Turning headcount into profits: a shifting industry picture

Data Insights

Employee numbers across the pharma industry might have remained fairly constant in spite of the past six years’ financial market turmoil, but a look beneath the surface reveals a shifting picture of the efficiency with which companies are turning headcount into investor returns.

Among the big pharma peer group the company that has most improved its efficiency per full-time employee is Bristol-Myers Squibb, in market cap as well as profitability terms, EvaluatePharma data show (see tables below). Meanwhile – despite a massive hiring spree – big biotech remains a far more efficient user of staff, and on this metric it continues to improve.

Admittedly, from a pure investment perspective employee efficiency is not as important as pure appreciation in share price, or dividends and profitability per share, and these metrics remain the most important measures of shareholder return.

However, how much value companies generate per worker is an important measure of the efficiency of a business, and can identify clear winners, as well as picking out those that might need further restructuring.

The analysis below looks at big pharma companies’ market caps, free cash flows and revenues in 2007 and last year, and expresses these relative to the number of full-time employees on their books at the end of these time periods. It shows that most big pharma companies generate close to $1m of market cap per employee.

Big pharma's efficiency rating (in local reporting currencies)
Market cap per employee Change Free cash flow per employee Change Sales per employee Change
2007 2012 2007 2012 2007 2012
Bristol-Myers Squibb ($m) 1.28 1.88 46.6% 75 248 230.2% 372 629 69.2%
AstraZeneca ($m) 0.94 1.14 21.7% 98 61 (37.7%) 435 523 20.1%
Sanofi (€m) 0.75 0.85 13.1% 61 65 6.7% 281 310 10.3%
Pfizer ($m) 1.77 1.99 12.4% 154 186 20.9% 557 645 15.8%
Novartis ($m) 1.12 1.20 6.9% 94 111 18.5% 397 450 13.3%
Eli Lilly ($m) 1.51 1.47 (2.8%) 127 138 9.0% 459 589 28.4%
GlaxoSmithKline (£m) 0.68 0.66 (3.5%) 42 47 9.9% 220 268 21.9%
Johnson & Johnson ($m) 1.60 1.52 (5.0%) 126 120 (4.6%) 513 525 2.5%
Roche (SFr m) 2.18 2.00 (8.5%) 149 183 22.5% 587 554 (5.6%)
Abbott Laboratories ($m) 0.65 0.57 (13.1%) 76 102 34.3% 381 438 15.0%
Merck & Co ($m) 2.13 1.49 (29.8%) 117 121 3.2% 405 569 40.7%

But while Bristol-Myers Squibb is no numerical outlier, it demonstrates the value of cost cutting. The company has slashed headcount from 42,000 in 2007 to 28,000 at the end of last year, partly through the sale of business units, and this has resulted in huge efficiency gains in terms of market cap, free cash flow and revenue per employee.

AstraZeneca has carried out a similar race to the bottom, though while its market cap has held up – largely thanks to a generous dividend policy – profitability has not.

Conversely, Merck & Co closed one of the biggest M&A deals of recent years, buying Schering-Plough in 2009, but its market cap has barely treaded water. And without a commensurate reduction in employees – Merck’s headcount has climbed nearly 40% over six years – its valuation per employee has been hit, though interestingly profitability efficiency has remained flat.

True, analysing a business’s performance on a per-employee basis shows only part of the story. Indeed, one of the industry’s recent moves has been to build up an emerging market workforce at the expense of Western countries – with wage costs going down, presumably efficiency should be improving (Big pharma employee numbers stagnant as big biotech booms, August 7, 2013).

Big biotech on top

But what is truly illuminating is how big pharma compares against $30bn+ drug developers – a group that includes big biotech.

$30bn+ drug developers, including big biotech (in local reporting currencies)
Market cap per employee Change Free cash flow per employee Change Sales per employee Change
2007 2012 2007 2012 2007 2012
Novo Nordisk (DKr m) 8.49 14.78 74.0% 327 605 84.7% 1,718 2,360 37.3%
Gilead Sciences ($m) 7.22 11.16 54.5% 593 639 7.8% 1,420 1,941 36.7%
Biogen Idec ($m) 4.01 5.82 45.3% 237 316 33.1% 738 927 25.7%
Amgen ($m) 2.92 3.67 25.6% 309 327 5.9% 844 959 13.6%
Celgene ($m) 11.26 7.01 (37.8%) 283 429 51.6% 834 1,172 40.4%

Not only have most of these businesses made huge efficiency gains despite piling on the staff after the downturn, they consistently beat big pharma in numerical terms, generating well above $3m of market cap per employee, with Gilead currently boasting a staggering $11m of market value for each worker.

Against this backdrop, it hardly matters that each Celgene employee is now worth “only” $7m of market cap versus $11m six years ago; the group has almost tripled its headcount.

And much of big biotech’s enviable efficiency rating reflects expected gains over the coming years. These are not called growth stocks for nothing.

To contact the writers of this story email Jacob Plieth or Amy Brown in London at news@epvantage.com or follow @JacobEPVantage or @AmyEPVantageon Twitter

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