pharmaceutical companies and working capital management 2014 · pharmaceutical companies and...

Cash on prescriptionPharmaceutical companies and working capital management 2014

Cash on prescription

1 Summary

2 Improved WC performance in 2013 for big pharma

4Deterioration in WC performance since 2007 for big pharma

5 Case studies

6Wide variations in current WC performance among big pharma

8 Drivers affecting current WC performance

10 Improved WC performance in 2013 for Japanese pharmaceuticals

12 Opportunities going forward

13 Driving working capital excellence

14 How EY can help

14 Methodology

15 Glossary

16 Contacts

Contents

1Pharmaceutical companies and working capital management 2014

Cash on prescription is the latest in a series of working capital (WC) management reports based on EY research.Our analysis shows that compared with 2012, big pharma managed to report an overall improvement in WC performance in 2013. This reflects the accelerated impact of many of the actions taken in the last 12-24 months. Cash-to-cash (C2C) fell by 2%, after increasing by 1% and 3% in 2012 and 2011, respectively.

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.

But while progress has been achieved in many areas of WC, its impact on the industry’s overall performance has not been sufficient to reverse the deterioration seen in previous years (C2C was up 2% between 2007 and 2013). In addition, WC results remained far from uniform, with some businesses continuing to improve their performance while others did not.

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. While these performance gaps may partly result from varying business models, they also highlight fundamental differences in the intensity of management focus on cash and the effectiveness of WC management processes.

Overall, our research findings suggest that big pharma companies (which excludes Japanese companies) have up to US$37 billion of cash tied up unnecessarily in WC. This figure is equivalent to close to 7% of these businesses’ combined sales. For Japanese pharmaceutical companies, the corresponding figure is

US$2 billion, or 4% of sales. Pharmaceutical companies may also be able to identify additional opportunities for WC improvements by examining the practices of leading WC performers in other industries, such as consumer products.

To capitalize on this opportunity, pharmaceutical companies will need to drive continuous operational and structural improvements, addressing “root and branch” aspects of WC policies, processes and metrics. 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.

Summary

2 Cash on prescription

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. C2C fell by 2%, after rising by 1% in 2012 and 3% in 2011.

Improved WC performance in 2013 for big pharma

Table 1: Change in WC metrics across big pharma, 2013 vs. 2012

2013 Change 13/12DSO 65.9 -2%

DIO 49.4 3%

DPO 29.6 8%

C2C 85.7 -2%

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.

Table 2: Number of big pharma companies experiencing % change in WC metrics, 2013 vs. 2012

DSO DIO DPO C2CReduction > 5% 2 0 2 4

0%–5% 6 4 0 5

Increase > 5% 2 5 7 3

0%–5% 4 5 5 2



The overall improvement in WC performance in 2013 arose from a combination of higher DPO (up 8%) and lower DSO (down 2%), partly offset by higher DIO (up 3%). Nine companies out of 14 reported a lower C2C year-on-year, with four of them showing a decrease of over 5%.

A number of factors may explain these variations in WC performance, each with varying impacts on different companies:

• Unchanged sales for big pharma: Big pharma’s sales in 2013 remained almost unchanged from 2012, with the impact of new products and strong development in rapid-growth markets offset by the continued sales erosion of products coming off patent (while at a slower pace than in 2012), pressures on pricing and sluggish demand for consumer health care products in developed countries.

• Persistent volatility in exchange rates: Variations in exchange rates also played a significant role in driving sales and WC performance in 2013. For companies reporting in US dollars, the relative weakness of the US dollar against the euro at the end of 2013, compared with its average during the year, was a negative contributory factor to WC performance. In contrast, for those reporting in euros, the strength of this currency — against both the US dollar and the Japanese yen, and also against other currencies in rapid-growth markets — had a beneficial impact on WC performance.

• Intensification of WC efforts: Big pharma companies have intensified their focus on cash and WC during 2013, with many of the actions taken in the last 12-24 months having a much bigger impact on overall C2C performance. These actions have focused on lean manufacturing, billing and cash collection, effective management of payables, including renegotiation of payment terms, global sourcing optimization, supply chain efficiency, outsourcing and shared-services expansion, packaging standardization and simplication of structures.

