Pharmaceuticals working capital

Explanations and details of these terms can be obtained in various books and pamphlets, for instance, Allen (1980) and Liversey (1983). No one parameter is self-sufficient, and alone gives a complete view of the financial status of a project or product. Therefore a number of parameters are usually calculated, and used in conjunction. They serve to give indications of how to minimise the period over which capital needs to be committed to a specific project, to show changes in the cost-structure of the process with time, and to reduce the time taken to convert the material, labour and overhead resources (the working capital) into cash in the form of profits from sales. That is, to make the cash-flow as favourable as possible. Each comparer will have different criteria as to what constitutes an acceptable financial risk when evaluating a project. Obviously healthcare product/pharmaceutical companies have quite different criteria to companies manufacturing bulk chemicals. 

A new pharmaceutical plant is expected to cost (FCIj) 25 million, and the revenue (R) from the sale of products is expected to be 10 million/yr for the first four years of operation and 15 million/yr thereafter. The cost of manufacturing without depreciation (COM ) is projected to be 4 million/yr for the first four years and 6 million/yr thereafter. The cost of land (at the end of year zero) is 3 million, the working capital at start-up (which occurs at the end of year 2) is 3 million, and the fixed capital investment is assumed to be paid out as 15 million at the end of year 1 and 10 million at the end of year 2. Yearly income starts in year 3, and the plant life is ten years after start-up. The beforetax criterion for profitability is 17%. Assume the plant has no salvage value, but that the cost of land and the working capital are recovered at the end of the project life. 

The chapter is divided into two sections. The first section focuses on procurement as an industrial policy in African pharmaceutical markets. It takes a detailed microeconomic look at procurement design from the perspective of local pharmaceutical firms, for whom access to working capital is a major developmental constraint. Using illustrative data from Zimbabwe, the chapter shows that procurement can be either a source of finance or a serious drain on the finances of firms that operate in the context of high bank charges and interest rates, and in highly competitive markets. Careful procurement redesign can have a substantial impact on firms cash flow and investment prospects. 

Where small-scale bioseparations have been developed, particularly in the biopharmaceutical industry, there has been a tendency to retain laboratory type equipment even if this results in more labour and capital intensive processing. The reason for this is often to avoid the need for extended periods of process development work with new equipment designs, which might delay the launch of a product where competitors are not far behind. Manufacturers are also wary of adopting new bioseparation techniques for processes if there is any risk that regulators such as the U.S. Food and Drug Administration (FDA) will require more evidence that the equipment is fit for the purpose. This conservative tendency is understandable and may influence the choice of bioseparation equipment for pharmaceutical manufacturing in particular. 

Any scientist seeking work in the North American pharmaceutical industry should do so in the spirit that predominates there, which is not altruism but capitalism. A chemist s labor is as much a commodity as pork bellies, so he should trade it as dearly as a trader sells futures. He has at least three reasons to sell high. 

The price of drugs sold to the NHS is controlled indirectly by the DHSS through the Pharmaceutical Price Regulation Scheme (PPRS) which began in 1957. The scheme has been revised several times and requires that companies present details of costs, sales, exports, capital investment and estimates of future sales and profits. Rather than regulate the price of each individual product, the scheme aims to limit overall the return on capital which a company makes on its business with the NHS. The scheme works mainly by negotiation between the companies and the DHSS but the Secretary of State for Health can if necessary fix prices by order. For example, in 1983 the minister enforced a 2 % cut across the board. Moreover, limitations have been placed on the amount of money to be spent on promotion. It has been reduced to 10% of the sales for 1984 and 9% for 1985. Companies can in effect be fined under the PPRS for exceeding the limits on promotion. 

Bulk pharmaceuticals and generally the active ingredient in a pharmaceutical product, are more often than not produced in primary pharmaceutical plants which are very similar to fine chemicals plants. They arc capital intensive, are relatively large and work on a three-shift system. There is a tendency for pharmaceutical companies to locate their primary plants near to their home base. On the other hand, secondary pharmaceutical plants process the ingredients of the product, and fill and pack the medicinal item. These plants are not so capital intensive and work mainly on day shift. 

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