Ca s h o n p r e s c r i p t i o n 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
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
m C S u m m a r y 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 e s e a r c h o n w o r k i n g c a p i t a l m a n a g e m e n t. W h r u p r r t h p h m t r h c t r c p p r c t t m k, r t h p t f t t h c w h t g r p r c r u r t A g t h c h k g r p h m c p r t w w k c C p f m c p w h w h c - t c r. k p t r t h p r t w p r r H, p h m m t r m t h t h T h g r p C w t h. A t t h t p r r W C r f f r u m, w h c t p r t h p f m h f t T h w v W C p f m p h m t t h p f m g m r p t f r v m t h h h h t f u f t h m f u c t h f t W C m p r T c t h p t u p h m t c p w t m c h t h w t h m t h W C. B u m u m r r, w h c p r p r c r c t it ev enu es nder essu e, e ar ac eu ic al indu st y as ont inu ed o ev olv e ap idly om anies ar e br ing ing new odu s o ar et esh ap ing eir or olios of bu sinesses and op im iz ing eir ost bases, ile seek ing o ow ear ning s and im ov e ash et ns o sh ar eh older s. ainst is alleng ing bac ou nd, big ar a om anies ep or ed eak er or ing ap it al (W ) er or anc e in 2015 om ar ed it 2014, it ash o- ash (C 2C ) ising 2% 2015 s set bac ar ly ev er sed e ev iou s o year s og ess. ow ev er big ar a st ill anag ed o ec ov er or e an e ground lost in WC performance during the previous five years (2007 12). e ou s 2C as 2% low er in 2015 an in 2007 e sam e im e, og ess in em ained ar om nif or it som e bu sinesses ont inu ing o im ov e eir er or anc e and ot er s ailing o do so. e ide ar iat ions in er or anc e am ong ar ac eu ic al companies point to significant potential for improvement. While ese er or anc e ap s ay esu lt ar ly om ar ying bu siness odels, ey also ig lig ndam ent al dif er enc es in e int ensit y of anag em ent oc s on ash and e ef ec iv eness of anag em ent oc esses. o ap it aliz e on is op or nit y, ar ac eu ic al om anies ill need o em br ac e or e su bst ant ial and su st ainable ang es in e ay ey do bu siness and anag e eir sinesses st bec om e ev en or e esp onsiv e and esilient ile deliv er ing ont inu ou s oc ess im ov em ent s and ost edu ions. T h t h c p w A r f u W C t h r g h t t h, w h t h w h t p r I r r t c h w h f t u r p p c h t f f p r c t m k m w t h g h c r f u t c f t c w h w h h p h m t S u p p c h t h r, t h r g h r r m p r c v r t h t p p c h S t r t m t r t c r c W C, p r r p f m m r p C u f t m t h c p t r f c, c t h r t h h c p m u t W C p r t c r I m f r p r c t p r r c t r t c f u r c T h w v W p f m w t h p h m t c p r f p r t h w t u p t U S $ g r o ac iev e is, om anies ill need: st at eg ic oc s on ou ou e year it e ole bu siness eng ag ed and inc ent iv iz ed o dr iv e im ov em ent nc eased esp onsiv eness o ang e, it lean and ag ile anu ac ing and su ly ain solu ions dep loyed or dif er ent odu s or ar et seg ent s, as ell as or ou oss- nc ional oop er at ion and ef ec iv e ollabor at ion it olesaler s and ot er ar ac eu ic al bu yer s ly ains at ar e esilient ou obu st isk anag em ent olic ies, alt er nat iv e sou ing and enh anc ed isibilit y ac oss e end- o- end su ly ain ong disc ip line in er s and ansac ions, int er nal ont ols ov er ash and and ap op iat e er or anc e easu es in lac e lear nder st anding and ef ec iv e anag em ent of e om lex and ev olv ing ade- of s am ong ash ost s, deliv er y lev els and e isk s at eac om any st ak e im ov em ent init iat iv es ar e yp ic ally ear ning s- ac et iv e. n addition to increased levels of cash, significant economic benefits ay ar ise om odu iv it y im ov em ent s, edu ed ansac ional and op er at ional ost s, low er lev els of bad and dou bt l debt s, and edu ed inv ent or y obsolesc enc e. e ide ar iat ions in er or anc e bet een e ar ac eu ic al om anies in ou study (see Methodology) indicate there is significant potential or im ov em ent at e est im at e o be o 47 billion in ag eg at e. B a c k g r o u n d G l o b a hl a pr 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 2014 a fe t 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 U S m k w t h p r, w h U S m k r f r t % T h c g r t h w p t t t h r c p t g - u g u r t h h p r c t T h m u g p r t h F c t r g I t h w I c r, t h m m k E u r r t f f t t h p t p p c p f r g u g r p r r t c h h c, m E u r m k f t h r p t. t h t A g t h k g r f t h p h m c p r r c h h p c p w h e ar et as ag ain e im ar y dr iv er it ar et sh ar e ising om 45% in 2014 o 49 in 2015. is ac eler at ed ow as du e in ar o e edu ed im ac of ener ic dr inc sion and e lau nc of new odu s. e nu ber of new dr s ap ov ed by e DA ont inu