Pharmaceutical Industry 2006-2015: A Look at Performance, Improvement and Value

Globalization. Serialization. Clinical trials. Cold chain operations. Custom drug protocols. Compliance. Risk Management. Corporate Social Responsibility (CSR). First pass yield. Over the last decade, the number and variety of supply chain initiatives exploded for the pharmaceutical leader. As a result, the supply chain group, and the business imperatives, grew in importance. Who did the best? Biogen and Novo Nordisk did the best, but neither meet the criteria of the Supply Chains to Admire for 2016. 

Overall, the pharmaceutical supply chain fared better through the decade than that of consumer products or food/beverage. The reason? The pharmaceutical supply chain entered the decade as a supply chain laggard. They were able to focus and catch up to the level of other industries. As shown in Table 1, when the industry averages of 2016 are compared to 2015, the pharmaceutical supply chain grew revenue while driving improvements in operating margin, inventories, cash-to-cash and Return on Invested Capital (ROIC).

Table 1. Relative Industry Performance

However, when we look at the balance sheets and income statements, and compare company performance, there is not clear supply chain winner. While Biogen and Novo Nordisk are clearly driving improvement, and Price to Tangible Book Value, neither company outperforms on inventory.

As a result, no pharmaceutical company will make the Supply Chains to Admire list for 2016. To make the list, a company had to deliver performance (above average results for the period of 2009-2015 than their peer group on a portfolio of metrics including Price to Tangible Book Value, growth, operating margin, inventory turns and Return on Invested Capital) and drive supply chain improvement (based on the Supply Chain Index) faster than their peer group. We believe both performance and improvement matter. We hope this report can be a guide to help companies understand what is possible, and how supply chain metrics drive value.

In the pharmaceutical industry we find most companies to be stuck. They have either regressed in supply chain performance or they are at the same point as they were a decade ago. For many supply chain leaders that attend conferences, this may seem unfathomable. There is an industry belief that companies have implemented new technologies and evolved processes and driven improved balance sheet results. The goal of this report is to enable benchmarking and to spark a new conversation on the definition of supply chain excellence.

The Race for Growth

Growth rates for the pharmaceutical companies were faster early in the decade than the last part of the decade. The overall growth for the period of 2006-2015 is 6%. As shown in Table 7, note that four companies in the peer group posted growth rates greater than the industry average and are in the top half of the Supply Chain Index (measurement of supply chain improvement) for the periods of 2006-2015 and 2010-2015. These companies are Amgen, Biogen, Novo Nordisk and Shire. Conversely, Merck beat the growth rates for the period of 2006-2015, but struggled to drive supply chain improvement. Companies with the highest growth rates also did the best on driving supply chain improvement.

Many supply chain leaders don’t believe it is possible to grow and manage the Supply Chain Metrics That Matter simultaneously.  In the analysis, we see that as growth slowed in the pharmaceutical industry that it was harder to drive improvement on the Supply Chain Metrics That Matter.

Table 2. Industry Growth Rates Over the Last Decade with a Comparison to the Supply Chain Index

What Is Value?

As noted in Table 3, companies outperforming in market capitalization may not outperform in Price to Book, or Price to Tangible Book Value. Also note the trend between PTBV and the Supply Chain Index. While a company like AstraZeneca PLC is outperforming on many metrics, the supply chain performance is declining with a falling Price to Tangible Book valuation.

Table 3. Market Valuation and Supply Chain Improvement

Judging Supply Chain Performance

When it comes to overall supply chain performance, Biogen and Novo Nordisk are posting results better than the peer group while still driving improvement. However, neither company is pushing above the industry average on all of the metrics to meet the Supply Chains to Admire definition. As shown in Table 4, both Biogen and Novo Nordisk are outperforming in growth, operating margin and ROIC, but underperforming on inventory turns. Shire is showing improvement in the later part of the decade, but is a late bloomer.

Table 4. Comparison of Performance and Improvement for the Periods of 2006-2009, 2010-2005 and 2006-2015

Managing Cycles

When comes to managing cash-to-cash cycles, a small number is better. The question in the boardroom is “How small can supply chain cycles be managed before we put the supply chain at risk?” To understand the management of cycles in the pharmaceutical industry we evaluated them in three time periods: pre-recession, during the recession and post-recession. We wanted to understand how the components of cash-to-cash cycles had changed across competitors over time.

Cash-to-cash is a composite metric of receivables, inventory and payables. As can be seen through the charts, the greatest improvement in supply chains in the last decade has been made in payables—i.e. lengthening payment terms to supplies—while inventory levels and receivables have been more constant. However, with the exception of AstraZeneca, the pharmaceutical companies have not been as aggressive as other industries on the elongation of payables.

Table 5. Comparison of Cash-to-Cash Components: Pharmaceutical Industry During 2006-2009 and 2010-2015

While it looks like AstraZeneca has made the most progress in managing cash-to-cash cycles, a closer examination of the payables in Figures 1 and 2 tells a different story. The improvement is primarily coming from lengthening payables. The movement from 300 to over 500 days by AstraZeneca is dangerous. This is especially true in the pharmaceutical industry where there is a critical dependence on suppliers and contract manufacturers.

Figure 1. Cash-To-Cash Cycles for Major Pharmaceutical Companies for the Period 2006-2009

 

Figure 2. Cash-To-Cash Cycles for Major Pharmaceutical Companies for the Period of 2010-20015

 

 

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