• Better receivables performance: The pharmaceutical industry reported better receivables performance in 2013 for the second year in a row, with eight companies showing lower DSO. This was due primarily to further strong progress in the collection of receivables, notably in southern European countries, following the implementation of a number of measures, including in-depth communication with customers, payment plans, factoring, charging interest on late payment and legal actions, as well as settlement plans with governments and local authorities. Note that the use of factoring when properly disclosed should not have an impact on our measure of DSO, as our calculations include the factored amount. The overall progress in receivables performance was achieved against a background of contrasting

trends in payment terms with wholesalers. In the US, each one of the three main wholesalers reported a higher DPO (based on cost of sales) in 2013 compared with 2012, suggesting that they may have paid late or negotiated longer terms. In contrast, European wholesalers appear to have pursued different strategies, choosing either to ease or to increase payment pressure during 2013.

• Accelerated progress in payables performance: The pharmaceutical industry exhibited a further substantial improvement in payables performance in 2013, with DPO increasing by 8%, following a rise of 5% the year before. Companies continue to see significant benefits from leveraging and consolidating spend, extending payment terms and increasing collaboration with suppliers. Every big pharma company but two posted a stronger performance, including seven that showed an increase of more than 5%. The reported changes in payables overall also reflect companies’ differing strategies and tactics. For example, some companies have been stretching terms with their main suppliers or reducing their supplier base to achieve greater leverage in negotiations. Others opted to pay faster in return for bigger cash discounts.

• Further deterioration in inventory performance: In contrast with receivables and payables, 2013 saw a further deterioration in inventory performance compared with 2012. Ten big pharma companies out of 14 reported a higher DIO (including five that saw an increase of more than 5%). Using cost of sales rather than sales would have shown a similar result. This deterioration in performance was primarily caused by changes in the product sales and inventory mix following the loss of exclusivity for a number of blockbusters, as well as by the need for higher safety stocks to serve rapid-growth markets. For products facing generic competition, inventory management has also become more difficult. This is because companies have been losing the ability to estimate the levels of return from distribution channels with the same degree of precision as for patented products, due to uncertainties around the launch timing, pricing and level of take-up of generics. The overall poorer performance in inventory was partly offset by additional improvements in manufacturing and supply chain operations.


Despite the progress made last year, results for big pharma still show a deterioration in WC performance since 2007, with C2C up 2%. However, the number of companies reporting a higher C2C in 2013 than in 2007 is now 6 out of 14.

Deterioration in WC performance since 2007 for big pharma

Overall WC results since 2007 continued to be depressed by a poor showing in inventory (DIO up 9%) and receivables (DSO up 4%), insufficiently offset by strong results in payables (DPO up 20%). Note that the high degree of reported changes for each WC metric reflects the ongoing transformation of the industry’s business model.

• Much weaker inventory performance: Manufacturing and supply chains in the pharmaceutical industry are much leaner than they were a few years ago. For most companies, the cornerstone of this transformation has been the rationalization of the manufacturing network, combined with much higher levels of outsourcing, more effective collaboration with customers and globalization of procurement. As a result, asset efficiency has been increased and operating costs, lead times and inventory levels reduced. Several pharmaceutical companies have indicated, for example, that the sites which have undergone “lean” transformation have achieved reductions of between 20% and 30% in operating costs, and between 20% and 50% in lead times and inventory levels.

But for many of these companies, the benefits of these actions have been more than mitigated by a number of negative factors, including changes in the mix of products sales and inventory (following the loss of exclusivity for a number of blockbusters),

higher safety stocks to serve rapid-growth markets, and moves to fee-for-service and direct-to-pharmacy schemes. Most of the gains from increased collaboration between manufacturers and wholesalers also appear to have been captured in the early part of the period under review. Many customers have also adopted a similar approach to inventory management to that taken by manufacturers, dealing with fewer suppliers and expanding the use of just-in-time methods and vendor-managed inventory initiatives. Overall, nine companies reported weaker inventory results in 2013 than in 2007.

