Working Capital Management Seizes Priority in North American and European Pharma Industry

Efforts to improve working capital efficiency are becoming entrenched in the growth strategy of pharmaceutical firms in North America and Europe. The realization is that an effective working capital management will ease the difficulties caused by low sales, pricing pressures and patent cliffs. Big pharma companies expect to invest in optimizing working capital efficiency to bolster returns.

Analysis from Frost & Sullivan, Working Capital Management in the North American and European Pharmaceutical Industry, reveals companies in the US effectively managed to reduce the cash conversion cycle by 44.2% between 2012 and 2013. European companies were not as successful, managing to reduce the cash conversion cycle by 26.2% between 2012 and 2013. The cash conversion cycle is an indicator of working capital efficiency.

“Business models in the North American and European pharmaceutical industry are evolving; placing emphasis on achieving working capital efficiency by focusing on outsourced manufacturing and new market entry,” said Frost & Sullivan Senior Research Analyst Saneesh Edacherian.

The following issues highlight the importance of effective working capital management.

• Decreasing Profitability: Global economic slowdowns, expiring blockbuster drug patents, intensifying competition and lowering public spending on drugs affect the profitability of participants in the pharma and biotech industry, spurring the need for effective working capital management.

• Fizzling Innovation Model: Leading pharmaceutical manufacturers are facing a twofold crisis. The number of blockbuster drugs about to lose their patents is alarmingly high, and pipelines are empty. With no new sources of revenue emerging, cutting costs through working capital management is crucial to optimize expenses.

• Price Premium Pressure: Strict regulations and diverse healthcare models across geographies are compelling drug companies to cut costs, making working capital management a necessary ingredient in their strategic mix to sustain profits.

• Access to New Markets: Working capital management will gain further significance as major market participants in North America and Europe look to developing economies for merger and acquisition opportunities.

“Chinese, Indian and Latin American countries constitute large unexplored markets for drug makers,” concluded Edacherian. “The development of research centres and manufacturing plants will require adept working capital management, and a surefire way to ensure a smooth entry into these regions.”