Glaxo’s cash efficiency drive leaves Pronova reeling

For some time now big pharma companies have been striving to improve inefficient working capital cycles but with modest success, prompting analysts and investors alike to call for greater and tougher measures which would release significant amounts of cash; a recent report by Citi reckons $21bn in cash could be realised by European majors alone.

Good news for big pharma and their shareholders yet potentially bad news for any company supplying products to a larger partner. Witness the 21% decline in Pronova BioPharma’s shares today to NKr14.30 on news that GlaxoSmithKline is cutting its inventory of Lovaza, thereby reducing Pronova’s shipment guidance of the fish oil-based cholesterol-lowering drug by 20% this year. An over reaction perhaps given that in-market sales remain strong and unaffected, although the dwindling prospect of Norway’s biggest pharmaceutical company paying out its first ever dividend this year will not have pleased shareholders.

Short-term negative

Pronova, which recently opened a new manufacturing plant in Kalundborg, Denmark, to manufacture up to 1,200 tonnes of Lovaza, had previously guided the market that it would ship 1,800 to 2,000 tonnes of the product to its multiple international partners this year.

However, it seems Glaxo’s efficiency drive has highlighted a slight over-stocking of the product in the US, estimated to currently sit at around seven to eight months of inventory when compared to around four months in Europe.

As such, Glaxo appears to have recently dropped this small bombshell, prompting Pronova’s announcement today that shipment of Lovaza this year will now be closer to 1,600 to 1,700 tonnes.

Certainly a negative event, whether it warrants such a dramatic sell off is questionable considering sales of the product remain strong. Glaxo booked around $700m in sales last year which are forecast to break $1bn by 2012 before generic versions and new products are expected to enter the market and gradually erode market share; however sales in 2016 are still expected to be over $850m according to EvaluatePharma consensus.

Dividend disappointment

Earlier this year Pronova had raised the tantalising prospect of paying out its first dividend in the near future. Although it did not provide guidance on when this might happen, it simply said it would depend on the company’s net financial position, there certainly had been some expectation that it could happen this year.

On average, analysts had pencilled in a dividend payout this year of around NKr0.5 per share, NKr150m ($25m) in total, but clearly the negative impact on cash flow makes that highly unlikely. Pronova ended the first quarter with just $38m in cash.

Nevertheless, analysts have been quick to call the share price decline an over reaction. “I was neutral on the stock but am definitely a buyer now”, says one analyst from a leading investment bank in London. Arvydas Noreika, an analyst for Terra Markets, believes the share price decline is excessive, adding “Glaxo’s decision is quite likely to have been a surprise to the company”.

As such, Pronova shares should recover over the coming months as investors absorb the impact of the news.

Cash efficiency drive

The treatment dished out to Pronova today, both in terms of Glaxo’s decision and shareholder reaction, could serve as a warning to any other company supplying products to big pharma, particularly those massively reliant on just one product.

Citi analysts had highlighted Glaxo as one of the least efficient of its European peers in terms of managing its working capital, identifying almost $5bn that could be released with senior management incentivised to improve its cash cycle.

So while some Glaxo execs could be set for a bonus, Pronova is left to pick up the pieces and start the long process of rebuilding shareholder confidence.

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