Insights

nVentic Big Pharma inventory trends benchmarking report 2024

We ended last year’s benchmark report with the question, would 2023 be the year that the seemingly inexorable upward rise in big pharma inventory levels abates? The answer, emphatically, is no.

Once one-off effects (1) are taken out, in DIO terms median inventory grew a further 6.1% year on year, with mean inventory growing 5.1%. Total inventory grew from $160bn to $175bn, in a year where revenues and cost of sales were down 4%.

Overall inventory write offs, as far as can be estimated (2), held steady at about 4% of cost of sales, although there were significant write offs of Covid-19-related vaccines and treatments, most notably Pfizer’s eye-watering $6.2bn write off of Paxlovid and Comirnaty.

Days Inventory Outstanding (DIO) = inventory value/(cost of sales/365). See also the technical notes at the end of this article.

Overall, despite a good crop of new medicines coming to market, financially 2023 wasn’t a great year for the industry. There were notable blockbuster successes, such as MSD’s Keytruda, and growth in demand for weight-loss treatments carried on apace, although with greater competition as more medicines enter the market, but the overall lacklustre sales saw many companies forced to cut costs, with layoffs across the sector. The full impact of the Inflation Reduction Act on medicine pricing in the US still remains to be seen but is also driving an increased focus on cost.

We refresh the list of companies included in the benchmark from time to time, so you can’t compare the numbers from one year’s report to another, but in the seven years we have been producing this report, inventories expressed as DIO have increased every year but 2, with DIO remaining roughly flat one year and showing a small decrease the other. The other five years have shown increases. Looking at it another way, in 2017, median DIO was around 180 days, equivalent to approximately 6 months of demand. In 2023 median for those companies who were in the benchmark in 2017 was over 220 days, comfortably more than 7 months in demand.

In short, the industry’s inventory binge does not appear to be over. As we write every year, there are good reasons why pharmaceutical companies carry a lot of inventory (security of supply for products that are critical to patients, long lead times, regulatory restrictions) as well as bad ones (high gross margins, a lack of focus on inventory optimization).

One reason for the increase in inventories in 2023 was the playing out of a classic bullwhip, as concerns of shortages throughout the value chain in previous years had led many to increase inventories, leading to overstocking. Producers of API’s noted a slow-down in sales, as many pharmaceutical manufacturers had swollen their raw material supplies in recent years to ensure supply. For the companies in our benchmark, on average raw materials inventories are almost double what they were before the pandemic. Meanwhile the pharmaceutical manufacturers themselves reported overstocking at their customers as a reason for suppressed demand.

Of course, given the importance and utility of their products, no one would want the pharmaceutical manufacturers to run short of essential medicines, and this consideration features very highly in their approach to inventory. If the current levels of excess and obsolescence are simply a necessary evil to achieve such high availability, surely it is a price worth paying?

However, while a certain amount of waste is necessary to maintain very high service levels for products with very short shelf lives, most medicines have a shelf life sufficiently long for this not to be a significant factor on its own. When a product has a shelf life that can be measured in months, this is certainly the case.

Another way of looking at it is from a purely financial perspective. There are a variety of companies in the benchmark: generics manufacturers, research-driven pharmaceutical manufacturers, diversified groups, contract manufacturers, but the average gross margin in 2023 was 65%. The gross margin is so large because R&D accounts for such a large proportion of the true cost of doing business for a lot of the firms, but EBITDA is also very healthy in the sector. In this context, scrapping 4% of your inventory each year equates to little more than 1% of revenue. This is a very small consideration compared to the rewards for, say, successfully bringing a new blockbuster to market.

Inventory is not a cost to be minimized. It is a strategic asset to be optimized. Medicine shortages continue to be a global problem (3). As we highlighted in last year’s report, contrary to what intuition might tell you, shortages and overstocks are not inversely linked. Yes, if you only have one product then having too much of it means you can’t simultaneously not have enough. But once you consider the huge number of different medicines and dosage forms, it is obviously possible to have too much of some and not enough of others and this is the case in practice. Manufacturing capacity, raw materials and cash are all finite resources and overproduction in one area can and does cause shortages in others.

So when we hear people say “we don’t want to reduce inventories because we don’t want to risk shortages”, this is the wrong way of thinking about it. You should reduce unneeded inventories so that shortages can be better avoided. This is not to say that pharma supply chain teams are not already exerting themselves to better achieve this balance – of course they are, this is the very essence of supply chain. But as we look at another year’s inexorable rise in big pharma inventory levels, we have to conclude that there is still much room for improvement.

If you have any questions about this report, or would like help improving your organisation’s inventory levels (whether you feature in the benchmark or not), please contact us.

Technical Notes

1. “One-off effects” include the change of companies in the benchmark as well as major acquisitions or divestitures. When we compare DIO numbers from one year to the next, we exclude companies with this type of one-off effect so that they do not distort the underlying trend. Of course, a lot of these companies are making acquisitions or divestitures on a fairly regular basis, so we only exclude those where a significant impact on inventory levels is observable in either of the two years compared. The major one-off effects in 2023 are as follows:

• Bausch Health recorded a fair value step up on $162m of XIIDRA inventory acquired from Novartis. This should be amortized over 2 years, of which $20 was amortized through Cost of Sales in 2023.
• Biogen recorded a fair value step up on $1.3bn of inventory acquired through the purchase of Reata. This should be amortized over 3 years, with 31.5m amortized in 2023. Biogen have finished writing off Aduhelm.
• Pfizer recorded a fair value step up on $4.1bn of inventory acquired through the purchase of Seagen , $672m of inventory acquired through the purchase of GBT and $817m of inventory acquired through the purchase of Biohaven. Pfizer wrote off $6.2bn of unmarketable Paxlovid and Comirnaty (which also affected the DIO numbers by swelling Cost of Sales). In addition, Pfizer lost $209m of inventory from the tornado which hit its Rocky Mount facility.
• Amgen recorded a fair value step up on $5.025bn of inventory acquired through the purchase of Horizon Therapeutics.
• AstraZeneca recorded a $114m impact on Cost of Sales from the unwinding of fair value from the acquisition of Alexion.

At the time of publishing, Boehringer Ingelheim had not released their Finance Report for 2023, so we have replicated the 2022 figures as a placeholder and will update the benchmark once it becomes available. Boehringer Ingelheim do not report Cost of Sales so we have used an estimate as with previous years.

2. For estimates of inventory write offs, see our article “Inventory write offs in pharmaceutical manufacturing”.

3. See, for instance, the European Association of Hospital Pharmacists report, this summary from C&EN on shortages in the US, or this research briefing from the UK parliament. Of course, there are multiple reasons why medicines run short, but a lack of free capacity to react quickly to shortages is one.