Trade & Channel Strategies 2024: The Significance of Return on Invested Capital for Pharma Companies

PC: In what ways does return on invested capital (ROIC) differ in its significance for biopharmaceutical companies compared to other industries, considering the unique R&D cycles and patent lifespans?

Trombetta: So, let’s look at two companies, and you can guess who those two companies are. Why? Well, it’s because of the GLP-1 inhibitors. Those two companies are Novo Nordisk and Eli Lilly. Their ROICs are astronomical I think Novo Nordisk is around 50%. Most companies would kill just to have a gross margin of 50%. Their ROIC is 45% at the bottom before taxes, so that's astronomical, and that's why the ROIC is so important.

Full Interview Summary: The upcoming industry audit presentation will analyze key metrics and trends among top biopharma companies, focusing on financial and strategic performance. The audit, now in its 23rd year, has evolved from analyzing 25 to the current "nifty 15" publicly traded pharmaceutical companies, reflecting industry consolidation. Core metrics assessed include enterprise value, enterprise value-to-sales ratio, and return on invested capital (ROIC), providing insights into shareholder value, growth potential, and operational efficiency. High ROIC figures, such as Novo Nordisk’s 45%, underscore the sector's exceptional profitability compared to others, driven by innovative products like GLP-1 drugs for diabetes and weight loss.

Two broader themes contextualize the audit. First, Johnson & Johnson ranked sixth overall and fifth in innovation among 250 U.S. companies in the Drucker Institute's Best Managed Companies list, reflecting the growing recognition of pharma's management excellence. Second, diversity remains a focal point. Women now outnumber men in U.S. medical and law schools and achieve parity in MBA programs, signaling progress in advancing women into executive roles, though female representation among CEOs remains limited, especially globally.

Novo Nordisk stands out not only for its market value exceeding Denmark's GDP but also for its philanthropic initiatives, such as the world-leading Novo Nordisk Charitable Foundation. Such efforts illustrate how biopharma companies are increasingly integrating societal objectives into their strategies. In a shifting market, financial performance alone is no longer sufficient; long-term value creation must align profitability with stakeholder benefits and community impact. This balance, exemplified by companies like Novo Nordisk and J&J, will likely shape how the industry communicates its value to investors amidst uncertainties.