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Insight & Intelligence : Jul 28, 2009
Improving Working Capital—The Next Step in Big Pharma’s Transformation Efforts
Better management of working capital could help firms get a better return rather than just driving top-line growth.!--h2>
Pharmaceutical companies have long been the envy of other industries, given their strong balance sheets, high operating margins, and access to cash. As a result of these competitive advantages, members of the industry have historically paid little attention to releasing cash from their working capital, which is commonly defined as the difference between a company’s current assets and its current liabilities.
Cash on the prescription!, Ernst & Young’s new report on pharmaceutical companies and working capital management, provides an analysis of the performance of the 16 largest U.S. and European pharmaceutical companies by sales, based on their publicly available financial statements. While the report does not disclose the performance of individual pharmaceutical companies, it found that these players have an aggregate total of between $22 billion and $47 billion in cash unnecessarily tied up in working capital. Even for an industry as cash-rich as pharma this is a significant amount of capital, equivalent to between 4% and 9% of annual sales in the industry.
The opportunities for companies to release cash are distributed across all traditional components of working capital, with 35–40% each coming from payables and inventories and 25–30% coming from receivables.
There have been several high-profile mergers and acquisitions in the pharmaceutical sector in the last year. There are expectations for further consolidation given revenue challenges and the need for greater returns on R&D efforts. This consolidation could advance companies’ efforts to improve their working capital management by helping the merged entity leverage relationships with customers and suppliers and implement best practices.
Pharmaceutical companies in recent years have increasingly sought to standardize and rationalize their global supply chain and manufacturing networks. Steps taken by the industry include outsourcing noncore operations, globalizing procurement activities, and rescaling business processes.
The impact of the current economic and financial crisis was not fully reflected in the industry’s operating and financial performance in 2008, so its impact could not be fully identified in the Cash on the prescription! report. The continuation of current economic conditions, however, will undoubtedly have a greater impact on the industry in 2009, with early indications already pointing to some softening in sales growth.
David Sage is a partner, transaction advisory services, Ernst & Young. The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young. “Cash on the prescription!” relied on publically available data of the 16 largest U.S. and European pharmaceutical companies by sales, which includes Abbott Laboratories, Amgen, AstraZeneca, Bayer, Bristol-Myers Squibb, Eli Lilly, GlaxoSmithKline, Johnson & Johnson, Merck & Co., Merck KGaA, Novartis, Pfizer, Roche, sanofi-aventis, Schering-Plough, and Wyeth.
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