By Russ Banham
The race to develop a COVID-19 vaccine and therapies is changing business-as-usual operations at many drug companies and creating atypical financial pressures as firms shift personnel and other resources to finding a vaccine or therapeutic.
These changes are altering traditional operating paradigms in the drug discovery process, which in turn are affecting cash flow predictions, drug pricing regimes and manufacturing and distribution capacity.
As a result, the life sciences industry that existed pre-pandemic is being reshaped into what Mark Drozdowski, partner, national audit leader, life sciences at KPMG, calls a “new normal.”
“As the industry rapidly scaled up to meet the needs of COVID-19 patients worldwide, profound disruptions affected the capital management of drug companies, from the drug discovery process to drug licensing and contract manufacturing,” he said.
For public company drugmakers, the need to make accurate assessments of the financial impact of these disruptions is a daunting task. Meanwhile, the world is watching, with the stock market reacting instantly to COVID-19 vaccine news.
“This is part and parcel of the drug discovery world, which tallies misses along with successes,” said Drozdowski. “But what is unique this time around is the public’s visibility into the drug discovery clinical trials process, with everything playing out in front of everybody. It’s daily news for everyone.”
Business And Financial Repercussions
With the public watching every step toward the development of a successful vaccine and effective patient therapies, pharmaceutical companies are taking on several risks.
A case in point is the need to manufacture large-scale dosages that will be ready to ship upon FDA approval. Companies are effectively manufacturing “at risk,” since their clinical trials are still proceeding and regulatory approval has not been given. If a drug fails in the clinical trial process, the “at-risk” inventory essentially has no value.
Even if a candidate vaccine or therapeutic succeeds, another risk is ensuring all patients have access to the drug, including those in emerging nations with fast-growing infection rates. In effect, drug companies are making significant investments in research with no certainty of success while also preparing to make these therapies accessible to all patients with responsible pricing, said Drozdowski.
Drozdowski provided the example of outcomes-based pricing for high-cost therapies aimed at a smaller patient population. In such cases, a drug may be subject to a refund or a discount if, after a period of time, a positive patient outcome is not maintained or achieved, he said.
“Once this outcome is realized, the price is set; if the outcome is not realized, then a rebate would be provided,” Drozdowski explained. “Assuming this pricing methodology is in place, companies would need to use judgment to determine revenue recognition, timing and amount in cases where the price is not fixed over multiple reporting periods.”
Other complications abound. For instance, if a drug company relies on a contract manufacturer to produce a vaccine or therapeutic, accountants must assess if the company effectively controls assets like equipment at the contract manufacturer, since this may be viewed as an embedded lease for reporting purposes. “All of these complexities require a certain level of professional judgment to determine if this would be a lease, service contract or a combination of both,” said Drozdowski.
Added to the complexities for finance and accounting staff are research and development (R&D) partnering deals in the early phases of the R&D cycle, a period of time with a high degree of risk.
“If it’s an asset deal, the accounting rules allow you to write off the in-process R&D, which is a bit cleaner,” Drozdowski said. “But if it’s a business combination, you now have in-process R&D, which then goes on the books as a capitalized asset that you must evaluate every year for asset impairment. This requires significant judgment with respect to both the likelihood of approval and commercial success.”
There is also the financial impact of having to pause clinical drug trials due to the health of the professionals involved in the trial. “It’s not as simple as stop and restart,” said Drozdowski. “If you stop, you run the risk of losing data and incurring expenses by extending the trial timeline.”
Technology Is Essential
Few human endeavors across history match the passion to develop a COVID-19 vaccine and patient therapies. In the months since the pandemic began, pharmaceutical companies across the world have recruited thousands of volunteers to test their candidate vaccines, many now working their way through the four-phase clinical trials.
With regard to COVID-19 patient treatment options, doctors around the globe have amassed and exchanged a growing repository of outcomes data. The efficacy of a wide array of different medications is being tried and tested alone and in combination with several drugs appearing to ease patient health complications and curtail the death rate.
Not all treatments, of course, are efficacious. But the industry cannot leave a single stone unturned. In this regard, researchers are benefiting from the use of artificial intelligence (AI) technologies like machine learning and deep learning algorithms that mathematically analyze shared research data.
“Technology is being used by researchers to rapidly unlock the data recorded by physicians, making it easier to quickly find specific drugs improving the treatment outcomes of groups of patients with certain genetic and other characteristics,” Drozdowski said. “Speed is essential, but not at the expense of patient health and safety.”
Technology is also helping to make a difference for the thousands of individuals recruited by the drug companies to remotely test the effectiveness of different medications. As of November 2020, there have been more than 370 trials reviewed by the FDA and there are more than 700 development programs in the planning stages.
“Every trial is different, but there are examples of sending a medication to a volunteer at their home who can then track their diagnostic responses to a treatment on a tablet,” Drozdowski said. “Wearables can also capture vital patient data and send it remotely to researchers.”
Much like every business has kept the lights on by using technologies like videoconferencing platforms, drug companies and their respective audit firms are leveraging financial and accounting automation software to make faster and more accurate assessments, estimates and judgments. “As our clients evolve into this more accelerated mode, it is incumbent on us to do the same,” said Drozdowski.
In this regard, KPMG utilizes a self-developed global, secure, cloud-based audit platform, KPMG Clara. “We’ve designed it as a centralized portal to serve as a single source of client financial data, speeding up the exchange of information needed to perform the audit,” said Drozdowski.
With the world watching and waiting for breakthrough vaccines and more effective therapeutics, the significant business and financial risks incurred by drug companies must also be in view. Finance and accounting teams are doing their part to ensure the race to a cure and treatments is ultimately victorious.
Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.