• Poor receivables performance: The weakness in receivables performance was caused primarily by changes in distribution and payment policy arrangements in many countries. These included a move toward fee-for-service and direct-to-pharmacy schemes and the tendency for wholesalers to pay late or negotiate longer terms, with consolidation providing them with the opportunity to leverage scale. Another contributory factor was the rising

Table 3: Change in WC metrics across big pharma, 2013 vs. 2007

2013 Change 13/07DSO 65.9 4%

DIO 49.4 9%

DPO 29.6 20%

C2C 85.7 2%


Table 4: Number of companies and % change in WC metrics, 2013 vs. 2007

DSO DIO DPO C2CReduction > 5% 4 4 1 6

0%–5% 2 1 3 2

Increase > 5% 5 7 10 4

0%–5% 3 2 0 2



A global pharmaceutical company had pursued a number of initiatives to improve receivables management during the past few years but felt that its performance could still be improved much further. An EY project team was engaged to review the existing processes and design an action plan to implement leading practices in this area. The program involved an end-to-end review of the receivables processes flowing from the end markets through the logistics and shared services centers. Planned steps included an analysis of payment terms in key countries and policies associated to “sold-in” inventory, as well as a review of commercial arrangements with different customers and partners.

EY was also engaged by another pharmaceutical company to implement a global supplier payments extension program. This involved segmenting the supplier base by industry and country; implementing changes to payment terms, trigger and frequency according to norms within a particular geography as well as spend category, while establishing compliance with the latest 2013 European payment directive (including understanding the accepted exceptions to the rules based on location and industry); and documenting the related policies and processes. Recommendations for new standard terms were based on a review of the main suppliers’ median and third-quartile receivables performances, rounded to the nearest 15-day increment.

Case studies

proportion of sales coming from rapid-growth markets, where customer payment terms are generally longer and overdue payments higher than in the US. Measures to contain health costs in many developed countries, compounded by financial difficulties in some European markets, have also contributed to this deterioration. Eight companies reported weaker receivables performance in 2013 than in 2007.

• Strong payables performance: In contrast with receivables and inventory, payables performance has improved significantly since 2007, owing to better management of the procurement and payables process, including managing terms more effectively (notably via extended payment terms). Consolidation in the pharmaceutical industry was a further positive factor, as it created larger companies with greater buying power, capable of extracting better cash terms from suppliers. Conversely, some companies may have pursued a deliberate policy of trading off improvements in payables against reductions in purchasing costs. Changes in sourcing strategies also played a role. Eight companies managed to improve their payables performance.

• Shifting business models: As the pharmaceutical industry seeks to re-invent itself, changes in WC performance overall and for each individual company also reflect the ongoing transformation of business models. For example, some companies have chosen to pursue mergers as a means of both enhancing revenue and boosting their capacity to bring new products to the market, while generating significant cost reductions, lowering tax rates and reducing R&D risk. Others have opted for a more diversified and less-risky sales growth strategy through bolt-on acquisitions in areas such as over-the-counter (OTC) medicines, generics, vaccines, and consumer and animal health care, coupled with aggressive expansion in fast-growing markets. A third strategy has been to focus on fewer therapeutic areas, through asset swaps and small-scale acquisitions, partnerships and licensing deals. Pharmaceutical companies have also moved from managing for revenues to managing for return on a more sustainable and less-risky basis, addressing costs, tightening control over cash and WC, increasing asset efficiency (including actively managing portfolios of assets) and optimizing tax structures.


Current WC performance among big pharma continues to vary widely overall and for each metric, with 2013 showing a stability in the spread in C2C compared with 2012.In 2013, the average level of C2C for big pharma was 86 days, with a spread of 16 days using standard deviation as a measure. More specifically, the averages for DSO, DIO and DPO were 66 days, 49 days and 30 days, respectively, with spreads of 10 days, 13 days and 14 days, respectively.

For big pharma, the spread in C2C in 2013 was similar to the level reported in 2012, but lower than in 2007 (when it was 20 days), suggesting that laggards have been gradually closing the WC performance gap with leaders.

However, a degree of caution should be exercised when reviewing individual WC performances, due to continuing differences in financial reporting and disclosures.

Typical industry issues affecting WC comparability relate to: (i) the definition of cost of sales or cost of goods sold (which may or

may not include depreciation, amortization and impairments); (ii) the definition of accounts payable (which include trade payables, but may also include non-trade payables items and exclude trade accruals, both being disclosed separately or not); (iii) the disclosure of accounts receivable factoring and securitization arrangements; (iv) the rules governing the calculation and treatment of rebates and other sales incentives and their impact on turnover and accounts receivable and payable; (v) the allocation of VAT to accounts receivable and payable; (vi) the distribution between current and non-current trade receivables and inventories; and (vii) the accounting revaluation policies of acquired companies, notably with regard to cost of sales or cost of goods sold and inventory.

It is also worth noting that the extent of financial disclosures may also vary from one year to another, as companies choose to reassess the degree of materiality of some of these disclosures.

