Historically, research-based pharmaceutical companies have not focused rigorously on cash management, as the industry enjoyed high operating margins and strong balance sheets. As a result, a cash culture has been far from prevalent.
The pharmaceutical industry is in the midst of a substantial transformation, with WC management frequently cited as a critical element of this change. Our latest findings for 2009 reveal an overall deterioration in WC performance compared with 2008.
This means that the WC gains achieved between 2000 and 2005 have been fully reversed in the last four years. Remarkably, out of the 14 companies in our survey, only six companies reported improved performance since 2000.
Much of the deterioration in WC performance between 2005 and 2009 came as a result of higher receivables and inventories.
Several factors – some of them conflicting – may explain the reported variations in performance over the different periods under review.
- The effects of some of the industry’s recent WC initiatives are only expected to manifest themselves gradually, assuming changes are sustainable.
- A contributing factor to the weakness in receivables performance was the rising proportion of non-US sales in the total, as payment terms with customers are longer in most countries than with US-based customers. Change to the distribution arrangements taking place in many countries have also played a part. Ongoing consolidation in the European wholesale market may have been a negative influence. More recently, performance appears to have suffered from the decision of US wholesalers to stretch terms with their suppliers.
- Recent inventory performance has been more varied, adversely affected by large variations in levels of specialty chemicals inventories. Since 2000, disciplined inventory management, leaner supply chains and more effective collaboration with wholesalers and pharmacies have delivered major benefits.
- Improved payables performance was primarily the result of a stronger focus on procurement and sourcing.
- Other factors that influenced WC performance include changes in the revenue mix of products, as well as industry consolidation and currency movements.
Comparing the findings between pharmaceutical companies also continue to show a wide disparity in WC performance.
Our report indicates that leading pharmaceutical companies have an aggregate total of at least US$18b and possibly as much as US$37b of cash unnecessarily tied up in WC.
Table: Change in WC in 2009 compared with 2008, 2005 and 2000
This is equivalent to between 3.5% and 7.0% of sales and entirely consistent with the level of benefits that can be achieved when we work with clients where WC has not been a primary focus.
Against this backdrop, who will be appropriately placed to outperform their industry peers and seize opportunities?
It will be those companies that work even more closely with key customers and suppliers, drive ever greater efficiency out of the supply chain, share real-time information about supply and demand, and have robust risk management policies in place.
