Big Pharma Has Gotten Better At Managing Cash

Startups and SMEs often struggle with managing their cash flow, but some of the world’s largest corporations depend just as much on adequate working capital management to succeed — especially in today’s pharmaceutical market.

New research from Frost & Sullivan shows that pharmaceutical businesses are finally realizing how important cash flow management is for their businesses. In a new report published Wednesday (July 29), researchers found that companies across North America and Europe are increasing their efforts to improve working capital strategies.

“The realization is that an effective working capital management will ease the difficulties caused by low sales, pricing pressures and patent cliffs,” Frost & Sullivan said in its announcement. “Big pharma companies expect to invest in optimizing working capital efficiency to bolster returns.”

According to the report, U.S. pharmaceutical companies have reduced their cash conversion cycle by 44.2 percent between 2012 and 2013. Their European counterparts were not as effective but still reduced their cash conversion cycle by 26.2 percent during that time, researchers said.

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

There are several key factors that analysts found to be the main drivers of improving cash flow management. Those include the decreased profitability faced by pharmaceutical firms, the slowing down of the industry’s innovation model and the pressure placed by regulators to cut costs and lower prices.

While these factors are negatively impacting the way pharmaceutical companies operate, the companies are also encouraged to improve their cash flow management practices thanks to the potential in new markets. Working capital is crucial to these players looking to explore new opportunities abroad, analysts said.

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

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