Table 5: WC performance distribution among big pharma, 2013

C2C Average* Top quartile Bottom quartile Standard deviationDSO 65.9 62 72 10

DIO 49.4 43 55 13

DPO 29.6 39 18 14

C2C 85.7 70 94 16

*sales-weighted Source: EY analysis, based on publicly available annual financial statements.

Wide variations in current WC performance among big pharma


Note: average is sales-weighted.

Source: annual accounts December 2013.

Table 6: C2C (based on sales)

Table 8: DIO (based on sales)

Table 7: DSO (based on sales)

Table 9: DPO (based on sales)

115110

9994 94 93 90

86 83 7971 70 70 69 68

0

20

40

60

80

100

120

Average2013

Day

s 68

90

79 77 7569 67 67 66 66 66 65 64 60

54 54 51

0

20

40

60

80

100

Day

s

Average2013

7066 65

5853

49 48 47 46 45 45 4541 40

2722

0

20

40

60

80

Day

s

Average2013

61

4542 41

37 35 33 32 3023

19 18 18 17 1512

0

20

40

60

80

Day

s

Average2013

WC performance per big pharma company, 2013


Drivers affecting current WC performance

There are a number of drivers that need to be considered when comparing current WC performance, including payment practices, levels of outsourcing, alliances and collaboration arrangements, inventory acquisition strategies and exposure to generics.

A comprehensive analysis must also consider the trade-offs between cash, cost and service levels that were agreed to between pharmaceutical companies and their customers and suppliers.

Wide range of payment practices

There is a wide range of payment practices across the pharmaceutical industry, due not only to differences in payment terms and behaviors among buyers among and within regions, but also to variations in the degree of management focus on cash.

Wholesalers are generally the quickest payers for pharmaceutical products, while hospitals and government agencies tend to pay later. For US wholesalers, the average payment period (DSO) is 30–40 days. Europe shows wide variations in payment terms across wholesalers, with a small number of them dictating the overall level for each country. In Japan, DSO remains high at 90–120 days,

while in the rest of the world, there is a wide distribution of DSO performance, reflecting varying levels of market maturity, local payment practices and commercial strategies.

Besides wholesalers, pharmaceutical companies in Europe deal with a great number of doctors, pharmacies, hospitals and government buying agencies. This customer mix results in extended payment terms, high levels of overdue payments, and high logistics and distribution costs. For this segment, DSO can be estimated at 70–80 days, with wide variations across categories and within each country.

Varying levels of outsourcing

The pharmaceutical industry increasingly relies on third-party providers to manufacture, supply, incorporate and package intermediates and active ingredients, with outsourcing now accounting for 30%–35% of primary and secondary manufacturing and 35%–40% of packaging. A substantial proportion of clinical and pre-clinical research, sales force and logistics operations are also conducted by external service providers. More recently, outsourcing has been extended to include business management processes, such as finance and accounting, sourcing and procurement, and R&D.

For the industry as a whole, outsourcing has played a significant role in optimizing costs and increasing speed to market. It has also led to significant reductions in inventory levels, especially when applied to short-production runs. The use of outsourcing still varies widely between companies. This affects inventory as well as payables performance.


Importance of alliances and collaborations

For the pharmaceutical industry, strategic alliances and collaborations have become increasingly important to gain access to R&D, accelerate product development, reach specific markets, leverage production capabilities and share risks and rewards.

These arrangements can take many different forms (including co-marketing, co-production, joint R&D and sourcing agreements,

joint ventures and equity investments) and have a significant impact on companies’ profit and loss accounts and WC levels, with the accounting treatment depending on the nature of the arrangement in each territory.

Inventory acquisition strategies

There is a wide spread of inventory distribution by category across the industry, with different companies pursuing differing inventory acquisition strategies. Some companies push products to finished goods, while some hold more work-in-progress to provide them

with greater flexibility to finalize the product in the right packaging or ship in bulk to markets around the world. Some companies favor a continued replenishment policy, while others prefer to emphasize service levels, inflating the proportion of finished products.

Varying exposure to generics

Varying degrees of exposure to generics also played a role in the WC variations between pharmaceutical companies in 2013.

Compared with branded pharmaceutical activities, generics typically carry much higher levels of WC in relation to sales, with an average C2C of 127 days in 2013 (based on a selection of four “pure” generics pharmaceutical companies — Dr Reddys, Mylan, Stada and Teva Pharmaceutical Industries). This is as a result of much higher DSO (96 days) and DIO (89 days), partly offset by a stronger DPO (58 days).

