Citi s Online Academy Presents: The Pharmaceutical & Healthcare Industry in Latin America Jamie Davies Head of Pharmaceuticals & Healthcare Business Monitor International Oscar Mazza Consumer & Healthcare Industry Head Citi Transaction Services Latin America
Working Capital Trends & Opportunities The Pharmaceuticals & Healthcare Industry in Latin America Oscar Mazza Citi Transaction Services Consumer & Healthcare Industry Head
Global and LatAm Market Trends Strong growth of the Pharma & Healthcare industry in the region and positive macroeconomic outlook for Latin America Multinational Pharma companies depend more on their LatAm franchises to drive global sales targets LatAm Pharma companies have a greater need to manage their Working Capital efficiently and invest for growth Multinationals are repatriating dividends to head office and limiting intercompany loans to maintain adequate liquidity positions globally due to challenging market conditions and high credit restrictions (mainly due to the situation of European Banks). LatAm subsidiaries are increasing the focus on improving WK metrics to free up needed cash The focus on WK management is reflected in incentive pay. Best in class Pharma companies: Include payouts for improving working capital metrics in incentive plans Incentivize managers to monitor and improve working capital on a monthly basis Include working capital as a metric for stock awards Unlocking cash flow invested in WK opens the door to new growth opportunities Fund R&D Increase liquidity to finance acquisitions 2
Working Capital Benchmarking 40% 30% Benchmarking against industry peers can help guide strategies to reach Best In Class working capital management Components of Working Capital as a % of Total Revenues Inventory 20% Avg NWC 10% Accounts Receivable 0% Accounts Payable (10%) (20%) Average BMY JNJ LLY NOVN GSK MRK AMGN ABT SAN ROG AZN PFE Sales ($bn) $19 $62 $23 $51 $45 $46 $15 $35 $42 $52 $33 $67 4 Inventories 11% 6% 9% 11% 12% 14% 13% 14% 9% 16% 10% 5% 13% Receivables 19 11 16 15 20 17 16 16 20 20 20 30 22 Payables (7) (10) (9) (5) (9) (8) (5) (5) (4) (9) (2) (7) (6) NWC 23% 7% 15% 21% 22% 23% 24% 25% 25% 27% 28% 28% 28% 3 Source: Company filings, Capital IQ Data for 2010 Notes: Accounts receivable, inventories, and accounts payable balances include balances related to trade only. Other receivables related to taxes, rebates, and other accruals are not included. Averages exclude Merck.
Days Payable Days Inventory Days Receivable Working Capital Benchmarking Benchmarking against industry peers can help guide strategies to reach Best In Class working capital management 100 80 60 40 20 0 Days Sales Outstanding (DSO) Avg DSO: 65 days 54 55 55 55 57 66 66 66 71 72 75 79 LLY BMY AMGN MRK JNJ NOVN GSK AZN ABT ROG SAN PFE 400 Days Inventory Outstanding (DIO) 300 4 4 200 100 0 200 150 100 50 0 Avg DIO: 172 days 81 93 102 102 148 154 159 138 136 133 116 112 108 107 103 92 198 199 224 244 ABT BMY JNJ AZN ROG NOVN MRK GSK SAN LLY PFE AMGN Days Payable Outstanding (DPO) 60 52 36 AZN BMY PFE AMGN NOVN SAN JNJ GSK LLY MRK ROG ABT Source: Capital IQ Notes: Peer averages exclude Merck. 349 Avg DPO: 103 days
If Global Pharma Company ABC were to achieve Best in Class metrics in each category, the result could unlock $6.5 billion in free cash flow, $2.9 from extending DPO Estimating The Impact Of A Move to Best- in-class Working Capital Metrics ($ in billions) Benchmarking against Best in Class Efficiency Pharma Company ABC Current State Best in Class Comp Best in Class Days ABC Average Account Balances Avg. Balances Implied @ Best in Class Days Unlocked Value from WC DSO 55 days Eli Lilly 54 days Receivables: $7.0 $6.8 $0.2 DIO 159 days Abbott Laboratories 81 days Inventory: $7.0 $3.5 $3.4 DPO 60 days AstraZeneca 138 days Payables: $2.3 $5.2 $2.9 CCC 154 days Bristol-Myers Squibb 11 days $6.5 5 Source: Capital IQ
What leading firms are doing to improve WK in LatAm 1 2 3 4 5 Supplier Finance Buyer Benefits Supplier Benefits 6 Companies are re-thinking their supply chain operating models There are numerous incentives to improve supply chain stability and increase working capital through terms extension Citi offers solutions for both local and international supplier programs Strengthen relationship with strategic suppliers Increase DPO, reduce COGS Increase returns on working capital Solution with simple implementation and no associated cost Reduced processing costs and vendor inquiry Strengthen relationship with strategic suppliers Increase DPO, reduce COGS Increase returns on working capital Solution with simple implementation and no associated cost Reduced processing costs and vendor inquiry
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Q & A Working Capital Trends & Opportunities The Pharmaceuticals & Healthcare Industry in Latin America 8