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Time for Life Sciences firms to take a new look at credit insurance

A number of factors could see businesses take a new look at how the credit insurance markets can help them whether it is selling new products into unfamiliar territories, a growing awareness of the need to optimise the use of working capital or freeing up cash to use in M&A related deals.

Make money work harder

Companies within the Life Sciences sector typically have significant capital sitting on their balance sheets so, traditionally speaking, credit insurance as a way to protect against bad debt only has really been used in a targeted manner, for instance to address concentration and/or high risk areas. But against a backdrop of significant economic uncertainty, businesses continue to be under pressure to optimise every key financial metric, including their use of capital. As mentioned in Aon’s latest C Suite Series report on Credit Solutions, ”Many of our multinational clients are listed public companies. Those that are, are judged by investors and shareholders; and the manner in which they manage their working capital is one of the key elements that could impact their share price.”

Life sciences businesses are not immune to these economic and trading pressures which means there is now a keener focus on areas like cash flow than there had been in the past. Governments are big buyers in the pharma world and while there are few concerns that they will pay eventually, they can be very slow to pay. This can be a significant drag on the balance sheet which is where credit insurers can help to free up capital by working with financial institutions to insure those trade receivables and allow a bank to advance funds. In addition, a lot of the big pharma companies have spun off some of their older off-patent drugs into separate companies because they are more focused on higher growth, higher margin, newer drugs. These new spin offs don’t have the same balance sheet strength as the big pharma companies do. Particularly as they tend to operate with tighter margins as competition from others producing the same generic product drives prices down. This could mean they are more vulnerable to both slow payers and customers who don’t pay, which again can make credit insurance products more relevant.

The COVID-19 effect

COVID-19 has pushed more companies to focus on R&D. This means that smaller companies, if successful, will likely be bought by larger pharma companies. And, when acquiring a company, you also obtain much added credit risk where these exposures are likely not to be as well managed as the current processes in place. Credit solutions can also help prevent and mitigate the unknown credit risk carried over from acquisitions. Another effect the pandemic has been the intensified credit concentration risk given the rise in sales to key distributors. The sector has seen strong underlying demand for key products, driven by increased customer buying patterns and patient prescription trends due to COVID-19.

Selling into new markets

There is also the assistance that credit insurance can provide when businesses are trading in foreign countries where they may not have the ability to examine their counterparties’ financials. It could be a pharmaceuticals company pushing into Eastern Europe, Middle East or Asia where they need greater comfort about the businesses they’re selling to. Credit insurance is a risk transfer vehicle but it also provides valuable insight into the credit worthiness of potential clients.

Developing and emerging economies can also represent potential new markets for some of the higher end cancer and rare disease drugs being developed. The challenge is that these drugs are expensive and while developed healthcare systems in countries like the US, and parts of Europe and Asia can afford them, distributing them into emerging economies is a challenge. Access and affordability are key factors for growth in Life Sciences firms and there is a route for credit insurance in these regions to help businesses sell more products even if that means extending payment terms. As Aon’s Credit Solutions report highlights, “by using the insurance market as an accounts payable solution, companies are able to create additional financing opportunities for suppliers without increasing their own debt levels or using existing banking lines.”

Finance the deal

One current significant trend for pharma companies relates to M&A strategies. Many pharma businesses are facing a ‘patent cliff’ as their pipeline of new products slows down and existing patents run out. A way to solve the problem is to go out and buy new companies to get hold of their products – rather than spend up to 15 years developing a new product in house. But, even if a company is flushed with cash, funding those sorts of acquisitions is a challenge. Again, there’s a role for the credit insurance market through the use of surety bonds. For example, buyers may have traditionally used a cash confirmation statement to certify they have the funds available and turned to a financial institution for a bridge credit agreement to facilitate these statements. A surety bond, however, issued by an insurer can be offered on financially superior terms as well as preserving the bidder’s cash liquidity.

Grab the opportunity

Whether it’s M&A or selling into new markets, as the global economy continues to slow, life sciences businesses need to take every opportunity they can to remain competitive. Credit solutions can play a vital role in helping deliver sustainable growth while also helping to optimise cash flow and working capital. It’s perhaps time for many life sciences companies to take a fresh look at what credit insurance can do for their business.

Download a copy of Aon’s latest C-Suite Series report ‘Driving growth through uncertain times