Brian Shanahan of Informita (right) sets out the findings of his latest survey of working capital in the pharmaceutical sector
When we published our first pharmaceutical industry working capital analysis in 2012, the survey suggested that there was excess working capital across the industry of €51 billion.
The equivalent survey based in 2014 suggest that excess working capital had reduced to €41 billion, but this latest survey shows a return to to the €51 billion level last seen four years ago.
This would have the effect of reducing the industry average of net working capital to sales from 22% to 13% - enough to fund a number of massive acquisitions.
The strangest thing about these numbers is that there has been no uniform deterioration in any element of working capital and there have been several improvers. The most curious piece seems to be that although many pharmaceutical companies make use of financial instruments to manage working capital, the impact of such instruments seems to be limited at best.
Almost all pharmaceutical companies have either a formal working capital programme or someone who is permanently responsible for working capital. The numbers would suggest that only some of these initiatives have been successful, some that were successful have slipped back to a lower level of performance and most have been successful in one area of working capital while under-performing in others.
The number of people working at pharmaceutical companies with titles suggesting a direct responsibility for working capital continues to increase and many of these new recruits are ex-consultants or ex-pharma executives where you would expect a deep experience of both the industry and the techniques required to improve working capital. But it doesn’t seem to be making that much difference for many firms.
With the continued pressure from shareholders to maintain and increase dividends the battle to control working capital continues.