Johnson & Johnson and Roche are at the top of S&P Global’s pharmaceutical industry power ratings, which assess the strength of the world’s top 17 drugmakers.
To come up with the ranking, S&P considered a variety of measurement tools including competitive advantage, prospects for sustaining revenue growth, operating efficiency, scale, scope and diversification. In its analysis, S&P distills these factors into two categories—business risk and financial risk—to determine its ratings.
The two companies that are rated highest each has a separate medtech business alongside their drugmaking capabilities.
S&P defines business risk as a measure of a company’s long-term ability to generate profits. Financial risk refers to a company’s credit ratio, which is an assessment of its leverage, calculated as interest-bearing liabilities minus cash or cash equivalents, and divided by its profit in EBITDA.
“Although the leading branded pharmaceutical companies share many common characteristics—including a strong competitive advantage reflecting differentiated products with premium pricing and limited sensitivity to the business cycle—we see meaningful variation in business strength across the sector,” S&P wrote.
The report, titled "How Business Strength Varies Across Top Branded Pharmaceutical Companies," also gave a top rating in the business risk category to Sanofi, Novartis, AstraZeneca, Pfizer and GSK.
The difference with J&J and Roche however, was that they also placed at the top with their financial risk, categorized as “minimal.” The financial risk profile of Sanofi, Novartis and AZ was in the next best category—“modest,” while the financial risk profile for Pfizer and GSK was labeled as “intermediate.”
Meanwhile, Novo Nordisk and Eli Lilly, who have seen their share prices skyrocket along with the booming sales of their diabetes and obesity products, were slotted in the next best, or “strong” category, for their business risk. While Novo was placed in the top financial risk category, “minimal,” Lilly’s financial risk was a notch below at “modest.”
Novo and Lilly are the top two companies in the industry by a significant margin when measured by market cap, but S&P says their diversification is weaker than that of the previously mentioned powerhouse companies.
“Both Eli Lilly and Novo Nordisk have higher focus in products for a single disease (diabetes) than similar peers. We expect this will decline, helped by strong revenue growth in (new) GLP-1 based products approved for obesity,” S&P wrote. “Although GLP-1 based products have shown benefits beyond obesity and type-2 diabetes, we don’t currently view them as having the same qualitative diversity because it’s not yet clear whether these potential benefits accrue independent of or because of the weight loss they provide.”
Also tabbed as “strong” in the business risk category were Merck, AbbVie, Bristol Myers Squibb, Takeda and Amgen. As to financial risk, Merck ranks with Lilly as having “modest” risk, while AbbVie, BMS and Takeda were a slot below, at “intermediate.” Amgen, which in recent years made several acquisitions, stood out as the only one of the 17 drugmakers in the study with financial risk termed “significant.”
Ranking at the bottom, with “satisfactory” business risk profiles, likely due to the lack of depth in their portfolios, are Biogen, Regeneron and Gilead Sciences. On the flip side, these companies have solid financial risk, with Biogen and Regeneron pegged a “minimal,” while Gilead received “modest” financial risk rating.
Breaking down the companies individually, J&J’s primary strength relative to other companies is its scale, according to S&P. With $85 billion in revenue in 2023, J&J’s sales were well ahead of second-place Roche, which generated revenue of 58.72 billion Swiss francs ($65 billion).
“While we believe greater scale can confer certain competitive advantages, such as greater economies of scale, capabilities, and negotiating power of larger companies, we believe the correlation with our assessment of business risk also reflects the greater diversification and competitive position (market leadership and market share) associated with larger scale,” S&P explained.
Meanwhile, Roche’s greatest strength, according to S&P, is its sheer number of blockbuster products at 15 compared to 14 for J&J, 13 for Novartis and a dozen each for AbbVie and AZ.
In 2023, five companies ranked as the most profitable, with EBITDA margins between 45% and 50%. They were Gilead, Amgen, Novo, BMS and AbbVie. When the EBITDA margins are adjusted for differences in relative R&D spending, the top performers were Regeneron, Gilead and Lilly, each with margins over 50%.
Ranking the lowest in EBITDA margins were Pfizer, which was in the mid-teens in both measures, and Sanofi, which was in the 20s.
“The difference in accounting treatment between R&D (which is expensed) and M&A (which is capitalized and amortized) can materially inflate the margins of pharma companies that pursue an M&A-oriented growth strategy (as a substitute for investment in R&D),” S&P explained.
The analysts also considered geographic diversity. With the effects of drug pricing reform coming in the U.S., S&P viewed concentration of business in the U.S. as more of a risk than in the past. Companies with a higher percentage of their sales in the U.S. include Gilead, AbbVie, BMS and Biogen, all at more than 65%. Drugmakers with the least share of their sales in the U.S. are Sanofi and Takeda, at less than 30%.
Another factor S&P weighted was revenue volatility. The analysts examined the last 15 years and eliminated the effects of divestitures and COVID-19 sales to discover that the companies with the most revenue stability were Regeneron, Amgen and Novartis, as none saw an annual sales slide of more than 5%. At the other end of the spectrum, with the most volatility, were Biogen, BMS, AZ, Gilead and Lilly, all with an annual sales slide of at least 15% at some point during the period.
Overall, companies in the biopharma industry show more combined strength than firms in other industries, S&P wrote in its summary.
“The top branded pharmaceutical companies have strong investment-grade ratings based on attractive and highly profitable business models, combined with conservative adjusted net leverage and strong cash flow,” S&P wrote. “These models share many positive characteristics, including limited sensitivity to the business cycle, high barriers to competition, and very healthy profitability, with EBITDA margins averaging 30% to 40%––more than any other industrial sector.”