Designing Financial Systems to Support Commercialization

Hello, and welcome to the Informa Connect Life Sciences's webcast. I'm Leah Rosen, and we your host for this webcast. Before we get started, just a couple of notes, this webcast is being recorded and will be made available for replay in the multimedia section of our website. We've muted the audio lines, but we welcome you to type in your questions for a speaker in the question and answer window on your screen.

After the presentation, we will begin the question and answer portion. And I will ask our speaker your questions. Your questions in the question and answer window will be only visible to myself and our speaker. So thank you for joining us today.

It is now my pleasure to introduce James Neil from BDO.

Hi. My name is James Neil.

And I'm here to talk about designing financial systems to support commercialization.

So today, we're gonna go through, ERP considerations.

You know, when we're talking about financial systems for life sciences companies.

You know, it's generally ERPs that we're talking about, not just accounting systems and, you know, ERPs are systems like NetSuite, like, Dynamics three sixty five, you know, SAP oracle, rather than accounting systems, which are zero, QuickBooks, you know, some of the other, you know, smaller packages.

We'll talk about inventory tracking and costing, some order entry in sales, when you aren't, you know, doing your own and 3PL connections, and and how those apply we'll be covering a little bit about gross to net and what you need to think about there and then forecasting and planning as you, you know, work towards commercialization.

So within, commercialization and and the ERP landscape of, of commercialization.

We really start with the building blocks of, you know, as you see here.

Financials, of course, as the foundation.

You know, wanna make sure that you have a system that'll cover you for three to five years out. So we wanna think about you know, is there gonna be global implications, statutory reporting, for the financials, are we gonna need to do are we gonna need Sarbanes obsolete compliance, even if you aren't public yet, is there a possibility you're gonna IPO and even if it's private equity, you know, is that the exit strategy. So it's always good to put that into the system and make sure that that's applied.

You know, are you gonna need contracts and and and contract management?

The approval structure, is that gonna be sufficient to handle scale up, for commercial? And then recording, you know, we're gonna a little bit about management consulting, or management reporting, management, and departmental reporting, external reporting. Do you have enough to to to satisfy that scale up into commercial.

On the supply chain side, we'll talk about whether you're a completely outsourced, you know, supply, supply chain, are you using all CMOs?

Is again, is there a global implication or a global piece of your supply chain that you need to think about?

And then if you're doing in house manufacturing, you need to think about Gxp manufacturing.

So all of the things like lot inspection and release, approved vendors and suppliers, approved items and services, purchasing limited to approve suppliers, all those things that go with GMP, on the FPA side, the the the the reporting and forecasting becomes more sophisticated, because now we're thinking about, sales and revenue numbers we're thinking about inventory that has to get out, and and, you know, what we it will take to produce those, on the commercial side.

Actually dealing with the sales, you know, if if yours is a product that's sold through three P. O.

You know, we'll talk through what that means and and and you know, what you need to think about in an ERP with that. And then gross to net, you know, revenue and info, invoice forecasting, or rev or revenue and inventory forecasting revenue you know, based off of what sales numbers projections should be. And then, you know, if you're doing own cash receipt management or F3PLs doing that. We'll talk a little bit about that as well. If you're a direct product, you may need to think about customer management sales orders, all the things that the 3PL would normally do for you, even up to fulfillment shipping. So we'll talk a little bit about that as well.

So, you know, we said the financials is really at the core, and that's the truth. Really, you need that foundational level, to be able to handle rapid growth.

This really should be done before you get commercial.

Replacing a financial system really becomes called after your in commercial operations, because there's so many more pieces to deal with. So you wanna make sure the financial system that you have in place as we we talked about earlier, can handle Servbanes oxley. It has the proper approvals, in place to to, to scale with the system. So as an example, does it have delegation of authority so you can disperse approvals out outside of the accounting department without having to do emails without having to do a lot of manual, processes. You really wanna be able to push approvals out push those systems out into the departments.

Do you need to think about contracts? So so as you develop contracts with your vendors, as you're tracking those, those aren't purchase orders anymore. They they have, different pieces with them that need to be adhere to, and it's easier to adhere to those within a system, you know, and measure your vendors against those than just a true, a traditional purchase order system.

Do you have things like, three way match in the vendor bills to the receipts, to the purchase orders.

All those things you really need to make sure in that base ERP system.

To to support you as you go, you know, three to four, five years out after commercialization.

