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To see the latest version of this DIO benchmark, along with more general commentary on how to understand DIO benchmarks, see our latest white paper: nVentic Big Pharma inventory trends benchmarking report 2023

2021 was a challenging year for supply chain professionals everywhere, not just in the pharmaceutical industry. Logistics issues abounded, with constrained capacity, ports closed or overwhelmed, HGV drivers in short supply, production delays and labour market shortages.

Such climates provoke bullwhips, since even perceived shortages lead to a scramble to tie in supply and while some run short, others have overstocks. Instead of a good balance between supply and demand, stockpiles develop in some places and shortages appear in others.

By and large, though, the global pharmaceutical supply chain has continued to demonstrate its agility and resilience as production and distribution ramped up at an unprecedented scale to get vaccines to patients while other treatments continued mostly uninterrupted.

2021 saw strong sales growth in the pharmaceutical industry overall after a Covid-restrained 2020. It will maybe best be remembered as the year of the vaccine, but the broader impact of the pandemic has continued to affect both demand and supply sides not just for Covid-related treatments.

Big pharma’s ability to weather the supply chain storm is in no small part thanks to the inventories that it carries for just such contingencies. But inventory is not the only lever available to deliver resilience and having too much of the wrong inventory is a positive burden. In this, our annual look at the inventories of the biggest pharmaceutical manufacturers, we will consider what trends were visible in their inventories in 2021.

The numbers

We normally consider median inventories for this group to be a reasonable overall metric of what big pharma inventories have done over the course of the year, but given the nature of DIO and the distribution of the outliers this year, it would be misleading.

(Median DIO for the whole group is down nearly 10% but once you remove those companies with one-off effects skewing the year-on-year DIO comparison, median DIO is up nearly 7%. However, since the companies with one-off effects are predominantly below median, that too is misleading.)

Once all considerations are factored in, underlying inventories expressed as DIO are more or less flat year on year. If you were to treat all companies as one, then aggregate DIO would be significantly down, since annual cost of sales rose at about three times the rate of inventories, but this was due more or less entirely to Covid-19 vaccine sales and once that is accounted for, again overall inventories remained at much the same level as the previous year.

In 2020, 22 out of 28 companies saw their inventories increase, in 2021 it was much more balanced, with 13 showing an increase and 15 a decrease.

Bar chart showing end of calendar year DIO, for 2021, 2020 and 2019.

Two good indicators that inventories are not doing their job are shortages and obsolescence. While there are almost always shortages of some medicines in some markets, there is no evidence that shortages worsened in 2021. Indeed, surveys such as the PGEU Medicines Shortages Survey 2021 found that 2021 was the first time in years that shortages did not worsen year on year.

Inventory write offs are an opaque area, since not all companies declare how much they write off each year and the ones that do follow slightly different accounting conventions, making comparison difficult.

However, from those that do declare something in this area, the average amount of inventory being written off each year appears to be slightly up, at 4% in 2021 compared to 3% in 2020. This increase was driven in part by a number of big bets, such as Eli Lilly’s $340m net impairment charge related to Covid antibodies that were produced in response to government demand but ended up not being required.

When you’re dealing with perishable products and responding to extraordinary circumstances, some waste is inevitable, although the number of companies in this report that write off hundreds of millions of dollars’ worth of inventory each year is also symptomatic of more structural problems and is an issue we know several companies listed here are already trying to address. This is an area that nVentic is actively working in. See also our special report on inventory write offs in pharmaceutical manufacturing.

DIO numbers are also subject to significant swings in the event of major acquisitions and other exceptional circumstances. A number of these are visible in this year’s benchmark when you consider the biggest year on year changes. Because acquired inventories are marked up to fair value, it temporarily swells inventory value until such time as the fair value is unwound through cost of sales. Thus you can see the impact of Bristol Myers Squibb’s acquisition of Celgene, Gilead’s acquisition of Immunomedics, and Amgen’s acquisition of Otezla. Viatris was formed by the merger of Mylan and Pfizer’s Upjohn business and we have included Mylan’s 2019 DIO number to show how Viatris is now back at Mylan’s previous inventory levels.

Acquisitions are not the only event that have such a significant impact on DIO. Pfizer’s numbers reflect the impact of the Covid-19 vaccine Comirnaty: annual revenue almost doubled, from nearly $42bn in 2020 to over $81bn in 2021, driving cost of sales to grow more than 250% while inventories only increased by 24%. Having a product with essentially unlimited demand naturally means that it doesn’t hang around in inventory for long. The scale of that demand as a proportion of total production moved Pfizer from one end of the graph to the other in just one year, although it goes without saying that getting the vaccine produced and shipped so fast and at such impressive scale is what really matters. We focus on inventories each year as that is our specialist area of interest, but we hopefully never pretend it is the only or even the most important measure of big pharma’s performance.

Big bets on coming products can also have a material effect. For instance, Biogen’s DIO numbers are still significantly up on 2019, to no small extent due to the disappointing sales of aducanumab, which has left them with large inventories that are gradually going out of date, with 2021 seeing $168m written down, mostly for obsolescence.

And in some cases, different forces cancel each other out. Abbvie’s acquisition of Allergan is barely visible in the charts, helped to no small extent by the runaway success of Humira. Similarly, AstraZeneca’s acquisition of Alexion does not appear to have produced an uplift in DIO despite the fair value still to be unwound and this is probably the impact of AZ’s Covid-19 vaccine Vaxzevria, which whilst modest compared to Pfizer’s, was still large enough to counterbalance the Alexion inventory impact.

One trend that is emerging over the last couple of years is an increase in the spread of DIO numbers. The standard deviation is increasing for the group year on year and 2021 was a prime example, with a majority of companies who reduced inventories in DIO terms already on the leaner side of the chart, while a majority of those who increased inventories already had more to begin with. This is probably an indication of different strategies being followed. We thought this year we would dig deeper into what DIO does and doesn’t show.

Understanding DIO benchmarks

As we write every year, DIO is an imperfect metric. It is subject to various accounting decisions and you are not entirely comparing like for like. It is certainly not a case of “low DIO = good, high DIO = bad”.

On the other hand, it is equally true that there is no (inverse) correlation between size of inventories and shortages, so you can’t really argue that high DIO = good, low DIO = bad either. All other things being equal, and availability being as high as desired, the companies with lower DIO have more efficient supply chains than those with higher DIO purely from a cash conversion perspective. The real question, if you wanted to make a genuine like-for-like comparison between companies, is just how equal those other things are.

