Any supplier of services to the pharmaceutical industry is acutely aware that the drug companies now take far longer to pay invoices. In many other ways, pharma's onerous payment terms have imposed serious burdens on those vastly smaller suppliers. This seemingly humdrum matter of invoice payment policy is informative for people beyond those who do business with pharma. An understanding of pharma's screw-the-vendors payment system reveals a lot about the industry's devolving integrity.
A decade ago pharma companies generally paid invoices within 30 days. As the industry's fortunes started to ebb as a result of patent expirations, price constraints, and declining R&D productivity, that turnaround time expanded to 45 days, then to 60 days. Now most pharmas hold invoices between 75 and 90 days before issuing payment.
To say the least, it represents a spiteful example of finance management when multi-billion dollar companies withhold past due payments to small concerns for increasingly longer periods. But if that wasn't bad enough, the pharma companies routinely use a multitude of tricks and traps to withhold payment even longer.
For example, if the 75th or the 90th day on which payment becomes due falls on a Tuesday, the accounts payable department presents the lame explanation that they send out payments only once a week and that day happens to fall on Mondays. Seventy-five days thereby expand to 81 days.
Teva, for example, adds another nasty move to this shell game. Payments from that company go out 60 days after they receive an invoice, but the 60-day count doesn't start until the month after the invoice arrives. That means if a vendor submits an invoice near the beginning of the month, turnaround time for payment takes 90 days.
Often as not, invoices still remain unpaid after more than 90 days. When hapless vendors then inquire about payment, they are often told that because religious holidays such as Simchat Torah or Shavuot are being observed in the Holy Land, A/P will make no payments that week.
Although not located in the Holy Land, Pfizer has also used such dog-ate-my-homework excuses to delay paying its vendors. Often as not, suppliers to that company with payment due dates that occur after the second week in December will have to wait until the second week of January to get paid. If the twelve days of Christmas bring a partridge to CFO Frank D'Amelio's pear tree, they also provide an excuse for delaying payment to vendors by a month.
A marketing researcher who has done a considerable amount of work for Bristol-Myers Squibb over the years claims a source of his who works in accounting there told him the Accounts Payable people boast that they have been able to extend their median payment time to more than 100 days by using such excuses.
Then there is the fact that most if not all the Big Pharma companies have outsourced their Accounts Payable function to companies in India or elsewhere in the "emerging" countries. This transition has provided still more excuses to delay payment by at least a month. The frequently heard explanations include:
"There's been a delay during the transition while they learn our system."
"They don't yet have a firm grasp on American business terms."
"They don't really have a means of vendor relations."
"There have been several invoices that fell in the cracks while we're changing over."
Suppliers to pharma companies across the Delaware Valley likely have horror stories about delayed payments that would make these seem merely cute by comparison. It would be interesting to hear some of them.
Probably the low point in pharma's extortion of its vendors came in November 2013. To mark the holiday season, GlaxoSmithKline sent out notices to its vendors, demanding retroactive rebates for work already completed or in process during that year. GSK noted that although the work was done under contracts at stipulated prices, meaning vendors were not legally obligated to submit rebates, failure to do so would jeopardize a vendor's inclusion on GSK's preferred list for 2014.
And what reason did GSK give for figuratively holding a gun to demand rebates? The form letter actually was so bold as to state that the company was facing financial reverses. One of those setbacks, which the clawback letter declined to specify, was the prospect of enormous fines in China for routinely bribing the country's health ministry officials and hospital purchasing agents.
The reason for this malicious sort of finance/accounting bad behavior is not difficult to discern. The late Steve Jobs sketched out the rationale when he said that if a company and its industry produce innovative products that people want, R&D usually drives operations. That represents stage 1 of this ethical continuum and it is characterized by growth and brightening prospects. With a productive R&D developing valuable products, there is rarely any need for accounting dirty tricks.
Then there's Stage 2. That arises when innovation slows and the sector produces products of lesser value. At that point marketing and sales typically run the show. Pharma was in that stage during the 1980s and '90s.
Then when marketing and sales can no longer effectively sell old wine in new bottles, finance takes over. In this third Stage, the sector is characterized by M&A, accounting tricks, share buybacks, and high dividend yields. The managerial mindset under finance/accounting sees R&D as a wasteful indulgence that fails to justify the costs of capital. The bean counters also get their revenge on marketing and sales by classifying them as major cost drivers that often create legal liabilities.
Then there is Stage 4, when even the legerdemain of finance/accounting can no longer mask fundamental difficulties. That's when an industry turns to fraud, stealth, deception, unethical behavior and various forms of civil/criminal violations.
Between 2007 and 2014, twenty-one of the largest pharma companies collectively sustained fines of $40 billion. The transgressions included under-reporting of side effects, off-label marketing, illegal or unethical payments to researchers and prescribers, subverting the channels of medical communications and bribing nursing home suppliers. The consumer advocacy group, Public Citizen, published a report in 2012 labeling pharma the largest organized crime entity in the U.S.
So the question for consideration is this. Does pharma's systematically despicable, quasi-extortionist delay of invoice payments to vendors represent the nadir of Stage 3's operational control by finance/accounting, or Stage 4 which is Al Capone with a mortar, pestle and a ledger?