You know, the biggest piece of advice I can give to anybody in in the situation, you know, before commercial is make sure that you get into a system before commercial that'll take you three to four years out after commercialization.

You definitely do not want to be implementing a new system or new systems, while you're also you know, commercializing the product, of the organization.

A lot of companies don't have to worry about this piece.

The order to cash.

You know, you may have Alliance partnership you may have some royalties, things like that that are build out.

Of course, you know, you wanna think about those, as you're implementing a system.

But what we're really talking about here is your main product. Most companies will go through a 3PL.

They'll do all the billing. They'll do all the, cash collection, and, you know, you're effectively downloading information for that, and we'll talk about that here in a in a minute.

But then on the other the other side over here, record to report, you really wanna think about all these different statements and things that are coming out of this. And and you'll see that, a lot of these are, you know, external, but they're also internal reporting. So you'll have internal departmental P and Ls. You'll have you know, budgets for those departments and then also external budgets.

If you're a global company, really think through if the the package you have can handle the eliminations consolidation. It's the service agreements between the entities that you'll need as you continually continue to scale up.

Most companies these days will have if they don't have an actual subsidiary, you know, outside of their home country they'll generally have some agreements to sell, outside of the country. So you need to think through how the system's gonna take care of those arrangements you know, and at a minimum handle multi currency transactions.

There's two different ways that we think about, inventory and supply chain in the life sciences world.

The first one, of course, is completely outsourced model. So you're moving, you know, you're buying raw materials, you're buying API you're buying whatever it is from, you know, one CMO, one supplier, and then it's sending it to the next. They're doing something, you know, whether it's a you know, creating bulk drugs, substance, or, you know, creating some other, intermediary product, and then you send it through another, you know, packaging, you know, sharp PCI, you know, whoever whoever it is. And and then eventually it goes to a three p o. Right? That's the normal, outsourced model.

In that model, you you really need to think about a couple of different things.

From a standpoint of inventory costing, what's the cost model that you're gonna use? In this model, you really have very few queues. You're only dealing with, you know, maybe a few raw materials that are really commercially important or really, you know, that you own. Right, that that the CMOs themselves aren't, aren't including as part of the processing.

So those few items, you know, how are you gonna cost those? How are you going to think about the manufacturing fee, when you get to, you know, each of these intermediary steps?

Generally, you want costing by lot number. You want tracking by lot number, not for the purposes of, like, FDA recalls or any of that, but you want it to be able to trace back and say, okay, what, you know, what was the cost build up of this item? And and also, you know, where are those goods?

You know, you wanna think about R and D versus commercial. There's gonna be a point in time where your R and D will be at zero cost, but then you'll start making commercial materials, so you need to actually start capturing inventory costs for those those materials.

And then, you know, of course, the the the the simplest reason to really think about inventory, and this is just really tracking inventory at your CMOs. What inventory is there? What's the value of that inventory for insurance purposes for tax purposes?

You know, what state are they setting therefore, what do you have to report? So there's all kinds of different reasons why you need that, that tracking. So you wanna think about, from a from a you know, not only from a inventory standpoint of of truly like a lot number for FDA purposes, but also from costing standpoint, for tax and for insurance and and those type of things.

The other thing to think about, and this is one you know, depends on, your organization and how you think about your organization and how much control you have over your CMOs.

Some companies will require GM, GMP compliant purchasing, which means that basically they'll have, you know, although they don't touch their product, they'll have a, a piece of the system that actually will will will, for approved vendors and approved materials.

So then as you go through and you're doing purchasing, of these raw materials, you you, you know, you've got a verification that you're, that you're able to purchase them. So are you gonna need that? Are you gonna need a piece of GMP compliance, even though you aren't touching the project product physically.

If you manufacture, now you're into a GMP world. And and, you know, where we talked about maybe you need that for vendors and items. If you aren't touching the product, if you are touching the product, well, now you need it on all of the, you know, all the pieces. So we need to think about you know, okay. Well, this raw materials are coming in. We need to bring them in.

We need to inspect those as they come in, control those in quarantine and release, potentially have processes for noncompliant caterals.

So, you know, you have all kinds of different workflows and processes that have to be in place. So you need to make sure that the ERP is you choose can actually support, GMP Manufacturing. That's a big deal.

