Ca s h o n
p r e s c r ip t io n
P h a r m a c e u t ic a l c o m p a n ie s a n d
w o r k in g c a p it a l m a n a g e m e n t
2016
Contents
Summary..............................................................3
Background...........................................................3
Weaker WC performance in 2015...........................4
Current WC performance stronger than in 2007......6
Case studies..........................................................8
Wide variations in current WC performance
continues .............................................................8
Opportunities going forward...................................10
How EY can help....................................................11
Methodology.........................................................11
Glossary................................................................11
Contacts................................................... Back cover
2
Cash on prescription
S u m m a ry
Cash on prescription i s p a r t o u r a n n u a l s e r i e s o f i n d u s t r y r e p o r t s , b a s e d o n E Y
r e s e a r c h o n w o r k in g c a p it a l m a n a g e m e n t .
W it h r ev enu es u nder p r essu r e, t h e p h ar m ac eu t ic al indu st r y
h as c ont inu ed t o ev olv e r ap idly — c om p anies ar e br ing ing new
p r odu c t s t o m ar k et , r esh ap ing t h eir p or t f olios of bu sinesses and
op t im iz ing t h eir c ost bases, w h ile seek ing t o g r ow ear ning s and
im p r ov e c ash r et u r ns t o sh ar eh older s.
A g ainst t h is c h alleng ing bac k g r ou nd, big p h ar m a c om p anies
r ep or t ed w eak er w or k ing c ap it al (W C ) p er f or m anc e in 2015
c om p ar ed w it h 2014, w it h c ash - t o- c ash (C 2C ) r ising 2% .
2015’ s set bac k p ar t ly r ev er sed t h e p r ev iou s t w o year s’ p r og r ess.
H ow ev er , big p h ar m a st ill m anag ed t o r ec ov er m or e t h an t h e
ground lost in WC performance during the previous five years
(2007 – 12). T h e g r ou p ’ s C 2C w as 2% low er in 2015 t h an in 2007 .
A t t h e sam e t im e, p r og r ess in W C r em ained f ar f r om u nif or m , w it h
som e bu sinesses c ont inu ing t o im p r ov e t h eir p er f or m anc e and
ot h er s f ailing t o do so.
T h e w ide v ar iat ions in W C p er f or m anc e am ong p h ar m ac eu t ic al
companies point to significant potential for improvement. While
t h ese p er f or m anc e g ap s m ay r esu lt p ar t ly f r om v ar ying bu siness
m odels, t h ey also h ig h lig h t f u ndam ent al dif f er enc es in t h e
int ensit y of m anag em ent f oc u s on c ash and t h e ef f ec t iv eness of
W C m anag em ent p r oc esses.
T o c ap it aliz e on t h is op p or t u nit y, p h ar m ac eu t ic al c om p anies w ill
need t o em br ac e m or e su bst ant ial and su st ainable c h ang es in
t h e w ay t h ey do bu siness and m anag e t h eir W C . B u sinesses m u st
bec om e ev en m or e r esp onsiv e and r esilient , w h ile deliv er ing
c ont inu ou s p r oc ess im p r ov em ent s and c ost r edu c t ions.
T o ac h iev e t h is, c om p anies w ill need:
• A st r at eg ic f oc u s on W C t h r ou g h ou t t h e year , w it h t h e w h ole
bu siness eng ag ed and inc ent iv iz ed t o dr iv e im p r ov em ent
• I nc r eased r esp onsiv eness t o c h ang e, w it h lean and ag ile
m anu f ac t u r ing and su p p ly c h ain solu t ions dep loyed f or
dif f er ent p r odu c t s or m ar k et seg m ent s, as w ell as t h or ou g h
c r oss- f u nc t ional c oop er at ion and ef f ec t iv e c ollabor at ion w it h
w h olesaler s and ot h er p h ar m ac eu t ic al bu yer s
• S u p p ly c h ains t h at ar e r esilient , t h r ou g h r obu st r isk
m anag em ent p olic ies, alt er nat iv e sou r c ing and enh anc ed
v isibilit y ac r oss t h e end- t o- end su p p ly c h ain
• S t r ong disc ip line in t er m s and t r ansac t ions, int er nal c ont r ols
ov er c ash and W C , and ap p r op r iat e p er f or m anc e m easu r es
in p lac e
• C lear u nder st anding and ef f ec t iv e m anag em ent of t h e c om p lex
and ev olv ing t r ade- of f s am ong c ash , c ost s, deliv er y lev els and
t h e r isk s t h at eac h c om p any m u st t ak e
W C im p r ov em ent init iat iv es ar e t yp ic ally ear ning s- ac c r et iv e. I n
addition to increased levels of cash, significant economic benefits
m ay ar ise f r om p r odu c t iv it y im p r ov em ent s, r edu c ed t r ansac t ional
and op er at ional c ost s, low er lev els of bad and dou bt f u l debt s,
and r edu c ed inv ent or y obsolesc enc e. T h e w ide v ar iat ions in W C
p er f or m anc e bet w een t h e p h ar m ac eu t ic al c om p anies in ou r
study (see Methodology) indicate there is significant potential
f or im p r ov em ent t h at w e est im at e t o be u p t o U S $ 47 billion in
ag g r eg at e.
B a c k g ro u n d
G l o b a l p h a r m a c e u t i c a l r e v e n u e c o n t i n u e d i t s s o l i d g r o w t h i n 2015, r i s i n g 9% o v e r
2014 a f t e r a n i n c r e a s e o f 7% t h e y e a r b e f o r e .
