MedCity Influencers

Calling All CFOs: It’s Time to Plan for 2013

CFOs of life sciences companies face unique challenges as their companies progress with the development of their pipelines. These include the need to maneuver through various regulatory requirements for the first time, the establishment of complex infrastructure, development of increasingly complex financial statements and the forging of relationships with industry partners. Companies must manage these […]

CFOs of life sciences companies face unique challenges as their companies progress with the development of their pipelines. These include the need to maneuver through various regulatory requirements for the first time, the establishment of complex infrastructure, development of increasingly complex financial statements and the forging of relationships with industry partners. Companies must manage these new challenges alongside constantly dwindling financial reserves in today’s challenging environment for raising money. With these conditions combined, executives have to be diligent about focusing on more than growth alone. They must maintain a prudent financial perspective with forward and strategic thinking at this time of year to create the necessary flexibility to weather financial challenges that may come in the year ahead.

 

Think Ahead

In order to be effective, financial planning should be initiated in the third quarter or at least early in the fourth quarter. This should be a look ahead at the financial situation for the company as it aims to accomplish various goals in development. Identifying a budget and expected timeline for those goals is a good step.

 

These goals and events should all hold significance or be a transition point for the company, such as clinical trial results, potential partnership, M&A activity and even a financing. In addition, there could be events that will require considerable capital to complete, such as expansion of a laboratory, launch of a product or purchase of new equipment. Laying out these events, and understanding the time and resources that each will require, is a critical step to the planning. Even items for the following year that may not be high budget should be considered to understand the changing state of the company.

 

One of the most important activities for any company on a quarterly basis is the reporting of financial statements, as this reflects the progress and changes at the company. This may include aspects of a key collaboration and how expenses or revenue recognition may impact the coming year. In addition, reporting of non-financial considerations for life sciences companies, such as significant FDA actions or changes in the regulatory environment, are important to consider in the planning process.

 

These items cannot exist solely within the financial team, though, and must be discussed with the executive team as a whole. It is necessary to have buy-in from the team, both to decide how much capital will be needed as well as which items deserve higher priority. It is not uncommon for a company to have more projects than resources, both human and financial. Identifying the priority of where resources will go, taking into account all projects, will ensure that projects can move forward effectively.

 

Review Analyst Assumptions

CFOs of public companies may find it useful to complete a review of the assumptions held by covering analysts. It is essential to know what the assumptions held by these analysts are, including the financial model, revenue and expense projections. This allows for an understanding of their view of competitive advantages, or disadvantages, as well as market penetration.

 

The company and its CFO should complete this exercise to understand if ongoing communications need to be improved to allow for a better understanding of goals and strategies for the year ahead. If a company is undergoing a significant transition in the coming year that can impact the perceived value by investors, this is a particularly useful step.

 

Strategizing for the Next Financing in Advance, Even a Year

All life sciences companies should understand the current financial status of the organization and plans for financing in the future. Placing strategies well in advance shows forward thinking by the CFO and can be integral to the success of the financing itself. Companies can fall into a bad position if they see raising capital as only something to be done when needed instead of planning in advance to maintain control. As part of ongoing activities, including the annual budgeting activities, CFOs should assess their capital needs for 18 to 24 months in advance.

 

The first steps for a financing should be initiated approximately one year in advance in order to allow enough time for evaluation of the tool that will be used, as well as the participating investors. Publicly traded companies have a wealth of options at their disposal, including registered direct, PIPE, ATM convertible debt and traditional offerings, to name a few. All of these tools have pros and cons to consider, based on management time, timing of capital-raising, warrant coverage and ownership dilution.

 

It is also critical to understand the current market environment and making predictions about where it will go. Clearly CFOs do not have control over the market, and predictions are difficult to make, but it is essential to evaluate the state of the market for life sciences companies and the marketplace overall. For companies in life sciences, there will always be a special situations environment due to positive data for companies and milestones reached by others that can access capital. Without these attributes, a company can experience greater challenges in raising capital.

 

Review and Necessary Revisions of Internal Controls

Another important process that all companies must undergo is the annual review and testing internal controls (Sarbanes-Oxley compliance). Every year there is evolution among life sciences companies, making it important to review and, if necessary, revise and update the related internal controls for the changing complexity of the company. The considerations for revising internal controls include: installation of new accounting software; significant changes in the number of employees; adding new divisions, such as sales and marketing, or manufacturing; entering into a collaborative agreement; and prominence of a single financial statement line item such as inventory. These internal controls should be challenged by CFOs each year to ensure they are in line with the company. Completing an early review and testing of updated internal controls, with company auditors, will identify and remedy deficiencies that can be retested later in the year.

 

Conclusion

There are significant steps to take to prepare for 2013, just as there are every year. Life sciences companies face particular challenges because of the transitions, often significant in nature, encountered in the industry. As a result, CFOs should begin the budgeting process early and find a consensus within leadership teams about priorities. Annually these companies should review internal controls, with additional attention paid during times of expected transition. The writing and modeling of analysts are important to review, as they may provide indications about a need to better communicate the company’s story. Taking a proactive view of the company’s financial condition and operations is also a necessary step for smart CFOs. By reviewing financial needs over the short and long term on a continual basis, and evaluating the capital raising that fits best, companies can be better prepared with a little planning ahead.

 

This article was co-authored by Robert E. Hoffman, Sr. Vice President, Finance and Chief Financial Officer of Arena Pharmaceuticals.

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