From preclinical to commercial: Refining the life sciences back office
Optimizing back-office value throughout the life sciences life cycle
INSIGHT ARTICLE |
In times both good and challenging, life sciences companies attract substantial shares of private investments and are more likely to go public than any other industry. This presents substantial challenges to the chief financial officer charged with leading these organizations, and requires them to carefully consider back-office investments. When every dollar invested in back-office systems is a dollar not invested in research, you must be confident that you will get a sufficient return to justify it.
According to a 2019 Gartner study, life sciences companies spend less on systems and information technology than most other industries, representing less than 5% of operating expenses on average. That same research shows that spending on IT is predominantly focused on existing operations (76%), as opposed to the transformative or growth driving initiatives that are truly needed in rapidly growing companies.
Life sciences back offices contend with countless challenges, with vastly differing levels of resources and support necessary at each stage of the clinical development cycle. Getting a drug to market—from the preclinical phase to commercialization—is a lengthy and expensive process. According to research published by the Journal of the American Medical Association in March 2020, the median cost for a biotech company to develop a drug is $985 million—but can range from as low as $320 million to as high as $5.4 billion.1 With drug development timelines often exceeding 10 years, companies must be strategic in how they spend money on people and technology for the back office, carefully monitor cash burn and always be ready to raise a new round of financing as reality on the ground changes.
As the company progresses through this life cycle, the back office must evolve to match the changing needs of the organization. Growing from a small number of founders and possibly a single person in finance, to needing the ability to manage the complex financials of running a clinical trial and working with a contract research organization, building out financial controls to manage the supply chain and contending with inflection points with rapid increases in staffing. The back office will also need to support clinical, supply chain and commercial teams as they prepare for a drug launch, with the gross-to-net (GTN), cost accounting, compliance reporting and revenue recognition challenges that includes.
Further complicating the environment, life sciences companies will have to raise capital multiple times to support the substantial costs required to advance a drug through trials and into commercialization. This will entail multiple rounds of private financing, often going public while still in pre-revenue, and entering into collaboration and licensing deals. To ensure that these inflection points occur on favorable terms, it is critical that the company carefully manages its cash runway and burn rates. This requires processes and technology to support cash forecasting, and the discipline to revisit these forecasts frequently as facts on the ground change.
As the company matures, the CFO will spend more time focusing on building and managing the back office. Attracting experienced talent is often challenging. During the early growth stages, a company may have a bookkeeper, then a controller and mainly accounting-focused resources as opposed to a commercial CFO. While going through this gradual transition and increasing financial needs, many life sciences companies turn to outsourcing for resources and technology platforms that can scale as the business matures.
Below, we evaluate the back-office demands that your life sciences company may face at each stage of its life cycle, with insights into how you can overcome them:
Research and development and preclinical phase
During the initial research and development and preclinical phase, companies require technology strategy and build out, as well as general accounting support. They often need a broad range of support, from helping with day-to-day financial demands to closing the books. With very small finance and IT organizations often consisting of only a handful of staff, outsourcing strategies can provide significant support at this level as well as access to experienced personnel and sophisticated back-office systems without requiring substantial cash investments.
As the company grows, it will need to onboard employees with industry-specific experience. One of the most important hires will be the CFO, who will need to have a breadth of expertise driving key initiatives throughout each phase of the organization, as well as a general understanding of all aspects of the business. An early stage CFO will need to be adept at raising and managing capital in order to understand and manage the cash runway and burn rate, as well as provide real-time and strategic cash-related KPIs.
The clinical phases bring several additional back-office considerations, as supplier management demands emerge, and several new accounting policies and procedures need to be executed. As companies near approval, the back office will need to prepare for commercialization, including setting up its manufacturing supply, distribution channels and sales teams. For each of these, companies will need to determine to what extent they will build internal capacity versus relying on outsourced partners.