So what drives differences in DIO between companies? We can divide the main causes into 5 categories:

  1. Accounting. The two key numbers in calculating DIO are cost of sales (CoS) and inventory value, both of which are influenced by some of the accounting decisions made. There is no suggestion that any company here is doing anything improper, but different approaches to, for example, what to include in CoS, where to apply LIFO, FIFO or weighted average cost in inventory valuations, even whether to capitalize R&D inventories, have an influence on the numbers reported.
  2. Forecastability. While forecasting is not the only, or even necessarily the most important lever when it comes to inventory management, it is certainly true that the harder it is to predict demand, the likelier it is that you will end up with either too little or too much inventory. A company with lots of new blockbusters with as yet uncertain demand is liable to have bigger inventory imbalances than a company with many more mature products. The impact of big bets is visible in the numbers from time to time.
  3. Structural. There are a number of decisions made over the medium to long term that influence how much inventory you need. Having long lead times, large batch sizes, constrained manufacturing capacity, few supply options, and so on, means that you need more inventory than if you have short lead times, continuous manufacturing, plenty of spare capacity and multiple supply options. From an optimization point of view these are often considered as the “givens”, but they determine what is possible before those responsible for the day-to-day management of inventory even get started.
  4. Strategic. There are also situations where companies just choose to hold more inventory. This might be for tax reasons, it might be to ensure supply even in case of major disruption (contingency stocks), it might be to shore up supply of a raw material in short supply, and so on. A lot of these strategic decisions are appropriate in many situations, especially in pharmaceuticals where products are often necessary for the protection of life or quality of life. However, it is also true that not all strategies are good and even with this type of “strategic” inventory (i.e. anything not built based on actual supply and demand constraints), you still have decisions to make concerning the size and location of such inventories.
  5. Efficiency. While all of the previous 4 factors play a role in how much inventory an organisation has, efficiency is still highly relevant. In our experience most companies, not just in pharmaceuticals, have little to no transparency into what good even looks like when it comes to inventory levels, and their ability to hit the targets they set themselves is heavily compromised by the way inventory is managed and the way decisions affecting inventory are made. A reduction of 20-50% in inventory levels while maintaining or improving service levels is usually possible using just this 5th lever alone.

So while there are several “good” reasons why some companies have more inventories than others, there are also some less good reasons. And for all the differences between the companies in this benchmark in terms of product portfolios and strategies, it is still surprising to the outside observer that a company at one extreme can run its supply chain successfully with barely two months’ average inventory, while one at the other seems to require around 10 months. That is quite a spread for companies in the same industry. It is likely that the big differences (eg 60-100 days vs 250-300 days) are driven by structural and strategic differences at least in part, although you can’t disentangle the reasons for small or large differences just by looking at the benchmark DIO figures.

The other thing that DIO cannot do is tell you how much inventory an organisation should ideally have. To do this you need to work bottom up, looking at the particular qualities of each individual item you stock. These qualities include lead times, demand, variability, forecastability, intermittence, shelf life, seasonality, and so on. Working bottom up gives you an optimal amount of inventory based on your precise situation and is a much better and more useful guide to what good looks like for you. Even if you are following a deliberate strategy of holding surpluses as contingency, there is value in knowing as precisely as possible how much you need for operational purposes before you start layering more on top.

If you really wanted to compare inventory performance between companies, you would therefore want to measure how close each of them is to the optimized inventory profile for their situation. In the absence of such data, DIO gives an approximate flavour of what’s going on. At nVentic we use it as a conversation starter. People are naturally fascinated by benchmarks, although there is a tendency to accept benchmarks when they show you in a favourable light, but to focus more on the limitations of the benchmark itself when they show you in a less favourable light…

Outlook

The impact of the pandemic over the last two years has led a lot of companies to rethink their supply chain strategies and structures. Risk management is an even bigger consideration than before. While inventory has traditionally played, and will no doubt continue to play, an important role, some effects of the pandemic have highlighted the risk of depending too much on inventory.

Even within an industry like pharmaceuticals, which, like food, benefits from normally steady demand, there have been significant fluctuations on the demand side. Depending on a few suppliers far from home and piling up cheap inventory doesn’t work so well when logistics routes are disrupted and demand becomes less predictable. Developing new sources of supply, especially closer to home, is a trend we can expect to see continue, which has the side benefit of reducing the need for inventory.

The macro-economic environment is also in a period of change, with inflation putting pressure on sales and the cost of capital in many industries, although pharmaceutical companies do not have much to worry about here, with cost of sales low as a percentage of revenue and demand which is generally insensitive to price beyond competition. Investors looking for protection against the effects of inflation are likely to see pharmaceuticals as a safe bet.

While the economics of running a pharmaceutical company will therefore continue to allow companies to operate successfully without improving their inventory management, it doesn’t mean they should. If nothing else, the amount of waste generated by the industry each year, while never entirely avoidable, is already inspiring many to put additional focus on this topic and this is a trend that will hopefully continue.

Technical Notes

Benchmark reports for 2018, 2019, 2020 and 2021 can be found on our website.

For a fuller discussion of DIO as a metric, see our Ultimate guide to DIO. All figures from published corporate reports/filings.

Like last year, we have used figures for calendar years for all firms, including those whose financial years are not the calendar years, i.e. Daiichi Sankyo, Takeda and Astellas, by putting together their quarterly reports.

Like in previous years, we have used an estimate of Boehringer Ingelheim’s cost of sales, which they do not publish.

To see the latest version of this DIO benchmark, along with more general commentary on how to understand DIO benchmarks, see our latest white paper: nVentic Big Pharma inventory trends benchmarking report 2023

It has been quite a year for the whole of the medical supply chain, but what, if anything, has the Covid-19 pandemic taught us about the inventories of the big pharmaceutical manufacturers? In this, our annual benchmark of big pharma inventories, we will have a look at what the data is telling us.

But before diving into the numbers, one thing is hopefully clear already: the global pharmaceutical supply chain has proven itself remarkably resilient over the past 12 months. A number of localized issues notwithstanding, supply chain professionals across the world have done a great job of keeping essential medicines moving.

