Biotech and life science CFOs encounter very different accounting and financial challenges and risks from other tech companies, especially in the early stages of growth.
According to a report by IBISWorld, with over 2,700 businesses employing almost 84,000 people, the £18bn UK biotech industry is widely regarded as one of the most exciting sectors with the greatest opportunities for growth.
Mike O’Connell, CEO at Isosceles, welcomed to our recent iFD Community event to share their thoughts on the challenges and rewards of investing in life science companies:
- Tim Rea, Investor and Head of Early Stage and Cambridge at BGF and
- Nick McCleery, life sciences and biotech CFO at Isosceles Finance
To keep this article concise, we focus here on the CFO’s thoughts on the highlights and challenges of this sector.
Please click the link below to get the investor’s perspective and insights.
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Question: What are the highlights from a life sciences CFO working with investor-backed businesses?
Mike asked Nick McCleery, a biotech CFO at Isosceles who has worked in this sector for many years, what he felt were the highlights of working with VC (Venture Capital) and PE-backed life science businesses. Nick, currently CFO at Synthace, said it was a privilege to work with talented and passionate founders and entrepreneurs. Seeing them in action was phenomenally exciting. The management team and senior decision-makers at Synthace feel they are harnessing the power of biology and enabling their customers to make the world a better place.
Question: How does the life sciences CFO deal with forecasting and modelling
Forecasting and modelling in this new, young sector is more challenging than in other sectors as there is minimal history and hence little analytical predictability of outcomes. Furthermore, commonly customers in the sector are still catching up with high-tech common practices such as use of the Cloud, digitisation and data analytics – and suppliers use largely untested GTM (go-to-market) strategies.
Cash Generation
The focus for modelling, as always, is cash burn. The biggest impactor and biggest sensitivity to cash burn on the plus side is revenue, but the uncertainty with revenue generation is with the customers.
Customers need education as to why a particular product is the way forward. They are early adopters, and they tend to be hesitant and demanding. They can be demanding on price and the amount of support they need from the customer success team. These two areas are difficult to forecast and model.
Additionally, the salespeople have particular biotech knowledge; some are PhD biologists, and they can be difficult to recruit because we are picking from a tiny pool of those with sales experience and scientific understanding. In addition, there can be uncertainty around how readily an individual adapts to your specific sub-sector, so you may not have a good feel for how long it will take them to become 100% effective.
Cash Burn
Most of your spending is on the payroll cost of engineers, scientists, salespeople, and your customer success team. With the whole sector being in the headlines with the COVID-19 pandemic, the hiring costs and availability of the absolute best have put employers in a more challenging situation than they were five years ago.
De-risking
So, what you do is model various scenarios. You look at the sensitivity of the variables to the burn rate against the roadmap to your next fundraise, and you put in place variable costs so that with your uncertain revenue generation, you can be flexible with your cost base and de-risk it.
Question: Can you give any additional thought to complicated factors to model?
The whole nature of this sector is that the people who are the decision-makers are very bright and deeply passionate about biology and the potential commercial success of enabling biology. As a prudent accountant, you must factor in the enthusiasm and step back from time to time to check that the business case works and that the people are not being overly optimistic.
In all areas of the technology sector we are particularly good at writing excellent software, but is there a commercially viable need and will people want to buy it? It can be difficult for the CFO to moderate sales expectations and the developers’ enthusiasm for perfection.
Many of these businesses are rolling through multiple stages of funding. One of the key things to put on the table when modelling financial projections is: do you have enough money to reach a credible milestone, whether, with the product itself or sales levels, that will underpin the next funding stage?
Similarly, the amount of high-risk funding required to launch and grow a biotech or life science business out of infancy is huge and a considerable barrier to entry. For CFOs in biotech and life science businesses, a time will come when fundraising is required to scale the business or introduce new products and/or services.
The Covid-19 pandemic and emerging vaccines and treatments have brought biotech and life science businesses to the forefront of the investment industry’s attention, particularly with venture capital, so significant funding is provided to those who are moving fastest. Due to the need for successful biotech and life science businesses to be at the vanguard of the industry, there is a need to be in that group, but it should not come at the expense of fudging results or misleading investors. Once the way forward is clear, companies with abundant resources will have the advantage to exploit the opportunities in the sector.
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