Healthcare Study Trend and Impact on Working Capital (Feb 2016)

© 2016 WIPRO LTD | WWW.WIPRO.COM | CONFIDENTIAL1
Health Care Working
Capital Trend
F. Piquemal
Senior Manager
Consulting Services

Agenda
Health Care Market Trends
Overall Challenges
Working Capital
Inbound / Outbound
Distribution and SLA
1
2
3
4
5
6 Conclusion

Change is the new normal. Providers, payers, governments and other stakeholders strive to deliver effective, efficient and equitable care. They do so
in a ecosystem that is undergoing a dramatic and fundamental shift in business, clinical and operating models. (1) (2)
Trends
This shift is being fuelled by aging and growing populations, the proliferation of chronic diseases;
heightened focus on care quality and value; evolving financial quality regulations; informed and
empowered consumers; and innovative treatment and technologies; all of which are leading to rising
costs and increase in spending levels for care provision, infrastructure improvements and technology
innovations.
Health sector is moving from its traditional fragmented approach to one focused on consolidation,
convergence and connectivity. Health plans are also defragmenting via mergers and acquisitions and
collaborative relationships with providers to create a powerful data-sharing networks. (3) (4)
Emerging reimbursement models are based on risk and effectiveness while governmental
organization are looking for innovative ways to manage and deliver care.
While cash levels are high at the moment, there is a significant requirement for funds to support and
enable future growth. Financial expectations between providers of services and the budgets of
payers and commissioners are drifting away from each other.
Health care is one of the largest industry in the world, at close to 10% of global GDP and governments fund much of its operations. However,
challenging economic conditions are making it difficult for governments to devote the necessary financial resources to handle expanding health care
demands, especially when couple with ever rising costs. This leads everywhere to healthcare reforms in which cost containment is the basic
approach in conjunction with a drug price control.

Increased demand for innovation, efficient therapies and value reaches both new emerging E7 markets (China, Russia, India, Indonesia, Turkey,
Brazil and Mexico) due to PIB increase supported by health care development policies and G7 markets due to aging population trend. (5) (6) (7)
Trends
Global health care spend is forecasted to grow only at 4.3%
annually to 2019 with India to lead the way at 16.1% growth by
2019.
Pharmaceutical companies have to face a lack of new molecules
with structural increase in R&D, commercial and marketing costs
coupled with a bad reputation and poor financials performance.
From 2001 to 2007, the Global Pharmaceuticals FTSE index
increase 1,3% compared to 35% for the Dow Jones World Index
and pharmaceutical TSR dropped -2.4% each year.
Pharmaceutical companies must improve R&D productivity and
capture new opportunities from emerging market from new and
dedicated products with a more specific effectiveness competing
with prevention program, virtual care and new health advisers. (8)
The pressure to reduce costs, increase efficiency and provide
value are starting to be seen.
In this context, 20% of the R&D costs are dedicated to extension
rather than introduction of new products.
R&D Spend (US$ Millions) NMEs

Market prices are more controlled by Government which limit price dispersion from mature to emerging market and more and more based on
competing clinical value. Pharmaceutical companies have more and more to prove to the governmental healthcare institution that medicine are
efficient.
Trends
Modern countries institutionalize new healthcare policies
to reduce spend by promoting prevention campaign,
introducing observance program, developing auto
medication (OTC) or introducing new actors for
delivering medicine and following the patient up in an
ever-changing regulatory and risk environment. (7) (8)
Therefore pharmaceutical companies will have to adapt
their strategy and complete portfolio with ad’hoc
additional services. New therapies, improve outcomes
and specialty drugs are one of the segment to rise.
They currently comprise 31.8% of total drug spending
and are projected to reach 44% by 2017. (7)
Health care providers are investing in new capabilities
as they reconfigure around Value Based Care models.
Pharmaceutical companies are forced to rework their
strategic sourcing, identifying, implementing,
maintaining costs savings(9) underpin by structural
changes in the way information are managed (10)

