The world’s biggest drugmakers could release as much as $35 billion in working capital if they improve the way they manage their payments and inventories, according to a report from Ernst & Young.

The E&Y analysis says that the majority of the 16 largest US and European pharmaceutical companies “have a significant opportunity” to release cash from working capital in the range of $17-$35 billion, the equivalent of 3%-7% of sales. This would be distributed across the various components of working capital, with 40% from payables and 30% each from receivables and inventories.

The sector is having a tough time as a result of “generic competition, customer consolidation and government health authorities’ cost-containment policies”, the report states. As a result, “the big pharma business model and stock prices are under siege”.

Given this environment, the pharmaceutical industry’s “increasing attention on working capital has taken on new urgency”, says E&Y. The study notes that the sector has made progress in reducing levels of working capital since 2000, but in the last two years “70% of the achievement gains in the previous five years have reversed”.

Simple cost-cutting not enough
The analysis goes on to claim that “although a lot of focus has been on big pharma’s cost-cutting measures, increasing the return on investment on existing assets is the value that keeps on giving”. In the past, noted David Sage, E&Y’s head of working capital services, pharmaceutical companies “have not focused as rigorously on working capital management as other industries”.

Because of this, “with high operating margins, strong balance sheets, and fears of running out of critical patient medication, a cash culture never fully developed,” he added.

The full cash and cost benefits could be realised within 12 to 24 months from the launch of an intense working capital programme, according to the report. This would involve incentivising cash performance, tightening management of payment terms for customers and suppliers and improving credit, billing and collections processes.

The report also emphasises the importance of “establishing leading demand forecasting processes” and “building greater linkage and closer coordination across the entire supply chain”.