Lots of bad news for Schering-Plough today. You can read that here.
But if you go back to S-P’s second quarter earnings call, you’ll note that the company is on a cost-cutting drive.
They have a name for that drive, the “Productivity Transformation Program.”
So, just how productive is it?
CFO Robert J. Bertolini said this:
“To date, we have achieved about $100 million in savings, including about $70 million this quarter. Most of the savings were in SG&A.”
Sounds pretty impressive. But does it hold up to analysis?
Regular readers will remember that NRx recently did an experiment regarding SG&A at drug companies. I asked, How efficiently do drug companies handle their selling, general and administrative budgets? And how profitable are the results of those budgets? By comparing SG&A to revenues and gross profits, we can plot the growth – or lack thereof – of the productivity of SG&A.
(Don’t understand this? All you need to “get” is that we’re figuring how many dollars each company makes in revenue and gross profit for each single dollar it spent on marketing.)
Here’s a chart of growth rates of revenue and gross margin yield from S-P’s SG&A spend. (In general, you want to see the pink and blue lines either flat or pointing upward, and above the 0% level.)
As you can see, despite cutting $100 million ($70 million this quarter!) the growth in S-P’s yields declined. The revenue yield of its marketing investment actually declined into negative territory. And the growth in profitability of that investment slowed considerably, from nearly 15% to less than 10%, meaning that the company is currently destroying the value of its SG&A investments, not increasing it.