Contradictory forces influence health care market, such as aging population, growth of
emerging markets and advanced in treatments. Continual cost increases and margin erosion
are impacting providers and health care plans. (11)
Trends - Abstracts
Therefore pressure to contain costs and demonstrate value is coming from all side
(Government, Providers, Live sciences companies, consumers and health plan).
New value based care models focus on maximizing value (lower cost and higher quality) are
being increasingly looked at as a sustainable solution.
Providers start adopting new organizational structures to face a more segmented market and
meet new upcoming governmental healthcare policy.
Access to new emerging markets are more and more dependent on local infrastructure
implementation or local involvement of subcontractors or distributor alliance.
To increase competitiveness and productivity, industries planned to outsource production to
third party manufacturer, invest in biotech companies with promising portfolio.
Key benefits will be by adapting their Supply Chain activities finding synergy in distribution
(warehousing, order management, transport) using retail standards. (12)
SC costs are under pressure as a source to finance raising R&D spends. Stocks represent
around 40/50% of the total supply chain capital assets. (10)

Overall Challenges
Companies are expanding their product portfolios to meet rapidly changing markets and lengthening product life cycles. Emerging economies want
more affordable products. Quality and compliance issues are rising because products are more complex and regulatory scrutiny is stricter. (1)(13)(14)
And the number of drug recalls is increasing. Yet the supply chain remains fragmented and incomplete, with weaknesses that put patients at risk, cost
billions in value, and lessen the healthcare sector’s ability to take on the challenges it faces.
By learning from the experience of industries such as
fast-moving consumer goods (FMCG), the health-care
sector could cut production lead times
and obsolescence, while manufacturers, distributors,
hospitals, and pharmacies could carry significantly
smaller inventories. (15)
Researches have identified five specific capabilities
that can have a dramatic impact on performance
and bottom lines:
• Better segmentation of products, markets, and
customers
• Greater agility, to reduce costs and increase flexibility
• Measurement and benchmarking
• Alignment with global standards
• Collaboration across the health-care value chain
Financial impact of supply chain improvements ($ Billion)(11)
Opportunity across the value chain
from supply chain transformation (11)

Challenges: Working Capital
Many pharmaceutical companies will need to draw in their working capital and to convert more operating profit to cash to finance future development
and sustainable growth.
Pharma & life science have highest number of working capital days. Hence, major industry to look into to streamline processes. (3)
Working Capital growth 2010-2014 is 31.5% for all industrial sectors. Part related to Asia rose up from 26% to 33% (from 2010-2014) while part
related to Europe dropped from 36% to 28% (from 2010-2014).
For pharmaceuticals & live science median NWC is at 92 days. All sectors show a significant spread in performance between top and bottom
performers. Related best in class is at 54 days versus 133 for bottom performers in healthcare sector.

Challenges: Working Capital / Inventory
Health Care companies need to manage a more complex and
fragmented sourcing with increasing demand in active ingredient. (3)(9)
Pharma and life sciences is the sector with longest DIO, mostly related to
inventory level usually imposed by governmental regulation policies.
Replenishment lead time from plants to distribution Centres is on
average 75 days versus 30 days in leading companies. (14)(15)
This implies an increase reliability in long term forecast and demand
analysis to optimize stock, specifically non quality related one and reduce
risk in shortage:
• 16% shortage due to raw material/intermediate on time availability for
active ingredient:
o China produce 53% of them
o India produce 22% of them
• 28% shortage due non anticipated sales increase
• 33% shortage due to production and quality control, inspection
Pharmaceutical
& life sciences
Metals Engineering
& construction
Industrial
Manufacturing
Technology Forest, paper
& packaging
Chemicals Healthcare Retail &
consumer
Automotive Aerospace
defense & security
Entertainment
& media
Transportation
logistics
Communication Energy
utilities &
mining
Hospitality
& leisure
Health Care companies start to initiate and implement lean strategy (as
car producer did years ago) to better channel financial resources from
productivity in WIP, safety stock level in addition to new technics
implementation like DDMRP. (12)
Health Care companies start to manage serialization to overcome
counterfeiting.

