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Managing R&D Costs in Life Science: What 2020 Taught Us

Author: Jennifer Stango, Director, Strategic Engagements, Arbela Technologies

In a single year, research and development (R&D) spending in life science increased by a whopping 22%.1 (And this was between 2018 and 2019, before the global pandemic — just imagine where we’ll be going forward.)

It’s no secret in the industry that R&D costs will continue to climb, and that late stage terminations of some products eating up that R&D spend will continue to erode margins. While larger life sciences companies are able to absorb these costs and losses (more revenue, larger portfolios), smaller companies are typically unable to and often fold as a result. Meaning that while ALL life science companies need to manage ballooning R&D spend, smaller companies in the space need to do so with absolute precision.

Compounding the issue is the fact that while larger companies have ERP systems and other solutions helping optimize budgets and ensure compliance, the smaller companies — who need such systems even more — are often left managing costs on a spreadsheets and the like, a recipe for disaster.

Time is money, and R&D takes a lot of time

As all life science companies know, R&D takes time. Phase one clinical trials can take up to five years, and phase two trials typically take six years or more. This timeline can be further extended by compliance and regulatory issues that arise during trials, and thus costs are driven higher even more dramatically.

And if compliance and regulatory issues were not enough, life sciences companies are also impacted by changes in healthcare coverage: finding out, after years of R&D, that coverage providers are going in a different direction, and a drug, device, or test — into which years of work and millions of dollars were invested — won’t be covered after all can be the death knell for a small bio-tech.

Money is money, and R&D takes a lot of it

The trials and hurdles in the R&D process have both direct and indirect costs that create significant challenges for any size life science company. The good news is that these costs are in fact “investments” that should generate returns once a product is launched and the revenue starts rolling in.

But how much should a business invest?  Forecasting projected revenues while trying to calculate the exact cost of the R&D effort can be a complex and nearly impossible exercise, one rife with the aforementioned risks. Based on our experience, it’s nearly impossible to even begin forecasting returns until late into the third trial of a given product. Until that milestone in the R&D process, life science companies often utilize forecast rates based on other products in their portfolio, an approach that’s essentially a best shot at a best guess. 

But it gets easier when you trust the system. And for Arbela and our customers, that system is Dynamics 365.

A systemized approach to managing costs and mitigating risk in life science R&D

Dynamics 365 Finance can help life sciences companies improve efficiency during R&D by capturing both direct and indirect costs and providing an automated means of capturing and running the numbers that keep R&D moving. Additionally, Dynamics can be extended to mitigate risk with a compliance framework that can ensure adherence to ever-evolving regulations.

We referred to R&D costs as investments earlier. And that’s another strength of Dynamics: costs in an investment project are tracked and controlled using estimate functionality. As an investment project progresses, you record costs in WIP accounts, where costs can be held until the project is completed. When the project is eliminated, you transfer the WIP value to a fixed asset, a ledger account, or a new project.

Arbela has worked for years empowering life science companies at every stage of their development (R&D, commercialization, etc.) with the technological tools and business tactics/best practices to ensure their success as they march into the market.

If you’re moving forward with R&D now and are concerned about ever-climbing costs in the post-pandemic world, contact us. We have the industry experience and Dynamics expertise to safely and completely equip you for success.

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