 2.11. Major areas of focus of non-US pharmaceutical companies  GlaxoSmithKline AstraZeneca Novartis Roche Sanofi-Aventis Takeda BayerAnti-bacterial / anti-fungal / infections X X X X X XAnti-inflammatory / anagletics X X XCardiovascular diseases X X X X X X XDermatology X X XEye diseases XGastrointestinal X X X XHematology XImmunology XMetabolic diseases X X X XNeurology / psychiatric disorders X X X X X XOncology X X X X X X XRespiratory diseases X X X XUrogenital conditions X X X X XVirology (including HIV) X     X      Source: Annual Reports of the companies

Sales and total assets dynamics of 7 major non-US pharmaceutical companies are provided in Tables 2.12 and 2.13. Three major factors that determine the dynamics of these parameters – mergers / acquisitions, R&D expenditures, and ability of companies to protect their patents – are briefly discussed below to give a better understanding of sales and total assets dynamics.

Table 2.12. Sales dynamics of non-US pharmaceutical companies, 2002-20042002 2003 2004

GlaxoSmithKline 3.5% 1.1% -5.0%AstraZeneca 10.0% 5.6% 13.7%Novartis 11.3% 19.1% 13.6%Roche 1.0% 6.0% 0.2%Sanofi-Aventis 14.8% 8.1% 86.9%Takeda 4.3% 4.1% 3.9%Bayer -2.2% -3.6% 4.2%Source: calculations, data used from Annual Reports of the companies

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Table 2.13. Total assets dynamics of non-US pharmaceutical companies, 2002-20042002 2003 2004

GlaxoSmithKline -0.1% -5.0% 6.5%AstraZeneca 16.7% 9.3% 8.7%Novartis 13.3% 9.5% 10.4%Roche -15.0% -7.0% -2.4%Sanofi-Aventis -5.1% 3.1% 687.3%Takeda 12.4% 4.8% 13.4%Bayer 12.6% -10.2% 1.0%Source: calculations, data used from Annual Reports of the companies

As it was mentioned above, the largest and most attractive market for pharmaceutical companies is the United States. Therefore, companies with head-quarters outside of the U.S. need to spend extra resources in order to successfully compete with US-based companies on their territory. As the result, consolidation of the pharmaceutical industry outside of the U.S. during the last few years was even stronger than in the U.S. : three out of seven major non-US based pharmaceutical companies, GlaxoSmithKline, AstraZeneca and Sanofi-Aventis, recently underwent the process of mergers.

GlaxoSmithKline was formed as the result of the merger of Glaxo Wellcome and SmithKline Beecham in 2000. Among major reasons of this merger were named enhanced marketing power, improved R&D productivity and increased financial strength. GlaxoSmithKline is now the largest pharmaceutical company outside the U.S. and the second largest worldwide. At the same time, restructuring initiatives that followed the merger had a negative impact on its sales during next several years after the merger took place.

Similar factors lead to the merger of Astra and Zeneca in 1999 to form AstraZeneca, the 5th largest pharmaceutical company worldwide according to 2004 sales from the pharmaceutical business segment. It is worth mentioning that in both cases the companies had to spend significant resources and time to utilize synergies of theses mergers. For example, according to 2002 annual report of AstraZeneca, it took 2 years and about $1.4 billion in order to consolidate the operations and remove duplicate activities of different units of the newly formed company.

High rates of consolidation in the industry were one of the factors that lead to another significant merger: in 2004 Sanofi-Aventis finished its registration as the result of the merger of Sanofi-Synthelabo and Aventis. The results of operations of Aventis for the period between August 20, 2004 and December 31, 2004 have been included in the consolidated financial statements that resulted in a significant increase in revenues and total assets shown in Tables 2.12 and 2.13.

Other non-US pharmaceutical companies also tried to strengthen their positions by acquiring other companies according to their strategy. Novartis and Roche, both of each do not concentrate exclusively on the pharmaceutical industry, further diversified their businesses by acquiring non-pharmaceutical companies. Bayer’s current acquisitions

23

(seed treatment business and over-the-counter medicines) even further decreased its share of pharmaceutical segment. Major acquisitions of non-US pharmaceutical companies are summarized in Table 2.14.

Table 2.14. Recent acquisitions by major non-US pharmaceutical companies

Company Company acquired* Core business of target Purchase price

GlaxoSmithKline

Merger of Glaxo Wellcome and

SmithKline Beecham

Megrer of two major pharmaceutical companies

(registered in 2000)-

Block DrugOral care and over-the-counter

medicines843 mln GBP

AstraZenecaMerger of Astra and

Zeneca

Megrer of two major pharmaceutical companies

(registered in 1999)-

Novartis

SabexGeneric manufacturer with a leading position in generic

injectables565 mln USD

Mead Johnson's adult nutrition business

Global adult medical nutrition 385 mln USD

Idenix Pharmaceuticals Inc

Biotechnology255 mln USD + up to 357 mln

USD in possible additional payments

Roche

Igen International Human in-vitro diagnostics 1,823 mln CHF

DisetronicInsulin pumps and injection systems for the treatment of

diabetes.1,132 mln CHF

Sanofi-AventisMerger of Sanofi-

Synthelabo and Aventis

Merger of two major pharmaceutical companies

(registered in 2004)-

Bayer

Roche's over-the-counter business

Over-the-counter medicines 206 mln EUR

Gustafson Seed treatment 100 mln EUR

Source: Annual Reports of the companies*Acquisition of patents is not included in this table

Overall, as shown in Table 2.15, non-US pharmaceutical companies have approximately similar R&D costs as % of total sales to those of U.S. companies.

