Pharma seeks to ease pain of euro crisis With Greece and Spain struggling to repay billions of euros in outstanding debts to the healthcare sector as the eurozone crisis festers, Merck of Germany is stepping up action to ease the pain. "We have introduced cash on delivery and are looking at how much we will, in future, invest in commercial infrastructure," says Stefan Oschmann, head of pharmaceuticals at the company. He is not alone. Across the eurozone - above all in Greece and Spain - the uncertainty over outstanding payments and future income has squeezed many drug companies and forced them to modify their business practices. While the scale of exposure is too small to be disclosed for many of the larger pharmaceutical companies, estimates of unpaid debts for the sector exceed €12bn. Simon Lowth, chief financial officer at AstraZeneca, echoes several peers when he argues that the situation eased when Greece paid off much outstanding debt in 2010 in the form of sovereign bonds. But with arrears slipping again, he says the industry is negotiating to offset recent price cuts against unpaid debts to reduce the loss. Meanwhile, the sector is taking remedial measures. Joe Jimenez, chief executive of Novartis, says: "We are watching very carefully and have made a lot of effort by changing incentives." His commercial staff are now no longer paid a commission based on simply generating sales but also on collecting cash. Like his rivals, he is reluctant to reveal details, stressing that they provide a competitive edge. In common with other multinational groups, Novartis's exposure to Portugal, Italy, Greece and Spain also remains relatively modest, easing the overall risks and meaning there is no obligation to disclose their precise exposure. For smaller and regional companies, the burden is more material. Bad debts and the prospects of still tougher financial times ahead, including further cuts in drug prices and volumes, are accelerating restructuring pressures on the industry. Several Italian companies have sought buyers or partners in recent months; and others such as Almirall in Spain have stepped up efforts to diversify into new regions or more profitable drugs. Many companies have used factoring to generate immediate cash and offset the uncertainties of future payment; or have sought loans from banks secured against the debts. Others have gone further. Unpaid receivables - which were always long in duration in the Mediterranean region - have grown, notably in Spain where in four regions the payment terms have reached 800 days. Olivier Bohuon, head of Smith & Nephew, for which the troubled eurozone countries represent 6 per cent of group sales, says: "The receivables are worsening in these countries. I don't see any improvement anytime soon. He recently took back $5m in inventories from a large distributor in Spain, which had been stocking products not paid for. Novo Nordisk, the Danish insulin provider, took radical steps early in the Greek crisis, shifting to cash on delivery and threatening to withhold its more innovative drugs entirely. Lars Sørensen, chief executive, says that, where there are payment problems, the company is focusing on supplying effective but often less convenient older and cheaper versions of drugs. Chris Viehbacher, head of Sanofi of France, has also shifted the portfolio of medicines it supplies while stressing: "We will supply drugs when they are no alternative sources or there is a higher medical need." Where possible, drug companies have also tried to switch customers away from the worst payers - hospitals often reliant on regional government budgets - towards individual pharmacies, backed by individual traders who pay better. But this policy is easier to implement for companies with older drugs or "me too" products for which there are alternatives. It is politically more difficult for those supplying costlier and rarer life-saving innovative products, which are often only prescribed by specialists based in hospitals. Overall, the impact of the crisis depends significantly on each company's products. "We don't have high-priced cancer drugs in our portfolio," says Jörg Reinhardt, head of Bayer HealthCare, who says the overall impact is limited and has been tackled by measures including cutting inventories in countries at risk. Even for those with similar levels of exposure, companies have adopted varied responses. While Novo Nordisk sold off Greek bonds in lieu of payment, AstraZeneca has held them on its books. So has Merck of Germany, which has since written down more than half their €56m value. "It's an austere environment but it's not the end of the world," says Sir Andrew Witty, head of GlaxoSmithKline, which will provide more detail in its results his week. But we are a lot more focused on debt than we were two years ago. Additional reporting by Mark Wembridge