Scaling the Finance Function for a Pharmaceutical Product Launch

Scaling the Finance Function for a Pharmaceutical Product Launch

February 07, 2024

When pharmaceutical companies receive U.S. Food and Drug Administration (FDA) approval and begin to sell new drug products for the first time, significant organizational transformations need to occur. Existing departments take on new responsibilities, and new or unfilled roles suddenly become much more relevant. Finance is no exception, and a commercial launch will add new complexity and challenges to the financial reporting process and other key areas owned by Finance.

Inventory and revenue will be the most significant new areas as a company prepares to sell a new product. After a commercial launch, an organization must understand the operating model, including the people, processes, and technologies that will be required for appropriate financial reporting of inventory and revenue.

The finance organization will typically navigate through three distinct stages before and after a commercial launch.

Pre-Launch Preparation and Execution

Once leadership has confidence in an FDA approval date, the Finance team should begin preparation for the stand-up of inventory and revenue processes. Finance must consider key sources of data, relevant systems, and key personnel as it stands up processes and prepares to close the books with the addition of inventory, cost of sales, revenue, and gross-to-net accruals to ensure timely and accurate reporting.

For example, if a contract manufacturing organization (CMO) is leveraged for production, Finance must ensure inventory reports are obtained timely and at an appropriate level of detail from CMO locations. Additionally, organizations that leverage their own facilities for production will face similar challenges in working with internal teams to obtain necessary information.

Similar challenges will occur on the revenue side. Finance will need to understand contracts in place with customers and ensure revenue is being recognized in accordance with ASC 606. Often, companies will find it useful to leverage third parties for contract review and 606 implementations to ensure that revenue is being recognized appropriately following a commercial launch. In addition, Finance will need to determine data sources necessary to record revenue, accounts receivable, and gross-to-net accruals each month. Accounts receivable and collections will also require analysis and monitoring.

When an entity is public, reporting timelines not only become more important, but the overall workload can end up being substantially higher due to additional reporting requirements. Public entities will face pressure to ensure revenue and inventory figures are timely and accurately recorded prior to filing their upcoming 10-Q or 10-K. Sarbanes–Oxley (SOX) requirements will add more stress, as companies will be expected to roll out policies, risk and control matrices, and process narratives for the first time. Organizations will also be responsible for timely performance and documentation of SOX controls.

In our experience at Stout, value can be found in leveraging customized playbooks and models for inventory and revenue that provide guidance on determining roles and responsibilities for new areas and support immediate execution of new key tasks (e.g., inventory management). Our team often provides playbooks and offers hands-on support to ensure execution of new tasks or areas following a commercial launch.

Steady State and Optimization

As the finance department adds new functions, roles, and responsibilities, closing the books will likely take longer. However, Finance will be expected to reduce the close back to its pre-launch timeline. This will require Finance to better organize new roles and responsibilities so that key data inputs can be obtained and processed into accurate financial information faster. Finance will need to ensure timely performance of account reconciliations, SOX controls, and financial statements, and will need to support the development of budgets and forecasts.

Improving processes, especially the intake and review of third-party data, offers a quick win to reduce the time needed to close the books. Finance will often find it can claw back days in the close by working with third parties to ensure timely provisioning of cleanly formatted data. For example, organizations that leverage a CMO will likely need monthly or quarterly inventory reports from each location as a key input to the close process. To the extent that supply chain, Finance, and the CMO team can align on cadence and reporting requirements, the timeliness of the close can quickly be improved.

The timeliness of the financial statement production accuracy will be a heavy focus as well. Gross-to-net accruals and their underlying assumptions will require constant scrutiny and monitoring to ensure the financial statements are accurate and complete. The same concern will be valid for inventory, ensuring that procedures appropriately capture and record cut-off and in-transit materials.

Leveraging technology can be a key driver in closing the books accurately and timely. Finance is often not fully leveraging its existing technology stack or can add new technology solutions that are advantageous to both Finance and other departments.

For example, at Stout, we have seen clients calculate and track inventory in standard spreadsheet software following a commercial launch and then switch to inventory management solutions offered by their ERP or switch to an entirely new ERP if their existing ERP lacks needed sophistication as volumes increase.

Additionally, drawing on experience in supporting consistent month-end close execution, our team often provides roadmaps for month-end close reduction or actively support a reduction in days to close the books through performance of month-end close activities.

Strategic Business Partner

Finance will also be expected to provide substantial support as a business partner to new commercial departments (e.g., sales, supply chain) and leadership. Business partnering will typically be expected throughout the launch process, but Finance will often struggle to find time to provide strategic support. While the emphasis should be on supporting the business throughout the launch, Finance is frequently ignored as a value-add until the organization has pushed through the previous steady state and optimization phase. Finance should strive to provide strategic support as early as possible.

Strategic decision support can come in many forms following a commercial launch. Finance will often be expected to support the supply chain beyond standard activities like the valuation and costing of inventory. This support could come through development of cash flow analytics, forecasts, and budgets that support decision making around product purchases and help illustrate the expected impacts to working capital. Additionally, as the commercial organization continues to expand, Finance may be expected to help quantify or evaluate the impact of changes like establishing an additional production line at a site or switching vendors for a material or service. While post-launch organizations are typically very focused on ensuring product demand is met, understanding historical and expected spending is incredibly valuable.

In terms of revenue and gross-to-net accruals, better understanding or helping predict revenue by segment — whether it be customer, channel, or region — is incredibly valuable. Finance will also want to ensure a seat at the table for a review of new customer contracts to ensure ASC 606 implications are appropriately considered. Revenue dashboarding can also be a value-add service that allows sales leaders to visualize key data points on demand and drill into areas of interest (e.g., channel, region, customer).

For example, at Stout, we have supported clients with the creation of forecasts, budgets, and financial models that help support strategic decisions around cash flow and working capital. Development of recurring dashboards focused on tracking KPIs also helps clients realize more value from their financial and operational data.

Navigating Your Commercial Launch

Navigating a commercial launch is an important but difficult task for companies. But with robust planning, the finance team can play a critical role in ensuring a smooth launch throughout the wider organization. Third parties can provide services that offer guidance for management and finance teams who are navigating a launch for the first time or may have limited commercial experience.

Leveraging a third party can help provide assurance that deadlines will be met and the business will run optimally. Additionally, third parties can help to temporarily fill roles that quickly open because of a launch and ensure that the organizations staff do not get stretched thin and can focus on activities that truly matter.