#tldr knowledge of industry-specific needs and trends = building more highly adopted models

We all know what a planning model looks like, and, generally, regardless of industry, there are certain components to a basic FP&A model:

·       Expense Forecasting

·       Revenue Forecasting

·       P&L reporting (Actuals & Forecast)

·       Balance sheet reporting (Actuals & Forecast)

·       Capital Expenditure forecast

·       Headcount forecast detail

Over the years, I’ve build a lot of FP&A models with these components, and, since I was living in Northern California for much of that time, a lot of the models ended up being for biotech companies, both small and large. This article focuses primarily on the smaller, mid-market Biotech company needs.

Biotech companies care about all of the standard FP&A reporting, as listed above. But every industry has its own needs and its own standards, all driven by the unique factors in each industry. Biotech companies face unique challenges that require careful financial planning and analysis. For example, they may need to invest heavily in research and development, manage complex supply chains, and navigate regulatory hurdles. I’ve summarized a few of the main components that most mid-market Biotech models are looking for.

1.     Allocating to Projects

One of the main commonalities in Biotech models is the need to see things at a project level, especially headcount related costs since these are often the biggest expense. Often, headcount is forecasted directly by project, but sometimes this is too cumbersome and not feasible. In those situations, an allocation module is built to distribute the costs (headcount and otherwise) to the various projects. The allocation method varies – it can be a systematic algorithm, or something that is centrally controlled such as assigning percentages to each project. This kind of allocation allows biotechs to evaluate their various projects (generally stages of clinical trials) individually over the life of the project.

2.     Clinical Trial Expense forecasting

For biotechs that manage their own clinical trials, tracking expenses by trial allows managers to see both the detailed expenditures by each phase of each trial, and also have those expenses aggregated and integrated into the overall expense forecast, and, ultimately, the P&L. This model tracks expenses by patient, and includes drop-off rates, fixed and variable costs, and summarized results.

3.     Tracking by Clinical trial phase

Forecasting for biotechs involves predicting when each clinical trial phase will be complete, and then also approved. These dates can shift dramatically, as discoveries are notoriously difficult to forecast, and timing of government approvals are also not an easy thing to predict. This means that wide swaths of data, all expenses and activities associated with a particular phase of a particular area of inquiry, shift by weeks or even months. Being able to track and identify this information so that it can be shifted, added, or removed as new information is available, is critical to creating a successful forecasting environment.

4.     Partnership reporting

Mid-market biotechs almost always work with one or more partners, generally the partners are one of the big pharma companies. Large pharma companies cultivate the ecosystem of start-up biotechs in hopes of increasing their chances of an important discovery. Thus, partnerships are very prevalent in the industry, and frequently have reporting and analysis requirements associated with partnership reporting. For example, many biotechs run separate legal entities to track shared costs with one or more partnerships. It’s a huge win to be able to generate this information directly from your core planning and analysis system, rather than having to maintain separate, manual reporting systems.

5.     Predicting Stock Compensation

Mid-market biotechs know they are the target of potential acquisition by big pharma. In fact, that is generally the goal for the current management team of a smaller Biotech firm: get the discoveries and clinical trials to the point where another company will acquire them. Because of this, and the fact that most start-up biotechs have no source of revenue for many years, stock compensation is generally a large part of employee compensation for all employees. Stock grants and vesting often need to be tracked and forecasted at a detailed level to provide an accurate picture of this major expense item.

6.     Centralized FP&A

While the trend in many industries is to make departmental financial reports available for self-service, and have budget managers interact directly with the planning system, the mid-market Biotech industry remains more centralized. This makes sense, as these companies are generally very fast growing, with lots of hiring, and a heavy focus on the R&D side. To facilitate the growth and company focus, the finance team often is responsible for a majority of the updates to the forecasting system. Ensuring the system supports this more centralized approach makes the model more usable and friendly.

Summary

Factoring in industry-specific needs ensures the applications we build will be more relevant, and more highly adopted. Biotech companies face unique challenges that require careful financial planning and analysis. Effective financial planning and analysis can help biotech companies manage these challenges and make strategic decisions. TM1 is a powerful financial modeling tool that can help biotech companies build complex financial models, perform what-if analysis, and generate accurate forecasts.

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