While outsourcing of the finance back office is a critical strategy in this phase, this is also the period when companies should begin considering a holistic transformation of their technology foundation. An application architecture with an enterprise resource planning (ERP) system as the focal point can increase efficiency, insight and productivity across the organization, integrating with other key platforms, including, but not limited to the following:
- Corporate performance management
- Accounts payable automation
- Time and expense
- Human resource management
- Contract management
- Quality management
- Close automation
In addition, logistics strategies should be top of mind for life sciences companies at the clinical phase, whether they choose to take on the process in-house or utilize a third-party logistics provider. The decision of what technologies to deploy and when should be informed by this manufacturing and supply chain strategy.
Companies must remember that while technology is important, it is only a tool to support the people and processes required to run the business. Ultimately, a technology solution is only as good as the processes behind it. Determining the holistic automation strategy, along with executing on all of the potential automation tools and underlying process is imperative at this stage.
During the approval phase, companies should be zeroing in on what their supply chains will look like and how to effectively meet forecast demand and define inventory needs. Additional concerns include determining pricing and channel strategies, implementing an effective revenue policy, complying with the Sunshine Act and deciding whether to hire a direct sales force or utilize a third party.
If a company has made it to the approval phase without implementing the back-office technology infrastructure to support commercialization, it will need to move quickly to catch up. The demands on all areas of the business increase rapidly as the commercialization date approaches, and back-office implementations should not distract from the critical work of launching a company’s first drug. An application infrastructure should be prepared to meet the needs of the supply chain, manufacturing quality and integrations with a third-party logistics provider and 3PLs (if applicable). An external advisor can help strategize, design and create an effective framework.
Ultimately, the ERP system implementation is the most critical element of the technology platform. Companies must focus on several key steps to get the most value out of an ERP investment, including designing standard operating procedures within the supply chain, building effective integrations with third parties and designing the right reports for inventory visibility across the supply chain.
Selecting and implementing the right business intelligence tool is often done in parallel to an ERP implementation. The right tool will yield the valuable data-driven insights to help the executive team evaluate sales, accounting and operations, and make more informed business decisions during growth.
Finally, companies can leverage technology to design a comprehensive sales and operations planning process, forecasting demand and translating information to materials ordering and financial planning functions to ensure that supply chain challenges never get in the way of sales growth.
After the arduous march from idea to first sale, one would hope to be able to slow down and bask in the glow of a successful product launch. That is rarely the case, and the drive that was necessary to bring a new therapy to market quickly focuses on a new set of challenges and business considerations. Here, mergers and acquisitions are prevalent strategies to continue growth and expansion. In addition, companies are often changing how they sell and distribute drugs—title models, distribution models and third-party logistics strategies can change due to pricing issues, where a drug will be delivered, or a host of other reasons.
To effectively execute on M&A activities, life sciences companies will stand up an integration management office and develop a comprehensive 100-day plan for a post-transaction transition. Further, the function should document updated processes, policies and procedures, redesign work constructions and make any necessary changes in the ERP system while keeping other critical integrations in mind. M&A success will often breed additional M&A opportunities. So these integration processes should be well-documented, thoughtfully designed and ready to be deployed again for the next deal.
As a commercialized company, the back office will be expected to provide real-time budgeting and forecasting for enhanced financial and demand modelling. The finance team will need to operationalize the GTN processes—setting up processes for managing allocations, ensuring accurate reporting and monitoring changes in the channel mix that require adjustments to their GTN models. It will also need to provide key reporting capabilities, including collecting commercial sales data, sales trends and insights across each potential buying channel to support executive and sales decisions.
Life sciences companies are inherently fast-paced, with complex regulatory and operational challenges. As your company evolves throughout the drug development life cycle, the people, processes and technology of your back office must effectively scale with it. The right mix of talented staff, advice from qualified advisors, outsourcing and back-office systems offers your best chance at meeting these demands.
1Estimated Research and Development Investment Needed to Bring a New Medicine to Market, 2009-2018, Journal of the American Medical Association, accessed July 30, 2020, https://jamanetwork.com/journals/jama/article-abstract/2762311.