T h e U S m ar k et w as ag ain t h e p r im ar y dr iv er , w it h U S m ar k et sh ar e
r ising f r om 45% in 2014 t o 49 % in 2015. T h is ac c eler at ed g r ow t h
w as du e in p ar t t o t h e r edu c ed im p ac t of g ener ic - dr u g inc u r sion
and t h e lau nc h of new p r odu c t s. T h e nu m ber of new dr u g s
ap p r ov ed by t h e F DA c ont inu ed t o su r g e. I n addit ion, t h er e w as a
further significant increase in prices for branded products.
af t er ac h iev ing st abilit y t h e year bef or e. A c t iv it y w as adv er sely
af f ec t ed by t h e c ont inu ed sales er osion of p r odu c t s c om ing of f
p at ent , as w ell as p r ic ing p r essu r es and m ov em ent s in ex c h ang e
r at es. I n addit ion, c onsolidat ion am ong U S insu r er s and h ealt h
c ar e p r ov ider s h as g iv en p ayer s m or e bar g aining p ow er ov er
p h ar m ac eu t ic al c om p anies.
I n c ont r ast , t h e m aj or m ar k et s in E u r op e r ep or t ed f alling sales,
af f ec t ed by t h e im p ac t of p at ent ex p ir y, c om p et it ion f r om g ener ic
dr u g s, and inc r easing p r essu r e t o c ont ain h ealt h c ar e sp ending ,
esp ec ially on m edic ines. E u r op e’ s m ar k et sh ar e f ell t h r ee p oint s
t o 21% .
A nu m ber of ot h er t r ends c ont inu e t o im p ac t p h ar m ac eu t ic al
bu sinesses’ s abilit y t o m anag e w or k ing c ap it al; indu st r y c ost
p r essu r es; inc r easing p r odu c t dev elop m ent sp ec ializ at ion; dr iv ing
m anu f ac t u r ing int o sm aller and m or e f r eq u ent bat c h p r odu c t ion;
ong oing c onsolidat ion of su p p lier s; m anu f ac t u r er s and bu yer s;
r ising ou t sou r c ing ; new allianc es and c ollabor at ions; ex p ansion
int o new m ar k et s and dist r ibu t ion c h annels; c h ang ing r eg u lat or y
r eq u ir em ent s; m or e c om p lex dem ands on log ist ic s; and t h e need t o
m aint ain p r odu c t int eg r it y and sec u r it y.
Rapid-growth markets and Asia-Pacific were relatively stable at
23% of t h e t ot al.
A g ainst t h is bac k g r ou nd, sales f or t h e 15 big p h ar m a c om p anies in
ou r r esear c h (see Met h odolog y) dr op p ed 4% c om p ar ed w it h 2014,
P h a r m a c e u t i c a l c o m p a n i e s a n d w o r k i n g c a p i t a l m a n a g e m e n t 2016
3
W e a k e r W C p e r f o r m a n c e f o r b ig p h a r m a
i n 2015
T h e
W C
d ro
b e t
p ro
re s u
p e rfo
p p in g
w e e n
c e s s e
lt s
rm
b y
U S
s .
f r o m o u r a n a ly s is
a n c e c o m p a re d w
4% t h e y e a r b e f o
$ 22 b i l l i o n a n d U
o f
it h
re .
S $
b ig p h a r m
2014. T h
B a s e d o n
47 b i l l i o n
a i n 2015 s h o w
e g r o u p ’ s C 2C w
o u r re s e a rc h , p
o f c a s h u n n e c e s
d e
a s
h a r
s a r
te r
u p
m a
ily
Ch a n g e i n W C m e t r i c s a c r o s s t h e i n d u s t r y , 20 1 4 – 1 5
B ig p h a r m a
20 1 5
Ch a n g e 20 1 5/ 20 1 4
DS O
64. 9
1%
DI O
52. 4
2%
DP O
34. 3
0%
C2C
82. 9
2%
N u m b e r o f c o m p a n i e s a n d % c h a n g e i n W C m e t r i c s , 20 1 5 v s . 20 1 4
DSO
R edu c t ion
I nc r ease
DIO
DPO
C2C
> 5%
3
3
3
1
0% – 5%
1
4
2
5
> 5%
3
7
6
6
0% – 5%
8
1
4
3
N ot e: DS O (days sales ou t st anding ), DI O (days inv ent or y ou t st anding ), DP O (days p ayable ou t st anding ) and
C 2C (c ash - t o- c ash ), w it h m et r ic s c alc u lat ed on a sales- w eig h t ed basis.
Source: EY analysis, based on publicly available annual financial statements.
4
Ca s h o n p r e s c r i p t i o n
io r
2%
c o
t ie
a t in g
, a fte r
m p a n ie s h a v e
d u p in W C
T h i s w e a k e r W C p e r f o r m a n c e o v e r a l l i n 2015 w a s d r i v e n b y f u r t h e r d e t e r i o r a t i o n
i n i n v e n t o r y p e r f o r m a n c e , w i t h D I O u p 2% . P e r f o r m a n c e i n r e c e i v a b l e s w a s a l s o
p o o r e r , w i t h D S O u p 1% .
of 15 r ep or t ed a h ig h er DI O (inc lu ding sev en of t h em t h at
saw an inc r ease of m or e t h an 5% ). U sing c ost t o sales (C O S )
r at h er t h an sales w ou ld h av e sh ow n a sim ilar r esu lt . A g ain t h is
year , t h is det er ior at ion in p er f or m anc e w as p r im ar ily c au sed
by c h ang es in t h e p r odu c t sales and inv ent or y m ix f ollow ing
t h e loss of ex c lu siv it y f or a nu m ber of bloc k bu st er s, as w ell
as by t h e need f or h ig h er saf et y st oc k s t o ser v e r ap id- g r ow t h
m ar k et s. T h e ov er all p oor er p er f or m anc e in inv ent or y w as
p ar t ly of f set by addit ional im p r ov em ent s in m anu f ac t u r ing and
su p p ly c h ain op er at ions.
