PGCPM 14th June 2012 BrAPP/University of WalesPostgraduate Course in Pharmaceutical Medicine Financial Management, Budgeting, Cost Behaviour, and Management Skills 14th June 2012
Roadmap • Introduction & Overview • Finance in Context • The Cost of Clinical Trials • What Cost? • Workshop • Financial Management • The Financial World • The Credit Crunch • The Accounting System • Financial Organisation and Control
Introduction and Overview PGCPM 14th June 2012
Introduction & Overview • Who am I? • Neil Serjeant • Chartered (Global) Management Accountant • CEO Shared Services for the Department for the Environment, Food and Rural Affairs (Defra). • Worked extensively in the pharmaceutical industry with Huntingdon Life Sciences, Pharmaco and most recently with Quintiles Transnational
Health Warning! • Finance can be excruciatingly boring • I will try and keep it interesting and relevant to you • Interact with me (laugh at my jokes….please) • Ask questions as we go • Please sleep quietly so as not to disturb others!
Finance In Context PGCPM 14th June 2012
Finance is Central to Business Success • The ability to measure success is pivotal to success and good management: • If you don’t measure it how will you know you’ve achieved it? • Without objective data on performance, business decisions will be poorly informed.
Finance in Context • However • “Measurements that do not spell out the assumptions with respect to the non-measurable statements that are being made - at least as boundaries or restraints - misdirect and misinform.” • “Yet the more we can quantify the measurable areas, the greater the temptation to put all out emphasis on these. And the greater therefore the danger that what looks like better controls will actually mean less control, if not a business out of control altogether.” MANAGEMENT - Peter F Drucker, Butterworth/Heinemann Oxford 1992.
Finance in Context • “There seemed to be a common belief that everything could be measured and that, if only the accountancy systems were better, and we embraced such concepts as discounted cash flow, success would automatically follow.” • “The difficulty is that there can never be any single correct solution for any management problem, or any all-embracing system which will carry one through a particular situation or period of time.” MANAGING TO SURVIVE John Harvey-Jones Heinemann, Oxford 1993
Finance in Context • So Finance and measurement of the financial performance is PART of the management process and is NEITHER a panacea NOR an end in itself.
The Cost of Clinical Trials Financial Management of Clinical Trials PGCPM 14th June 2012
Financial Control of Clinical Trials • Why? • How?
Why? • In the context of the pharmaceutical company, to maintain costs within budget. • In the context of the CRO to deliver financial returns to the shareholders
How? - the CRO model • Understand how it works in the context of the CRO • Apply the principles in other contexts
Cost Drivers in Clinical Trials • Time • hours • rates • Investigator Grants • fees • patient visits • Travel and Other Disbursements • Overheads
Types of Contract • Fee for Service • Fee for Service (with a cap) • Fixed Price • Fixed Unit Price
Fee for Service • Generally no fixed budget • The contract will specify rates for levels of staff provided, or activity undertaken • Fees invoiced in accordance with contract at volume x rate. • Advantages • Protects CRO from scope changes • Disadvantages • Rewards CRO inefficiency • Discourages innovation
Fee for Service with a “cap”. • Same as Fee for Service above but with a financial limit • Fees invoiced in accordance with contract • Renegotiation to commence when the budget cost is expected to be exceeded • Advantages • Limits financial exposure of client • Disadvantages • Limits upside but not downside for CRO • “Worst of all worlds”
Fixed Price Contracts • Price negotiated at a fixed budget e.g. £1m • Costs exceeding budget due to “Out of Scope Work”: Sponsor pays • Cost exceeding budget due to CRO problems: CRO pays • Project Budgets only amended for client approved renegotiation • Fees invoiced on a milestone basis
Fixed Price Contracts • Advantages • Encourages CRO to innovate and be efficient • Client has fixed exposure • Disadvantages • Frequent (and frequently arduous) negotiations on changes of scope
Fixed Unit Price • Risk is shared • Price negotiated for each unit of work, eg • Price per monitoring visit • Price per evaluable patient recruited • Price per evaluable patient completing treatment • Price per page data entry • Billed according to progress • Advantages • Reduces need for contract renegotiation • Encourages efficiency & innovation
Pause for thought: objective • A quality clinical trial delivered on [ahead of] time and at [below] budget.
CRO Finances • A CRO earns revenue from the work it performs for its customers. Revenue recognised in each period is the value of work performed on each contract.
CRO Finances • A CRO incurs costs from performing its work. Major costs are people-related (salaries, benefits, travel). • Under the accruals concept, costs and revenues must be matched in each reporting period to provide investors (and managers) with a fair view of the financial performance of the organisation.