Who would have thought, 12 months ago, that even one, let alone several vaccines to treat Covid would be developed, launched and being rolled out at speed by now? This has not happened without herculean efforts, not least on the part of the supply chain specialists who have helped make it possible. And in the meantime, despite limited freight capacity, volatile demand patterns, restricted working practices and stockpiling in various parts of the supply chain, supply of other pharmaceutical products has continued more or less uninterrupted.

For anyone who has worked in pharma supply chain this should perhaps not be a surprise. The industry is very conscious of the life-saving or life-enhancing properties of its products and has well-devised strategies to avoid sudden shortages, including multiple sources of supply and, yes, inventories.

So what has all this meant for inventories held by the big pharma companies themselves? How well provisioned were they going into the pandemic, what have the trends been during the year, and what does the situation look like now?

Hindsight 2020

The big pharmaceutical manufacturers entered 2020 with substantial inventories, as we commented last year. Median for our benchmark was 193 days, a bit more than 6 months.

One of the benefits of a large inventory buffer, if of the right products, is that it allows you to absorb supply disruption and demand increases up to a point, and to this extent it is an asset. On the other hand, in instances where demand is down and your inventories are perishable, too much of the wrong inventory quickly becomes a liability. Both effects have been experienced during 2020.

No two companies have exactly the same product mix and so inevitably none was impacted in exactly the same way as any other, but from a survey of their annual reports and press releases a number of macro-trends emerge.

The first quarter of 2020 saw an increase in sales, as initial concerns about the pandemic and its impact led to stockpiling across the various channels that the manufacturers supply – the hospitals, clinics, pharmacies and wholesalers. However, with a few exceptions, this increase in sales was easily covered by existing inventories.

Q2 and Q3 2020, on the contrary, saw a marked softening in demand. Partly this was just a natural lull after the channel stockpiling in Q1. However, another factor in play was a reduction in elective care. As lockdowns discouraged people from visiting the doctors, demand for a lot of non-Covid-related drugs fell. Therefore, over Q2 and Q3 inventories grew.

In Q4 sales recovered, but at the end of 2020 inventories remain somewhat up on the previous year, although not significantly so. For the companies in our benchmark where a comparison is meaningful, median DIO is up 4% year on year, to 201 days.

Bar chart showing end of calendar year DIO, for 2020 and 2019.

The trend over 2020 as a whole was thus a (small) increase in inventories. 22 of the companies in this benchmark saw their inventories increase whilst only 5 saw them decrease and at least 2 of those 5 can be attributed to one-off events.

Several companies mention an intention to increase raw materials to protect against potential supply disturbance, but in fact, of the companies who have published the splits at the year end, only half show a DIO increase in raw materials whereas two thirds show an increase in WIP and/or finished goods. If anything, this suggests declining sales have had as big an impact on inventories as planned increases, although given the macro-environment and the long lead times involved, this is not surprising. It is hard to turn a tanker at speed.

Of course, this high-level view needs to be understood for what it is. Relatively small aggregate percentage changes hide much larger swings at a product level. While demand is sky-high for products used to prevent or treat Covid, other therapeutic areas have seen considerable declines. Several companies have commented on increases in write offs of excess and obsolete (E&O) inventory for just this reason.

Outlook

Despite the tremendous success of the vaccines to date, the pandemic is far from over. In the short term there is still considerable uncertainty. Lockdowns, with their impact on new patient starts, clinical trials and overall supply chains, remain one of the most effective barriers to the virus. Vaccines and vaccination will continue to put supply chains under strain as capacity and resources are focused there. The development of new variants and their resistance to the vaccines remains to be seen. Many medicines are still being tested as potential treatments for Covid and could suddenly see a surge in demand if they are found to be effective. In short, it is likely to take some time before anything like normality returns to the market.

The judicious building of strategic inventories to ensure supply will continue to be an important lever. Inventory optimization is not the enemy of inventory, just the enemy of the wrong inventory. Even as pharmaceutical companies move to ensure the supply of their critical medicines, they also need to make sure that resources and capacity are not wasted on excess inventory. The billions of euros written off due to obsolescence each year can never be eradicated entirely if we want to continue to ensure high availability of medicines, but the industry can do better on this measure.

It is to be hoped that there are also some lasting benefits to be gained from the industry’s reaction to the pandemic. One of the biggest obstacles to better inventory levels is the long lead times taken to manufacture pharmaceutical products. In the last year necessity has truly been the mother of invention in this respect, as lead times have been driven down for several products in high demand. This needs to be an area of focus for as many products as possible. Reducing lead times without compromising on stability makes supply chains more agile and responsive and reduces the need to build large buffers of perishable medicines.

There are also various longer-term considerations that are likely to affect global pharmaceutical supply chains in the coming years.

2020 was a breakthrough year for mRNA technology. The wider field of genetic treatments, long promising, could start to change the focus and mix of technology used by the industry overall. While presenting a number of production challenges that have only recently been overcome, mRNA technology should in principle facilitate shorter manufacturing cycles because it is not dependent on cell cultures. Manufacturing processes should also be able to be repurposed more easily for new treatments.

Another set of changes potentially coming down the tracks are political. At the time of writing, the US has a 100-day review of its drug supply chain underway, while the EU published a new Pharmaceutical Strategy for Europe back in November. Both address the topic of security of supply, and could lead to requirements to onshore or near-shore certain types of production. This might have mixed results for supply chains. Excessive reshoring could actually lead to increased concentration risks, but if done proportionately it could have benefits, including in reducing lead times for raw materials which are currently predominantly manufactured in China and India.

In summary, while continuity of supply will continue as always to be the top priority for the big pharmaceutical companies, the high levels of interest and scrutiny in supply chains also represent an opportunity to drive improvement in areas in which the industry has historically underperformed, including inventories. Will 2021 be the year when the corner is turned?

Technical Notes

Benchmark reports for 2018, 2019 and 2020 can be found on our website.

For a fuller discussion of DIO as a metric, see our Ultimate guide to DIO. All figures from published corporate reports/filings.

Unlike in previous years, this year we have used figures for calendar 2019 and 2020 for all firms, including those whose financial years are not the calendar years, i.e. Daiichi Sankyo, Takeda and Astellas. This enabled seasonal effects related to the pandemic to be seen more easily.

Like in previous years, we have used an estimate of Boehringer Ingelheim’s cost of sales, which they do not publish.