ed o su e. n addit ion, er e as a further significant increase in prices for branded products. n ont ast e aj or ar et s in op e ep or ed alling sales, af ec ed by e im ac of at ent ex ir y, om et it ion om ener ic dr s, and inc easing essu e o ont ain ealt ar e sp ending esp ec ially on edic ines. op e s ar et sh ar e ell ee oint s o 21% Rapid-growth markets and Asia-Pacific were relatively stable at 23% of e ot al. ainst is bac ou nd, sales or e 15 big ar a om anies in ou esear (see Met odolog y) dr op ed 4% om ar ed it 2014, t h t h A c t w f t t h c p r c t c f p, w p r p r r m c h r I c U S r h h c p r h g p m g p p h m t c p A m h t r c t p t p h m t t m w k c r c p r r r p r c t m m f t u r m f r u c h p r c t c p p m f t u r r t r c ; c p m k r t c h c h r u r u m c p t h t m p r c t r u r af er ac iev ing st abilit y e year bef or e. iv it y as adv er sely af ec ed by e ont inu ed sales er osion of odu s om ing of at ent as ell as ic ing essu es and ov em ent s in ex ang e at es. n addit ion, onsolidat ion am ong insu er s and ealt ar e ov ider s as iv en ayer s or e bar aining ow er ov er ar ac eu ic al om anies. nu ber of ot er ends ont inu e o im ac ar ac eu ic al bu sinesses s abilit y o anag e or ing ap it al; indu st y ost essu es; inc easing odu dev elop ent sp ec ializ at ion; dr iv ing anu ac ing int o sm aller and or e eq ent bat odu ion; ong oing onsolidat ion of su lier s; anu ac er s and bu yer s; ising ou sou ing new allianc es and ollabor at ions; ex ansion int o new ar et s and dist ibu ion annels; ang ing eg lat or y eq ir em ent s; or e om lex dem ands on log ist ic s; and e need o aint ain odu int eg it y and sec it y. 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 3a n a g e m
W e a k e r W C p e r f o r m a n c e f o r b i i n 2015 T h e r e s u l t s f r o m o u r a n a l y s i s o f b i g p h a r m a i n 2015 s h o w W C p e r f o r m a n c e c o m p a r e d w i t h 2014. T h e g r o u p s C 2C w a d r o p p i n g b y 4% t h e y e a r b e f o r e. B a s e d o n o u r r e s e a r c h, 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 o f c a s h u n n e c e s p r o c e s s e s. 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 1 1 1 4 O 9 O O 9 i g p h a r m a 20 5 Ch a n g e 20 5/ 20 DS 64. 1% DI 52. 4 2% DP 34. 3 0% C2C 82. 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 R edu c t ion I nc r ease > 1 > 7 DSO DIO DPO C2C 5% 3 3 3 0% 5% 1 4 2 5 5% 3 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
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 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 p o o r e r, w i t h D S O u p 1%. T h p r p p f m p r c t h, w h O r u h -. A m u c h 9 t c p r t h h C t h w h t h r m t h. A m f t m p t h v W C p f m h w h v p t f c p e im ov em ent in ayables er or anc e seen in ev iou s year s am e o a alt it DP em aining nc ang ed year on- year s as ou of 15 om anies (or 60% ) ep or ed a ig er 2C in 2015 an in 2014, it 6 of em sh ow ing an inc ease of or e an 5% nu ber of ac or s ay ex lain ese ar iat ions in er or anc e, eac it ar ying im ac s on dif er ent om anies: Co n t i n u e d f o c u s ob ig n p hw ar C: 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. r t h h O t h t h r m t h U c t O S r h t h w h r. A g t h, t h p f m w p r c c h t h p r c t m f t h c f m k w t h f h h k t v r g r t h m k T h p p f m w p t f p r m f t u r p p c h of 15 ep or ed a ig er DI (inc lu ding sev en of em at saw an inc ease of or e an 5% ). sing ost o sales (C ) at er an sales ou ld av e sh ow n a sim ilar esu lt ain is year is det er ior at ion in er or anc e as im ar ily au sed by ang es in e odu sales and inv ent or y ix ollow ing e loss of ex lu siv it y or a nu ber of bloc bu st er s, as ell as by e need or ig er saf et y st oc s o ser e ap id- ow ar et s. e ov er all oor er er or anc e in inv ent or y as ar ly of set by addit ional im ov em ent s in anu ac ing and su ly ain op er at ions. I c r w h : t h p r t w t h p h m t r r t w r p f m w h O r. E p h m c p h h O. T h t r r p f m w h k g r c r t r p t m w h w h I t h U S, t w t h t h r m w h r t h h O C O S c p w h : r p u r c h g p h m t h h h P h m t c p c t r t h p t m t h p h m t p t f w h c m g t r t h f u t u r g r t h p r t w h g r v t t m T h w g t r O w T h t r m h h p t E u r w h g g t h t h c h h C f c p t t r p p r r r I p t u f W r u r t h E u r c r m h c t u r E : U S c h r p p t t h r T h : W C p f m F c p r t r p r p p f m p r B r p S w f r t h w t h c t h w h O u h - c u r r t h U S c p w h. Y t w t h p h m c p m t r t h w p c r t f t. I t h O, t h r m c r, f c p r t U S