T h e im p r ov em ent in p ayables p er f or m anc e seen in p r ev iou s year s
c am e t o a h alt , w it h DP O r em aining u nc h ang ed year - on- year . A s
m u c h as 9 ou t of 15 c om p anies (or 60% ) r ep or t ed a h ig h er C 2C in
2015 t h an in 2014, w it h 6 of t h em sh ow ing an inc r ease of m or e
t h an 5% .
•
A nu m ber of f ac t or s m ay ex p lain t h ese v ar iat ions in W C
p er f or m anc e, eac h w it h v ar ying im p ac t s on dif f er ent c om p anies:
Co n t i n u e d f o c u s o n W C: B ig p h ar m a c om p anies
c ont inu ed t o p u r su e im p r ov em ent s in W C , f oc u sing on
reconfiguring manufacturing and supply chains to make
t h em leaner , c ollabor at ing m or e c losely w it h w h olesaler s,
im p r ov ing dem and f or ec ast ing ac c u r ac y, m anag ing p aym ent
t er m s f or c u st om er s and su p p lier s m or e ef f ec t iv ely, im p r ov ing
billing and c ash c ollec t ions, c onsolidat ing p r oc u r em ent and
dev elop ing e- sou r c ing , m anag ing ou t sou r c ing ar r ang em ent s
more effectively, creating a more unified shared-services
or g aniz at ion, st andar diz ing p ac k ag ing and sim p lif ying
st r u c t u r es.
•
T r a n s fo r m a t io n o f b u s in e s s p o r t fo lio s :
•
E x c h a n g e r a t e m o v e m e n t s : Mov em ent s in U S dollar
•
W e a k e r r e c e i v a b l e s p e r f o r m a n c e : I n c ont r ast w it h
•
St a b i l i t y i n p a y a b l e s p e r f o r m a n c e : T h e su bst ant ial
P h ar m ac eu t ic al c om p anies c ont inu ed t o r esh ap e t h eir
p or t f olios of bu sinesses, w it h a c om m on g oal t o st r eng t h en
f u t u r e g r ow t h p r osp ec t s w h ile deliv er ing g r eat er v alu e t o
sh ar eh older s. T h is t r ansf or m at ion h as h ad an im p ac t on
last year ’ s ov er all C 2C — and f or som e indiv idu al c om p anies
in p ar t ic u lar — as inv olv ed bu sinesses disp lay dif f er ent W C
r eq u ir em ent s.
t h e p r ev iou s t w o year s, t h e p h ar m ac eu t ic al indu st r y r ep or t ed
w eak er r ec eiv ables p er f or m anc e in 2015, w it h DS O r ising by
1% . E lev en big p h ar m a c om p anies sh ow ed h ig h er DS O . T h is
ov er all t r end in r ec eiv ables p er f or m anc e w as ac h iev ed ag ainst
a bac k g r ou nd of c ont r ast ing t r ends in p aym ent t er m s w it h
w h olesaler s. I n t h e U S , t w o of t h e t h r ee m ain w h olesaler s
r ep or t ed a h ig h er DP O (based on C O S ) in 2015 c om p ar ed w it h
2014, which appears to reflect the impact of acquisitions and
inc r eased p u r c h ases of g ener ic p h ar m ac eu t ic als (w h ic h h av e
long er p aym ent t er m s t h an br and- nam e p h ar m ac eu t ic als)
rather than the benefit of paying late or negotiating longer
t er m s. T h er e w er e also div er g ing t r ends in DP O bet w een
E u r op ean w h olesaler s, su g g est ing t h at t h ey c h ose eit h er
t o ease or t o inc r ease p aym ent p r essu r e du r ing 2015. I n
addition, many of the benefits from improving the collection of
r ec eiv ables, not ably in sou t h er n E u r op ean c ou nt r ies, m ay h av e
been c ap t u r ed.
•
ex c h ang e r at es also p layed som e p ar t in dr iv ing t h e indu st r y’ s
W C p er f or m anc e in 2015. F or c om p anies r ep or t ing in eu r os,
B r it ish p ou nds or S w iss f r anc s, t h e w eak ness of t h ose
c u r r enc ies ag ainst t h e U S dollar c om p ar ed w it h it s av er ag e
lev el du r ing t h e year w as a p osit iv e c ont r ibu t or y f ac t or . I n
c ont r ast , f or c om p anies r ep or t ing in U S dollar s, t h e st r eng t h of
t h e U S dollar ag ainst all m aj or c u r r enc ies at t h e end of t h e year
h ad a neg at iv e im p ac t .
F u r t h e r d e t e r io r a t io n in in v e n t o r y p e r fo r m a n c e :
im p r ov em ent in p ayables p er f or m anc e seen in p r ev iou s year s
c am e t o a h alt in 2015, w it h ov er all DP O u nc h ang ed year on- year . Y et t w o- t h ir ds of big p h ar m a c om p anies m anag ed t o
boost t h eir DP O , inc lu ding six t h at sh ow ed an inc r ease of m or e
t h an 5% . F or t h e lat t er , t h is im p r ov em ent w as dr iv en p r im ar ily
by a f u r t h er ex t ension in p aym ent t er m s, as w ell as by g r eat er
efficiency in procurement and payables processes. Conversely,
t h e t r end t ow ar d c onsolidat ion am ong U S insu r er s and h ealt h
c ar e p r ov ider s m ay h av e h ad a neg at iv e im p ac t on DP O .
