Novo, Roche Scored Highest Returns on Invested Capital
Among the largest publicly traded pharmaceutical companies, Novo Nordisk (NYSE:NVO) and Roche (RHHBY) had the highest returns on invested capital during the period from 2011 to 2019, according to a report from the Westhealth Policy Center. At the other end of the spectrum were Abbott Laboratories (NYSE:ABT) and Easai Co. (TSE:4523).
In simplest terms, ROIC is a profitability ratio that indicates just how efficient a company is turning capital into profit. It measures the return that an investment generates for those who have provided capital (i.e., bondholders and stockholders).
ROIC can be important to investors because it is a key measure of management's effectiveness and an important driver of premium shareholder returns, according to a Talk Markets article by Steve Chen, a former Wall Street hedge fund analyst and now managing partner at an investment partnership.
Chen thinks ROIC is the best measure of management performance and the primary driver of equity returns. "Empirical research shows that high ROIC companies tend to outperform significantly those of less profitable firms, regardless of the market climate," he wrote, adding that he gives ROIC the highest weighting for his stock rating system.
During the period from 2011 to 2019, Novo achieved an ROIC of 95% and Roche's was a close second at nearly 86%. Abbott's was a paltry 9.4% and Esai did even worse, coming in at 7.0%. The overall average for the 19 companies on the list was 17.3%.
Interestingly, there didn't seem to be a significant correlation between the stock performance of the percentage leaders and laggards. In fact, just the opposite in the case of Eisai, whose shares grew almost 200% during the period, blowing out of the water Novo's 100% gain and the 118% achieved by Roche. Even Abbott shares climbed a respectable 86%.
It appears the lesson here is that investors consider ROIC an important way to evaluate a company, but other factors need to be considered.
Return on invested capital and total profits
Large pharmaceutical manufacturers
2011 to 2019
Source: Westhealth Policy Center
Company | % Average During Period | Total Profits (in $ millions) |
Abbott Laboratories (NYSE:ABT) | 9.4% | 29,139 |
AbbVie Inc.(NYSE:ABBV) | 36.2% | 65,685 |
Amgen Inc. (NASDAQ:AMGN) | 13.7% | 55,642 |
AstraZeneca (NYSE:AZN) | 19.4% | 47,063 |
Bayer AG (BAYN) | 13.3% | 55,312 |
Biogen Inc. (NASDAQ:BIIB) | 27.0% | 27,896 |
Bristol-Myers Squibb Co. (NYSE:BMY) | 15.8% | 27,662 |
Eisai Co. Ltd. (TSE:4523) | 7.0% | 4,079 |
GlaxoSmithKline (GSK) | 25.5% | 65,467 |
Johnson & Johnson (JNJ) | 18.3% | 125,039 |
Eli Lilly and Co. (LLY) | 19.3% | 33,089 |
Mallinckrodt Plc. (MNK) | 10.9% | 5,916 |
Merck & Co. Inc. (MRK) | 11.9% | 65,950 |
Novartis (NVS) | 10.2% | 72,788 |
Novo Nordisk (NYSE:NVO) | 95.0% | 41,481 |
Pfizer Inc. (PFE) | 14.2% | 119,700 |
Regeneron Pharmaceuticals Inc. (REGN) | 22.7% | 7,364 |
Roche (RHHBY) | 85.9% | 117,732 |
Sanofi (SNY) | 18.4% | 62,900 |
Overall | 17.3% | 1,163,791 |
Disclosure: The author holds positions in Amgen, Bristol-Myers, Johnson & Johnson, Eli Lilly and Pfizer.
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This article first appeared on GuruFocus.