t h r t h t h. F t h t, t h p r w p r t h U S m c u r r t h t h f u r t h t p t m w g r h p t. t h t r t c U S r h h F c p r m : h h p t O. p f m c p w h w h O u p. E h t p h m c p t W e a k e r r e c e i v a b l e s p e r n f o ont r m ast a n it c e e ev iou s o year s, e ar ac eu ic al indu st y ep or ed eak er ec eiv ables er or anc e in 2015, it DS ising by 1% lev en big ar a om anies sh ow ed ig er DS is ov er all end in ec eiv ables er or anc e as ac iev ed ag ainst a bac ou nd of ont ast ing ends in aym ent er s it olesaler s. n e o of e ee ain olesaler s ep or ed a ig er DP (based on ) in 2015 om ar ed it 2014, which appears to reflect the impact of acquisitions and T r a n s f o r m a t i o n o f b u s i n e s s p o r t f o l i o s inc eased ases of ener ic ar ac eu ic als (w ic av e ar ac eu ic al om anies ont inu ed o esh ap e eir long er aym ent er s an br and- nam e ar ac eu ic als) or olios of bu sinesses, it a om on oal o st eng en rather than the benefit of paying late or negotiating longer e ow osp ec s ile deliv er ing eat er alu e o er s. er e er e also div er ing ends in DP bet een sh ar eh older s. is ansf or at ion as ad an im ac on op ean olesaler s, su est ing at ey ose eit er last year s ov er all 2C and or som e indiv idu al om anies o ease or o inc ease aym ent essu e du ing 2015. n in ar ic lar as inv olv ed bu sinesses disp lay dif er ent addition, many of the benefits from improving the collection of eq ir em ent s. ec eiv ables, not ably in sou er n op ean ou nt ies, ay av e been ap ed. x c h a n g e r a t e m o v e Mov m eme nent t s in dollar ex ang e at es also layed som e ar in dr iv ing e indu st y s St a b i l i t y i n p a y a b l e s p e r f e o su r bst m anta nial c e er or anc e in 2015. or om anies ep or ing in eu os, im ov em ent in ayables er or anc e seen in ev iou s year s it ish ou nds or iss anc s, e eak ness of ose am e o a alt in 2015, it ov er all DP nc ang ed year enc ies ag ainst e dollar om ar ed it it s av er ag e on- year et o- ir ds of big ar a om anies anag ed o lev el du ing e year as a osit iv e ont ibu or y ac or n boost eir DP inc lu ding six at sh ow ed an inc ease of or e ont ast or om anies ep or ing in dollar s, e st eng of an 5% or e lat er is im ov em ent as dr iv en im ar ily e dollar ag ainst all aj or enc ies at e end of e year by a er ex ension in aym ent er s, as ell as by eat er ad a neg at iv e im ac efficiency in procurement and payables processes. Conversely, e end ow ar d onsolidat ion am ong insu er s and ealt 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 ar f oe r ov m ider a ns c ay e av e ad a neg at iv e im ac on DP 2015 saw a det er ior at ion in inv ent or y er or anc e om ar ed it 2014, it DI 2% ig big ar a om anies ou 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 5a n a g e m
C u r r e n t W C p e r f o r m a n c e o f b i 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 i m 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 i n g f r o m t h 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 i g 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 O - O 9 % O - - DS 2% 3% 5% DI 16% 6% DP 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 > 9 0 > 0 DSO DIO DPO C2C 5% 5 3 2 0% 5% 3 1 0 5% 6 11 12 6 0% 5% 1 0 1 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%. T h t : r m c h t p u r m g m r r r c R & r. O t h h t f m - q u c p w h g r p r g r t h m k A t h r h t f u f t h t t h r g h q u p t P h m t c p h m f r m f r t m f r u r m r Sh i f t i n g b u s i n e s s m e o ong d eoing l s ansf or at ion of the industry s business models has been a significant factor influencing C2C over time. Some companies have osen o su e er er s as a eans of enh anc ing ev enu e, while generating significant cost reductions, lowering tax at es and edu ing D isk er s av e op ed or a or e diversified and less-risky sales growth strategy through bolt on ac isit ions, ou led it ag essiv e ex ansion in ap id- ow ar et s. ir d st at eg y as been o oc s on ew er er ap eu ic ar eas, ou asset sw ap s and sm all- sc ale ac isit ions, ar ner sh ip s and lic ensing deals. ar ac eu ic al om anies av e also ov ed om anag ing or ev enu es o anag ing or et n on a or e su st ainable and less- isk y basis. 6 Ca s h o n p r e s c r i p t i o n
