Why Is Clinical Finance So Challenging?

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

Join IGM Biosciences Vice President, Financial Planning & Analysis Chris Chan in part one of this three-part series on clinical finance as he explains why the role of clinical finance can be so challenging to define, uphold, and even defend in the world of clinical research.

“Welcome to the company!” the CMO exuded warmth as he shook my hand with a smile that filled my heart with rainbows and California golden poppies. Then like Smeagol spontaneously morphing into his malevolent twin, his face turned into Gollum and he hissed: “I have only one request for you…leave my people alone. They have a lot on their plates and do not have time for all the finance crap.” Although my poppies wilted, I was not too surprised. This was not my first gig as an R&D finance partner. In fact, I owe the start of my career to this very dynamic. My inaugural clinical finance job years ago was freshly created by the head of clinical because the relationship between clinical and finance had become Gryffindor versus Slytherin. I understood that, like an amalgam of Frodo, Harry, and Luke, it is my job to bring balance and peace to the universe.

What makes clinical finance notably challenging? Undoubtedly, every functional area has its own brand of challenges. But clinical finance holds a special place in the pain pantheon. This article will explore what makes clinical finance so exasperating, why having a proficient clinical finance infrastructure is so important for biopharma companies, and what some strategies are to making your process as smooth and effective as possible.

“There’s no problem that can’t be ignored if we really put our minds to it.” – Ralph, “King Ralph”

Or, “Get in line, numbers cruncher.”

If you ask your company’s C-leaders and shareholders whether meeting clinical milestones or adhering to budgets is more important, the former wins in a landslide. Similarly, when clinical personnel receive their performance evaluations, the emphasis is on clinical progress rather than budget variance. Achieving clinical milestones is pivotal (no pun intended) to the company’s long-term success and longevity, much more so than hitting financial budgets and forecasts. Because clinical leaders are well-educated and rational, they prioritize accordingly. Therefore, when we finance folk approach them to talk budget variances and accrued expenses and liabilities, it is not immensely surprising if they don’t express zealous enthusiasm.

Of course, there are circumstantial exceptions. If the company’s cash runway runs low and becomes a major concern, or if accounting issues risk of material weakness conclusions by external auditors, finance becomes a much higher priority. But conventionally speaking, clinical finance professionals often find themselves interacting with extremely busy and overstressed business partners for whom financial matters are not among their most urgent priorities.

“Danger, Will Robinson!” – Robot Model B-9, “Lost in Space”

Or, “Be clinical savvy, lest you be eaten by a space walrus.”

My spider sense buzzed as soon as the question came out of his mouth. The accountant myopically asked, “Can you explain why your accrued estimate was $75K, but the invoice came in at $78K?” Before the clinical team could respond, I pointed outside and said, “Oh look, a puppy!” When we were beyond striking distance post-meeting, I explained to the newbie accountant that in the world of clinical trials, the accrual variance in question was the clinical finance equivalent of kicking a game-winning field goal 2 inches left of dead center. We should be gleeful with the result, and hounding our clinical partners for an explanation would only make them more skittish about providing data going forward. To be clear, the accountant did not do anything fundamentally wrong; he queried as he was trained to do. He simply failed to recognize the nuance. Plus, as my pappy always said, no sense being right if it results in having your leg chewed off by an alligator.

One thing I have learned after decades of clinical-centric finance is that being excellent at finance or accounting does not necessarily make one excellent at clinical finance. Clinical trials are characterized by unique challenges and are less like herding cats than herding locusts. Additionally, because there are no standards or generally accepted guidelines, the way different companies account for clinical trials can vary considerably. As an example, bigger pharma companies often use the “straight-line” method to accrue for clinical expenses (that is, dividing the total contract amount by estimated duration and recording an equal accrual monthly). Because they simultaneously run numerous trials, the inherent imprecision of straight-line methodology evens out in the aggregate. On the other hand, smaller companies running only a few trials cannot feasibly use this methodology because the imprecisions stand out and risk conspicuous corrections down the road. Because of such nuances, even experienced clinical finance professionals can encounter steep learning curves when moving between different companies.

“I’m going to heaven, Lieutenant Dan.” – Forrest Gump, “Forest Gump”

…And clinical will hit all milestones on time.

Clinical professionals are often the most optimistic people in Middle-earth when they budget. Because their patient enrollment and other milestone expectations are often more idealistic than realistic, they underspend their budgets. To further complicate matters, the preferred remedy to slow enrollment is to expand resources by initiating additional sites and increasing site visits to drum up enthusiasm and support. These remedies increase spend. When these forces conspire, the financial results are: (a) underspend versus current year budget; (b) overspend versus the overall (multiyear) study budget; and (c) acute conniptions for the wretched souls explaining the variances.

Clinical’s inclination toward optimism is understandable. They face enormous pressure to meet or exceed trial timelines, and their personal, team, and corporate goals focus on these timeline targets. When more reasonable projections are proposed, they are frequently construed as pessimism or even sandbagging and are explicitly or implicitly discouraged.

But why, you might ask, is clinical finance important? Learn why in part two of this series on clinical finance.

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.