Biotechnology is an essential industry that uses microorganisms to create medicines and other products. Former CFO, David Johnston, says biotechnology is especially important for developing new antibiotics and other medicines that can save lives.
IBISWorld estimates the U.S. biotechnology industry will generate more than $193 billion in revenues and should continue to grow. The United States is the global leader in biotechnology, which is encouraging for emerging biotech firms.
Like any new venture, emerging biotech firms must be careful with their finances. David Johnston explains that there are four financial challenges that emerging biotech firms must overcome.
Funding R&D of New Products
A biotech firm needs to produce innovative products that are better than its competitors’ offerings. Those products must undergo continual improvement and innovation to stay ahead of the field and address new challenges.
Maybe a new virus causes a pandemic, or perhaps existing products are not as effective as they could be. Research and development help to create new biotechnologies that could become effective medicines and other products.
The cost to perform research can be very high, so many biotech firms outsource at least some of their research projects. Outsourcing requires confidential agreements and compensation for the research organization.
Such challenges can make it very difficult for emerging biotech firms to generate profits. So it is important to reach clear agreements and focus on viable and potentially profitable projects for all interests.
Consolidating Business Interests
In addition to outsourcing, many emerging biotech firms enter into agreements with other entities to combine their resources to produce new products via biotechnology. Those agreements often result in friction between two or more organizations, but they need to work toward a common goal.
Consolidating business interests can help to accelerate research and development while lowering the cost to produce new biotech products. The consolidation requires a very clear structure and chain of command to enable the best possible results.
Recognizing Revenue Streams
It is very important to properly account for all potential revenues and report them in an ethical and lawful way. Emerging biotech firms should recognize when they have a contract with a customer and ensure all performance standards are attained by the involved parties.
The emerging biotech firm must place a dollar value on various transactions and ensure any performance contracts clearly stipulate what must be done and at what cost. Only then is it possible to recognize revenue streams versus performance obligations.
Reporting Financial Condition
David Johnston says it is important to report the financials and performance obligations to provide investors and others with an accurate assessment of the firm’s financial condition.
Emerging biotech firms require substantial investment to achieve new breakthroughs. It is very important to record spending and account for expenditures so that the investors have full transparency.
It also is important to clearly report reasonable income expectations and anticipated costs.
Preparing for Success
Emerging biotech firms cannot succeed without a viable business plan and implementing it. Preparing for success is an essential part of attaining it, and knowing the four financial challenges can help firms to overcome them.