Acquisitions have a misleading effect on DIO, since acquired inventory is stepped up to fair value, which reflects the acquisition cost, not the production cost that the rest of the inventory is mostly valued at. This fair value is amortized over time, but creates an artificial bump in DIO in the period immediately following the acquisition which can take a time to unwind. The cost of the acquisition itself, if amortized quickly, can also have the opposite effect on DIO, as is evident with Amgen in 2020, when its acquisition of Otezla saw an increase in inventories of less than 10% but annual cost of sales up by 41%, substantially driven by the acquisition costs.

During the period considered (2019 and 2020), the following major acquisitions had a material effect on DIO numbers: Bristol Myers Squibb’s acquisition of Celgene, Gilead’s acquisition of Immunomedics, Amgen’s acquisition of Otezla.

Abbvie’s acquisition of Allergan, because it closed mid-year, is not so visible in the end of year figures, even though they anticipate it will take a year to amortize the $1.2bn step up in inventory value.

Biogen also has a noticeable increase in inventories from 2019 to 2020. This seems to be at least partly due to the capitalization of nearly $100m of pre-launch aducanumab inventory at the end of 2020.

Viatris launched in Q4 2020, formed of Mylan and Upjohn. As these two firms had very different inventory profiles, neither makes a good year-on-year point of comparison for Viatris.

To see the latest version of this DIO benchmark, along with more general commentary on how to understand DIO benchmarks, see our latest white paper: nVentic Big Pharma inventory trends benchmarking report 2023

At the time of writing, early May 2020, the global pharmaceutical industry is mobilised in reaction to the Covid-19 coronavirus. Inventories of medical products have become a hot topic far beyond the pharmaceutical industry itself. We are still in the heart of the crisis, so it is too early to know which parts of the supply chain prove to be most resilient, and which most fragile, but in this white paper we will look at what has happened so far. We will do this both in light of how much inventory the biggest pharmaceutical companies were carrying going into 2020, and what they need to do in the coming months.

Substantial inventories at the start of the year

Let us start with the baseline figures. Going into the start of 2020, substantial inventories were held:

Bar chart showing major pharmaceutical companies DIO 3 year trend, for 2019, 2018 and 2017.

DIO is an imperfect comparative metric. See our notes at the end of this paper. Yet a number of trends are of interest:

Does this matter? Surely keeping the supply of drugs flowing to patients is the most important thing? Well yes, that is precisely why companies hold inventory in the first place. But inventory is also a strategic choice. Building inventory uses capacity, so making too much of some products uses up time and resources that could have been better used making others. And it ties up cash: money invested in inventory is not available for other uses. Perhaps worst of all, with perishable goods like medicines, excessive inventories can and regularly do lead to expired products being written off.

Look again at the graph. Pfizer and Novo Nordisk are carrying nearly a year’s worth of inventory on average. Abbvie around 3 months. Does this imply that Abbvie is more likely to run short of inventory? Or that Pfizer and Novo Nordisk are immune from shortages?

Shortages are a lot harder to track and compare than inventories, since they are not published in the same way. However, if we take as an indicator the USA’s FDA shortage database (1), at the end of April 2020 only 7 of the companies in our benchmark (Abbvie, Allergan, Bristol Myers Squibb, Mylan, Pfizer, Sanofi and Teva) have declared shortages in the USA since the start of 2020, for 25 products across 99 presentations. None of these specifically lists Covid-19 as a reason for shortages, although “increase in demand” is the most common reason given. It is also relevant to mention that the majority of these are not in therapeutic categories directly related to the Coronavirus. The European Medicines Agency, meanwhile, lists no new shortages since the start of 2020 (2).

These shortages are with companies from all across our DIO benchmark. This shows that the companies with most inventories overall seem neither more nor less likely to suffer shortages than those with the least. This seems counter-intuitive. What, after all, is the point of holding so much inventory, if not to assure supply?

Shortages are not a new thing. In the FDA database mentioned, almost half of the total shortages listed as current at the end of April 2020 dated from before the end of 2019. Biopharmaceutical manufacturing processes can be very long and fragile, so despite the industry’s best efforts there are frequently shortages of some items in some places.

It is also important to point out two important features of the benchmark:

  1. A company’s overall DIO figure is just an average. Item by item, each company will have more or less than that, in some cases very much so. This is how a company like Pfizer can be registering shortages despite the significant stocks held on average.
  2. DIO is only an approximate guide to performance. There may be good reasons why one company needs to hold more inventory than another, in particular the lead times and variability inherent in its supply chain, as well as its mix of products. Our experience at nVentic suggests, however, that all companies have substantial opportunities to reduce inventories and shortages by using optimization techniques.

Will inventories be sufficient?

It is of course too early to say definitively how well supply chains will continue to function. Even if all raw materials supply had completely dried up for everything (which it hasn’t), we are only about 3 months into the crisis, which even the leanest inventory holder in our benchmark holds on average. But if we look at announcements from the big pharma companies themselves, there seems to be limited concerns about shortages, other than relative to potential demand spikes. Inventories only protect you against demand spikes if they are the right inventories. The leanest companies in our benchmark appear to be just as well equipped to deal with what is coming as those at the other end. Agility, the ability to react quickly, is much more useful than inventory when faced with uncertainty.

There are a number of factors influencing the pharma supply chain at the moment, each of which will affect inventories, and each of which will be affected by inventories. These are the major ones:

  1. Demand has already soared for diagnostic tests for Covid-19 and key drugs related to the use of ventilators, such as anaesthetics, sedatives and paralytics (3).
  2. At the time of writing, over 260 drugs are being tested to see if they can be beneficially used to treat Covid-19 (4). Demand for those which prove effective can be expected to explode, but that demand might drop again if and when alternatives prove superior. Having a strong candidate in this race could be a mixed blessing for the manufacturers.
  3. Demand for some drugs, especially those which can only be administered by health professionals, has dropped (5). People are avoiding non-critical medical trips. But in some cases, such as routine vaccines, there is likely to be pent-up demand, which might surge when restrictions on movement are relaxed.
  4. There is evidence of stockpiling at some nodes in various healthcare systems, driven by concerns about potential shortages (6). This creates bullwhips, with short-term increases in demand being followed by lulls, rippling up the supply chain. This is likely to continue if different treatments prove effective and in the absence of concerted coordination of demand management.
  5. There has so far been limited disruption to the supply of critical raw materials, in particular related to enforced shut-downs at facilities in India and China (7). The biggest shortages seem by far to be caused by surges in demand rather than supply issues, although such demand surges do of course put the supply chain under increased pressure and many big pharmaceutical companies have warned of potential supply issues if demand is high.
  6. The search for a vaccine and therapeutics to treat Covid-19 is diverting capacity and efforts from other areas. More than 900 clinical trials for other conditions have so far been suspended or delayed (8). This will have an impact on development timelines and future revenue streams.