There are different levels of support of GMP manufacturing. So you could have a system that basically does some status tracking, but you're doing, you know, most of the GMP tracking external whether through a different system or manually, versus a fully automated system, which would actually have you know, all the documentation, the sign offs, everything in the system itself. So you really need to be careful and think through what level of GMP system you want.

When that, you know, when you think that through and you look through that, you you really need to look at it from all sides. Need to make sure that the purchasing workflows are in place. Make sure that you're purchasing, the system controls purchasing from approved supplier. Approved items, approved materials, that is it is doing, you know, when you do receipts, that you're doing lot inspections, lot, releases, and you're you're, you know, you're you're capturing all the documentation for those releases. When you're doing transfers between facilities that it's actually, paying attention to the the the statuses that are transferring and making sure that, you know, quarantine material doesn't end up in, in, areas where it should not be.

You know, when you're doing work orders, do the work orders actually enable you to release to a lot inspection step, or you know, do you have to do that manually?

Do your assemblies have the ability to sign off and make sure that they're locked down so you're producing things, you know, that the goods that are in there are what are were, you know, were the the approved billing materials. And then, you know, talking about final product release, does the system have the ability, to produce an actual batch record, a record that shows everything that went into it and all the stat you know, the final statuses of those items.

You know, you really wanna make sure that the system has all those different pieces, you know, to be a fully automated system, and, and that you, you know, you can depend on the system to give you that data.

Water wrenching sales, you really need to think about if you have, you know, a direct sales force. If you're actually selling a product, that goes directly to the customer or directly to a hospital.

The vast majority of of our customers and and, and quite frankly, the life sciences industry goes through a 3PL.

In that case, you know, your Salesforce is is, you know, dealing with doctors and and, you know, out there selling, but they're not taking orders per se.

So, you know, in that case, if you're dealing with a three p l, they'll handle a lot of the sales order entry. The filament, all the AR in collection, you just need to worry about bringing in the data from that 3PO.

If you do have a direct Salesforce, well, that's a different thing. Right? Now you need to think about how you're gonna fulfill them, how you're gonna ship them, and and, you know, how you, you know, you're you're actually going to handle those new customers.

But the vast majority of, you know, of the people in this industry don't will deal directly through a 3PL.

Gross to net is one of those complicating factors of going commercial.

There's a bunch of different pieces to this. So there's the actual accrual piece that you need to think about at the front end. And what that is is basically, you know, how much of the revenue I collect today needs to be accrued because I'll probably end up getting either, you know, a a rebate or a chargeback of some sort that'll reduce that revenue later on.

Now you wanna make sure that your ERP is able to, at a minimum, record those accruals, because you'll probably use an outside service that will actually true up those accruals. So they'll tell you you know, hey, when you're when you're accruing, your your, you know, your gross to nets, you're gonna put, you know, eight percent against this particular thing, and ten percent against this, and, you know, twenty percent against that.

They'll usually be broken down by SKU by country, sometimes by, dosage, you know, there's all kinds of different ways that that you can break down those accruals. But the goal is is to give you a chance to to to net down that revenue to a realistic number, and then later as you actually get the the real adjustments in, you're gonna reconcile those accruals and and adjust them. So you may say, well, you know, it's not eight percent. It's ten percent for Medicaid or it's, you know, something else that we need to, you know, do, you know, for this period going forward.

What we see a lot of times is is the ERP system will do the gross to net accruals, and then you'll have an outside service or, you know, an another consulting group that will do the true up as they collect everything from Medicaid, Medicare, you know, all those rebates for you and and and apply to the proper, skews and, and, geographies and so on and so forth. So you know, if you think about it, you really think about it in two different ways. There's the accrual piece, and then there's a true up, you know, whether it's quarterly, annually, monthly, you know, however often you true that up, that's a separate process, that's generally handled by an outside group. That you have collecting all that data.

Forecasting and planning. Now, this can get very complicated.

It really depends on your number skews, you know, how many countries you're in, what the sales channels are.

I've seen very simple ones that you know, for companies that don't maybe have one or two SKUs, and their channel is maybe hospitals.

And they're just approved in the U. S. Very, very simple sales forecast. But if you're, you know, multiple SKUs and and there's, you know, specialty farming hospital and then and your cross mall countries.

This can get very, very, detailed, very quick. What you're really trying to get to is the demand plan you know, of what this, you know, what this will drive. So so what do we need to produce? Where do we need to have it?

