The big pharmaceutical companies are under siege from declining rate of sales growth, slowing pipeline productivity, and pricing pressures from generic drug manufacturers. As customer consolidation and government policy on price control are adding to their woes, attention on working capital is acquiring urgency.
An Ernst & Young analysis of 16 largest US and European pharmaceutical companies by sales, ?Pharmaceutical companies and working capital management,? finds that the majority of big pharma players have a significant opportunity to release cash from working capital, between $17 billion and $35 billion, which is the equivalent of 3% to 7% of sales. This opportunity is distributed across the various components of working capital, with 40% from payables and 30% each from receivables and inventories.
The analysis notes that the industry has made progress in reducing levels of working capital since 2000. In the last two years, however, 70% of the achievement gains in the previous five years have reversed.
?In the past, pharmaceutical companies have not focused as rigorously on working capital management as other industries,? an Ernst & Young official said. With high operating margins, strong balance sheets, and fears of running out of critical patient medication, a cash culture never fully developed, the analysis said.
The full cash and cost benefits could be realised within 12 to 24 months from the launch of an intense working capital programme, according to the report.
The analysis finds that the best opportunities for improved working capital management include: incentivising cash performance; tightening management of payment terms for customers and suppliers; improving credit, billing and collections processes, establishing leading demand forecasting processes; and building greater linkage and closer coordination across the entire supply chain.
The study also notes that there is a wide range of performance across the industry in the areas of cash-to-cash cycle, receivables, inventory and payables, indicating significant potential for improvement.
Aligning performance of each pharma company with the industry average and with the upper quartile indicates potential cash opportunities of between $11 billion and $16 billion, respectively, for cash-to-cash performance; between $5 billion and $11 billion for receivables performance; between $5 billion and $10 billion for inventory performance; and between $7 billion and $14 billion for payables performance.