Big pharmaceutical firms are also working in a different macro-environment. The pandemic has highlighted the critical role played by the industry, while putting it under significant pressure not only to expedite treatment and vaccines, but also to be seen to be doing the right thing. With many individuals losing their jobs and companies going bust, no one wants to be seen to be profiting from the situation.

In many respects, the pandemic seems to be bringing out the best in the industry. Erstwhile competitors are collaborating both with each other and governmental and other agencies. Significant doses of potentially useful drugs have been made available to those in need. Exclusivity rights have been waived to allow others to support production.

The Covid-19 crisis appears unlikely to prove a financial boon to the pharmaceutical industry. Of course, it is certainly better to be an industry whose products are essential to life in such times. When so many others are going to the wall, survival is an enviable ability in itself.

Instead, what we see from Q1 results is a mixed picture. Some have actually registered a drop in sales, while others fear that increases in sales are artificially supported by stockpiling. And wonderful though a breakthrough vaccine or treatment would be, having something in high demand has a number of downsides from a supply chain point of view.

Case study – Remdesivir

At the time of writing, Remdesivir has just been given approval for emergency use by the FDA. It is the first drug to demonstrate clinical benefits for Covid-19 sufferers in a randomized study. Gilead has pledged its entire inventory of finished and semi-finished Remdesivir to the US government for free, to distribute as it sees fit.

Gilead has also announced a ramping up of production and shortening of lead times. It says that the full production lifecycle is normally 12 months, but it is able to reduce this to 6 to 8 months (9). It is planning to have an additional 500 thousand courses available by October 2020, 1 million by December 2020 and “millions” more in 2021. This seems like the right thing to do.

However, consider that the emergency use authorisation is temporary. It could be withdrawn at a later stage. As Remdesivir’s use is rolled out, a lot more data will start to come in. And then consider that it has limited effectiveness. Its main observable effect is to reduce recovery time. This is a good thing in itself, but if one of the other candidate drugs being examined at the moment is shown to be significantly more effective then demand for Remdesivir could slump. Possibly at a point in time where Gilead is already well committed to the production of millions of doses.

There are also reputational risks in play. Gilead has donated around 1.5 million individual doses at no cost. But how will it price future doses? The Institute of Clinical and Economic Review has said that the drug is cost-effective even at $4,500 per course of treatment (10). It seems unlikely that Gilead will price it that high, especially given the criticism it has faced for pricing in the past (when launching its highly effective Hepatitis C drug Sovaldi). But balancing the public health requirements and the need to cover costs will be challenging.

This is just one example of the sort of challenge that the whole industry is facing. These are extraordinary times. The impact of the Coronavirus on the whole world is so significant that normal considerations of profit and waste can and should be discounted up to a point. It is great that Remdesivir appears to alleviate the symptoms of Covid-19 and that Gilead is ramping up production. If something even more effective comes along, that will be even better, but unless and until that happens the best available course must be followed.

A similar approach is being taken with the development of a vaccine. Many research projects are currently under way and production capacity is being converted or built to produce vaccines in sufficient quantities. The Bill and Melinda Gates Foundation, for instance, has pledged billions of dollars to pay for the construction of vaccine facilities capable of producing a vaccine at scale, knowing that many of those investments will be wasted. This is being done in the hope of significantly compressing the timeline it takes to scale up production after a vaccine has been developed.

What more needs to be done with pharma inventories?

If we imagine ourselves at the end of 2020, success will very much be measured – as to a large extent it always is in the pharmaceutical industry – by the lack of shortages, not by the leanness of balance sheets. But this is the essence of inventory optimization. It is precisely by avoiding excesses of the wrong inventory that companies can better avoid shortages of the right inventory. With massive efforts being devoted to battling Covid-19, this balance becomes even more critical to everything else.

So what should pharmaceutical firms be doing to manage their inventories in these times?

  1. Be wary of forecasts. We argue consistently that too much trust tends to be put in forecasts when it comes to inventory management. At present there is a lot of “noise” in the system, as demand for some products soars or plunges, perhaps temporarily, perhaps more lastingly. Precisely because lead times are typically long, bullwhips are a major risk. Where there are clear reasons for a change in demand then adjustments should be made. For everything else it is likely to be more prudent to plan for a gradual return to normality.
  2. Do everything possible to shorten lead times, not just for Covid-19 related items. This allows companies to react quicker to changes and necessitates less safety stock.
  3. Where possible, reduce the sizes of production runs. This too will make companies nimbler and more responsive.
  4. For all products which are critical to life, consider increasing inventories if necessary to assure supply in the face of potential supply disturbance.
  5. For all items which are neither Covid-19 related nor critical for life, increase efforts to optimize inventories. Any cash or capacity freed up here may be very useful for other purposes.
  6. Review and enhance allocation policies. The handling of shortages will come under more scrutiny than ever, so transparent and equitable policies are essential.

2020 is an extraordinary year for the pharmaceutical industry and the supply chain has a critical role to play in how the industry navigates it. Pharmaceutical companies have tended to operate with very high inventories, only partly for good reasons. As the industry plans its way forward over the coming months, inventory is a vital lever it must put every effort into getting right.

Notes

The DIO benchmark:

Benchmark reports for 2018 and 2019, containing analysis of big pharma inventory levels in more normal times, can be found on our website.

All DIO figures calculated from published annual reports for 2017-2019. Most companies in the benchmark use calendar years as financial years, except for Daiichi Sankyo, Takeda and Astellas, where the data used is from the 12 months to 31 March in each year.

The latest Takeda figures, following the integration of Shire, give a false impression due to the full transfer of inventories, but only a quarter’s worth of the increased cost of sales being reflected in the annual report. We have chosen to exclude Takeda from the graph this year since the DIO figure would be misleading.

