Why Is Clinical Finance Important?

By Chris Chan, vice president, financial planning & analysis, IGM Biosciences

In part two of this three-part series on clinical finance, IGM Biosciences Vice President, Financial Planning & Analysis Chris Chan explains just how important the role of clinical finance can be in bringing harmony and success into clinical research. Part one — “Why Is Clinical Finance So Challenging?” — can be found here.

“Just a flesh wound.” – Black Knight, “Monty Python and the Holy Grail”

Or, bringing peace and order to chaos.

A senior vice president of clinical operations had a well-earned reputation for destroying people. As colleagues often counsel before joining her meetings: “Bring body armor.” On this fateful day, I was presenting my first budget-versus-actual quarterly report to the R&D senior leadership team. Despite the pre-meeting warnings, I wore an armor-less polo shirt. However, to prepare, I did make an extra effort to thoroughly vet every underlying variance detail with multiple members of the clinical team. When I presented the report, I emphasized the fact that the results stemmed from a close partnership between finance and the clinical teams. I referred to “our actual spend” and “our budget” rather than “clinical’s” spend and budget. Afterward, SVP Body Armor asked a few clarification questions, which I made a point to answer in my most collaborative and empathetic tone. I was prepared to bow repentantly and ask forgiveness as needed, but the barrage never came. People made a few suggestions, nodded, and the meeting ended uneventfully. Later in the day, SVP Body Armor’s boss walked into my office, closed the door, and glared at me. As I contemplated refreshing my resume, he said: “I think that was a major breakthrough. You succeeded in achieving credibility with the team leads. Going forward, I’d like you to attend our future meetings and provide regular financial updates.” This was the very same CMO (Gollum) who previously instructed me to leave his people alone when we first met.

As any person who has experienced contentious clinical versus finance relationships can attest, it leads to considerable discord and an enormous drain on everyone’s time and energy. Think “War of the Roses” with central lab testing. Clinical finance can serve as mediator, educator, and common denominator to ensure a productive and serene relationship.

“There is no secret ingredient, it’s just you.” – Po, “Kung Fu Panda”

Or, helping to navigate an unstructured, confusing world.

The stress lines pulsed on his forehead, and I thought: “That’s how Theodon looked when he prepared to defend Helm’s Deep against 10,000 orcs.” But this initial 1:1 meeting was not with the King of Rohan but with the company’s head of accounting (I know…potato, potahto). He nervously relayed: “I do not understand why our accrued expenses across multiple studies are so much less than the invoices coming in from our CROs. Are we being overcharged? Is our accruals methodology wrong? Can you help?”

Although I was not good at fighting orcs, I did know a bit about accruals methodology, so I asked for some time to dissect the models. A few days later, I presented my deciphered findings to him: First, the Excel-based accruals models were “borrowed” by my predecessor from his previous company, and that company happened to be a very Big Pharma (let’s just say it rhymes with Bizer). Second, these models calculated accrued expenses based on patient enrollment, which works fine for big companies running many dozens or hundreds of clinical trials. Finally, because we were a smaller biotech running less than 10 trials, the models resulted in very distinct discrepancies. The punch line: They did not account for substantial fixed start-up costs that are a fundamental part of every CRO contract.

Amid the cumulative noise of a hundred Bizer trials, the imprecisions are obscured. But with a small number of studies, these imprecisions are greatly amplified. My suggestion: Make a simple model tweak that layers in estimated fixed costs. When this was done, it immediately resulted in higher trial-to-date accrued expenses and the magical disappearance of the confounding “excess payments” (what accountants call “prepays”). In the aftermath, the accountants revered me like the villagers revered the Dragon Warrior after he defeated the evil snow leopard. A week later, I re-morphed into an unremarkable panda nerd.

The important takeaway is that in a complex multifunctional field characterized by great ambiguity and inconsistency, clinical finance can serve as an expert guide and a human Rosetta Stone translator. A competent clinical finance function helps the company reduce layers of logistical burden and ensure maximum efficiency.

“You are a sad, strange little man, and you have my pity.” – Buzz Lightyear, “Toy Story”

Or, establishing harmony among diverse, discrepant stakeholders.

It is typically not a good idea to call your external financial auditor a doofus. But I truly came close. I was explaining the mechanics of a clinical accruals methodology we hoped to implement. It was elegant, efficient, and sparkled with my typical brilliance. More promisingly, the model was deemed acceptable by my previous company’s external audit senior partner… who fortuitously happened to be the senior audit partner for this current company. Score! Needless to say, I was as confident as a lion chasing a three-legged antelope.

After I finished explaining, the audit manager frowned, shook his head, and said, “I don’t think that’s feasible.” He explained his reasoning and then suggested several alternative methods that underscored his acute lack of clinical trials familiarity. Despite my further entreaties, including a gentle suggestion that he review the model with his boss (the senior audit partner), he would not budge. My own CFO boss advised me, “Let’s not make waves… we’ve got bigger fish to fry with these guys.” As a result, we implemented an accruals system that pleased the audit manager but convinced my other colleagues that I had finally lost my remaining senses.

Several months later, the external auditors determined that our clinical trials accruals methodology was not viable. What I wanted to say: “That’s what I tried to tell your Manager Doofus when he suggested it.” What I did say: “Thank you for your insightful feedback. We will work on improving the process immediately.” We then implemented the original proposed methodology, and everyone lived happily ever after.

In summary, clinical finance not only can help enhance a company’s internal serenity but also achieve more harmonious coexistence with important (and often problematic) external stakeholders – not only auditors but also CROs, investigator sites, tax authorities, government grant organizations, and research partners.

Finally, learn how to improve your clinical finance function in part three of this series. Chan’s final article in the series can be found here.

About The Author:

Growing up, Chris Chan wanted to be Bruce Lee or a Jedi Knight. He wound up doing the next closest thing and became a biotech finance professional. Over a span of three decades (or approximately four times Al Capone’s total prison tenure), Chris has worked in biopharmaceutical companies of various shapes and sizes, primarily in the areas of corporate FP&A and clinical/R&D finance. He has given numerous conference presentations and written multiple articles on drug development budgeting, financial accruals, and outsourcing. He currently crunches numbers as the vice president of FP&A at IGM Biosciences. When he retires, he hopes to become Bruce Lee or a Jedi Knight.