Financial Control Case StudyThe CRO model REFERRING to FINANCIAL WORKSHEET CONTRACT DETAILS • B: ORIGINAL PRICE is the price at which the CRO has contracted to perform the project for its client. • C: MODIFICATIONS shows the increase or decrease in the contractual price once the change has been formally agreed between the CRO and the client. • D: TOTAL PRICE is the sum of the original price and any agreed modifications (ie B+C)
VALUE OF TIME WORKED is the number of hours booked by CRO staff to the project multiplied by their hourly selling rate. • E: BUDGET is the CRO’s internal estimate for its work on the trial, based on the number of hours and the rate at which those hours are sold. • F: THIS MONTH is the number of hours worked this month multiplied by the rates at which those hours are sold. • G: CUMULATIVE is the number of hours worked on the project to date multiplied by the rates at which those hours are sold. • H: EAC – Estimate at Completion - is the latest projection by the CRO of the total number of hours to be worked on the project by the time it is completed, multiplied by the rates at which those hours are sold.
I: % COMPLETE is calculated as the value of time worked to date (cumulative) divided by the EAC (ie G/H). It represents one way of assessing objectively how much of the project is done and how much remains to be done.
REVENUE RECOGNITION is the amount of the total contract price the CRO can book as income based on the % complete. • J: Cumulative Revenue Recognised in a Fixed Price Contract is calculated as the % Complete multiplied by the Contract Value (ie D x I). • K: This Period Revenue Recognised is simply this month’s cumulative number less last month’s cumulative number.
Case Study Therapeutic Pharmaceuticals And Rapid Outsource Partners PGCPM 14th June 2012
Suggested Lessons Learned • Open bidding • Communicate! Communicate!! Communicate!!!
From within the industry • Project Budget • complete • accurate • timelines • Unspent budget at the and of the year may not be carried forward!
Financial Management 1. The Wonderful World of Finance PGCPM 14th June 2012
Speculate to Accumulate - 1 • An entrepreneur mortgages his home to fund equipment for his new business. • The business fails • The creditors take possession of the entrepreneur’s home • Results: • unhappiness • entrepreneur becomes an accountant!
Speculate to Accumulate - 2 • An entrepreneur persuades 100 people to invest £100 with limited liability in his new company • The company fails • 100 people lose £100 • The creditors receive only some of what’s owed them • Results • 100 disappointed investors • Somewhat unhappy creditors • The entrepreneur tries again • The investors invest again
Speculate to Accumulate - 3 • An entrepreneur persuades 100 people to invest £150 with limited liability in his new company • The company succeeds • 100 people receive a dividend on their investment. They find they can sell their £150 stake for £200. • Results • 100 happy investors are incentivised to invest some more. • The company expands and creates new jobs
Limited Liability • Under limited liability, investors stand to lose only their stake in the event of the failure of the company in which they invested. • Limited liability is a relatively new concept dating back to around 1600 when the East India Company was founded. It started 2 “big things” • The owners stood to lose only what they invested, not the shirt off their back. • The company had professional managers who were not the owners of the company. • These 2 fundamental principles characterise the capitalist business world today.
Stocks and Shares • The owners of a limited liability company own some or all of the company through share ownership. • A company issues SHARES in exchange for cash. If there are 1,000 shares, each shareholder owns one thousandth of the company. • Collectively shares are referred to as stock. • Shares may be privately held (eg “Acme Ltd”) or publicly traded (eg Acme PLC/Plc/plc)
Stocks and Shares • The company uses the cash received to purchase materials and invest in plant and machinery. • With these is makes its product and sells it (hopefully) for a profit.
Stocks & Shares • Profits are: • re-invested in the business to fuel growth, and/or • shared with the shareholders by way of a DIVIDEND • DIVIDENDS reward shareholders for the risk they have taken in investing and the utility they have foregone in not having their cash available.
Stock Market • Publicly traded shares are bought and sold on a stock market. • Shares of a successful company will be in demand; the share price will rise. • Investors feel good; they anticipate being able to sell at a higher price than they paid. Rising prices are a further reward to shareholders (who can sell their shares for more than they bought them). • The proceeds from a rising stock price do not directly benefit the company. • A rising stock market is known as a “Bull” market; the early 2000s saw bull markets in Europe and the US.
Stock Market • Shares of a failing company will not be in demand; the share price will tend to fall. • Investors feel bad; they may have to sell their shares a lower price than that at which they bought them. • A company’s financial position does not suffer directly when its share price falls. However the value the market is placing on it is falling. • Falling stocks characterise a “Bear” market such as we saw between mid 2008 and early 2009.
Health Warning! • Savvy investors make money in Bull and Bear markets. • You can lose money in Bull and Bear markets.
Company ownership • The shareholders are the owners of the company. • They appoint the board of directors to run the company for them, and hold them to account at the Annual General Meeting. • They have a vote on key issues relating to the business, including executive pay, and appointment of independent auditors. • In the UK, most shares are held by institutional investors, eg pension funds. In other economies, the number of private investors is greater, eg France, USA.
Investor Protection • The South Seas Company scandal (reporting stock as income and paying dividends from capital) led to the South Seas Bubble Act in 1720. This was the first attempt to regulate misleading accounting practices. • Most company legislation is designed to protect investors, including requirements provide them with objective information on the financial performance of their company. • Much of this objective information is provided by way of company accounts, which are prepared to national and international standards.
Financial Management 2. The Credit Crunch