Part of the performance gap for DSO reflects differences in the customer base. For example, US wholesalers, which offer generally shorter payment periods, represent a much lower proportion of total sales. Variations in the way sales reserves and allowances are accounted may have been a further contributory factor.

For DIO and DPO, performance gaps would have been much reduced (to an 11% and 22% premium, respectively) had the calculations been made using cost of sales (COS) rather than sales, as generics boast a much higher COS to sales ratio than big pharma (50% vs. 30%).


Improved WC performance in 2013 for Japanese pharmaceuticals

The Japanese pharmaceutical companies that we have reviewed reported an improvement in WC performance in 2013 compared with 2012, in sharp contrast with previous years. Their overall C2C fell by 4%, with four companies out of five included in our analysis posting better results.Compared with 2012, the 2013 fall in C2C was due to a combined reduction in DSO and DIO (down 5% and 4%, respectively), partially offset by a fall in DPO (down 6%). Note that changes in exchange rates during the year between the Japanese yen and other main currencies may have exaggerated the reported variations in WC overall and for each metric.

However, these latest WC results remained far from sufficient to reverse the deterioration in performance seen in the previous five years. In 2013, Japanese pharmaceutical companies’ C2C was still 24% above the level reported in 2007, with four companies out of five reporting a higher figure. This deterioration in performance has risen primarily from much higher DIO (up 48%) and, to a lesser extent, DSO (up 13%). In contrast, DPO increased by 26%.

The weakness in inventory performance may have been caused by changes in distribution arrangements, the rising proportion of sales coming from generics that carry much higher levels of inventory and increased investment in inventory to support growth outside Japan.

For receivables, the deterioration in performance largely reflects the impact of the consolidation of the wholesale market, which provided larger companies with better opportunities to extract better payment terms from their suppliers. Changes in product and geographic sales mix also played a role.

For payables, the improvement in performance arose from the impact of rising inventories and increased levels of purchasing made outside Japan, where payment terms are generally longer.

Table 10: Change in WC metrics across Japanese pharma, 2013 vs. 2007

2013 Change 13/12 Change 13/07DSO 88.4 -5% 13%

DIO 53.4 -4% 48%

DPO 24.6 -6% 26%

C2C 117.2 -4% 24%

Source: EY analysis, based on publicly available fiscal year ending March 14.

In comparison with big pharma, Japanese pharmaceutical companies display much higher levels of WC in relation to sales, with C2C averaging 117 days in 2013 (a 37% premium).

This figure is driven primarily by the longer payment terms with domestic pharmaceutical wholesalers, for which 90–120 days is customary. Inventory performance is also weaker (DIO is 8% higher). Interestingly, inventory distribution by category shows that Japanese pharmaceutical companies hold a larger proportion of finished goods in their total inventories than big pharma. With regard to payables, performance is also below big pharma’s (DPO is 17% lower), notwithstanding possible differences in trade accruals accounting and disclosure.


Note: average is sales-weighted.

Source: annual accounts March 14.

Table 11: C2C (based on sales)

Table 13: DIO (based on sales)

Table 12: DSO (based on sales)

Table 14: DPO (based on sales)

150143

119 117108 104

0

40

80

120

160

Average 2013

Day

s

106 10594

8881 79

0

30

60

90

120

Average 2013

Day

s

6256 55 54 53

42

0

20

40

60

80

Average 2013

Day

s

32

2825

21

16

11

0

10

20

30

40

Average 2013

Day

s

WC performance per Japanese pharmaceutical company, 2013


Opportunities going forward

The wide variations in WC performance between different pharmaceutical companies revealed by our research point to significant potential for improvement — amounting to an aggregate of US$37b for big pharma and US$2b for the top five Japanese pharmaceutical companies.This range of cash opportunity has been calculated by comparing the performance of the WC components of each company with that of the average (low estimate) and the upper quartile (high estimate) of its peer subgroup (big pharma and Japanese pharmaceutical companies). Even for the top end of each range, our experience across many projects, industries and geographies shows that a dedicated focus on WC management can often realize results at or above this level.

On this basis, big pharma has between US$20 billion and US$37 billion of cash unnecessarily tied up in WC processes, equivalent to between 3.6% and 6.7% of their aggregate sales. Note that the top range of cash opportunity identified in 2013 is slightly lower than a year ago.

