Succeeding in the competitive biotechnology space demands more than finding scientific breakthroughs in the multifaceted challenges within the field. Handling your accounting and finance function effectively and efficiently is equally critical to a thriving company. But economic headwinds, complex regulations, a dynamic industry, and a continually changing tax code make it difficult to keep up—especially if you have a lean staff focused on other, value-add activities.
Scrubbed understands the challenges biotech founders and leaders face in handling their accounting and finance processes—as well as the unique issues and nuances in the industry. Based on our experience working with biotechs and other life sciences companies, we find the following are among the most frequently asked questions about biotech accounting and finance.
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1. How should we recognize revenue for our biotech products and services?
Revenue recognition is complex for biotech companies for a variety of reasons.
For instance, biotechs commonly enter into third-party collaborations to further their drug development and commercialization, gaining a partner to share the costs and risks. Whether you decide to engage with a Contract Research Organization (CRO) to enhance your in-house R&D efforts, or you already secured regulatory clearance and require a Contract Manufacturing Organization (CMO) to expand production capabilities or seek a co-marketing partner to extend your reach, these partnerships introduce complexities into revenue recognition.
Selling or licensing your intellectual property (IP) also complicates revenue recognition. And when IP licensing is packaged with other services, such as contract R&D or manufacturing, the picture becomes even cloudier.
Keeping current with the most recent accounting standards for revenue recognition (including ASC 606) and applying them properly requires the help of an experienced partner that’s worked with many biotech businesses. There are a few simple, clear-cut answers, but the following five-step process is a good starting point for recognizing revenue:
- Identify the contract terms with each customer or relevant collaborator, including price, delivery dates, and payment.
- Understand the performance obligations in each contract and establish what goods or services you’re obligated to provide.
- Determine the transaction price you’ll recognize as revenue.
- Allocate the transaction price to the performance obligations, based on the relative standalone selling prices of the goods and services.
- Recognize revenue as each performance obligation is satisfied. The criteria for satisfying those obligations will vary based on the type of contract, especially when you work with third-party collaborators.
2. What’s the best way for our biotech company to raise capital?
In an industry that can be capital-intensive, the ability to fundraise successfully is critical to your long-term success and short-term viability. Yet, long development cycles and high risks can deter investors or cause them to favor companies that are at or near the clinical trial phase. The current economic headwinds make it an especially challenging time for biotechs to raise capital—particularly in the wake of Silicon Valley Bank’s fall and the lingering effects it’s projected to have on biotech fundraising.
Since you’ll likely go through multiple rounds of financing before your product reaches commercialization, raising capital will remain an important objective throughout your lifecycle. And the best source and type of capital will likely differ at every stage.
Relevant capital sources can include:
- Grants from government agencies (like the National Institutes for Health) and corporations (including some of the largest pharmaceutical companies);
- Partnerships with research universities that have strong biotechnology programs;
- Angel investors and venture capital firms, which tend to invest in early-stage biotechs; and
- Private equity firms, which tend to get involved later in a biotech’s lifecycle.
Then there is the question of whether to use debt or equity financing to raise capital. Each approach brings advantages and disadvantages, so it’s best to consult with an experienced accounting and finance firm that specializes in serving biotechs. Generally speaking:
- Debt financing can be a faster way to raise capital. But it’s become costly in today’s high interest rate environment, and the resulting debt service will restrict your cash flow.
- Equity financing requires giving up a portion of your ownership in the business, so you need to be careful not to dilute ownership more than what is necessary.
Scrubbed’s Guide to Early-Stage Funding is a great resource on this complex subject. Your accounting and finance partner can also help guide you in raising capital based on your stage of development and business objectives.
3. How can our biotech business budget and forecast effectively?
Proper budgeting and forecasting are essential for biotechs for the same reasons that fundraising is critical. A capital-intensive business, coupled with lengthy product development cycles, makes it essential to manage your capital and forecast your revenue and expenses accurately.
While every biotech business has unique characteristics, most of them need to budget for R&D (which often makes up the lion’s share of expenses), along with salaries and benefits for PhD-level scientists and the cost to set up a Scientific Advisory Board. Once you reach the clinical trial stage, you’ll need to budget for the trial’s ongoing expenses while maintaining good cash flow. These are just a few of the many budgeting issues that biotech issues face.
In Scrubbed’s experience, best practices like the following can help your biotech company budget and forecast with confidence:
- Involve all stakeholders, including management, other employees, and investors.
- Use historical data for budgets and forecasts to improve their dependability.
- Stay agile to accommodate changes in the business environment.
- Review budgets and forecasts regularly to ensure they’re accurate and relevant.
- Lean on today’s sophisticated modeling tools to develop dynamic forecasts (which an outsourced accounting and finance partner like Scrubbed can help with).
4. How can we optimize our biotech’s tax strategy?
Though the specific taxes you’re subject to will vary by location, business structure, and activities, there are some common aspects to consider in optimizing the tax strategy of your biotech business.
- Research and development (R&D) tax credit: This federal tax credit is available to businesses that conduct qualified R&D activities, and some states offer a similar credit.
- International taxes: If you operate internationally, it’s important to understand the tax implications and ensure you’re meeting the requirements.
- Transfer of IP: Some biotechs find it tax-advantageous to develop IP in one jurisdiction, then transfer it to a subsidiary or other internal entity in a different jurisdiction. It’s critical and complex to handle this transfer correctly from an accounting standpoint.
- Tax impact of prescription drug fees. Any drug fees your biotech may owe per the Patient Protection and Affordable Care Act will impact your tax accounting. Since these fees aren’t tax deductible, they create a difference between your income for financial reporting purposes and your taxable income.
These are just a few of the many tax strategy considerations and implications for biotech businesses. Since tax accounting is never straightforward, partnering with an experienced accounting and finance firm that knows the biotech industry is always a smart move.
5. How should we evaluate potential acquisition targets and integrate them into our business?
Mergers and acquisitions (M&A) can be a boon to biotechs and life sciences companies. Whether you’re looking to acquire an emerging business that offers IP or other assets of value, or you’re interested in merging with a larger entity that can give you access to new products, expand your R&D capabilities, or enable you to enter new markets, M&A may be an important part of your business strategy.
But identifying the best acquisition target to achieve your business objectives, then integrating it into your operations, is not an easy task. While every deal is different, as a general rule, it’s best to closely evaluate a potential target from three perspectives:
- How financially healthy is the company, in terms of revenue, expenses, debt, and cash flow?
- Does this company provide a good strategic fit with your business, in terms of its products, technologies, markets, and customers?
- How strong is the target company’s management team, as reflected in its experience and track record?
Once you’ve selected the target company, you need a plan for integrating your entities quickly, efficiently, and effectively, across every function. Assess each company’s operations, including products, technologies, processes, and people, and determine how to best integrate them. Be sure to include a communication plan that outlines how you’ll inform employees, customers, investors, and suppliers.
You also need to handle the M&A transaction correctly from an accounting perspective, but here again, there are complexities. For example, the standards that guide accounting for an M&A transaction vary based on whether the entity you’re acquiring is considered a business or an asset.
How Scrubbed can help?
It takes experience and expertise to guide biotech and life sciences accounting in today’s complex environment. That’s why many biotechs and life sciences companies count on Scrubbed as their outsourced accounting and finance partner.
Scrubbed understands the nuances and complexities of accounting and finance in your industry, along with the challenges you face in a complicated and ever-changing market. Our experienced team and proven practices enable us to handle your accounting and finance needs with ease.
Schedule a call with a Scrubbed expert to learn how we can help your biotech or life science company thrive!
