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Article | Executive Pay Matters

Biopharma industry pay-for-performance update: a challenging journey towards improved performance

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By Mitchell Bardolf and Jang Han | October 2, 2019

How will near-term challenges to improve the biopharma industry’s performance impact incentive payouts?

The biopharma industry will be challenged to improve performance in the face of continued pricing pressures and global tensions and uncertainties. Financial results for the first half of 2019 largely trended below the same 2018 time frame, and are tracking below analysts’ expectations for the year, suggesting below -target incentive payouts despite continued positive shareholder returns.

Our quarterly update highlights 2019 biopharma industry performance trends and expectations, complementing our last update that focused on the pay implications of 2018 performance. Both annual and long-term incentive payouts in 2018 were above target, reflecting stronger than expected performance partly due to a strong market (for more details, see “Biopharma industry 2018 pay-for-performance update: strong 2018 performance yields above-target incentive payoutsExecutive Pay Matters, July 16, 2019).

Figure 1 reviews early 2019 expectations compared with 2018 results. Analysts’ expectations were quite conservative, lower than the actual results in 2018 across key measures, with the exception being return on equity (ROE), a trend observed in the broader S&P 1500.

Figure 1. Biopharma industry analysts’ growth expectations for 2019
Figure 1. Biopharma industry analysts’ growth expectations for 2019

Source: S&P's Capital IQ database

Figure 2 shows financial performance results are generally in a downward trend for the first half of this year compared with the same six-month period last year:

  • Income statement growth and margins saw a significant decline versus last year except for net income margin, which saw a slight uptick.
  • Balance sheet performance remained flat or declined compared with the same period last year.
  • Cash-flow growth saw a steep decline compared with the same time last year, well below analysts’ estimates.
 
  Health care biopharma industry median*  
Measures 1st half 2018 1st half 2019 2019 trend
Income statement      
Revenue growth 11% 4% This is a red arrow pointing down indicating a downward trend
Earnings before interest and taxes (EBIT) growth 12% 3% This is a red arrow pointing down indicating a downward trend
Earnings per share (EPS) growth 17% 7% This is a red arrow pointing down indicating a downward trend
EBIT margin 21% 17% This is a red arrow pointing down indicating a downward trend
Net income margin 11% 13% This is a green arrow pointing up indicating and upward trend
       
Balance sheet      
Return on net assets 12% 9% This is a red arrow pointing down indicating a downward trend
ROE 14% 14% This is a yellow arrow pointing to the right indicating no significant change in the trend
EBITDA**/interest expense ratio 9 9 This is a yellow arrow pointing to the right indicating no significant change in the trend
       
Cash flow      
Cash-flow growth 13% -1% This is a red arrow pointing down indicating a downward trend
Cash-flow return on net assets 11% 10% This is a red arrow pointing down indicating a downward trend
       
Market-based measures      
Price/earnings ratio 26 26 This is a yellow arrow pointing to the right indicating no significant change in the trend
Total shareholder return (TSR) 3% 13% This is a green arrow pointing up indicating and upward trend
       

Figure 2. Biopharma industry first half performance scorecard

*Financials through first two quarters; TSR represents composite performance through June 30, 2019
**Earnings before interest, taxes, depreciation and amortization
Source: S&P's Capital IQ database

For the past few years, the industry’s performance has been relatively strong, with corresponding levels of incentive payouts. But with the industry’s actual performance tracking below analysts’ conservative expectations, the chances of below-target payouts are good. The end result will largely depend on how companies handled their incentive plan goal-setting.

Global economic tension and ongoing pricing pressures will challenge the industry in the second half of 2019. However, there is cause for optimism as mergers and acquisitions and pipeline development offer the potential for continued growth.

As part of the annual goal-setting process, more companies are bringing additional analytics to the discussion, including predictive analytics. Willis Towers Watson’s predictive performance model (PPM) helps clients measure the probability of achieving goals and aligning pay and performance. To learn more about PPM, follow the link here and watch a brief video (mid-page) explaining how our model can help you calibrate your incentive plan goals.

For a look at first half results for 2019 in the broader S&P 1500, see “S&P 1500 pay-for-performance update: Will weaker 2019 performance reduce incentive payouts?Executive Pay Matters, October 2, 2019.

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