How working capital

enhancement can
drive life sciences
innovation
Life sciences companies have $217b tied
up in working capital that could be better
invested to drive long-term value.

Life sciences companies face a number of head winds, including revenue pressure, a potential
squeeze on drug pricing and patent expirations that could put $226b in worldwide prescription sales
at risk through 2026.1 At the same time, there is a push to reshore key components of the supply
chain, while some companies also continue to roll out COVID-19 vaccines. Freeing up working capital
is a crucial component for how life sciences companies can invest in future growth.

EY analysis projects the life sciences market to grow from $2.9t to $3.85t by 2024, with biotech
continuing to be a significant driver. The number of biotech companies with a market capitalization
of $1b–$4b has doubled over the past five years. An influx of venture capital is funding innovative
new companies. The pressure to keep up with this rapid growth and intensifying competitive
landscape can drive life sciences executives to consider new partnerships for rapidly developing and
delivering innovative treatments through robust and agile supply chains. (Figure A)

Figure A. Strategic drivers for pursuing acquisitions to create value

Acquiring technology, talent,

new production capabilities
or innovative startups
Gateway to new markets 25%
12%

Response to regulatory or
tariffs and trade changes/
secure supply chain
26%

Sector convergence/growth
Consolidation to into adjacent business activity
increase market share 21%
16%

Source: 23rd EY Global Capital Confidence Barometer, February 2021.

1
“World Preview 2021,” Evaluate Pharma, July 2021.

How working capital enhacement can drive life sciences innovation  | 1

For example, the 23rd EY Global Capital Confidence Barometer an important business action for growth. These statistics are
reveals that capital reallocation is a high priority for finance not surprising considering the industry’s rapid growth and the
teams. In addition to this, 16% (Figure B) of life sciences availability of cheaper and widely untapped funding mechanisms.
executives say that creating liquidity and investment capital is

Figure B. Current strategic actions in progress

(Respondents were allowed to select
three responses in order of priority. Invest in accelerating the digitization of customer journeys and business processes
The percentages are prorated to 100%).
19%
Adopt new pricing constructs or innovate pricing models
17%
Adapt sales force for optimization
17%
Create liquidity and investment capital at scale
16%
Adapt supply chain for resiliency
16%
Acquire a business in an adjacent sector to create new growth avenues
15%

Source: 23rd EY Global Capital Confidence Barometer, February 2021.

Figure C. Working capital opportunity and metrics in life sciences sector by lever
144 154
139 145 139
200
145 148

Accounts 144 158

100 140
receivable
Days

$79b
77 77 77 78 76
0
Inventory
$107b -79 -77 -82 -82 -80

-100
FY2016 FY2017 FY2018 FY2019 FY2020
Accounts
DSO — Days sales outstanding DPO — Days payable outstanding
payable $30b
DIO — Days inventory outstanding CCC — Cash conversion cycle

Source: CapIQ, EY-Parthenon analysis

The Ernst & Young LLP US (EY) industry benchmark analyses on P&L toward balancing P&L and cash flow to help maximize
suggest that life sciences companies have $216b (Figure C) shareholder value.
tied up in working capital. A change in the way life sciences
“If we can free up working capital that is otherwise tied up
companies manage cash flow maybe required to release this
in AR and AP, we can invest in our internal pipeline, business
value. While much of the life sciences industry is known for
development opportunities, shareholder distributions and
having strong cash flows, this is not something that should
buybacks. Even though we have a strong credit rating and
be taken for granted. Over the past decade, EY teams have
significant amount of cash on the balance sheet, there is always
worked closely with several industry-leading companies and
the opportunity to add more shareholder value,” Brian McMahon,
have observed them establish a new focused approach on Cash
VP and Assistant Treasurer, Pfizer, said at a September 2021
Leadership to enable a cultural shift away from focusing only

How working capital enhacement can drive life sciences innovation  | 2

How cash leadership can be leveraged
to increase value holistically
Cash Leadership is a programmatic approach to managing the P&L and the balance sheet, with equal focus on achieving more
predictable and improved cash flows. To do this, CFOs and other executives need to start thinking end-to-end rather than in
individual functions across the enterprise, from cash collections to disbursements, funding operations along the way.

True cash leadership breaks down silos and creates transparency
in trade-off decisions. A few examples:
• Deciding to accept longer receivables terms in exchange for
holding less inventory at distributors which, in turn, improves
margins
• Reporting indirect tax balances as part of your trade working
capital and with that improving DPO while deteriorating DSO
• Managing product lines based on anticipated return on invested
capital (ROIC) help life sciences organizations make decisions
with profitability, working capital and capital requirements in
mind (i.e., R&D spend, formulation, kitting and packaging, and
distribution considerations)
To break down silos and achieve a true end-to-end focus,
organizations can define what good looks like in terms of cash
management by assessing their operations with a cash lens
and establishing incentives across the organization that include
EBITDA and cash from operations.
The additional focus on the balance sheet also gives executives
more control over the financial health of the business. Successful
corporations establish regular forums in which cash strategy
is determined and end-to-end cash metrics are managed. The
focus is often narrow at first, centered on controllable areas
such as trade working capital, with an ever-expanding scale until
the executive team manages cash flow from operating activities
comprehensively. (Figure D)
“We had a lot of low hanging fruit to harvest. That created
momentum for our leaders and people across the world to
contribute process change and results,” John Miraglia, Head of
Global Treasury, Viatris, said during the webcast.