Once you get that in place, then you can drive the supply plan. So now we know what to we need, when we need it and where we need to have it, Now we can generate all the things that that that build that out, and then act you know, action the actual transactions themselves.

So, you know, as we look at each piece of of the planning, process, you know, you're gonna you're gonna think about these in different places, like the sales forecast, you know, those can sometimes be done in an FP and A system. Sometimes done in a budget. This depends on how you think about it. The demand plan, is usually translated down into the inventory system.

So it's thinking about units, and and where do I need those units? What location? And then the supply plan, of course, is is, you know, building back from that you know, that demand plan to say, okay. Well, if I need this final product here, what purchase orders do I need to action? Which work orders? Which transfer orders to get those, to the, to, you know, to, to make sure that we can hit our sales numbers.

So we're concentrating quite a bit on the ERP system.

You know, ERP system will support some other areas as well. You know, as you think about your R and D grants, you know, as you move towards product launch, as you think about transfer pricing, which talked about earlier, you know, all these different pieces as you as you move towards product launch, these are these are just different areas to to to think about in question. You know, will my system support these as we as we move into the commercial phase.

In conclusion today, commercialization definitely creates complexity.

And as I, you know, I said a couple times during this, this, this, webinar, It's it's it's far better to get into a system, a scalable system, a scalable financial system ERP that will scale with you and and and keep you for three to four years after commercial. So thinking about that prior to commercial is always the best way to go. Putting in a system after launch is very difficult, with all the other moving parts going on.

We talked about the, the, the new sales and financial processes how you can manage, you know, multiple CMOs, you know, even if you're doing your own manufacturing, you will have generally CMOs that you deal with, or there's always some outsourced processes.

We talked a little bit about gross to net calculations and accruals, and how to think about those and where those should sit within the system.

We talked about, you know, a little bit about, forecasting and and operational needs there and what those support.

The the, you know, one of the big things that we covered, was was that, you know, the system should support your team.

It's always better to think about things like inventory MRP, approvals management, things that that take a lot of, they'll be very hard to do manually, and and would take a lot of people time.

Really, you really want your systems to do. So as an example, you know, pushing approvals out to departmental leaders rather than keeping them within the, you know, into in the accounting team, forcing people to chase people around, you know, having an automated approval system, using MRP effectively, to build out your purchase orders, work orders, transfer orders, create all those transactions that move inventory around your system. Very difficult to do manually. A lot of, of wasted time and effort, to try to do that without a system.

You know, find the right system to automate those tasks. Do not try to do everything manually. As you scale, the numbers will just make it harder, and then start well ahead of commercial as if there's anything you take away from this, you should really have your all of your systems in place a couple of months you know, four, five, six months before launch.

You know, it's just too risky to wait till after lunch.

Again, I'm a James Neil. I'm a partner BDO.

And so, you know, I wanna thank you for your time today. And, We'll go ahead and take some questions.

And so just a reminder to the audience, you can go ahead and type in your questions.

And the first question that we have is It seems to me that if you're outsourcing to a full service three PL and a contract manufacturer and just making one journal entry to record sales, cost of goods that a smaller accounting package would be sufficient.

Hi. So, yeah, I I mean, it it can be to a certain extent.

I think once you get to, you know, either as a public company, or, you know, if you have you know, financial, interest in the company like a PE firm or or different things like that. As you get closer to commercial and the surface the location of the company grows, the employee base of the company grows, even if you're completely outsourced and you're you never actually touched the product.

You know, QuickBooks and or a zero or something like that is is not gonna fit the bill because you really need auditable accounts, you need to have certain controls in place, approvals, you know, everything that that, an external company come in can come in and actually attest to the the the the, bookkeeping of the the company.

Are you outgrowing QuickBooks? Download our checklist.

So yes, to a certain extent, you can do that, for a period of time. But as soon as you get to any of the any of the pieces hit in complexity, and there's really three pieces that'll hit from an ERP standpoint. It's either gonna be audit requirements. So, you know, you you're hitting accelerated filer or you're hitting, four four b.

The the second one is international operations. So at that point, using something like a QuickBooks or a smaller accounting package, it just becomes a very difficult close and and actually get consolidated statements, something that you can, again, trust and and position out to outside companies, and then and then the the the the third aspect, is commercialization.

So again, the number of people and the number of operations, the complexity of the, system drives you to an ERP just for cost savings standpoint. You're you're actually using more people to do the work with a smaller accounting package than you are with an ERP.

