U.S. pharmaceutical industry is overlooking as much as $16 billion in cash

May 31 2005

The pressured U.S. pharmaceutical industry is overlooking as much as $16 billion in cash tied up in excess working capital or the equivalent of up to a full 2.1% of the current total enterprise value, according to the results of a new study by REL Consultancy Group.

"U.S. pharmaceutical companies are literally leaving money on the table at a time when the industry as a whole is struggling in the face of disappointing single-digit growth, a lack of new products to replace drugs coming off patent, increasing competition and shrinking margins," said Stephen Payne, chief executive officer of REL Consultancy Group. "The cash is just sitting there, waiting to be liberated."

Together, the large U.S. and European pharmaceutical companies have as much as $25 billion cash tied up in excess working capital, according to the REL analysis. The study also notes that as much as $1 billion in additional annual cost savings also can be realized if pharmaceutical companies put into place best practice working capital strategy and processes.

"Considering that yearly global organic sales for the large pharma companies as a whole are expected to slow to a growth rate of just above 2% over the next five years, new challenges are forcing management to rethink the way it has been conducting business in order to continue to deliver value to shareholders," Mr. Payne noted.

"While some forward-thinking companies have made progress, it is clear that a fundamental transformation is needed for the industry as a whole," Mr. Payne continued. "A significant part of this change is greater attention to cost reduction and efficiencies such as better working capital management."

Working capital is the capital invested in operating processes to buy, make and sell in order to generate profit. The operating working capital comprises operating cash, trade receivables and inventories less payables. Typically, a reduction in operating capital can be achieved through improved collection, dispute and credit management, inventory and supply chain optimization, supplier consolidation and more efficient buying.

The Enterprise Value is the sum of a company's stock market capitalization plus its net debt, and is believed by many money managers and financial analysts to be a more accurate way to put companies with different capital and tax structures on the same basis for analysis.

Further details and full research findings can be found at www.relconsult.com.