2015 saw a det er ior at ion in inv ent or y p er f or m anc e c om p ar ed
w it h 2014, w it h DI O u p 2% . E ig h t big p h ar m a c om p anies ou t
P h a r m a c e u t i c a l c o m p a n i e s a n d w o r k i n g c a p i t a l m a n a g e m e n t 2016
5
C u r r e n t W C p e r f o r m a n c e o f b ig p h a r m a
s t r o n g e r t h a n i n 2007
I n s p i t e o f a d i s a p p o i n t i n g p e r f o r m a n c e i n 2015, b i g p h a r m a s t i l l m a n a g e d t o
im p r o v e W C p e r f o r m a n c e , m o r e t h a n r e c o v e r in g f r o m t h e g r o u n d lo s t d u r in g t h e
y e a r s ( 2007– 12) . I t s C 2C w a s 2% l o w e r i n 2015 t h a n i n 2007.
Ch a n g e i n W C m e t r i c s a c r o s s t h e i n d u s t r y , 20 0 7 – 1 5
B ig p h a r m a
Ch a n g e
20 1 5/ 20 0 7
Ch a n g e
20 1 5/ 20 1 2
Ch a n g e
20 1 2/ 20 0 7
DS O
2%
- 3%
5%
DI O
16%
9 %
6%
DP O
40%
23%
12%
C2C
- 2%
- 5%
3%
N u m b e r o f c o m p a n i e s a n d % c h a n g e i n W C m e t r i c s , 20 1 5 v s . 20 0 7
R edu c t ion
I nc r ease
DSO
DIO
DPO
> 5%
5
3
2
0% – 5%
3
1
0
> 5%
6
11
12
0% – 5%
1
0
1
C2C
9
0
6
0
Source: EY analysis, based on publicly available annual financial statements.
B ig p h ar m a r ep or t ed an inc r ease of 3% in C 2C bet w een 2007
and 2012 (f r om 84. 4 days t o 87 . 3 days) and t h en a dr op of 5%
bet w een 2012 and 2015 (t o 82. 9 days). I t sh ou ld be not ed t h at
t h e st ar t dat e of 2007 f or t h e p er iod u nder analysis h as been
selec t ed t o allow m or e m eaning f u l c om p ar isons of long - t er m
performance, given the subsequent impact of the global financial
c r isis of 2008– 09 on t h e indu st r y’ s v olu m e g r ow t h , p r ic ing ,
r eim bu r sem ent and p aym ent sc h em es.
O v er all, t h is im p r ov em ent in W C p er f or m anc e sinc e 2007 r esu lt ed
f r om m u c h h ig h er DP O (u p 40% ), p ar t ly of f set by a c om binat ion of
h ig h er DI O and DS O (u p 16% and 2% , r esp ec t iv ely). N ine ou t of 15
c om p anies r ep or t ed a low er C 2C in 2015 t h an in 2007 , w it h eac h
one of t h em sh ow ing a dec r ease of m or e t h an 5% .
6
Ca s h o n p r e s c r i p t i o n
•
Sh i f t i n g b u s i n e s s m o d e l s : T h e ong oing t r ansf or m at ion
of the industry’s business models has been a significant
factor influencing C2C over time. Some companies have
c h osen t o p u r su e m er g er s as a m eans of enh anc ing r ev enu e,
while generating significant cost reductions, lowering tax
r at es and r edu c ing R & D r isk . O t h er s h av e op t ed f or a m or e
diversified and less-risky sales growth strategy through
bolt - on ac q u isit ions, c ou p led w it h ag g r essiv e ex p ansion in
r ap id- g r ow t h m ar k et s. A t h ir d st r at eg y h as been t o f oc u s on
f ew er t h er ap eu t ic ar eas, t h r ou g h asset sw ap s and sm all- sc ale
ac q u isit ions, p ar t ner sh ip s and lic ensing deals. P h ar m ac eu t ic al
c om p anies h av e also m ov ed f r om m anag ing f or r ev enu es t o
m anag ing f or r et u r n on a m or e su st ainable and less- r isk y basis.
•
Ch a n g i n g t r a d e - o f f s b e t w e e n c a s h , c o s t s ,
d e l i v e r y l e v e l s a n d r i s k s : C h ang es in W C p er f or m anc e
also reflect the complex and evolving trade-offs between cash,
c ost s, deliv er y lev els and r isk s t h at eac h c om p any m u st t ak e
and m anag e t o dr iv e bu siness g r ow t h , im p r ov e t h e bot t om line
and st r eng t h en t h e balanc e sh eet . O t h er assoc iat ed f eat u r es
inc lu de t h e need f or q u alit y assu r anc e at sev er al p oint s of t h e
su p p ly c h ain and t im ely deliv er y of p r odu c t s t o av oid t h e r isk of
disr u p t ing p at ient s’ liv es.
P er f or m anc e c ont inu es t o be adv er sely af f ec t ed by c h ang es
in dist r ibu t ion and p aym ent p olic y ar r ang em ent s in m any
c ou nt r ies. T h ese inc lu ded a m ov e t ow ar d f ee- f or - ser v ic e and
dir ec t - t o- p h ar m ac y sc h em es and t h e t endenc y f or w h olesaler s
t o p ay lat e or neg ot iat e long er t er m s, w it h c onsolidat ion
p r ov iding t h em w it h t h e op p or t u nit y t o lev er ag e sc ale. A not h er
c ont r ibu t or y f ac t or w as t h e r ising p r op or t ion of sales c om ing
f r om r ap id- g r ow t h m ar k et s, w h er e c u st om er p aym ent t er m s
ar e g ener ally long er and ov er du e p aym ent s h ig h er t h an in
t h e U S . Measu r es t o c ont ain h ealt h c ost s in m any dev elop ed
c ou nt r ies h av e also c ont r ibu t ed t o t h is det er ior at ion. H ow ev er ,
t h e nu m ber of c om p anies r ep or t ing bet t er r ec eiv ables
p er f or m anc e bet w een 2007 and 2015 now ex c eeds t h ose
sh ow ing a det er ior at ion.