Several comments should be made. First, the incredible 49.6% for Sanofi-Aventis is explained mainly by current merger of Sanofi-Synthelabo and Aventis – according to accounting standards in-progress R&D costs of Aventis were capitalized after its acquisition. During three years preceding this merger the company annually spent about 16.2% of its sales for R&D.

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Second, very low values of R&D costs as % of total sales for Bayer to a significant extent can be explained by a very low share of pharmaceutical business in its total sales.

Finally, Takeda has the goal of becoming one of the leading pharmaceutical companies worldwide. Recent restructuring initiatives of the company that were mentioned above allow Takeda to concentrate its resources mainly on development of new drugs that had the reflection in increase of its R&D expenditures as % of total sales from 9.3% in 2001 to 11.9% in 2004.

If we do not count capitalized R&D expenditures of Sanofi-Aventis, GlaxoSmithKline was the leader in 2004 R&D expenditures in absolute terms (about $5.2 million), while AstraZeneca had the best result in relative terms (average of 17.6% during last 4 years).

Table 2.15. R&D costs as % of 2004 total sales2001 2002 2003 2004

GlaxoSmithKline 12.5% 12.9% 12.9% 13.9%AstraZeneca 17.1% 17.2% 18.3% 17.7%Novartis 13.5% 13.6% 15.1% 14.9%Roche 13.3% 14.5% 15.3% 16.3%Sanofi-Aventis 15.9% 16.4% 16.4% 49.6%Takeda 9.3% 10.0% 11.9% 11.9%Bayer 8.5% 8.7% 8.4% 7.1%Source: Annual Reports of the companiesTo calculate this ratio R&D costs and revenues for all business segments of the company were used

As it was discussed above, after expiration of its patent, drugs usually experience very sharp decline in their sales. Therefore, companies with a well balanced portfolio of their products with no any single product having very high share of sales can be considered as less risky. From this point of view non-US pharmaceutical companies look better. As Table 2.16 shows for all listed companies the share of the best-selling product is below 20% while three US-based companies exceed this level (Pfizer’s Lipitor has 20.7% of sales, Merck’s Zocor has 22.7%, and Eli Lilly’s Zyprexa has 31.9%) and two other companies are very close to this threshold (Wyeth’s Effexor has 19.3% of sales, and BMS’s Plavix has 17.2% of sales).

Expiration of patents had a significant negative effect on some of non-US pharmaceutical companies during last several years. For example, negative effect of generic competition to GlaxoSmithKline’s Paxil and Wellburtin was estimated to be 1.5 billion GBP (about $2.7 billion) that was one of the major factors that caused decline in sales of the company by 5%.

Another example is the expiration of Bayer’s Cipro patent that caused a 41% decline in sales of this Bayer’s top selling product.

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Table 2.16. Top 5 pharmaceutical products based on the sales in 2004

GlaxoSmithKlineSales,

mln GBP% of total

salesSales, mln

USD RocheSales, mln

CHF% of total

salesSales, mln

USD

Seretide / Advair £2,461 12.1% $4,512 MabThera / Rituxan CHF 3,378 10.8% $2,719

Avandial / Avandamet £1,116 5.5% $2,046

NeoRecormon, Epogin CHF 2,082 6.7% $1,676

Paxil £1,063 5.2% $1,949 Pegasys + Copegus CHF 1,562 5.0% $1,257 Zofran £763 3.7% $1,399 Herceptin CHF 1,435 4.6% $1,155 Wellbutrin £751 3.7% $1,377 CellCept CHF 1,403 4.5% $1,129

AstraZenecaSales,

mln USD% of total

sales Sanofi-AventisSales, mln

EUR% of total

salesSales, mln

USDNexium $3,883 18.1% Lovenox € 1,904 12.7% $2,368 Seroquel $2,027 9.5% Plavix € 1,694 11.3% $2,107 Losec / Prilosec $1,947 9.1% Allegra € 1,502 10.0% $1,868 Seloken $1,387 6.5% Taxotere € 1,436 9.5% $1,786 Pulmicort $1,050 4.9% Stilnox € 1,423 9.5% $1,770

NovartisSales,

mln USD% of total

sales BayerSales, mln

EUR% of total

salesSales, mln

USDDiovan / Co-Diovan $3,093 10.9% Ciprobay / Cipro € 837 2.8% $1,041 Gleevec/Glivec $1,634 5.8% Adalat € 670 2.3% $833 Lamisil $1,162 4.1% Ascensia € 627 2.1% $780 Zometa $1,078 3.8% Aspirin € 615 2.1% $765 Neoral / Sandimmun $1,011 3.6% Kogenate € 563 1.9% $700 Source: Financial reports of the companiesSales are provided in the currency of financial reports; conversion of sales into USD was made for comparison purposes

As for the case of U.S. pharmaceutical companies we calculated profitability and liquidity ratios for non-US pharmaceutical companies (provided in Table 2.17 and chart 2.3 respectively). Several factors are worth mentioning.

