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Global liquidity and cash: keeping the product pipeline flowing

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In the global economy, companies must explore new overseas markets. This presents challenges for treasury ranging from FX volatility to late payments.

by Graham Buck

Published: April 10th 2019

Corporate cash conversion cycles present a challenge for multinationals and vary significantly across different countries and across different industries. For pharmaceutical and biotech companies there are further issues. For example, how long the patent on a drug it has expensively developed can last before generic competitors move in? Can the economics work for a product that isn’t mass-market but will treat a specific condition afflicting relatively few people?

Ed Moselle, associate director capital markets and operations at BioMarin

Take the example of US group BioMarin Pharmaceutical, a pioneer in enzyme replacement therapies (ERTs). Established in the late Nineties, the San Rafael, California-based company has also set up operations in South America, Asia and Europe and has made six strategic acquisitions over the past two decades. In 2018 revenues grew by 14% to just under US$1.5 billion, although the company only managed a reduced loss of US$77.2 million.

The company’s mission is to bring new treatments to market that make a big impact on a small population, explains Ed Moselle, associate director capital markets and operations at BioMarin. “Usually the prize for a biotech is ‘big impact, big population’; that’s what gets shareholders excited. But over the past 20 years, we’ve developed more of a niche market, one of ‘small patients, big impact’.

“That means as an employee, you end up having to explain to people that they’re unlikely to ever meet anyone who uses a BioMarin product or has even heard of them. You’ll also get questions along the lines: ‘you’re spending hundreds of millions of dollars on R&D to treat diseases with no more than 1,000 patients – how do the economics of that work out?”

“As the person who sits in treasury, I’m a gatekeeper for commercial operations, getting payment terms and currencies approved. It can seem like a never-ending cycle, where different people from different parts of our commercial operation of the organisation talk to you about different drugs in different markets that you’d swear you had just approved terms for.

“Sometimes we can be negotiating two contracts in the same country that end up creating different exposures – whether that’s sovereign risk, credit risk or just extending terms.”

On the issue of cash efficiency, Moselle says that BioMarin’s dependence on single source suppliers for certain raw materials creates a “small risk with a big impact on the cash conversion cycle.” In some cases there is only “one shop in town” providing some of the core components of their drugs. “If they go down then our ability to serve our patients – children who are suffering severe diseases – could be severely impacted.

“We need to ensure we have a substantial amount of inventory in case bad things happen – because they can and do. And should a single source supplier fail to fulfil an order, having that extra inventory is vital because it could take a significant amount of time to either produce it ourselves or to find a new source.”

It’s not uncommon for the company to receive a large order – perhaps covering one financial quarter’s worth of supply – from Latin America. “As we have very large orders and very expensive drugs, one major order can be the difference between hitting or missing our earnings guidance,” says Moselle. “Not only do we need to have inventory available and buffer stock after the depletion of that inventory, we also need the resources and cash available to replenish both when the time is right.

Bird’s eye view

As a result of these constraints, BioMarin has to hold a lot of working capital, and has a cash conversion cycle of 191 days, based on analysis of recent SEC filings.

Shareholders typically expect companies to do their utmost to reduce working capital. But the cash conversion cycle at BioMarin, as well as other companies providing life sciences and specialist drugs, can’t be as efficient as those in other industries, Moselle points out.

“Often it’s not a priority”, he says. “There are too many risk factors standing in the way, which are more important to the organisation and to our mission that make it compelling to say: ‘we’re going to turn a blind eye to some of this – let some aspects of cash conversion cycle efficiency take a back seat’.”

“At the same time there are areas where staying vigilant means that treasury can continue providing strategic value. One concept that always helps me explain how and where treasury can provide that strategic value is that our team sits at the intersection of treasury flows – funding and investing – and commercial flows – payables and receivables.

“We get a bird’s eye view. Whether people like it or not, if you’re going to be dealing with money, you’ll want to let treasury know as much as possible about what you’re doing. We can be the facilitator that brings everybody – different groups within the organisation that otherwise wouldn’t necessarily talk to each other – together to facilitate a solution. That ultimately brings cash in from customers quicker, gets payments out on time, and informs the broader organisation of the financial risk factors the company is facing.”