•
A s c ar r ying W C bec am e m u c h less c ost ly du r ing t h e year
f ollow ing t h e dec r ease in t h e c ost of c ap it al, som e m ay h av e
c h osen t o t r ade of f W C im p r ov em ent s ag ainst sales g r ow t h ,
margin expansion or increased provision of financing solutions
t o t h eir su p p lier s and c u st om er s.
M u c h s t r o n g e r p a y a b l e s p e r f o r m a n c e : P ayables
•
performance has improved significantly since 2007, owing
t o bet t er m anag em ent of t h e p r oc u r em ent and p ayables
p r oc ess, inc lu ding m anag ing t er m s m or e ef f ec t iv ely
(not ably v ia ex t ended p aym ent t er m s). C onsolidat ion in t h e
p h ar m ac eu t ic al indu st r y w as a f u r t h er p osit iv e f ac t or , as it
c r eat ed lar g er c om p anies w it h g r eat er bu ying p ow er , c ap able
of ex t r ac t ing bet t er c ash t er m s f r om su p p lier s. C onv er sely,
som e c om p anies m ay h av e p u r su ed a deliber at e p olic y of
t r ading of f im p r ov em ent s in p ayables ag ainst r edu c t ions in
p u r c h asing c ost s. C h ang es in sou r c ing st r at eg ies also p layed a
r ole. E v er y c om p any bu t t w o m anag ed t o im p r ov e it s p ayables
p er f or m anc e sinc e 2007 .
W e a k r e c e i v a b l e s p e r f o r m a n c e : I n sp it e of w eak er
r esu lt s in 2015, big p h ar m a m anag ed t o im p r ov e it s
r ec eiv ables p er f or m anc e in t h e p ast t h r ee year s (DS O w as
down 2% between 2012 and 2015), partly reflecting further
p r og r ess in r ec ov er ing t r ade r ec eiv ables in a nu m ber of
sou t h er n E u r op ean c ou nt r ies. B u t t h ese r esu lt s w er e st ill not
sufficient to reverse the deterioration seen in the previous five
year s (DS O u p 5% bet w een 2007 and 2012).
•
Co n t i n u i n g d e t e r i o r a t i o n i n i n v e n t o r y
p e r f o r m a n c e : F or m any p h ar m ac eu t ic al c om p anies, t h e
benefits of becoming much leaner and more agile have been
m or e t h an m it ig at ed by a nu m ber of neg at iv e f ac t or s. T h ese
h av e inc lu ded c h ang es in t h e sales m ix (f ollow ing t h e loss of
ex c lu siv it y f or a nu m ber of bloc k bu st er s), h ig h er saf et y st oc k s
t o ser v e r ap id- g r ow t h m ar k et s, and m ov es t o f ee- f or - ser v ic e
and dir ec t - t o- p h ar m ac y sc h em es.
Most of t h e g ains f r om inc r eased c ollabor at ion bet w een
m anu f ac t u r er s and w h olesaler s also ap p ear t o h av e been
c ap t u r ed in t h e ear ly p ar t of t h e p er iod u nder r ev iew . Many
c u st om er s h av e also adop t ed a sim ilar ap p r oac h t o inv ent or y
m anag em ent t o t h at t ak en by m anu f ac t u r er s, dealing
w it h f ew er su p p lier s and ex p anding t h e u se of j u st - in- t im e
m et h ods and v endor - m anag ed inv ent or y init iat iv es. O v er all,
11 c om p anies r ep or t ed a h ig h er DI O in 2015 t h an in 2007 .
P h a r m a c e u t i c a l c o m p a n i e s a n d w o r k i n g c a p i t a l m a n a g e m e n t 2016
7
W id e v a r ia t io n s in c u r r e n t W C p e r f o r m a n c e
a m o n g b ig p h a r m a c o m p a n ie s
A s i n 2014, b i g p h a r m a c o m p a n i e s c o n t i n u e t o s h o w a l a r g e i n c r e a s e i n t h e
s p r e a d i n C 2C ( a n d i n t h e s p r e a d f o r o t h e r W C m e t r i c s ) i n 2015.
I n 2015, t h e m edian lev el of C 2C f or big p h ar m a w as 88 days, w it h
a spread of 18 days. More specifically, the median levels for DSO,
DI O and DP O w er e 63 days, 56 days and 35 days, r esp ec t iv ely,
w it h sp r eads of 12 days, 14 days and 13 days, r esp ec t iv ely.
H ow ev er , a deg r ee of c au t ion sh ou ld be ex er c ised w h en r ev iew ing
indiv idu al W C p er f or m anc es, du e t o c ont inu ing dif f er enc es in
financial reporting and disclosure.
T h er e ar e also a nu m ber of dr iv er s t h at need t o be c onsider ed
w h en c om p ar ing c u r r ent W C p er f or m anc e, inc lu ding p aym ent
p r ac t ic es, lev els of ou t sou r c ing , allianc e and c ollabor at ion
ar r ang em ent s, inv ent or y ac q u isit ion st r at eg ies and ex p osu r e
t o g ener ic s.
