Chris Wilkinson, Siemens Financial Services, looks how to drive growth in an innovative industry such as pharmaceutical manufacture
The UK is home to some of the world’s most renowned pharmaceutical companies. On a worldwide scale, British companies are responsible for developing one-seventh of the medicines currently in use across the globe,[1] commandeering the second largest share of the market behind US pharmaceutical organisations. According to the Association of the British Pharmaceutical Industry (ABPI), after Japan and the US, the UK is also the third greatest investor in pharmaceutical and biotechnological research worldwide.[2] Latest figures from the Office for National Statistics indicate that pharmaceuticals’ investments on research and development (R&D) account for 22% of total expenditure on R&D performed in UK businesses, twice that of the second largest contributor.
Aside from the home-grown global players, small- and medium-sized pharmaceutical companies also play a significant part in maintaining the UK’s crucial position as a frontrunner in the pharmaceutical market. In fact, it is estimated that activities from small- and medium-sized enterprises (SME) generate around 80% of the pharmaceutical innovations in the UK, with these companies supplying 40% of the branded products used by the NHS.[3] Because of the sector’s specialist expertise and emphasis on innovation, the development and manufacture of pharmaceuticals needs to be underpinned by cutting-edge research and sophisticated production facilities. With the growing requirements to comply with increasingly restrictive industry regulations and best-practice policies, it is imperative that pharmaceutical companies enhance efficiency and productivity, through, amongst other things, the use of state-of-the-art laboratory equipment and up-to-date technology.
Harnessing technological innovations can help realise costs savings while ensuring high-quality outputs and waste reduction. Nevertheless, keeping pace with technological advancements requires considerable capital expenditure. More often than not, businesses have to preserve their cash flow and lines of credit to support other working capital requirements; moreover access to affordable bank credit has become more restricted following the financial crisis. For smaller-sized pharmaceutical companies where funds can be scarcer and restrictions on capital tighter, realising technology investment can prove particularly challenging. With downward pressure on drug prices across the world and, specifically, changes to the 2014 Pharmaceutical Price Regulation Scheme, smaller businesses are likely to feel the squeeze further.
This explains why asset finance techniques such as leasing and renting are gaining popularity as a cost-effective investment-enabler. Such financing solutions spread the cost of the equipment over an agreed financing period, with monthly finance payments arranged to align with the expected benefit of its use, such as efficiency gains.. This removes the need for a large initial outlay, thereby increasing the funds available for operating expenditure. Asset finance thereby allows pharmaceutical companies access to the latest technologies, without having to commit scarce capital or use traditional lines of credit. Fixed finance payments also eliminate the volatility of interest rates, inflation and credit conditions while assisting with long-term budgeting. In addition, financing arrangements can incorporate other costs such as installation, maintenance, service and sometimes consumables, as well as introduce the possibility of technology upgrade in broad line with technology developments.
Such tailored, all-encompassing financing packages tend to be offered by specialist financiers who have an in-depth understanding of production technology and its applications. They are therefore more inclined and more able to create customised financing packages that fit the specific requirements of a business – for instance, flexing the financing period to suit the customer’s cash flow. This contrasts with the standard financing terms usually available from generalist financiers.
As changing regulations and a growing demand for innovative research and ground-breaking medicines have placed greater pressure on the sector, the use of outdated equipment could hamper industry progress and slow future development. In order to remain at the forefront of the industry, UK pharmaceutical companies should exploit the enhanced potential offered by advanced equipment and modern technology. Capital investment, however, must be undertaken under the premise of sustainable and affordable financing. Instead of tying up precious capital in equipment acquisition, pharmaceutical companies can utilise flexible asset financing techniques through which they can more effectively deploy available financial resources in research and development – a crucial area that underpins the sector’s ability to make a vital contribution to raising healthcare service quality.
[1] The Pharmaceutical Journal, 5 July 2014, Vol 293, No 7817, online
[2] Ibid.
[3] Ibid.