Figure D: Phases of enhanced

cash flow from operations
• Gross to net strategy
Net income • Strategic sourcing
• Sales effectiveness
Adjusted net
income

Adjustments • Asset strategy

• Tax footprint optimization

Cash flow from Trade working • Accounts payable

• Inventory
operations capital
• Accounts receivable
Working capital
Other working • Deferred revenue management
capital • Distributor agreements
Changes in assets
and liabilities
Legal • Settlement strategy

Other
Phase 1 Phase 2 Phase 3
Restructuring • Shared services outsourcing
• Asset-light
Source: Compiled by EY-Parthenon team

How working capital enhacement can drive life sciences innovation  | 3

To achieve this holistic perspective on cash flow, the cash
leadership forums are broad in nature and include financial and
operational leadership. This helps not only to achieve quarterly
or year-end financial goals, but also allows for proactive
Critical elements in cash leadership
Strategy includes a multiyear
focus on cash flow and a
comprehensive view of liquidity.
Initiative tracking enables
execution teams to thrive with
real-time, transaction level
balance sheet insights.
Cash leadership is a mindset supported by a structure that brings together all the critical elements to be able to view
and manage balance sheet performance effectively.
With proper governance, accountability and change management
in place, cash flows are managed more closely, initiatives to
release cash are uncovered and improvement programs can be
initiated and tracked using state-of-the-art metrics and analytics.
“As finance leaders, it is pretty difficult to have cash benefits,
but easy to lose the cash benefit if you don’t monitor,” Stephanie
Didier, Sr. Director, Treasury Group, Johnson & Johnson, said
during the webcast.
strategic decisions that impact day-to-day operations. Successful
cash leadership establishes accountability for cash performance
that can cascade down and across the organization in a
corporate culture revolution, enabling a cash culture.
Leadership ensures that cash is a key
part of decision-making and that central
funding is available for improvement
programs.
Communication, training and incentives
engage stakeholders at all levels, making
cash flow part of the compensation
structure, thereby integrating cash culture
across the organization.
As cash is more predictable, the release of cash can be managed
more thoroughly to drive more shareholder value. Freed-up
capital can be utilized to fund dividends, M&A activity and share
buybacks or reinvest in the business.
If releasing and managing cash was so easy, though, everyone
would do it. Through our work with major life sciences
companies, EY teams have established a framework that can help
organizations assess their cash programs and identify what key
elements may be missing to achieve sustainable benefits and
create a competitive advantage in the market.
How
Howworking
workingcapital
capitalenhancement
enhacement can drive life sciences innovation  | 4
 Critical elements of cash leadership maturity
5
4
Enhanced
3
Integrated
2
Consistent
1
Fragmented
Embryonic

Enterprise trainings Leaders drive cultural Cash performance is

Limited top-down Organization may be
emphasize the change around cash C-level priority and
visibility to drivers of functionally focused
importance of and how to and are accountable for incentives are tied
enterprise cash balance on cash
achieve cash objectives cross-functional areas to cash

Improvement Targets are integrated

Focus on high value Cascading, multi-tiered
Functional processes projects are executed into the budgeting
initiatives to generate metrics track continuous
and policies are siloed functionally without tie process and tracked
momentum improvement
to cash impact with accuracy

Cash leadership takes companies on a cash journey by focusing on the above key elements that enable
enhanced cash flow and a mature cash culture.

How one life sciences company

released trapped value
One global life science company had never needed to focus on
cash flow due to exceptional margins. But when an analyst called
out some untapped opportunities, the CFO decided to take action.
After validating the analyst’s assumptions, the CFO established a
program which the treasury team would manage, with two goals:
improve cash flow predictability and release value trapped on the
balance sheet. Program management was enabled by big data
transactional analytics and a steering team that encompassed
all functions that impacted cash. Moreover, monetary incentives
were adjusted to make cash flow a bigger part of the short-term
incentive. This dedicated focus, combined with the end-
to-end nature of the team involved, enabled the CFO
and his leadership team to create more ambitious and
realistic cash budgets at the beginning of each fiscal
year and orchestrate the end-to-end organization to
achieving their goal every year. Fast forward through
the program, and over $6b of incremental cash flow
has been released from the balance sheet. It has also
been easier to navigate through challenging periods
due to the higher level of visibility.

How working capital optimization can drive life sciences innovation  | 5

 To learn more about
EY-Parthenon’s Working
Capital Advisory Services
practice, contact us:
Conclusion
As the life sciences industry prepares for the future, creating a flexible
Sven Braun
capital structure with sufficient cash to fund big goals needs to be a
top priority. To do this, organizations can establish a successful Cash Turnaround and Restructuring Strategy
Ernst & Young LLP
Leadership Program backed by senior leadership, which can be a cost-
sven.braun@parthenon.ey.com
effective source of capital to strengthen a company’s financial position
before the next major disruption.

Peter W Kingma
Americas Working Capital Leader
EY-Parthenon Working Capital Advisory Services practice Ernst & Young LLP
helps organizations establish a successful, cost-effective Cash peter.kingma@parthenon.ey.com
Leadership Program. Backed by a senior team, our practitioners
have delivered more than $75b of incremental cash flow to clients,
averaging a 20%–25% cash flow improvement. Arda Ural, Ph.D.
Americas Industry Markets Leader,
Health Sciences and Wellness
Ernst & Young LLP
arda.ural@EY.com

Eidji Braghin, Aaron Bocian, Kankshit Bheda,

Eirini Veliou and Jo Zuber also contributed
to this article.
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