Some companies classify some of their inventories as “other assets” on their balance sheets. We have included such amounts in our DIO calculations where they are visible in the annual accounts.

We have not included any inventories written down, but since pre-release write downs are so common and so substantial (with one over $900 million in 2019), it would be fair to say that true inventory levels are higher than this benchmark shows.

Boehringer Ingelheim does not report cost of sales, so an estimate has been made based on information in their annual reports and typical ratios from peer companies.

The benchmark includes a selection of the biggest biopharmaceutical companies with published financial reports. If you work for another pharmaceutical company and would like to understand how your organisation compares, please contact us via our website.

For more information on DIO as a metric, see our Ultimate guide to DIO.

Other notes:

  1. Our analysis was done referencing the FDA database as of 28 April 2020.
  2. European Medicines Agency as of 5 May 2020. Note that this list only includes shortages likely to affect more than one EU member state, so it does not mean there are no new shortages anywhere in Europe since the start of the year. The UK lists 2 drugs from our benchmark companies suffering shortages since the start of 2020, neither obviously Covid-19 related. Most EU member countries have their own shortages lists, most of which are similar to the other countries looked at here – i.e. some shortages in 2020 so far, not just related to Covid-19. Links to individual countries’ lists can be found on the EMA website.
  3. There is much anecdotal evidence of high demand leading to shortages of some drugs in some settings. Consider this account in the Atlantic from a physician in the US.
  4. List from Bioworld as of 5 May 2020.
  5. For example, see this Q1 report from Pfizer, commenting on a drop in new prescriptions.
  6. See, for example, this Q1 report from AstraZeneca. They prefer the term “short-term inventory increases in the distribution channel” to stockpiling.
  7. Also referred to in the Q1 2020 report from AstraZeneca listed above (China). There are reports from the Economic Times of temporary shutdowns at Baddi, an important manufacturing hub in India. There are also shutdowns in other parts of the world. India and China are singled out only because of their criticality to the generics and raw materials markets respectively.
  8. Data from GlobalData as of 5 May 2020.
  9. For a clear explanation of the challenges involved, see the Gilead website.
  10. The same report from ICER calculates that a cost recovery price would be in the range of $10 per course.

To see the latest version of this DIO benchmark, along with more general commentary on how to understand DIO benchmarks, see our latest white paper: nVentic Big Pharma inventory trends benchmarking report 2023

Bar chart showing major pharmaceutical companies DIO, for 2018, 2017, and 2016.

Executive summary

Despite the many current cost pressures, pharmaceuticals is still a relatively high margin industry, and working capital does not seem to be a priority for many pharmaceutical firms. But all stakeholders, from patients to investors, should take an interest in inventory management, since inefficiencies can lead to both shortages and waste.

DIO is not a metric that should trend to zero, and each company will have a different optimal inventory level based on a number of variables, particularly its product range. But the very wide range of inventory levels evident in this benchmark is at least in part indicative of efficiency. While even the leanest companies are still finding year on year improvements, the opportunity for some of the companies considered is very significant.

Detailed analysis

Inventory serves an important purpose in any industry. In the pharmaceutical industry it is usually a life-saving or life-enhancing purpose. But does the industry as a whole really need the ~6 months stock it held at the end of 2018? We believe not. And we believe that a significant proportion of the working capital tied up in that inventory could be put to better use.

How much inventory should a company have? Each has a different product portfolio, with different manufacturing lead times, supply chains, criticality to life and demand variability. Therefore, each will have its own optimal inventory levels. The only way to really know how much you should stock is through a bottom-up analysis, but few and far between are the companies that can do this.

It is relatively easy to squeeze some cash out of inventory in the short term just by applying top-down pressure on the organisation, but this can have a number of undesirable consequences and is usually unsustainable. Inventory optimization ensures you have enough inventory to meet demand without tying up capital and other resources unnecessarily.

The thirty companies in this benchmark together had ~$115 billion in inventories at the end of 2018, up from ~$106 billion at the end of 2016. That’s a compound annual growth rate (CAGR) between 4% and 5%, which is slightly higher than revenue growth over the same period (3% to 4%) but somewhat lower than growth in cost of sales (6% to 7%). This indicates a slight improvement in our preferred top-level measure of inventory performance (DIO), which has decreased at a CAGR of 2% on average over the period.

To put this in a different perspective, if DIO had remained constant at end of 2016 levels throughout the period, there would have been an additional $4.38 billion tied up in inventory at the end of 2018. That’s $146 million per company on average. The companies in this benchmark are gradually getting slightly leaner in inventory overall, but with significant variation between companies.

In DIO terms, 15 companies saw an increase between 2016 and 2018, 14 saw a reduction and 1 stayed the same.

A number of companies have delivered solid year on year (yoy) reductions in DIO. Abbvie, Bristol-Myers Squibb, J&J, Mylan and Roche – all top quartile in this benchmark – have seen average yoy reductions between 5% and 11% for the last two years. Outside of the top quadrant, only four other companies have achieved this. Biogen, Gilead and Zoetis all started from a position of much more substantial stock holdings, and show average annual reductions between 10% and 14%. Technically GSK also fits into this category, but with a very small improvement – it might be fairer to describe GSK’s stock position as flat over the 3-year period.

8 companies have seen the opposite trend – year on year increases in days’ inventory outstanding. Abbott, Otsuka, Daiichi Sankyo, MSD, UCB, Amgen and Novo Nordisk have all seen average annual increases between 4% and 9% although here the similarity between these companies ends. Abbott, despite the increase, is still the third leanest company in this benchmark from an inventory perspective, while Novo Nordisk is at the other extreme, with ever closer to a full year’s stock on hand. And, of course, all of the companies have their own particular circumstances. For instance, given the major malware attack which MSD suffered in June 2017, which left them with little to no IT infrastructure in the short term, and a full recovery that took around 12 months, it is not surprising that they saw increases in inventories each year between 2016 and 2018. It is perhaps a remarkable achievement their position has remained as stable as it has.

These figures also need to be understood in their proper context. The market and companies are not standing still and it is not just a matter of business as usual. Take Bayer as an example. Inventories between 2016 and 2018 have gone from €8.4 billion/DIO 261 (2016), to €6.5 billion/DIO 210 (2017) to €10.9 billion/DIO 235 (2018). Quite a variance over three years, but almost all accounted for by first the spin off of Bayer Material Science as Covestro and then the acquisition of Monsanto.