First, both GlaxoSmithKline and AstraZeneca that underwent large-scale merger processes showed pretty stable financial performance during the last few years that indirectly says something positive about successful completion of their restructuring initiatives. It is too early to make any conclusions regarding the results of the merger of Sanofi-Synthelabo and Aventis. Although the company reported -8.3% ROA in 2004 in comparison with 21.6% during the previous year this sharp decline is mainly caused by accounting treatment of transactions related to the merger: expensing total acquired R&D of Aventis (total negative effect of 5,046 million EUR), and accounting of inventories (total negative effect of 342 million EUR after tax).

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Second, losses of Roche 2002 to a significant extent can be explained by the legal settlements with U.S. direct customers in the vitamin case, as well as sale of the Vitamins and Fine Chemicals Division.

Finally, Bayer showed much lower results than other companies in this group. Partially this can be explained by much lower share of the highly profitable pharmaceutical business in its total sales.

Table 2.17. Profitability analysis2002 2003 2004

GlaxoSmithKline      ROA 17.6% 20.6% 19.7%Profit margin 18.5% 20.9% 21.1%Total Assets Turnover Ratio 0.95 0.99 0.93

AstraZenecaROA 14.2% 13.4% 15.5%Profit margin 15.9% 16.1% 17.8%Total Assets Turnover Ratio 0.89 0.83 0.87

NovartisROA 11.1% 10.6% 11.1%Profit margin 22.6% 20.2% 20.4%Total Assets Turnover Ratio 0.49 0.53 0.54

RocheROA -5.8% 5.0% 11.3%Profit margin -13.7% 9.8% 21.2%Total Assets Turnover Ratio 0.42 0.51 0.53

Sanofi-AventisROA 18.1% 21.6% -8.3%Profit margin 23.6% 25.8% -24.0%Total Assets Turnover Ratio 0.77 0.84 0.35

TakedaROA 12.5% 13.5% 13.0%Profit margin 23.1% 26.0% 26.3%Total Assets Turnover Ratio 0.54 0.52 0.49

BayerROA 2.7% -3.4% 1.6%Profit margin 3.6% -4.8% 2.0%Total Assets Turnover Ratio 0.75 0.72 0.79

Source: calculations, data used from Annual Reports of the companies

Analysis of liquidity ratios shows that on average companies that recently underwent the merger process have higher Debt-Equity Ratio than others. For example, this ratio for Sanofi-Aventis jumped from 0.35 before the merger to 0.53 at the year of the merger. Such significant increasess of debt can be explained by two major factors: a) company incurred a new debt to finance the cash portion of the acquisition consideration, b) consolidated financial debt includes the debt incurred by Aventis prior to acquisition.

27

It is also interesting to compare European and Asian business models: Takeda, the only Asian country in this group, showed the lowest debt-equity ratio (0.25) that is much lower than average 0.48 for the whole group.

Chart 2.3. Liquidity analysis

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

GlaxoS

mith

Kline

AstraZ

enec

a

Novar

tis

Roche

Sanof

i-Ave

ntis

Taked

a

Bayer

Current Ratio CF from operations to Total Liabilities Debt-Equity Ratio

Not surprisingly, for non-US pharmaceutical companies it is much more difficult to gain access to the U.S. pharmaceutical market that remains the largest and the most attractive market worldwide. While almost all U.S. pharmaceutical companies had more than 50% of their sales from the U.S. market, none of non-US companies could claim as much as 50% of the revenues from it. At the same time, it is worth mentioning that for three largest non-US companies (GlaxoSmithKline, AstraZeneca and Novartis) the U.S. represented the largest geographical segment.

From the point of view of geographical distribution of sales Takeda remained apart from all other companies – it had more than 50% of its sales from non-US and non-European markets (mainly from Japanese market).

28

Chart 2.4. Geographical distribution of sales, 2004

49% 45%40%

35% 31% 27%36%

30% 36%

34%38% 49%

14%

36%

21% 19%26% 26%

20%

59%

28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

GlaxoS

mith

Kline

AstraZ

enec

a

Novar

tis

Roche

*

Sanof

i-Ave

ntis

Taked

a*

Bayer

USA Europe Other

Source: Annual reports of the companies* No geographical distribution of pharmaceutical segment is available. Proportions calculated on the basis of geographical distribution of total sales.

Part 3. Summary

Indiana is home to Eli Lilly and is the location of several other pharmaceutical manufacturing companies. These companies contribute significantly to Indiana’s domestic and international profile. The good news is that that these companies – like the rest of the industry – are doing well and share in a sanguine outlook. Demographics and rising incomes in industrial and developing countries combine to promise rapidly growing future sales.

But the gains for any particular company are not guaranteed. Drug companies compete vigorously – with themselves, generic producers, and with related-health companies who want a share of their action. The industry is changing fast. To survive and to prosper involves managing drug pipelines – as drugs come off patents they no longer bring in enough revenues and must be replaced quickly by other drugs with durable patents. This means that the companies have to think ahead, something that sounds easy but involves great risks. Huge sums must be invested in uncertain in-house research and development and/or must go toward mergers and acquisitions with other promising companies. Strategic alliances can be used to augment opportunities as well.