So, yes, we see a lot of companies, pre revenue, that use QuickBooks or zero or other, you know, smaller accounting packages, not ERP.

But there is a point in time where they just won't be sufficient keep up and and you're actually spending more money, on people to support the processes, than an ERP can can, you know, a good financial some, can handle.

Okay.

So we are running QuickBooks now. When should we think about an So, yeah, very, very, a much the same question, right, is, is, you know, we're doing fine with the system that we have today. You know, why should we switch or when should we switch? And it's really those three things that the the either there's going to be a higher level of of scrutiny on on the financial books. So you need to prove, you know, what those books are and and have that audit ability there to back that up.

The second piece is international, sophistication. So we're adding one subsidiaries in different countries. And therefore, we need to do statutory reporting. We need to do transfer pricing. We need to do, intercompany service agreement.

In her company and and and, financials consolidation.

Those things are not easy to do, and very, as a matter of fact, very difficult to do manually.

Plenty of companies do it in Excel. But I think anybody who who has done that before knows how difficult that is and how difficult it is to prove and to be able to show, you know, how that's done and and keep up with it.

In a lot of cases, manual systems, especially with consolidations, get you close, but they're not correct. You know, as an example, you know, when you talk about average rates and you talk about weighted rates, those are generally calculated month by month, not not on a on a total, and and really you need a system that can do those type of things.

At any kind of scale. You know, if you're a very small organization, you can do that manually, but as soon as you reach any kind of scale, the amount of transactions that cross subsidiaries and being able to consolidate, you just simply cannot do manually. You're always kind of taking as good as it as you can get which at a certain point is not gonna be good enough.

That last thing, commercialization, having a commercial product, connecting with the three p l, grabbing all that data, you know, is is is is very much, you know, something that will will drive you to an ERP as a cost savings and a time savings thing. And also, you know, you don't need to our FTEs to to manually track those things. So there is a certain point in time where it becomes cost effective to to to implement in the ERP rather than keeping with an accounting system and manual processes.

So that'll usually happen just from a timing standpoint. It depends on the type of company, but it'll usually happen, you know, before commercialization, because once you go commercial, it's very difficult to get everybody's attention on an, a system change. And so I've seen a lot of times when it's not done before commercial, you know, you kinda stumble into commercialization, with the financial systems you have and those have to stick around for a couple of years until you have time to get back to it. So that's why I always recommend if if you know, you see these coming down the the pipe and you know that it's gonna happen or it's a good chance that it's gonna happen, always get out in front of it, you know, six to eight months.

It's much easier to put in a system when you don't need it and you're gonna scale into it than after you already need it, and you and you're already buying the eight ball.

Okay. So I think that actually leads into the next question.

Which is how long do some of these implementations take?

Yeah. So so it really it depends on the level. So, you know, per the earlier question, when you have a, like you're completely outsourced and you're just dealing with CMOs, you never actually touch the product.

It's a much quicker implementation Right? You don't have the sophistication in in inventory that you're gonna need. You don't have to don't worry about a WMS system, you know, handhelds and bar codes and and and all the lot inspection stuff that goes with the GMP. So so when it's a when it completely outsourced. It's actually fairly quick implementation.

You know, with with customers, in the past, we've seen, two months to get a financial implemented. Now that's breakneck pace.

You know, I'm more comfortable with four months for financials.

But you can, you know, we we regularly get financial and supply chain, you know, a completely outsource supply chain set up in four months, you know, four to five months.

When you're talking GMP, you're talking internal manufacturing. That's a much bigger project. And so you're really thinking a year at that point.

So it really depends on, you know, what sophistication of the company is, how many international subsidiaries, how many accounting teams, you know, a lot of times we start with with very early pre revenue companies that might three or four people in their accounting department, and that's a really quick implementation, really, a month in your team, to to move at that point and then grow into, and scale from that point.

So, yeah, it the answer is it depends and great consent, you know, consulting, lingo, it depends, but it it's generally, you know, it falls in those two buckets either you're manufacturing your own goods or you're completely outsourced. Those two time frames are completely different.

And and, you know, that's the, you know, as I said, that the the the the fully outsourced relatively quick, relatively easy, the the fully manufactured or or or partial manufacturing is a little bit longer, you know, more difficult.

Okay. Well, I think that is all the questions, that we have time for.

So thank you to our audience for joining us. And thank you to James for the presentation.