Ca s e s t u d i e s
G l o b a l W C r e d u c t i o n p r o g r a m : E Y w as c h osen by a lar g e p h ar m ac eu t ic al c om p any t o dev elop a g lobal W C r edu c t ion
program. This program involved defining roles and responsibilities for WC across all relevant functions, validating reporting
p r oc esses w it h r elev ant st ak eh older s and su p p or t ing W C dec ision- m ak ing , r ev iew ing t h e ex ist ing W C p r oc ess and ident if ying
ar eas f or im p r ov em ent , dev elop ing det ailed ac t ion p lans t o im p lem ent leading p r ac t ic es and m easu r e p r og r ess t h r ou g h t h e
desig n of ap p r op r iat e K P I s, and p u t t ing in p lac e t h e r ig h t inc ent iv es t o m ot iv at e and c h ang e int er nal beh av ior s.
“ Pu r c h a s e - t o - p a y ” p r o c e s s i m p r o v e m e n t : E Y w as eng ag ed t o im p r ov e t h e m anag em ent of a p h ar m ac eu t ic al c lient ’ s
“ p u r c h ase- t o- p ay” p r oc esses. T h e p r og r am inv olv ed seg m ent ing t h e su p p lier base ac c or ding t o p aym ent t er m s, t r ig g er and
f r eq u enc y, r eneg ot iat ing and h ar m oniz ing t h e p aym ent p r ac t ic es f or eac h seg m ent , w h ile v er if ying c om p lianc e, er adic at ing t h e
r oot c au ses of inv oic e p r oc essing delays, and int r odu c ing r ep or t s and m et r ic s t o m onit or and assess p r og r ess.
In v e n t o r y m a n a g e m e n t i m p r o v e m e n t : A p h ar m ac eu t ic al c om p any h ad p u r su ed a nu m ber of init iat iv es t o im p r ov e
it s inv ent or y m anag em ent ov er a t h r ee- year p er iod bu t f elt it s p er f or m anc e c ou ld st ill be im p r ov ed. A n E Y p r oj ec t t eam w as
eng ag ed t o r ev iew t h e ex ist ing p r oc esses and desig n an ac t ion p lan t o r edu c e inv ent or y lev els. I nv ent or y lev els w er e c alc u lat ed
to reflect the characteristics of each stock-keeping unit (SKU), including supply lead times, forecast accuracy, order-fill rate goals
and m inim u m or der q u ant it ies. F or ec ast ac c u r ac y w as im p r ov ed v ia t h e p lanning p r oc ess, w h ile lead t im es w er e r edu c ed f or
k ey p r odu c t s. T h is p r og r am led t o an ov er all r edu c t ion in inv ent or y lev els and w r it e- of f s, alt h ou g h som e S K U s r eq u ir ed h ig h er
inv ent or y lev els t o su p p or t im p r ov ing ser v ic e lev els.
8
Ca s h o n p r e s c r i p t i o n
W C p e r f o r m a n c e d i s t r i b u t i o n a m o n g b i g p h a r m a c o m p a n i e s , 20 1 5
M e d ia n
T o p q u a r t ile
B o t t o m
q u a r t ile
St a n d a r d d e v i a t i o n
DS O
63
59
7 1
12
DI O
56
41
63
14
DP O
35
46
24
13
C2C
88
7 6
9 7
1 8
W C p e r f o r m a n c e p e r b i g p h a r m a c o m p a n y , 20 1 5
C2C (based on sales)
89 88 88 88
83 81
100
76 75
60
63
55
49
40
20
20
Days
60
40
70 68 67
63 63
66 64
63 63 62 61 61
57 57 56
50
Median
2015
DPO (based on sales)
60
58 57 56 56
46 45 42 41
45
32 32
20
0
78 71
68
0
Median
2015
DIO (based on sales)
80
82
60
40
0
94
80
Median
2015
27
Days
Days
80
120
Days
120 110
103 99 99
96
100
DSO (based on sales)
30
53 51
47 46 46
40 38
35 35
25 25 24 23
15
0
19 18 16
Median
2015
Source: EY analysis, based on publicly available annual financial statements.
P h a r m a c e u t i c a l c o m p a n i e s a n d w o r k i n g c a p i t a l m a n a g e m e n t 2016
9
O p p o r t u n it ie s g o in g f o r w a r d
T h e w id e v a r ia t io n s in W C p e r f o r m a n c e b e t w e e n p h a r m a c e u t ic a l c o m p a n ie s
revealed by our research point to significant potential for improvement —
a m o u n t i n g t o b e t w e e n U S $ 22 b i l l i o n a n d U S $ 47 b i l l i o n f o r b i g p h a r m a .
T h is r ang e of c ash op p or t u nit y h as been c alc u lat ed by c om p ar ing
t h e p er f or m anc e of t h e W C c om p onent s of eac h c om p any w it h
t h at of t h e av er ag e (low est im at e) and t h e u p p er q u ar t ile (h ig h
est im at e) of it s su b- p eer g r ou p . E v en at t h e t op end of eac h r ang e,
ou r ex p er ienc e ac r oss m any p r oj ec t s, indu st r ies and g eog r ap h ies
sh ow s t h at a dedic at ed f oc u s on W C m anag em ent c an of t en r ealiz e
r esu lt s at or abov e t h is lev el.
eq u iv alent t o bet w een 4. 2% and 8. 8% of t h eir ag g r eg at e sales.
Note that the top range of cash opportunity identified in 2014 is
low er t h an a year bef or e, w h en it w as bet w een 4. 5% and 8. 9 % .
P h ar m
op p or t
p r ac t ic
c onsu m
ac eu t ic al c om p anies m ay be able t o ident if y addit ional
u nit ies f or W C im p r ov em ent s by ex am ining t h e
es of leading W C p er f or m er s in ot h er indu st r ies, su c h as
er p r odu c t s.