29

As companies develop their new pipelines they must be mindful of changes caused by regulations and deregulations in countries all over the globe. While most of drug consumption and sales is a U.S.-European-Japanese affair – deregulation means sales opportunities are growing rapidly in the developing world. China, Thailand, Egypt, Mexico, Argentina, Brazil, and Venezuela have been increasing their imports of pharmaceuticals products at rapid rates. Of course, where there is growing demand – there is also growing supply and competition. Many new drug companies are springing up in developing countries and the biggest global firms are moving into those territories. But even this has more than the usual global risk for drug companies because of the importance of intellectual property protection. Picking places and partners takes more than the usual scrutiny or a company can lose valuable resources. Speaking of places – we noted that the U.S. is the largest market for pharmaceutical sales – and therefore will continue to be a hotbed of competition for Lilly and the other U.S. producers. Non-U.S. companies have been very active in mergers and acquisitions and will be more formidable competitors on U.S. soil.

This global competitive environment creates challenges and opportunities for the companies – with equal importance for the communities in which they reside. If size matters in the drug industry then both domestic and foreign mergers, acquisitions, and strategic alliances will continue to be critical. Such changes always have implication for location requiring communities around the globe to think harder about their roles as globalization unfolds. Communities that desire to maintain or build pharmaceutical clusters must be mindful that investment is always a two-way street. Building strong and growing pharmaceutical clusters at home will entail both inbound and outbound investment since whatever companies locate or stay in their areas – they will be compelled by global competition to own production facilities abroad.

This research offers no new insights into what it takes to build a viable pharmaceutical cluster but it surely underlines two facts – that it is worth doing in Indiana and that it will involve retaining and attracting companies that need to take sizeable financial risks. This suggests an infrastructure that supports not only the usual needs for top flight talent and communications/transportation advantages – but it suggests an environment that allows for flexibility and risk taking. While clusters bring to mind new facilities and higher employment, global competition suggests that drug companies will survive and prosper sometimes by shedding unprofitable lines of business. It is always painful for any community when firms restructure. It is tempting to regulate firms so that the blows to the community are softer. But the truth of the drug industry is that competitiveness and growth will require many actions on the parts of these firms – and not all of them will seem to be in the best short-run interest of the community.

30

References

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2. (Abbott Laboratories Annual Report 2003)http://abbott.com/investor/2003annualreport/2003AnnualReport.pdf

3. (Abbott Laboratories Annual Report 2004)http://abbott.com/investor/2004annualreport/includes/abbott_ar04_full.pdf

4. (Agarwal Sumit, Desai Sanjay, Holcomb Michele, Oberoi Arjun, “Unlocking the Value in Big Pharma)The McKinsey Quarterly, 2001 Number 2

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13. (Bayer Annual Report 2004)

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http://www.investor.bayer.com/docroot/_files/berichte1032356037/geschftsberichte1032356052/gb_2004_e1110868599.pdf

14. (Bristol-Myers Squibb Annual Report 2002)http://www.shareholder.com/bmy/edgar.cfm?PageNum=3&DocType=&SortOrder=Date%20Descending&Year=2003#

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17. (Bristol-Myers Squibb Sales and Earnings Report 2004)http://www.bms.com/static/irdocs/4q04fax.xls

18. (Eli Lilly Annual Report 2002)http://lilly.com/investor/annual_report/lillyar2002complete.pdf

19. (Eli Lilly Annual Report 2003)http://www.lilly.com/investor/annual_report/lillyar2003complete.pdf

20. (Eli Lilly Annual Report 2004)http://www.lilly.com/investor/annual_report/lillyar2004complete.pdf

21. (GlaxoSmithKline Annual Report 2002)http://www.gsk.com/financial/reps02/annual-review-02/cautionary-report.htm

22. (GlaxoSmithKline Annual Review 2002)http://www.gsk.com/financial/reps02/annual-review-02/index.htm

23. (GlaxoSmithKline Annual Report 2003)http://www.gsk.com/financial/reps03/annual_report2003.pdf

24. (GlaxoSmithKline Annual Review 2003)http://www.gsk.com/financial/reps03/annual_review2003.pdf

25. (GlaxoSmithKline Annual Report 2004)http://www.gsk.com/financial/reps04/annual-report-2004.pdf

26. (GlaxoSmithKline Annual Review 2004)http://www.gsk.com/financial/reps04/annual-review-2004.pdf

27. (Johnson & Johnson Annual Report 2002)http://www.investor.jnj.com/downloads/jnj_2002annual.pdf

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28. (Johnson & Johnson Annual Report 2003)http://www.investor.jnj.com/downloads/jnj_2003annual.pdf

29. (Johnson & Johnson Annual Report 2004)http://www.investor.jnj.com/downloads/2004annual.pdf

30. (Johnson & Johnson Financial Review)http://www.investor.jnj.com/downloads/2003_Financial_Review.pdf

31. (Johnson & Johnson Supplementary Sales Data 4Q 2004)http://www.jnj.com/news/jnj_news/pdf/su404b5s4l9c2.pdf

32. (Merck Annual Report 2002)http://www.merck.com/finance/annualreport/ar2002/merck_financial_section.pdf

33. (Merck Annual Report 2003)http://www.merck.com/finance/annualreport/ar2003/financial_section/merck2003_ar_financials.pdf

34. (Merck Annual Report 2004)http://www.merck.com/finance/annualreport/ar2004/pdf/Merck_2004_AR_FinSec.pdf

35. (National Science Foundation, “Research and Development in Industry: 2001”, 2001)

36. (O’Neill Jim, McCann Brian, George Mark, „The New Medicare Prescription Law”)TS Insight, Volume 1 No 6, May 7, 2004

37. Pharmaceutical Research and Manufacturers of America (PhRMA).“Pharmaceutical Industry Profile 2004” (Washington, DC: PhRMA, 2004)