m 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 P ter s 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 d e l i v e r y l e v e l s a nc d h ang r ies s in k W s C : p er f or m anc e in dist r ibu t ion and p aym ent p olic y ar r ang em ent s in m any also reflect the complex and evolving trade-offs between cash, 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 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 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 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 t o p ay lat e or neg ot iat e long er t er m s, w it h c onsolidat ion 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 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 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 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 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 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 disr u p t ing p at ient s liv es. 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 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 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, 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 t h e nu m ber of c om p anies r ep or t ing bet t er r ec eiv ables 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, p er f or m anc e bet w een 2007 and 2015 now ex c eeds t h ose margin expansion or increased provision of financing solutions sh ow ing a det er ior at ion. t o t h eir su p p lier s and c u st om er s. 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 M u c h s t r o n g e r p a y a b l e s p e Pr ayables f o r m a n c e : p e r f o r m a nf or c m e any : p h ar m ac eu t ic al c om p anies, t h e performance has improved significantly since 2007, owing benefits of becoming much leaner and more agile have been t o bet t er m anag em ent of t h e p r oc u r em ent and p ayables 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 p r oc ess, inc lu ding m anag ing t er m s m or e ef f ec t iv ely 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 (not ably v ia ex t ended p aym ent t er m s). C onsolidat ion in t h e 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 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 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 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 and dir ec t - t o- p h ar m ac y sc h em es. 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 Most of t h e g ains f r om inc r eased c ollabor at ion bet w een t r ading of f im p r ov em ent s in p ayables ag ainst r edu c t ions in anu f ac t u r er s and w h olesaler s also ap p ear t o h av e been 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 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 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 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 p er f or m anc e sinc e 2007. m anag em ent t o t h at t ak en by m anu f ac t u r er s, dealing W e a k r e c e i v a b l e s p e r fi n o sp r it m e of a nw eak c e 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). 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 7a n a g e m
W i d e v a r i a t i o n s i n c u r r e n t W C a m o n g b i g p h a r m a c o m p a n i e 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 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, 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 E ry ow gas rc ha osen m : 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 E py wr as o veng e ag m ed e tno t 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 A rp oh ar v m e ac m eu et icnal t 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 B O 7 O O 7 9 7 1 e d i a n T o p q u a r t i l e o t t o m q u a r t i l e St a n d a r d d e v i a t i o n DS 63 59 1 12 DI 56 41 63 14 DP 35 46 24 13 C2C 88 6 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) DSO (based on sales) 120 100 110 103 99 99 96 89 88 88 88 120 100 94 82 78 80 83 81 76 75 80 71 68 66 64 63 63 62 61 61 Days 60 63 55 49 Days 60 57 57 56 50 40 40 20 20 0 Median 2015 0 Median 2015 DIO (based on sales) DPO (based on sales) 80 70 68 67 63 63 58 57 56 56 60 53 51 47 46 46 40 38 Days 60 40 20 46 45 42 41 32 32 27 Days 45 30 15 35 35 25 25 24 23 19 18 16 0 Median 2015 0 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 9a n a g e m