O n t h is basis, big p h ar m a c om p anies h av e bet w een U S $ 22 billion
and U S $ 47 billion of c ash u nnec essar ily t ied u p in W C p r oc esses,
W C c a s h o p p o r t u n i t y f o r b i g p h a r m a , 20 1 5
Ca s h o p p o r t u n i t y
V a l u e ( U S$ b )
% W Cs c o p e *
% s a le s
A v e ra g e
U p p e r q u a r t ile
A v e ra g e
U p p e r q u a r t ile
A v e ra g e
U p p e r q u a r t ile
5
10
5%
11%
1. 0%
1. 9 %
I nv ent or ies
9
18
12%
24%
1. 8%
3. 4%
P ayables
8
19
15%
37 %
1. 4%
3. 5%
47
10%
21%
4. 2%
8. 8%
R ec eiv ables
T o ta l
22
* W C sc op e = su m
of t r ade r ec eiv ables, inv ent or ies and ac c ou nt s p ayable
Source: EY analysis, based on publicly available annual financial statements.
10
Ca s h o n p r e s c r i p t i o n
H o w E Y c a n h e lp
T h e g lo b a l E Y n e t w o r k o f d e d ic a t e d w o r k in g c a p it a l p r o f e s s io n a ls h e lp s
c lie n t s t o id e n t if y , e v a lu a t e a n d p r io r it iz e a c t io n a b le im p r o v e m e n t s t o lib e r a t e
significant cash from WC, through sustainable changes to commercial and
o p e r a t io n a l p o lic ie s , p r o c e s s e s , m e t r ic s a n d p r o c e d u r e a d h e r e n c e .
W e c an assist or g aniz at ions in t h eir t r ansit ion t o a c ash - f oc u sed
c u lt u r e and h elp im p lem ent t h e r elev ant m et r ic s. W e c an also
identify areas for improvement in cash flow forecasting practices,
t h en assist in im p lem ent ing p r oc esses t o im p r ov e f or ec ast ing and
h elp c r eat e t h e f r am ew or k s t o su st ain t h ose im p r ov em ent s.
W C im p r ov em ent init iat iv es ar e t yp ic ally ear ning s- ac c r et iv e. I n
addition to increased levels of cash, significant economic benefits
m ay ar ise f r om p r odu c t iv it y and inv ent or y im p r ov em ent s, c ost
sav ing s and low er lev els of bad and dou bt f u l debt s. W h er ev er you
do bu siness, ou r W C p r of essionals ar e t h er e t o h elp .
M e t h o d o lo g y
G lo s s a r y
T h
of
p h
th
p h
• DSO ( d a y s s a l e s o u t s t a n d i n g ) : year - end t r ade
is r ep or t is based on a r ev iew of t h e W C p er f or m anc e
big p h ar m a, w h ic h is c om p osed of t h e 15 lar g est
ar m ac eu t ic al c om p anies (by sales) h eadq u ar t er ed in
e U S and E u r op e, r ep r esent ing alm ost h alf of t h e w or ld
ar m ac eu t ic al m ar k et .
T h e c om p anies inc lu ded in ou r r ep or t
A bbot t L abor at or ies, A bbV ie, A m g en,
B ayer , B r ist ol- Myer s S q u ibb, E li L illy, G
J oh nson & J oh nson, Mer c k , Mer c k K G
Pfizer, Roche and Sanofi.
ar e as f ollow s:
A st r aZ enec a,
lax oS m it h k line,
aA , N ov ar t is,
T h e r ev iew of W C p er f or m anc e is bot h indu st r y- and
company-specific and uses metrics based on publicly
available annual financial statements.
T h e p er f or m anc e of indiv idu al p h ar m ac eu t ic al c om p anies
ar e not disc losed.
r ec eiv ables net of p r ov isions, inc lu ding V A T and
adding bac k sec u r it iz ed and f ac t or ed r ec eiv ables,
div ided by f u ll- year p r o f or m a sales and m u lt ip lied by
365 (ex p r essed as a nu m ber of days of sales, u nless
st at ed ot h er w ise)
• DIO ( d a y s i n v e n t o r y o u t s t a n d i n g ) : year - end
inv ent or ies net of p r ov isions, div ided by f u ll- year p r o
f or m a sales and m u lt ip lied by 365 (ex p r essed as a
nu m ber of days of sales, u nless st at ed ot h er w ise)
• DPO ( d a y s p a y a b l e o u t s t a n d i n g ) : year - end t r ade
p ayables, inc lu ding V A T and adding bac k ac c r u ed
ex p enses f or g oods and ser v ic es r ec eiv ed bu t not
inv oic ed, div ided by f u ll- year p r o f or m a sales and
m u lt ip lied by 365 (ex p r essed as a nu m ber of days of
sales, u nless st at ed ot h er w ise)
• C2C ( c a s h - t o - c a s h ) : eq u als DS O , p lu s DI O , m inu s
DP O (ex p r essed as a nu m ber of days of sales, u nless
st at ed ot h er w ise)
• Pr o f o r m a s a l e s : r ep or t ed sales net of V A T and
adj u st ed f or ac q u isit ions and disp osals w h en t h is
inf or m at ion is av ailable
P h a r m a c e u t i c a l c o m p a n i e s a n d w o r k i n g c a p i t a l m a n a g e m e n t 2016
