A recent analysis of working capital management practices of biopharmaceutical/pharmaceutical companies has some mixed implications
for the contract-services industry. The report from financial services giant Citi claims that the global biopharmaceutical/pharmaceutical
companies could release $33 billion in cash by managing their working capital better. Working capital is the difference between
current assets (which include accounts receivable and inventories) and current liabilities (which include accounts payable
and short-term debt). Companies use cash when they build up inventories and receivables and pay their bills; they increase
their cash when they run down their inventories, slow payments to suppliers, or collect receivables more aggressively.
Companies could free up that cash by reducing inventories and taking longer to pay their bills, according to the Citi report.
The additional cash resources could be used for licensing and acquisition deals or could be returned to shareholders as dividends
and stock buybacks.
Having to wait longer for their money is not something that CMOs and CROs want to hear. Service providers are already getting
squeezed on prices and profit margins, and a slowdown in payments will eat further into their profits by forcing them to borrow
more against their lines of credit or to forego discounts they might get from paying their own suppliers. In the worst cases,
CROs and CMOs could be forced to delay hiring or purchasing materials and equipment, which would hurt the quality and reliability
of the services they provide.
On the other hand, helping their biopharmaceutical/pharmaceutical clients to reduce their inventories could be a big opportunity
for CMOs. Managing inventories is about managing production schedules, cycle times, and supply chains. These are skill sets
at which CMOs are supposed to excel because they are at the core of modern manufacturing practice. CMOs that are able to reduce
schedule lock-in times from the traditional three months for dose forms and six to twelve months for APIs could increase their
share of business from key customers and probably earn somewhat higher margins.
The working-capital challenge raised by the Citi report is further proof that success for CMOs will go beyond traditional
measures of quality and cost of goods.
Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903,