Working capital report - Cash on prescription

Overall improvement in WC performance in 2013

Variations among pharma companies indicate potential for more improvement

EY - Working capital report - Cash on prescription
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Cash on prescription is the latest in a series of working capital (WC) management reports based on EY research.

The results from our analysis of big pharma in 2013 show an improvement in WC performance from 2012, in sharp contrast with the deterioration seen in the previous two years. Cash-to-cash (C2C) fell by 2%, after rising by 1% in 2012 and 3% in 2011. This reflects the accelerated impact of many of the actions taken in the last 12-24 months.

Change in WC metrics across big pharma, 2013 vs. 2012

EY - big pharma WC performance.

Note: DSO (days sales outstanding), DIO (days inventory outstanding), DPO (days payable outstanding) and C2C (cash-to-cash), with metrics calculated on a sales-weighted basis Source: EY analysis, based on publicly available annual financial statements.

Number of big pharma companies experiencing % change in WC metrics, 2013 vs. 2012

EY – big pharma WC performance.

Source: EY analysis, based on publicly available annual financial statements.

For the pharmaceutical industry, managing WC has become a critical element of its transformation, as it embraces a less risky, more sustainable and more cost-effective operating business model. This not only boosts return on capital, but also offers potential for higher cash returns to shareholders.

For Japanese pharmaceuticals, 2013 was also a year of improved WC performance. Their C2C was down 2% from 2012 levels, but remained well above the level of 2007.

Variations in WC performance between pharmaceutical companies point to significant potential for improvement. Key initiatives should include:

  • Managing WC as a strategic initiative, including aligning executive compensation with appropriate performance measures
  • Further streamlining of manufacturing and supply chains
  • Improving demand forecasting processes
  • Closer collaboration and process alignment with customers and suppliers
  • Better coordination between functions and processes in supply, planning, manufacturing, procurement and logistics
  • Improvements in billing and cash collections, more effective management of payment terms, and better monitoring of rebates and other sales incentives
  • Intensification of spend consolidation and standardization
  • Implementation of more robust supply chain risk management policies

Barring any material changes in payment policies with main wholesalers, our expectation for 2014 is that WC performance for big pharma companies will improve further. But the results are also likely to show even wider divergences between individual companies as some embrace more substantial and sustainable operational and structural changes in the way they address WC.