It is also worth pointing out that year on year increases are not necessarily a bad thing, especially the leaner you get in inventory. Inventory can be a strategic asset and companies in full command of their inventories might decide to deliberately increase holdings to drive higher service levels or to account for new products or supply chains. Although if inventories have not been optimized in the first place, this can just be a case of increasing excesses.

Another factor not directly visible in the DIO figures is the write off or write down in inventories. Celgene, soon to be acquired by Bristol-Myers Squibb, reduced inventories from over 400 days to under 300 between 2017 and 2018. However, according to Celgene’s annual report, this drop is down to “raw material charges recorded during 2018”. In other words, one assumes, the write-off of obsolete stock. With a gross margin of over 95%, Celgene did not need to put a high priority on keeping lean inventories. Scrapping obsolete inventory is good practice both financially and operationally, but obviously does not free up working capital.

Not that Celgene is alone in writing off or down large amounts of inventory. Companies are not equally transparent on this front, but it is common to see write downs in the tens if not hundreds of millions of dollars each year. It is common practice in the industry to write down the value of inventories built up pending approval of a new drug, so reversals of write downs are not infrequent either, but nevertheless scrappage of obsolete or irredeemable quality rejected stock constitutes a major financial item for a high percentage of companies. From 2018 annual figures we see one company write off as much as $208 million.

Conclusions

The industry appears to be making progress in inventory management, although slowly. Individual companies illustrate how much can be achieved. Others appear not to be prioritising this lever. The potential for improvement remains large. The pharmaceutical industry is not alone in this. But in a context of margin pressures and lively M&A activity, the opportunities are great.

If you would like to discuss how to take your inventory optimization capabilities to the next level, contact us: information@nventic.com

Notes

All DIO figures taken from published annual reports for 2016-2018. Most companies in the benchmark use calendar years as financial years, except for Daiichi Sankyo, Takeda and Astellas, where the data used is from the 12 months to 31 March in each year.

The latest Takeda figures used do not include the integration of Shire.

Some companies classify some of their inventories as “other assets” on their balance sheets. We have included such amounts in our DIO calculations where it is visible in the annual accounts.

We have not included any inventories written down, but since pre-release write downs are so common and so substantial (with one over $900 million in 2018), it would be fair to say that true inventory levels are higher than this benchmark shows.

Boehringer Ingelheim does not report cost of sales, so an estimate has been made based on information in their annual reports and typical ratios from peer companies.

For more information on DIO as a KPI, see our Ultimate guide to DIO.

To see the latest version of this DIO benchmark, along with more general commentary on how to understand DIO benchmarks, see our latest white paper: nVentic Big Pharma inventory trends benchmarking report 2023

A multi-billion-dollar opportunity

Lies, damn lies and statistics. The collection, presentation and interpretation of data is fraught with risks. But nevertheless, we are going to open with some analysis we have done of inventory performance (measured by Days Inventory Outstanding) amongst pharmaceutical companies.

Bar chart showing DIO selected pharmaceutical companies 2017.

Yes, this is a crude metric with all sorts of limitations (for a fuller discussion, see the note at the end of this white paper) (1). But as with most such approximations there is a grain of truth underlying the comparison. Companies don’t normally report shortages, so it is a shame we can’t overlay service level onto this chart, but we believe that two things are evident from these metrics:

  1. Median inventory levels for the industry are high – ~180 days DIO represents 6 months’ worth of stock on hand on average
  2. There is a striking range of inventory levels between companies, even given the differences in their product mix, supply chains and reporting practices

Given that the companies in this list have, on average, more than €3bn in inventory each, even a 20% reduction in inventory would represent nearly €17.5bn in capital collectively freed up for better uses: further R&D, increases in inventories of medicines in short supply, and so on. This is therefore a big opportunity for the industry as a whole and especially for companies lagging on this measure.

In terms of benefits, inventory optimization is immediately compelling: reduce shortages, reduce waste, reduce costs, improve service levels and free up working capital! And yet a lot of organizations, not just pharmaceutical companies, find inventory optimization difficult. For one thing it is reliant on big data, for another the mathematical principles involved are a little more complex than the basic numeracy which will get you through most things in business. Furthermore, inventory optimization depends on strong coordination throughout the value chain, from demand forecasting through to third party supply. A concerted effort is required to deliver sustainable improvement.

The sweetest pleasure arises from difficulties overcome

Pharmaceutical companies are faced with a number of particular challenges when it comes to inventory optimization:

For these reasons, optimizing inventory is more difficult for pharmaceutical companies than, say, the average industrial manufacturing company. To take one example: batch size is a key lever in optimizing inventory. Calculating how much of something to produce and how often is an important step in optimizing inventories. But for a pharmaceutical company this is not so easy to change. For one thing the production process is highly reliant on very precise quantities and scaling up or down is not certain to deliver the desired results. And for this reason, a manufacturing facility’s regulatory approval to produce a given drug is limited to pre-determined batch sizes. Changing a batch size can therefore be a lengthy and expensive process.

Besides the difficulty involved, there has perhaps been a tendency to overlook inventory optimization due to the financial structure of pharmaceutical companies’ operations. Cost of sales as a percentage of revenue is low compared to almost all other industries. This is no doubt why pharmaceutical companies seem happy to write down or write off eye-wateringly large amounts of obsolete inventory, sometimes several hundred million dollars’ worth a year. Who cares, if you’re still making a healthy margin overall? Indeed, the priority for many pharmaceutical companies is to reduce shortages, not to reduce excess or obsolete inventory. In this sense the overall market is well aligned – making sure drugs are available is good for patients as well as sales. But where a class of drugs, such as antibiotics, ceases to be a strong generator of profit, shortages are increasingly a risk.

There is a difference between having very high inventories because you’re consciously trying to deliver very high defined service levels and having very high inventories because you haven’t optimized your inventory management. The difference between the two is often measurable in shortages. If your balance sheet shows you have months’ worth of inventory on average but you seem to spend all your time dealing with shortages then you’re in the latter camp. Producing too much of one product not only leads to waste in that product, but it means time, resources and capacity have been misallocated. Shortages may indirectly have been caused in other products and more money could and probably should have been spent on other things.