Challenges: Working Capital / DSO
Situation is less encouraging when it comes to structural drivers or capabilities : Replenishment lead time, manufacturing frequency, supply reliability
(schedule adherence) and stability (share of rush orders, planning accuracy) are largely not systematically measured or managed across the overall
network and impact invoicing and collection efficiency. (3)
There is a need to do more groundwork to ensure a true standardization of metrics across the different countries or plants.
DSO in healthcare industry is around 65 days on average across all geography with USA/Canada being the best with 34 days versus 95 days for
middle eastern countries and Asia.
Europe has done marginally better in decreasing DSO. at 64.4 days.
One of the root cause led in the increased complexity of the supply chain
due to shift of the economic center of gravity towards the east.
Pharmaceutical companies are ranked as the 3rd longest DSO in
industries and service sectors. Despite initiatives in the sector
performance did not improved over the past 5 years.
If you are struggling with a high DSO, you are struggling with a
combination of one or more of the following:
1. Invoicing,
2. Collection efficiency,
3. Extended invoice terms,
4. Sales linearity.
Many businesses offer payment incentives which will reduce their DSO. Pharmaceutical
& life sciences
Metals Engineering
& construction
Industrial
Manufacturing
& packaging
consumer
defense & security
Entertainment
& media
Transportation
logistics
utilities & mining
Hospitality
& leisure

Challenges: Working Capital / DPO
Pharmaceutical companies are ranked as the 2nd bottom performers in DPO management.
Regulatory and internal compliance is the cornerstone to effective sourcing. Strategic sourcing process will minimize risk, keep the organization in
compliance.
The ability to reduce the complexity of the source to payment process allows for a greater understanding of contract lifecycle management and can
easily transform efforts into true cost saving efforts. (3)(9)
Align sourcing activities and objectives with those of greater organization
is their primary strategic action. But standardization is difficult with multi
org production, multiple product, several suppliers, vendors, SLA which
are all likely to carry significant differences across countries with multiple
country and federal regulatory requirement while adhering to state and
local laws.
Key drivers for increasing inbound performance led in:
1. Establishing formal strategic sourcing organization with
standardized and formal processes. Sourcing is the first line of
defence regarding bad product.
2. Establishing better KPIs to measure supplier effectiveness
3. Adopting technologies to improve spend visibility and accuracy of
spent data, thru accurate forecasts. Pharmaceutical
& life sciences
Metals Engineering
& construction
Industrial
Manufacturing
& packaging
consumer
defense & security
Entertainment
& media
Transportation
logistics
utilities & mining
Hospitality
& leisure

New commercial models will be integrating mix of push and pull
channels such as social media, online support communities, gaming,
public education campaigns and alliance with advocacy groups.
Challenges: Service Level & Distribution
Operational effectiveness and R&D and innovation are the areas where
the most pharmaceutical companies are focusing their investment
strategy but enhancing customer service becomes a top priority as well.
(1)(16)
Today’s supply chain shortcomings have severe impact on human
health. Drug shortages have nearly tripled since 2005. Provides pay an
average of 11% more for products experiencing shortages. Shortages
also create opportunities for counterfeiters, representing 5% of the
market sales and $70 billion in lost sales by 2016. (14)(15)
Health care resources are heavily skewed towards urban areas
(65/70% of infrastructure and manpower) while 70% of the population
resides in rural areas. (1)
Despite logistics costs represent a low % of the total product cost,
companies start to optimize them, reworking logistic processes to
increase direct service level to store or hospitals.
Adapt logistics to the various market segment and more heterogeneous
product mix.
Distribution network will be redesigned and rationalized to serve brand
new final customers.

Conclusion
Pharma’s future has never looked more promising. Companies are looking to innovation and emerging markets to drive growth. To do so, improving
operational effectiveness should continue to be a top investment priority.
While they are planning to change course to serve customers better and win their loyalty by
completing offer with new services, they should also be focusing in investing enough in better
customer service, by optimizing their supply chain and revenue cycle, influencing working capital
strategy all along the value chain.
The ongoing industry transformation is fuelled by global reform efforts, formulary pressure, and
shifts in product mix and presents an opportunity for supply chain executives to play a more
strategic role in shaping future business models.
These executives still will be expected to take
on traditional roles of developing tactics to
maintain or improve margins under new cost
constraints and to meet regulatory demands.
However, they also will be called upon to
develop broader strategies to transform the
supply Chain from an enabling function to one
that drives innovation and profitability. Supply
chain-driven innovation, such as novel
manufacturing techniques, alternative modes
of distribution, supply chain segmentation,
and partnerships with third-party service
providers infusing Innovation where it makes
sense, will be critical to sustaining a new
business model focused on different types of
products, services, and methods of patient
engagement.
All of that in the expectation to increase
financial capabilities to fund their R&D.