Japanese pharmaceutical companies have between US$0.9 billion and US$2.0 billion of cash unnecessarily tied up in WC processes, equivalent to between 1.8% and 4.0% of their aggregate sales. Note that the bottom range of cash opportunity identified in 2013 is lower than a year ago.

Pharmaceutical companies may be able to identify additional opportunities for WC improvements by examining the practices of leading WC performers in other industries, such as consumer products.

Table 15: WC cash opportunity for big pharma, 2013

Cash opportunityValue (US$b) % WC scope* % sales

Average Upper quartile Average Upper quartile Average Upper quartileReceivables 4 9 4% 9% 0.7% 1.5%

Inventories 8 13 11% 17% 1.5% 2.3%

Payables 8 16 17% 35% 1.4% 2.9%

Total 20 37 9% 17% 3.6% 6.7%


Table 16: WC cash opportunity for Japanese pharma, 2013

Cash opportunityValue (US$b) % WC scope* % sales

Average Upper quartile Average Upper quartile Average Upper quartileReceivables 0.4 1.1 3% 9% 0.7% 2.1%

Inventories 0.3 0.3 4% 5% 0.7% 0.7%

Payables 0.2 0.6 7% 17% 0.4% 1.2%

Total 0.9 2.0 4% 9% 1.8% 4.0%


*WC scope = sum of trade receivables, inventories and accounts payable


Driving working capital excellence

As the pace and scale of industry change continue to escalate, pharmaceutical companies seeking to achieve further progress in WC will need to focus on a number of key initiatives. These include:

• Further streamlining of manufacturing and supply chains to drive greater efficiencies, optimize asset utilization and build higher responsiveness into systems and processes

• Closer collaboration with wholesalers and other distributors,for enhanced demand and supply visibility, improved forecasting accuracy and better supply chain reliability

• Better coordination between supply, planning, manufacturing, procurement and logistics functions and processes

• Improvements in billing and cash collections by setting an effective organizational structure of collections and dispute management, tightening controls around terms and contracts and consolidating billing processes to accelerate invoice production

• More effective management of payment terms for customers and suppliers, including renegotiation of terms

• Intensification of spend consolidation and standardization, by increasing global sourcing while rationalizing the supplier base, developing e-sourcing and reducing complexity in products and processes

• More effective management of outsourcing arrangements,with clearly defined roles and responsibilities, trusted providers with contracts that are carefully configured and managed with improved communication and planning, and the preparation of adequate contingency plans

• Implementation of a larger, more unified shared-services organization, comprising processes and functions related to receivables and payables, order fulfilment and purchasing, human resources, information and legal services

• Increased use of vendor-managed inventory (VMI) practices,enabling better ordering, production and delivery planning and scheduling for the supplier, and reduced inventory levels and risk of stock-outs for the customer

• Alignment of business processes and information systems up and down the value chain to share real-time and accurate supply and demand information

• Increased use of financing solutions as a way to provide attractive and flexible alternatives to customers and suppliers

• Active management of the trade-offs, between cash, cost, service levels and risks, that are sometimes required with various WC strategies — choosing, for example, between customer payment terms and sales price rebates; supplier payment terms and early payment discounts; and inventory levels for consignment stock arrangements and customer service levels

• Implementation of more robust supply chain risk management policies, by improving network visibility, securing long-term supplies, ensuring dual sourcing and monitoring the financial viability of key suppliers

• Tracking and monitoring WC metrics and linking compensation to these metrics


How EY can help

EY’s global network of dedicated working capital professionals helps clients to identify, evaluate and prioritize realizable improvements to liberate significant cash from WC through sustainable changes to commercial and operational policy, process, metrics and procedure adherence.We can assist organizations in their transition to a cash-focused culture and help implement the relevant metrics. We can also identify areas for improvement in cash flow forecasting practices and then assist in implementing processes to improve forecasting and frameworks to sustain those improvements.

Companies that undertake working capital improvement initiatives often realize a high ROI. In addition to increased levels of cash,

significant cost benefits may also arise from process optimization, through reduced transactional and operational costs and from lower levels of bad and doubtful debts and inventory obsolescence. Improved processes also increase the quality of services both internally and externally. Our working capital professionals are there to help, wherever you do business.