The tide is now changing for pharmaceutical firms due to a number of macro-trends affecting the industry. Payer pricing pressure, patent cliffs, and competition from generics and biosimilars are all putting much more pressure on margins than has historically been the case. The relative decline of blockbuster drugs in favour of genomics and orphan drugs, as well as a shift in business model towards healthcare, implies greater SKU proliferation and therefore complexity. The importance of supply chain efficiency is therefore growing, and pharmaceutical companies have a great opportunity to develop competitive advantage using this lever.

Physician, heal thyself

A report by the Access to Medicine Foundation from May 2018 (2) lists a step change in inventory management as number one in its list of what pharmaceutical companies can do to improve their supply chain performance. It acknowledges that great progress has already been made in improving forecast accuracy, sharing data across the supply chain, and visibility of where inventories are held. But inventory management needs to go much further than this. This is a useful distinction, but based on our experience of talking to a large variety of companies, both within the pharmaceutical sector and further afield, not one that is always fully appreciated.

Real time, or close to real time visibility of inventories is very useful for the tactical, day to day management of inventories. Similarly, sharing data and making improvements in forecast accuracy should help to reduce the bullwhip effect and facilitate stable planning and scheduling. But inventory optimization can go further than this. It can provide organizations with a much better basis for understanding what inventory levels to target depending on the variability and sporadicity of demand as well as other key areas of variability in the supply chain. When looking at the supply chain as a whole, it can also help determine the best stocking locations for different types of products.

Moreover, inventory optimization is not totally dependent on real time inventory visibility or even forecast accuracy, although it is sometimes treated as if it were. As long as you have historical data of actual consumption you can carry out a highly valuable evaluation of how well you’re performing product by product and where you need to take action to prevent shortages or overstock situations. At nVentic we have automated this evaluation, which is otherwise labour-intensive and error prone, through a series of algorithms which can be applied to very large data sets. This gives companies quick visibility of target inventory levels SKU by SKU, along with actuals. Our customers are typically able to deliver significant double-digit reductions in excess inventory while improving or maintaining service levels.

This kind of improvement can make all the difference for stretched supply chains such as that for antibiotics where the need is most acute, but it also represents a huge potential for the pharmaceutical industry as a whole. Many pharmaceutical companies have already made great improvements in how they manage inventory, but to return once more to our opening benchmark – we believe the potential for further improvement is very significant across the industry.

So what should pharmaceutical companies do to take advantage of this opportunity? The first step is to quantify and target the improvement potential based on real data. This can be a daunting first step since the transactional data necessary to do this, whilst in principle available in ERP systems, is large and needs quite some manipulation to assess for inventory optimization. But this is a vital prerequisite to enable organizations to ensure they are focussing on the right things. There are many likely root causes of under- or overstock situations, and a data-driven approach allows companies to devote their attention to the most important.

It is also important to understand the role of segmentation in inventory optimization. Each SKU will require different treatment depending on its importance (both medicinal and commercial) and its demand characteristics (stable, variable, sporadic, growing, declining, new, etc.). Here again, a data-driven approach is essential to ensure best outcomes.

Once the total potential has been quantified, a deep analysis of the data will allow improvement levers to be prioritized based on ease and impact. The particular constraints of the pharmaceutical supply chain will play a key role here, and it is useful to separate quick wins (such as draining overstock situations) from longer-term initiatives (which might involve trying to reduce lead times by moving production sites, for example). New performance metrics, to track adherence to new inventory targets, are usually required to ensure the proper focus on optimized inventories across the organization.

Finally, it is important to understand that inventory optimization is not a one-off exercise. A one-off focus on inventory can indeed deliver improvements, in the same way that significant focus on any element of a business will tend to deliver improvement, but unless backed up with sustainable changes to ways of working, reversion to previous levels and problems is all too rapid. Inventory optimization programmes can normally deliver a significant improvement in the short term (say 6-12 months) but year on year improvements require investment in capability in this area.

The pharmaceutical supply chain is complex, but its products are vital. Life expectancy and health outcomes have seen tremendous improvements in the last 100 years. Population aging, pricing pressures and greater expectations from more people are putting current models under significant pressure. For the positive trends to continue we need to devote ourselves to the application of best practice across the board. Inventory management has a key role to play in those efforts, and to develop leadership in this area pharmaceutical companies need to go beyond the tactical management of inventories. Their very survival – and therefore ours – depends on it.

If you would like to discuss how to take your inventory optimization capabilities to the next level, contact us: information@nventic.com

Notes

1. The DIO chart. Source: published company accounts for 2017 (in some cases FY 2017 which is the year from 1 April 2016 to 31 March 2017). Not all companies split raw materials, work in progress and finished goods in the same way, so some approximations/estimates have been used.

Days Inventory Outstanding = total inventory value/(cost of sales/365).

The problems with using DIO as a strict comparator are numerous. The two main issues are the following:

  1. Each company’s ideal DIO will differ based on their product mix and supply chains. If you predominantly manufacture and sell products with very low demand variability and short lead times your optimized inventory will be much lower than that for a company with very volatile demand and very long lead times.
  2. The metric is highly susceptible to how companies choose to manage their balance sheet. Most pharmaceutical companies choose to write down the value of inventory to mitigate risk of obsolescence. For instance, if you have produced large quantities of a drug before it has received full regulatory approval it is common to write down the full value of the inventory and then reverse the write down once (/if) approval is given. Each company takes its own approach to how much inventory value they write down in this way and as to how transparently they do it. The table presented above reflects the net inventory value each company has decided to show on its balance sheet at the end of the year.

And yet we still believe that DIO is useful as a metric, not least because of how capital markets operate. The value of inventory affects a number of key financial metrics, including solvency, return on capital employed, return on assets, return on equity and earnings per share. At the risk of being overly simplistic, having too much capital tied up in inventory will make your investors unhappy. CEO’s and CFO’s should seek to keep inventory to the minimum possible while maintaining enough to support sales and stable operations. See also our Ultimate guide to DIO.

2. “Shortages, stockouts and scarcity: the issues facing the security of antibiotic supply and the role for pharmaceutical companies”, Access to Medicine Foundation, 31 May 2018. This paper is available online at https://accesstomedicinefoundation.org/media/atmf/Antibiotic-Shortages-Stockouts-and-Scarcity_Access-to-Medicine-Foundation_31-May-2018.pdf