An Examination of Big Pharma Inventories

Matthew Bardell

Last year, while brainstorming future editorial content for 2024, a question crossed my mind: Was there a specific report that explored the inventory levels of Big Pharma companies?

The short answer is yes.

For seven years now, nVentic—whose goal is to help its manufacturing clients improve inventory performance—has been gathering relevant data and compiling it all into what it calls its “Inventory Trends Benchmarking Report."

In a Pharmaceutical Commerce exclusive, we sat down with Bardell—the lead behind the benchmarks—to discuss the thought process into designing the report, its results, and what the storyline for 2025 will be.

Pharma Commerce: Could you further elaborate on nVentic, including the types of services it provides?

Matthew Bardell: nVentic is really a specialist inventory optimization company. We provide both technology and services to help mostly large to very large organizations better optimize their inventories. Our perception is that most organizations have not really taken advantage of all of the opportunities available to them through inventory optimization. We believe that there's a large opportunity in this area for plenty of organizations, not just in the healthcare sector, but further abroad.

We also provide broader supply chain and procurement services, but our key focus area has always been inventory optimization.

PC: What is the purpose of this yearly report? Could you describe the process that designing such an outline entails?

Bardell: Benchmarks are great conversation starters; as human beings, we're always interested in comparing ourselves to others.

Because we identified seven years ago that the pharmaceutical sector is a key sector for us, we thought, why not do some benchmarking and use it as a conversation starter with some of the different companies? I don't think we originally set off with the intention of making it a yearly occurrence, but we got a lot of reaction to the report right from the start. We're now at a stage where people contact us asking when the new one is coming out. It continues to serve its initial purpose to give people interested in the sector a view of what's happening with inventory levels at the biggest manufacturers.

It’s also got a certain momentum and interest, so we're happy to keep providing it for people. In terms of the process, a lot of it is just crunching numbers. We're going through quarterly reports, annual reports, press releases, collating the data, running some basic analysis on it.

We also look at what the companies themselves are saying about their inventories—it doesn't always get much of a mention. It's not always a high priority for companies, but they'll be some that say something about their inventory levels. And besides that, we're looking at what's going on in the bigger picture for them and what's going on in the industry.

Is business booming? Are sales taking off? Are costs under pressure? Are there new things? Is there a global pandemic affecting anyone? And if so, what difference is that making? It takes a certain effort to pull all of that information together and synthesize and analyze it and then summarize—in a short format—the key trends that we see year on year.

PC: What were some of findings that you found most notable?

Bardell: Well, I think the main thing this year is how much inventories have grown. We started seven years ago thinking that these companies have a lot of inventory—it's only gone up since then, so it's interesting to me that there's a constant sort of upward trend on this one.

Individual companies tell their own story. For example, Pfizer, pre-pandemic, had a lot of DIO (days inventory outstanding), and then such was the success of its vaccine; not only did the company's revenue double, but it had a proportionate effect on its DIO,which came way down. Over 2023, the company had to make an enormous write off—over $6 billion worth of COVID-19 related treatments (Paxlovid and Comirnaty) written off that they can no longer use.

When the pandemic came along, these companies suddenly faced unlimited demand for these products, and no one knew how long it was going to carry on. It was extremely difficult, and I think people generally are happy that these companies could suddenly develop a vaccine and start cranking it out at the speed that they did; so financially, these billions of dollars written off needed to be put into the perspective of the additional revenue they made from it. It just shows you the impact of sudden swings in demand. That’s occurring in this example of Pfizer, but also at many other companies at a much smaller level. There's never perfect knowledge of the future, and you're always going to have some waste generated.

Manufacturers like Pfizer are using a lot of the cash that they generated from COVID vaccines and treatments to buy new companies, and when acquisitions happen, you also see a big impact on DIO because inventories are normally marked up to reflect fair value until that's run through the books over a period of time. You can pick different companies in the report and each one has its own story to tell, just like Pfizer does.

PC: What are the main drivers of this rise in inventory levels?