38. (Pfizer Financial Report 2002)http://www.pfizer.com/download/investors/financial/10k_0327_2003.pdf

39. (Pfizer Financial Report 2003)http://www.pfizer.com/are/investors_reports/annual_2003/financial2003.pdf

40. (Pfizer Financial Report 2004)http://www.pfizer.com/annualreport/2004/financial/financial2004.pdf

41. (Pfizer Annual Review 2004)http://www.pfizer.com/annualreport/2004/annual/review2004.pdf

42. (Roche Annual Report 2002)http://www.roche.com/pages/downloads/investor/pdf/reports/gb02/gb02e.pdf

43. (Roche Annual Report 2003)

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http://www.roche.com/pages/downloads/investor/pdf/reports/gb03/gb03e.pdf

44. (Roche Annual Report 2004)http://www.roche.com/pages/downloads/investor/pdf/reports/gb04/gb04e.pdf

45. (Sanofi-Aventis Annual Report 2002)http://en.sanofi-aventis.com/Images/44_22402.pdf

46. (Sanofi-Aventis Annual Report 2003)http://en.sanofi-aventis.com/Images/44_23523.pdf

47. (Schering Annual Report 2004)http://www.schering.de/html/en/50_media/download/_files/2004/fin_rep/annual/04GB_en.pdf

48. (Schering-Plough Annual Report 2002)http://media.corporate-ir.net/media_files/IROL/89/89839/reports/2002ar.pdf

49. (Schering-Plough Annual Report 2003)http://media.corporate-ir.net/media_files/irol/89/89839/reports/2003ar.pdf

50. (Schering-Plough Annual Report 2004)http://media.corporate-ir.net/media_files/IROL/89/89839/reports/sgp_ar04a.pdf

51. (Takeda Annual Report 2002)http://www.takeda.com/english/annual/ar2002/pdf/ar2002.pdf

52. (Takeda Annual Report 2003)http://www.takeda.com/english/annual/ar2003/pdf/ar2003.pdf

53. (Takeda Annual Report 2004)http://www.takeda.com/english/annual/ar2004/pdf/ar2004.pdf

54. (Wyeth Annual Report 2003)http://media.corporate-ir.net/media_files/irol/78/78193/reports/AR03/WyethAR03.pdf

55. (Wyeth Annual Report 2004)http://library.corporate-ir.net/library/78/781/78193/items/141903/AR04.pdf

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Pharmaceuticals[Key Points | Financial Year '10 | Prospects | Sector Do's and Dont's]

The Indian Pharmaceutical industry is highly fragmented with about 24,000 players (around 330 in the organised sector). The top ten companies make up for more than a third of the market. The Indian pharma industry grew by a robust 17% YoY in 2009 to '401 bn (approx. US$ 8.5 bn). It accounts for about 1% of the world's pharma industry in value terms and 8% in volume terms.

Besides the domestic market, Indian pharma companies also have a large chunk of their revenues coming from exports. While some are focusing on the generics market in the US, Europe and semi-regulated markets, others are focusing on custom manufacturing for innovator companies. Biopharmaceuticals is also increasingly becoming an area of interest given the complexity in manufacture and limited competition.

The drug price control order (DPCO) continues to be a menace for the industry. There are three tiers of regulations - on bulk drugs, on formulations and on overall profitability. This has made the profitability of the sector susceptible to the whims and fancies of the pricing authority. The new Pharmaceutical Policy 2006, which proposes to bring 354 essential drugs under price control has not been officially passed as yet and has been stiffly opposed by the pharmaceutical industry.

The R&D spend of the top five companies is about 5% to 10% of revenues. This ratio is still way below the global average of 15% to 20% of sales. Indian companies have adopted various strategies for their R&D efforts. Some have entered into collaboration and partnership agreements with innovator companies, others have out-licensed their molecules for milestone payments. Hiving off R&D units into separate companies has also become a preferred option for many Indian pharma players. That said, given that the research pipelines of Big Pharma are drying up, they have now begun to dabble in generics. In this regard, these innovator companies are either buying out Indian firms or are forging alliances with them.

 Key Points

Supply Higher for traditional therapeutic segments, which is typical of a developing market. Relatively lower for lifestyle segment.

Demand Very high for certain therapeutic segments. Will change as life expectancy, literacy increases.

Barriers to entry Licensing, distribution network, patents, plant approval by regulatory authority.

Bargaining Distributors are increasingly pushing generic

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power of suppliers

products in a bid to earn higher margins.

Bargaining power of customers

High, a fragmented industry has ensured that there is widespread competition in almost all product segments. (Currently also protected by the DPCO).

Competition High. Very fragmented industry with the top 300 (of 24,000 manufacturing units) players accounting for 85% of sales value. Consolidation is likely to intensify.

TOP

 Financial Year '10 FY10/CY09 was a relatively better year for domestic pharma

companies as they recovered from the crippling impact of forex volatility in the previous year. There was good growth seen in generics especially in the US and the semi regulated markets. Europe continued to face pressure. Companies focusing on custom manufacturing for innovators were not spared from a slowdown in their business. This is because many of the global innovator companies chose to rationalize their inventories in wake of the global slowdown. And so there were not too many orders that were being given out. Further, the efforts of global innovators to entrench in the domestic market intensified with Abbott Laboratories buying out the domestic formulations business of Piramal Healthcare. Thus, with Daiichi also having acquired a majority stake in Ranbaxy, 2 of the top 3 players in the Indian market are MNCs.

