Unlike many industries, biotech has seen significant growth throughout the pandemic, with the global biotechnology market value expected to reach $2.4 trillion by 2028.
With strong government, media, and public focus on science and medicine, the biotech industry is an exciting space to be in right now. However, while science and engineering are the core focus of this business, anyone starting or running a biotech company will need to address some unique challenges.
In its 2021 Life Sciences Industry Accounting Guide, Deloitte highlights several financial issues biotech and life science companies face, such as research and development costs, acquisitions and divestitures, consolidation, contingencies, revenue recognition, income taxes, financial instruments, and financial statement presentation and disclosure.
In order for new companies to succeed, they must have a robust financial management system in place, whether that’s cloud-based accounting software or an all-in-one ERP solution.
Let’s take a deeper look at four key financial challenges so you can get an idea of some of the challenges new biotech companies might face and how to overcome them.
1. Revenue recognition
Biotech startups should be aware of the latest ASU accounting standard issued by the Financial Accounting Standards Board and International Accounting Standards Board on revenue from contracts with customers. This may require biotech companies to reassess and, in some cases, adjust their current revenue accounting policies.
One challenge resulting from this is evaluating collaboration agreements and determining whether they represent contracts with customers. The task of achieving compliance in this area can seem daunting: it will mean systemizing processes, providing consistent support documentation, and ensuring consistency through expansion.
The new ASU standard indicates that an entity should follow these five steps in recognizing revenue:
- Identify the contract(s) with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenue when (or as) the entity satisfies a performance obligation.
A business management system such as an ERP platform can help connect new users, new locations, and new lines of business, facilitating company growth. Having consistent processes across business units and locations will promote profitability and make the compliance process easier to manage.
2. Research and development
Product development is always an expensive and time-consuming process. This is especially true in the biotech industry, where profitability is restrained by pricing difficulties and scrutiny, the rising cost of materials and development, increased sourcing challenges, and tighter government regulations.
In response, many companies have focused on more capable and efficient specialized R&D models. Biotech companies often outsource research to external partners to reduce costs, acquire products with potential in preclinical and clinical-stage development, and optimize product approval timelines.
The R&D process can be greatly assisted by ERP, which can both help manage the process and connect external partners more holistically to the business.
Biotech companies will need to enter into a number of different arrangements with other parties, whether they’re aiming to facilitate research and development or preparing to sell products or intellectual property. These arrangements must be carefully analyzed before any corporate consolidation takes place, as parties may be absorbing risks and rewards through interests rather than based on traditional voting equity.
Under generally accepted accounting principles in the U.S., the dual consolidation model comprises both the variable interest entity model and the voting interest entity model.
The variable interest entity model is designed to make sure the reporting entity consolidating with another legal entity has a controlling financial interest. Under the voting interest entity model, by contrast, the reporting entity with ownership of a legal entity’s voting interests generally has a controlling financial interest.
This doesn’t apply to collaborative arrangements, as those are not primarily conducted through a separate legal entity.
Consolidation and the relationship between organizations can be tricky—and it helps to have an ERP system in place to manage these relationships and properly connect them.
4. Financial reporting
Billions of dollars are spent every year in the biotech industry. Analysis from Deloitte has found that the cost of bringing an asset to market is at record levels, even while R&D returns continue to fall.
Many biotech companies seek external financing to fund product development. This requires careful and thorough accounting analysis, as financing transactions will often include complex terms and conditions.
One of the most important considerations here is the ability to track spending and find the right spending cadence. Forecasting and budgeting are crucial to keeping projects running according to plan, by maintaining the right pace while monitoring cash flow. Projects can be delayed by not spending enough; conversely, spending too much can deplete funds, also resulting in delays.
Financial reporting and monitoring are essential to effectively manage successful companies from pre-revenue through all funding stages, up to a potential merger, acquisition, IPO, or operation as a much larger and profit-yielding entity.
Many companies use ERP systems made specifically for the biotech industry. ERP allows many processes to be automated, including several error-prone accounting tasks, while providing extensive reporting options and real-time monitoring.