O p p o r t u n i t i e s g o i n g f o r w a r d T h e w i d e v a r i a t i o n s i n 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 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 T h r c p t u h c u c p t h p f m t h W C c p h c p w h t h t h t h u p p q u t h p g r p. E v t h t h r r p r m p r t r g r h t h f u W C m c t r r t h is ang e of ash op or nit y as been alc lat ed by om ar ing e er or anc e of e om onent s of eac om any it at of e av er ag e (low est im at e) and e er ar ile (h ig est im at e) of it s su b- eer ou en at e op end of eac ang e, ou ex er ienc e ac oss any oj ec s, indu st ies and eog ap ies sh ow s at a dedic at ed oc s on anag em ent an of en ealiz e esu lt s at or abov e is lev el. 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, 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 ac eu t ic al c om p anies m ay be able t o ident if y addit ional op p or t u nit ies f or W C im p r ov em ent s by ex am ining t h e p r ac t ic es of leading W C p er f or m er s in ot h er indu st r ies, su c h as c onsu m er p r odu c t s. 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 ( ) % * % A A A R 9 % I 9 P % * W C = m t r r c p Ca s h o p p o r t u n i t y V a l u e U S$ b W C s c o p e s a l e s v e r a g e U p p e r q u a r t i l e v e r a g e U p p e r q u a r t i l e v e r a g e U p p e r q u a r t i l e ec eiv ables 5 10 5% 11% 1. 0% 1. nv ent or ies 18 12% 24% 1. 8% 3. 4% ayables 8 19 15% 37 1. 4% 3. 5% T o t a l 22 47 10% 21% 4. 2% 8. 8% sc op e su of ade ec eiv ables, inv ent or ies and ac ou nt s 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
W M H o w E Y c a n h e l p T h e g l o b a l E Y n e t w o r k o f d e d i c a t e d w o r k i n g c a p i t a l p r o c l i e n t s t o i d e n t i f y, e v a l u a t e a n d p r i o r i t i z e a c t i o n a b l e i significant cash from WC, through sustainable changes to commercial and o p e r a t i o n a l p o l i c i e s, p r o c e s s e s, m e t r i c s a n d p r o c e d u r e 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. e t h o d o l o g y G l o s s a r y T h 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 of big p h ar m a, w h ic h is c om p osed of t h e 15 lar g est p h ar m ac eu t ic al c om p anies (by sales) h eadq u ar t er ed in t h 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 p h 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 ar e as f ollow s: A bbot t L abor at or ies, A bbv ie, A m g en, A st r az enec a, B ayer, B r ist ol- Myer s S q u ibb, E li L illy, G lax os m it h k line, J oh nson & J oh nson, Mer c k, Mer c k K G aa, N ov ar t is, Pfizer, Roche and Sanofi. 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. DSO ( d a y s s a l e s o u t s t : a year n d -iend n g t) r ade 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: tyear a n - dend i n g ) 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) ( : - t r ) p V A T k c r u p f g v r t f u p r f m m u p r m u h w DPO d a y s p a y a b l e o u t s t year a n d end i n g ade ayables, inc lu ding and adding bac ac ed ex enses or oods and ser ic es ec eiv ed bu not inv oic ed, div ided by ll- year o or a sales and lt ip lied by 365 (ex essed as a nu ber of days of sales, nless st at ed ot er ise) C2C ( c a s h - t o - c a: eq s h 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 : ar ep l e or s 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 11 m a n a g e m
C o n t a c t s W o r k i n g c a p i t a l s e r v i c e s L i f e s c i e 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 l e p h o n e / e m a i l T i t l e Co n t a c t T e l e p h o n e / e m a i l U K & I r e l a n dj o n M o r r i s + 44 20 7 9 51 9 869 j m or r is10@ u k. ey. c om 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 U S 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 l i a W a y n e B o u l t 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 i a A l v i n 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+ 49 s 211 9 352 13851 ber nh ar d. w ender s@ de. ey. c om B e n e l u 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 i n l a n d G ö s t a H o l m q v i s 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 i n A m e r i Mc a t i a s De Sa n Pa b+ l5411 o 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 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 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 Pa m e l a Sp e n c e + 44 20 7 9 51 3523 p sp enc e2@ u k. ey. c om J e f f r e y G r e e n e + 1 212 7 7 3 6500 j ef f r ey. g r eene@ ey. c om St e p h e n K u n z + 1 610 202 17 39 st ep h en. k u nz @ ey. c om E Y 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 t t h g g m r t m t h m f m E r & Y G L h w h h E r & Y G L U K c p g u p r v t c F m m t r g p v c. ef er s o e lobal or aniz at ion, and ay ef er o one or or e, of e em ber ir s of nst ou ng lobal im it ed, eac of ic is a sep ar at e leg al ent it y. nst ou ng lobal im it ed, a om any lim it ed by ar ant ee, does not ov ide ser ic es o lient s. or or e inf or at ion abou ou or aniz at ion, lease isit ey. 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.