Another problem which continued to hamper the pharma sector was the stringency of the US FDA while inspecting manufacturing plants. While Ranbaxy and Sun Pharma's subsidiary Caraco are yet to come to a resolution, Lupin rectified the problems at its Mandideep plant and was given a clean chit.

The European market posed a set of challenges for Indian generic companies. While the UK was bogged with severe pricing pressure, the government's of Germany and France undertook various healthcare reforms, which impacted the revenues of companies having a presence in these countries. Further, the global economic slowdown only worsened matters.

In the domestic market, FY10 was a decent year for the pharmaceutical industry with most of the top players managing to clock a double-digit growth. However, it was the chronic therapy segment, which once again stole the thunder of the acute therapy segment. While the former recorded a robust 18% YoY growth, the latter grew by 15% YoY.

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Continuing with the trend last year, MNC companies did well during FY10/CY09 too. On an average, they were able to clock topline growth in the range of 10% to 13%. On the margin front, performance was mixed. While GSK Pharma and Novartis witnessed an expansion in operating margins, Aventis and Pfizer witnessed declines. Aventis was impacted by the termination of the agreement with Novartis Vaccines for the sale of the anti-rabies vaccine 'Rabipur'.

TOP

 Prospects The product patents regime heralds an era of innovation and

research resulting in the launch of new patented product launches. In the longer run, domestic companies would face fresh competition from MNCs, as they would make aggressive new launches. However, the latter would most likely be subject to price negotiation.

Drugs having estimated sales of over US$ 108 bn are expected to go off patent between CY09 and CY13. With the governments in the developed markets looking to cut down healthcare costs by facilitating a speedy introduction of generic drugs into the market, domestic pharma companies will stand to benefit. However, despite this huge promise, intense competition and consequent price erosion would continue to remain a cause for concern.

The life style segments such as cardiovascular, anti-diabetes and anti-depressants will continue to be lucrative and fast growing owing to increased urbanisation and change in lifestyles. Growth in domestic sales in the future will depend on the ability of companies to align their product portfolio towards the chronic segment.

Contract manufacturing and research (CRAMS) is expected to gain momentum going forward. India's competitive strengths in research services include English-language competency, availability of low cost skilled doctors and scientists, large patient population with diverse disease characteristics and adherence to international quality standards. As for contract manufacturing, both global innovators and generic majors are finding it profitable to outsource production. Although there has been a considerable slowdown in this area, the scenario is expected to improve going forward as the pressure to prune costs increases.

swot analysis of indian pharmaceutical industry

SWOT Analysis

It is often said that the pharma sector has no cyclical factor attached to it. Irrespective of

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whether the economy is in a downturn or in an upturn, the general belief is that demand for drugs is likely to grow steadily over the long-term.

Strengths: 1. India with a population of over a billion is a largely untapped market. To put things in perspective, per capita expenditure on health care in India is US$ 93 while the same for countries like Brazil is US$ 453 and Malaysia US$189. 2. The growth of middle class in the country has resulted in fast changing lifestyles in urban and to some extent rural centers. This opens a huge market for lifestyle drugs, which has a very low contribution in the Indian markets. 3. Indian manufacturers are one of the lowest cost producers of drugs in the world. With a scalable labor force, Indian manufactures can produce drugs at 40% to 50% of the cost to the rest of the world. 4. Indian pharmaceutical industry possesses excellent chemistry and process reengineering skills. This adds to the competitive advantage of the Indian companies. The strength in chemistry skill helps Indian companies to develop processes, which are cost effective. Weaknesses: 1. The Indian pharma companies are marred by the price regulation. The National Pharma Pricing Authority, which is the authority to decide the various pricing parameters, sets prices of different drugs, which leads to lower profitability for the companies. The companies, which are lowest cost producers, are at advantage while those who cannot produce have either to stop production or bear losses. 2. Indian pharma sector has been marred by lack of product patent, which prevents global pharma companies to introduce new drugs in the country and discourages innovation and drug discovery. 3. Due to very low barriers to entry, Indian pharma industry is highly fragmented. This makes Indian pharma market increasingly competitive. The industry witnesses price competition, which reduces the growth of the industry in value term.Opportunities 1. The migration into a product patent based regime is likely to transform industry fortunes in the long term. The new product patent regime will bring with it new innovative drugs. 2. Large number of drugs going off-patent in Europe and in the US during 2005 - 2009 offers a big opportunity for the Indian companies to capture this market. Since generic drugs are commodities by nature, Indian producers have the competitive advantage, as they are the lowest cost producers of drugs in the world. 3. Being the lowest cost producer combined with FDA approved plants; Indian companies can become a global outsourcing hub for pharmaceutical products. Threats: 1. Threats from other low cost countries like China and Israel exist. However, on the quality front, India is better placed relative to China.2. The short-term threat for the pharma industry is the implementation of VAT. Though this is likely to have a negative impact in the short-term, the implications over the long-term are positive for the industry.