11
C o n ta c ts
W o r k in g c a p it a l s e r v ic e s
L if e s c ie n c e s s e c t o r
Co u n t r y
L o c a l c o n t a c t
T e le p h o n e / e m a il
T it le
Co n t a c t
T e le p h o n e / e m a il
U K & Ir e la n d
J o n M o r r is
+ 44 20 7 9 51 9 869
j m or r is10@ u k . ey. c om
Pa m e l a Sp e n c e
+ 44 20 7 9 51 3523
M a t t h e w E v a n s
+ 44 20 7 9 51 7 7 04
m ev ans1@ u k . ey. c om
E Y G lobal
L if e S c ienc es
L eader
E Y G lobal
T r ansac t ion
A dv isor y
S er v ic es
L eader ,
L if e S c ienc es
J e ffre y G re e n e
E Y W or k ing
C ap it al
A dv isor y
S er v ic es
L eader ,
L if e sc ienc es
St e p h e n K u n z
Pe t e r K i n g m a
+ 1 312 87 9 4305
p et er . k ing m a@ ey. c om
M a r k T e n n a n t
+ 1 212 7 7 3 3426
m ar k . t ennant @ ey. c om
H y e H u
+ 1 312 87 9 3636
h ye. yu @ ey. c om
A u s t r a lia
W a y n e B o u lt o n
+ 61 3 9 288 8016
w ayne. bou lt on@ au . ey. c om
C a n a d a
Si m o n R o c k c l i f f e
+ 1 416 9 43 39 58
sim on. r oc k c lif f e@ c a. ey. c om
Ch r i s St e p a n u i k
+ 1 416 9 43 27 52
c h r is. st ep anu ik @ c a. ey. c om
A s ia
A lv in T a n
+ 65 6309 8030
alv in- c y. t an@ sg . ey. c om
G e r m a n y
Di r k B r a u n
+ 49 619 6 9 9 6 27 586
dir k . br au n@ de. ey. c om
B e r n h a r d W e n d e r s
+ 49 211 9 352 13851
ber nh ar d. w ender s@ de. ey. c om
B e n e lu x
De n i z A t e s
+ 32 2 7 7 4 9 0 52
deniz . at es@ be. ey. c om
F in la n d
G ö s t a H o lm q v is t
+ 358 207 280 19 0
g ost a. h olm q v ist @ f i. ey. c om
F r a n c e
A r t h u r W a s t y n
+ 33 1 55 61 01 55
ar t h u r . w ast yn@ f r . ey. c om
L a t in A m e r ic a
M a t i a s De Sa n Pa b l o
+ 5411 4318 1542
m at ias. de- san- p ablo@ ar . ey. c om
S w e d e n
Pe t e r St e n b r i n k
+ 46 8 5205 9 426
p et er . st enbr ink @ se. ey. c om
U S
E Y
p sp enc e2@ u k . ey. c om
+ 1 212 7 7 3 6500
j ef f r ey. g r eene@ ey. c om
+ 1 610 202 17 39
st ep h en. k u nz @ ey. c om
| A ssu r anc e | T ax | T r ansac t ions | A dv isor y
A b o u t E Y
E Y is a g lobal leader in assu r anc e, t ax , t r ansac t ion and adv isor y
ser v ic es. T h e insig h t s and q u alit y ser v ic es w e deliv er h elp bu ild t r u st and
c onf idenc e in t h e c ap it al m ar k et s and in ec onom ies t h e w or ld ov er . W e
dev elop ou t st anding leader s w h o t eam t o deliv er on ou r p r om ises t o all
of ou r st ak eh older s. I n so doing , w e p lay a c r it ic al r ole in bu ilding a bet t er
w or k ing w or ld f or ou r p eop le, f or ou r c lient s and f or ou r c om m u nit ies.
E Y r ef er s t o t h e g lobal or g aniz at ion, and m ay r ef er t o one or m or e, of
t h e m em ber f ir m s of E r nst & Y ou ng G lobal L im it ed, eac h of w h ic h is a
sep ar at e leg al ent it y. E r nst & Y ou ng G lobal L im it ed, a U K c om p any lim it ed
by g u ar ant ee, does not p r ov ide ser v ic es t o c lient s. F or m or e inf or m at ion
abou t ou r or g aniz at ion, p lease v isit ey. c om .
© 2016 E Y G M L im it ed.
A ll R ig h t s R eser v ed.
E Y G no. 02835- 164G B L
B MC A g enc y
G A 0000_ 06615
E D N one
I n line w it h E Y ’ s c om m it m ent t o m inim iz e it s im p ac t on t h e env ir onm ent , t h is doc u m ent
h as been p r int ed on p ap er w it h a h ig h r ec yc led c ont ent .
T h is m at er ial h as been p r ep ar ed f or g ener al inf or m at ional p u r p oses only and is not int ended t o
be r elied u p on as ac c ou nt ing , t ax , or ot h er p r of essional adv ic e. P lease r ef er t o you r adv isor s f or
sp ec if ic adv ic e.
T h e v iew s of t h ir d p ar t ies set ou t in t h is p u blic at ion ar e not nec essar ily t h e v iew s of t h e g lobal
E Y or g aniz at ion or it s m em ber f ir m s. Mor eov er , t h ey sh ou ld be seen in t h e c ont ex t of t h e t im e
t h ey w er e m ade.
e y .c o m
F or t im ely insig h t s on t h e k ey bu siness issu es af f ec t ing lif e sc ienc es
c om p anies, p lease g o t o ey. c om / v it alsig ns. Y ou c an also v isit
ey. c om / lif esc ienc es or em ail g lobal. lif esc ienc es@ ey. c om f or m or e
inf or m at ion on ou r ser v ic es. T o c onnec t w it h u s on T w it t er , f ollow @
E Y _ L if eS c ienc es.