Bardell: There are a variety of reasons. We normally start with what the companies are saying themselves—plenty of them made reference in 2023 to what they call an increase in channel inventory, by which they mean their customers had received a lot of stock that they hadn't used, so sales for the manufacturers didn't come through as expected. Pharmaceutical manufacturers have long production lead times compared to a lot of industries. That means you can't react as quickly to sudden changes in demand. The fact that there was perhaps an unexpected surplus of inventory in the wholesale and distribution parts of the market had a knock-on effect with the manufacturers in 2023. Sales are a little bit down, but production is mostly done in advance based on the forecast.
PC: Being that scrapping 4% of inventory each year equals a little more than 1% of revenue (on average, a prediction), what can be done to begin reducing unneeded portions, thereby reversing these Big Pharma inventory levels?

Bardell: Each company has its own particular situation and challenges and priorities, so I can only speak from experience. The supply chain teams who are responsible for managing inventory understand that some of the forecasts used are on the optimistic side and will generate excesses; they're often trying to act as a brake on that. But because it's a high-margin, revenue-driven industry, it's quite difficult to have your voice heard against the people who are saying, "look, this new medicine we're bringing out, it's going to be a top seller, it will completely transform our top line."

It's quite difficult to make yourself heard against those sorts of voices. There are two ways of counteracting that really. One is simply disclosure of how much inventory is scrapped each year. This is something that we've been working on with the Sustainable Medicines Partnership (SMP), a non-profit organization comprising a collaboration of 48 organizations. Whether the manufacturers themselves, along with parts of the [National Health Service] in the UK and other organizations interested in the healthcare supply chain, such as nVentic or charitable organizations in the US that look at donating unused medicines, as well as various industry bodies, people are looking at different ways of reducing waste in the broader sense in the industry.

Inventory waste is what we're talking about here—it consists of products that are surplus to demand and that end up being destroyed. The SMP also looks at other things like sustainable packaging and carbon accounting. One of the things that we are passionate about is creating greater visibility around this. That 4% figure is an estimate based on what little information we can get. Some companies are very clear, and report exactly what was written off each year, but many don't, and differing accounting protocols can make numbers hard to compare.

We think it's probably good enough for an estimate and then what we at the SMP would like to do is encourage companies to report this type of waste as part of their ESG reporting, so that there's greater visibility created across the industry in terms of how much actually completely goes to waste in this respect.

The second way of reducing scrapped inventory is to better use inventory science to reduce the excesses in the first place. This is our primary focus at nVentic.

PC: What would you say to companies who might feel that they don’t want to reduce inventories because they don’t want to risk shortages?

Bardell: This is where the difference between inventory optimization and inventory reduction comes in. Sometimes, companies will just pursue inventory reduction because they want to free up working capital. Inventory optimization is about finding the best possible balance between running short and having so much that you end up discarding some.

It’s not a zero-sum game. At the end of the day, both the FDA and the European Union—most countries of the world—publish medicine shortage reports on a regular basis. Medicine shortages exist. If you look at individual companies on our benchmark report, they've got an average of seven months worth of stock.

So shortages aren't caused because they don't have enough stock overall but because they don't have enough of the right stock. In other words, having an average of seven months stock on hand doesn't mean you have seven months of everything; you can run out of some completely while having 14 months of more of others.

For critical-to-life medicines, companies will already be applying something like a 99.5% fill rate. They may well even have complete redundancy in stocks for their most critical items as well. All of that is the right thing to do, but even then, it's still a matter of finding the right balance between those and some of our less critical items. Because manufacturing capacity is a finite resource; cash is a finite resource; time is a finite resource.

If you're busy producing too much of something that you don't need, then that's time and effort that you could perhaps better be applying to manufacturing things that are needed. So inventory optimization is not risking shortages to deliver reduction, it is addressing the common root causes of inventory shortages and excesses to deliver both future stockouts and less inventory written off.

Obviously, put like that, it's very simplistic. The real key comes in the huge volumes of data flowing through these organizations and the ability to really understand what the data is telling us in terms of how we can further optimize—that's where the incremental gains are to be made.

PC: What do you believe the main headline will be once 2025 rolls around?

Bardell: To be honest, I don't anticipate any major changes. The biggest conclusion I've taken from doing the report with nVentic is that this is not a priority for these companies. Of course, that’s not to say that inventory isn’t a very high priority for them. It's absolutely essential to what they do. They've got large teams of very skillful people doing nothing but trying to get these levels as good as possible, and that will continue to be the case.

What I mean is that at a strategic level, few companies seem to have a major ambition to prioritize inventory optimization. The attention is on M&A, R&D, and what’s coming, so I don't really see anything changing in that respect.