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Free Excel Spreadsheets

1. Capital Budgeting Analysis (xls) - Basic program for doing capital budgeting analysis with inclusion of opportunity costs, working capital requirements, etc. - Aswath Damodaran

2. Rating Calculation (xls) - Estimates a rating and cost of debt based on the coverage of debt by an organization - Aswath Damodaran

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3. LBO Valuation (xls) - Analyzes the value of equity in a leverage buyout (LBO) - Aswath Damodaran

4. Synergy (xls) - Estimates the value of synergy in a merger and acquisition - Aswath Damodaran

5. Valuation Models (xls) - Rough calculation for choosing the correct valuation model - Aswath Damodaran

6. Risk Premium (xls) - Calculates the implied risk premium in a market. (uses macro's) - Aswath Damodaran

7. FCFE Valuation 1 (xls) - Free Cash Flow to Equity (FCFE) Valuation Model for organizations with stable growth rates - Aswath Damodaran

8. FCFE Valuation 2 (xls) - Free Cash Flow to Equity (FCFE) Valuation Model for organizations with two periods of growth, high growth initially and then stable growth - Aswath Damodaran

9. FCFE Valuation 3 (xls) - Free Cash Flow to Equity (FCFE) Valuation Model for organizations with three stages of growth, high growth initially, decline in growth, and then stable growth - Aswath Damodaran

10. FCFF Valuation 1 (xls) - Free Cash Flow to Firm (FCFF) Valuation Model for organizations with stable growth rates - Aswath Damodaran

11. FCFF Valuation 2 (xls) - Free Cash Flow to Firm (FCFF) Valuation Model for organizations with two periods of growth, high growth initially and then stable growth - Aswath Damodaran

12. Time Value (xls) - Introduction to time value concepts, such as present value, internal rate of return, etc.

13. Lease or Buy a Car (xls) - Basic spreadsheet for deciding to buy or lease a car.14. NPV & IRR (xls) - Explains Internal Rate of Return, compares projects, etc.15. Real Rates (xls) - Demonstrates inflation and real rates of return.16. Template (xls) - Template spreadsheet for project evaluation & capital budgeting.17. Free Cash Flow (xls) - Cash flow worksheets - subsidized and unsubsidized.18. Capital Structure (xls) - Spreadsheet for calculating optimal capital structures

using different percents of debt.19. WACC (xls) - Calculation of Weighted Average Cost of Capital using beta's for

equity.20. Statements (xls) - Generate a set of financial statements using two input sheets -

operational data and financial data.21. Bond Valuation (zip) - Calculates the value or price of a 25 year bond with semi-

annual interest payments.22. Buyout (zip) - Analyzes the effects of combining two companies.23. Cash Flow Valuation (zip) - Walks through a valuation of cash flows under three

models- capital cash flows, equity cash flows, and free cash flows.24. Financial Projections (zip) - Spreadsheet model for generating projected

financials along with valuation based on WACC.25. Leverage (zip) - Shows the effects on Net Income from using debt (leverage).26. Ratio Calculator (zip) - Calculates a standard set of ratios based on input of

financial data.27. Stock Value (zip) - Calculates expected return on stock and value based on no

growth, growth, and variable growth.

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28. CFROI (xls) - Simplified Cash Flow Return on Investment Model.29. Financial Charting (zip) - Add on tool for Excel 97, consists of 6 files.30. Risk Analysis (exe) - Analysis and simulation add on for excel, self extracting exe

file.31. Black Scholes Option Pricing (zip) - Excel add on for the pricing of options.32. Cash Flow Matrix - Basic cash flow model.33. Business Financial Analysis Template for start-up businesses from Small

Business Technology Center34. Forex (zip) - Foreign market exchange simulation for Excel35. Hamlin (zip) - Financial function add-on's for Excel36. Tanly (zip) - Suite of technical analysis models for Excel37. Financial History Pivot Table - Microsoft Financials38. Income Statement What If Analysis 39. Breakeven Analysis (zip) - Pricing and breakeven analysis for optimal pricing -

Biz Pep.40. SLG Ratio Master (exe) - Excel workbook for creating 25 key performance ratios.41. DCF - Menu driven Excel program (must enable macros) for Discounted Cash

Flow Analysis from the book Analysis for Financial Management by Robert C. Higgins - Analysis for Financial Management

42. History - Menu driven Excel program (must enable macros) for Historical Financial Statements from the book Analysis for Financial Management by Robert C. Higgins - Analysis for Financial Management

43. Proforma - Menu driven Excel program (must enable macros) for Pro-forma Financial Statements from the book Analysis for Financial Management by Robert C. Higgins - Analysis for Financial Management

44. Business Valuation Model (zip) - Set of tabbed worksheets for generating forecast / valuation outputs. Includes instruction sheet. Bizpep

45. LBO Model - Excel model for leveraged buy-outs46. Comparable Companies - Excel valuation model comparing companies47. Combination Model - Excel valuation model for combining companies48. Balanced Scorecard - Set of templates for building a balanced scorecard.49. Cash Model - Template for calculating projected financials from CFO Connection50. Techniques of Financial Analysis - Workbook of 11 templates (breakeven,

valuation, forecasting, etc.) from ModernSoft51. Ratio Reminder (zip) - Simple worksheet of comparative financials and

corresponding ratios52. Risk Analysis IT - Template for assessing risk of Information Technology - Audit

Net53. Risk Analysis DW - Template for assessing risk of Data Warehousing - Audit Net54. Excel Workbook 1-2 - Set of worksheets for evaluating financial performance and

forecasting - Supplemental Material for Short Course 1 and 2 on this website. 55. Rule Maker Essentials - Excel Template for scoring a company by entering

financial data - The Motley Fool56. Rule Maker Ranker - Excel Template for scoring a company by entering

comparable data - The Motley Fool57. IPO Timeline - Excel program for Initial Public Offerings (must enable macros)

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58. Assessment Templates - Set of templates for assessing an organization based on the Malcolm Baldrige Quality Model.