Appendix by slides
Slide 3
(1) Deloitte – 2016 Global health care outlook – Battling costs while improving care
(2) Healthcare Facilities Today – Trends in Healthcare Facilities - Siemens Industry Inc. (2014)
(3) PWC - 2015 Annual Global Working Capital Survey
(4) BearingPoint – A market of challenges
Slide 4
(5) The Economist – Health outcomes and cost : A 166 country comparison (2014)
(6) PCW - Pharma 2020: La vision – Quelle voie prendrez vous ? (2009)
(7) Greg Reh - Deloitte – 2016 Global Life Sciences Outlook – Moving forward with cautious optimism (Jan 2016)
(8) PCW – Medical Cost Trend – Behind the numbers 2016 – (June 2015)
Slide 5
(7) Greg Reh - Deloitte – 2016 Global Life Sciences Outlook – Moving forward with cautious optimism (Jan 2016)
(9) Louis Berard – Aberdeen Group - Strategic Sourcing in Healthcare – (Feb 2015)
(10) Deloitte – 2016 Health care Providers Industry Outlook – (Jan 2016)

Appendix by slides
Slide 6
(11) Deloitte – 2015 Global Health care outlook – Common goals, competing priorities
(12) Supply Chain Magazine (November 2015)
Slide 7
(13) Deloitte – Health care and Life Sciences Predictions 2020 – A bold future ?
(14) Mc Kinsey & Company - Strengthening health care’s supply chain : A five step plan (2013)
(15) Mc Kinsey & Company – Building New Strengths in the Healthcare Supply Chain (2013)
Slide 8
Slide 9
(9) Louis Berard – Aberdeen Group - Strategic Sourcing in Healthcare – Feb 2015

Appendix by slides
Slide 10
Slide 11
(9) Louis Berard – Aberdeen Group - Strategic Sourcing in Healthcare – (Feb 2015)
Slide 12
(16) PWC – Dealing with disruption - 16th Global CEO Survey – Key findings in the pharmaceuticals and life sciences
industry (Feb 2013)
Slide 13
(17) Deloitte – 2015 Global life sciences outlook - Adapting in an era of transformation (2015)
(18) Health Catalyst - 6 Steps for Implementing Successful Performance Improvement Initiatives in Healthcare (2014)

Appendix
(1) Deloitte – 2016 Global health care outlook – Battling costs while
improving care
(2) Healthcare Facilities Today – Trends in Healthcare Facilities - Siemens
Industry Inc. (2014)
(3) PWC – 2015 Annual Global Working Capital Survey
(4) BearingPoint – Healthcare, a market of challenges
(5) The Economist – Health outcomes and cost : A 166 country comparison
(2014)
(7) Greg Reh – Deloitte – 2016 Global Life Sciences Outlook – Moving
forward with cautious optimism (Jan 2016)
(9) Louis Berard – Aberdeen Group - Strategic Sourcing in Healthcare – (Feb
2015)
(11) Deloitte – 2015 Global Health care outlook – Common goals, competing
priorities
(13) Deloitte – Health care and Life Sciences Predictions 2020 – A bold
future ?
(14) Mc Kinsey & Company – Strengthening health care’s supply chain : A five
step plan (2013)
(15) Mc Kinsey & Company – Building New Strengths in the Healthcare
Supply Chain (2013)
(16) PWC – Dealing with disruption - 16th Global CEO Survey – Key findings
in the pharmaceuticals and life sciences industry (Feb 2013)
(17) Deloitte – 2015 Global life sciences outlook - Adapting in an era of
transformation (2015)
(18) Health Catalyst - 6 Steps for Implementing Successful Performance
Improvement Initiatives in Healthcare (2014)

Thank you
F. Piquemal
fabrice.piquemal@wipro.com
Senior Manager
Consulting Services

Healthcare Study Trend and Impact on Working Capital (Feb 2016)

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