Methodology

This report is based on a review of the WC performance of big pharma, which is composed of the 15 largest pharmaceutical companies (by sales) headquartered in the US and Europe, representing almost half of the world pharmaceutical market. The companies included are Abbott Laboratories, AbbVie, Amgen, AstraZeneca, Bayer, Bristol-Myers Squibb, Eli Lilly, GlaxoSmithkline, Johnson & Johnson, Merck, Merck KGaA, Novartis, Pfizer, Roche and Sanofi.

The review of WC performance is both industry- and company-specific and uses metrics based on publicly available annual financial statements.

The analysis was completed by a review of the WC performances of five major Japanese pharmaceutical companies: Astellas Pharma, Daiichi Sankyo, Dainippon Sumitomo Pharma, Eisai and Takeda Pharmaceutical.

The performances of individual pharmaceutical companies are not disclosed.


Glossary

• DSO (days sales outstanding): year-end trade receivables net of provisions, including VAT and adding back securitized and factored receivables, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise)

• DIO (days inventory outstanding): year-end inventories net of provisions, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise)

• DPO (days payable outstanding): year-end trade payables, including VAT and adding back trade-accrued expenses, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise)

• C2C (cash-to-cash): equals DSO, plus DIO, minus DPO (expressed as a number of days of sales, unless stated otherwise)

• Pro forma sales: reported sales net of VAT and adjusted for acquisitions and disposals when this information is available

Cash on prescription 16

Contacts

Working Capital Services

Region Local contact Telephone/emailAmericas Steve Payne +1 212 773 0562

[email protected]

Canada Simon Rockcliffe +1 416 943 [email protected]

Chris Stepanuik +1 416 943 [email protected]

Latin America Matias De San Pablo +5411 4318 [email protected]

US Edward Richards +1 212 773 [email protected]

Peter Kingma +1 312 879 [email protected]

Stephen Kunz +1 610 202 1739 [email protected]

Mark Tennant + 1 212 773 [email protected]

Eric Wright +1 408 947 [email protected]

Asia Alvin Tan +65 6309 [email protected]

Australia Wayne Boulton +61 3 9288 [email protected]

Benelux Danny Siemes +31 88 407 [email protected]

Denmark Rasmus Jacobsen +45 51 58 25 [email protected]

Finland Gösta Holmqvist +358 207 280 [email protected]

France Benjamin Madjar +33 1 55 61 00 [email protected]

Germany Dirk Braun +49 6196 996 [email protected]

Bernhard Wenders +49 211 9352 [email protected]

India Ankur Bhandari +91 22 6192 [email protected]

Italy Stefano Focaccia +39 [email protected]

Norway Peter Stenbrink +46 8 5205 [email protected]

Sweden Johan Nordström +46 8 5205 [email protected]

Peter Stenbrink +46 8 5205 [email protected]

Region Local contact Telephone/emailSwitzerland Thomas Pallgen +41 58 286 40 08

[email protected]

UK & Ireland Jon Morris +44 20 7951 [email protected]

Matthew Evans +44 20 7951 [email protected]

Paul New +44 20 7951 [email protected]

Marc Loneux +44 20 7951 [email protected]

Pharmaceutical sector

Title/region Contact Telephone/emailGlobal Life Sciences Leader

Glen Giovannetti +1 617 374 [email protected]

Global and Americas Transaction Advisory Services Leader, Pharmaceuticals

Jeffrey Greene +1 212 773 [email protected]

Global Pharmaceutical Leader

Patrick Flochel +41 58 236 [email protected]


Notes

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

How EY’s Global Life Sciences Center can help your business Life sciences companies — from emerging to multinational — are facing challenging times as access to health care takes on new importance. Stakeholder expectations are shifting, the costs and risks of product development are increasing, alternative business models are manifesting, and collaborations are becoming more complex. At the same time, players from other sectors are entering the field, contributing to a new ecosystem for delivering health care. New measures of success are also emerging as the sector begins to focus on improving a patient’s “health outcome,” and not just on units of a product sold. Our Global Life Sciences Center brings together a worldwide network of more than 7,000 sector-focused assurance, tax, transaction and advisory professionals to anticipate trends, identify implications and develop points of view on how to respond to the critical sector issues. We can help you navigate your way forward and achieve success in the new health ecosystem. For more information, please visit: www.ey.com/lifesciences or email: [email protected].

© 2014 EYGM Limited. All Rights Reserved.

SCORE No. FN01481406-1268863ED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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