59. Cash Gap in Days - Spreadsheet for calculating number of days required for short-term financing.

60. Cash Flow Template - Simple cash flow model with explanations of each cash flow component - Arkansas Small Business Development Center.

61. Six Solver Workbook (zip) - Set of various spreadsheets for solving different business problems (inventory ordering, labor scheduling, working capital, etc.).

62. Free Cash Flow Valuation - Basic Spreadsheet Valuation Model63. Finance Examples - Seven examples in Business Finance - Solver64. Capital Budgeting Workbook - Several examples of capital budgeting analysis,

including the use of Solver to select optimal projects.65. Present Value Tables (rtf) - Set of present value tables written in rich text format,

compatible with most word processors. Includes examples of how to use present value tables.

66. Investment Valuation Model (zip) - Valuation model of companies (30 Day Trial Model) from Business Spreadsheets | Additional Trial Models from Business Spreadsheets > Real Option Valuation | Portfolio Optimization | Optimal Hedging Strategy

67. Cash Flow Sensitivity (xlt) - Sensitivity analysis spreadsheet - Small Business Store

68. What If Analysis - Set of templates for sensitivity analysis using financial inputs.69. Risk Return Optimization - Optimal project selection (must enable macro's) -

Metin Kilic70. CI - Basics #1 - Basic spreadsheet illustrating competitive analysis - Business

Tools Templates.71. CI - Basics #2 - Basic spreadsheet illustrating competitive analysis - Business

Tools Templates.72. External Assessment - Assessment questions for organizational assessment (must

enable macros).73. Internal Assessment - Assessment questions for organizational assessment (must

enable macros).74. Formal Scorecard - Formal Balanced Scorecard Spreadsheet Model (3.65 MB /

must enable macros) - Madison Area Quality Improvement Network. 75. Project Plan - Project Scheduling Template currently setup for a Balanced

Scorecard Project.76. Gantt Chart - Gantt chart for project management with work plan - Jim

Chapman's Web Site | Simplified Version - Barnard of Fong's Eng & Manf77. E O Q Model - Simple Inventory Models for calculating Economic Order

Quantity. 78. Inventory Simulation Control Model - Formal model for simulating inventory

shortages, delivery times, costs, backorders, and optimal inventory levels - John McClain

79. Financial Projections Model - A comprehensive financial model for forecasting a complete set of financials with breakeven and valuation tabs developed by Frank Moyes and Stephen Lawrence at Leeds School of Business.

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80. Option Trading Workbook - Educational toolkit for using Excel for Options - Option Trading Tips

81. Financial Model - A nice clean financial model driven by different calculators (such as Company, Market, Subscribers, etc.) developed by Bill Snow.

82. Forecasting Model - Step by step financial model for forecasting financials created by Sam Gui

83. Economic Evaluation - Step by step workbook for evaluating the economics of a system investment

84. Project Management Templates - A collection of templates (charter, budget, risk register, issues log, etc.) for managing a project - International Association of Project and Program Management

85. Project Cost Estimating Workbook - A workbook model for developing a cost estimate on a software development project - ProTrain China

86. Risk Assessment Register - A workbook for establishing a risk management register - Emergency Preparedness Capacity Builders

87. Simple ABC Model - A simple model that illustrates Activity Based Costing88. Six Sigma Tool Kit - A large collection of templates for doing six sigma tasks 89. Project Management Tool Kit - Collection of useful templates for managing

projects - Michael D. Taylor 90. Intellectual Property Valuation Model - A simple and easy to use model to help

assign value to intellectual assets such as patents, copyrights and trademarks - My Patent

91. IT Infrastructure Maturity Assessment - Maturity model for evaluating different segments of IT infrastructure

92. EVA Model - Template worksheets for calculating Economic Value Added (EVA) - Zachary Scott

93. EVA Tree Mode l - Economic Value Added drill-down model with charts - Manfred Grotheer

94. Personal Finance Model - A simple and clean model to track personal wealth - ROI Team

95. Financial Startup Model - A six parameter model to help organize financials for startup companies - ROI Team

96. Master Budget Model - A multi-period multi-product budget model for a fictional bicycle manufacturing company - Jason Porter, PhD at University of Idaho and Teresa Stephenson, PhD at University of Wyoming.

97. Performance Leadership Assessment - Simple and straight-forward tool for assessing leadership across five important categories - People Positive

98. Due Diligence Assessment Model - Assessment of new business ventures across ten different dimensions - Affiliate Tips

99. Management Diamond Assessment - A useful tool for developing human capital and teams - Geir Fuglaas | Management Diamond Overview | Management Diamond Book

100. Performance Solution Tool Kit - Evaluation of performance issues related to knowledge gaps - Brent Norton

101. Ratio Tree - A simple yet comprehensive tree of ratios for most businesses - Strategy Expert

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Note: Most of the spreadsheets on this web page are from different sources. Where possible, a link has been provided back to the source. If you have questions, please contact the source. Only five spreadsheets were created by Matt H. Evans (No's 48, 54, 58, 64, 88). If you need other spreadsheets not listed above, then please refer to the many links listed below for additional help. Also, my services are not related to spreadsheet modeling type projects. So please contact one of the Leading Experts linked below for assistance. - Matt H. Evans

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