"US pharmaceutical companies are literally leaving money on the table," said Stephen Payne, chief executive officer of REL Consultancy Group. "The cash is just sitting there, waiting to be liberated," he added.
The report reckoned that US Pharmaceuticals have between $6.4 billion and $16.3 billion of cash unnecessarily tied up in working capital, equivalent to between 14 per cent and 35 per cent of the total net operating working capital.
This cash represents between 0.8 per cent and 2.1 per cent of their current total enterprise value. For European Pharmaceuticals, the total level of cash tied up is between $4.6 billion and $8.6 billion, equivalent to between 11 per cent and 20 per cent of the total net operating working capital. This cash represents between 0.8 per cent and 1.4 per cent of their current total enterprise value.
REL also noted that as much as $1 billion in additional annual cost savings also could be realised 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 per cent 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.
In order to buy time, some companies have followed the mergers and acquisitions route to enhance revenue and to gain greater capabilities to bring new products to the market. This has generated significant cost savings and brought about a reduction in R&D-based risk.
In the last five years alone, Glaxo Wellcome has combined with Smithkline Beecham, Pfizer with Warner Lambert and Pharmacia, Astra with Zeneca, and Sanofi-Synthelabo with Aventis.
"While some forward-thinking companies have made progress, it is clear that a fundamental transformation is needed for the industry as a whole," Payne said.
"A significant part of this change is greater attention to cost reduction and efficiencies such as better working capital management," he added.
Operating efficiencies are now expected to be a major contributor to long-term value growth of the industry. Pfizer, for example, has targeted $4 billion in total annualised cost savings by 2008, which represents approximately 12 per cent of its current cost base.
Savings should come mostly from streamlining sales and costly R&D, as well as focusing on fewer diseases while, at the same time, forming more development partnerships.