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BrAPP/University of Wales Postgraduate Course in Pharmaceutical Medicine. Financial Management, Budgeting, Cost Behaviour, and Management Skills 4 th June 2013. Roadmap. Introduction & Overview Finance in Context The Cost of Clinical Trials What Cost? Working Session Financial Management

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brapp university of wales postgraduate course in pharmaceutical medicine
PGCPM 4th June 2013

BrAPP/University of WalesPostgraduate Course in Pharmaceutical Medicine

Financial Management, Budgeting, Cost Behaviour, and Management Skills

4th June 2013

  • Introduction & Overview
  • Finance in Context
  • The Cost of Clinical Trials
    • What Cost?
    • Working Session
  • Financial Management
    • The Financial World
    • The Financial Crisis
    • The Accounting System
  • Financial Organisation and Control
introduction and overview

Introduction and Overview

PGCPM 14th June 2012

introduction overview
Introduction & Overview
  • Who am I?
    • Neil Serjeant
    • Chartered (Global) Management Accountant
    • Business Service Centre Head, GlaxoSmithKline
Health Warning!
    • Finance can be excruciatingly boring
      • I will try and keep it interesting and relevant to you
      • Ask questions as we go
      • Please sleep quietly so as not to disturb others!
finance in context

Finance In Context

PGCPM 14th June 2012

finance is central to business success
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.
  • “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 context1
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.”


Heinemann, Oxford 1993

finance in context2
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

The Cost of Clinical Trials

Financial Management of Clinical Trials

PGCPM 14th June 2012

  • In the context of the pharmaceutical company, to maintain costs within budget.
  • In the context of the Contract Research Organisation (CRO) to deliver financial returns to the shareholders
how the cro model
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
Cost Drivers in Clinical Trials
  • Time
    • hours
    • rates
  • Investigator Grants
    • fees
    • patient visits
  • Travel and Other Disbursements
  • Overheads
types of contract
Types of Contract
  • Fee for Service
  • Fee for Service (with a cap)
  • Fixed Price
  • Fixed Unit Price
fee for service
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
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
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 contracts1
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
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
Pause for thought: objective
  • A quality clinical trial delivered on [ahead of] time and at [below] budget.
cro finances
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 finances1
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 study the cro model
Financial Control Case StudyThe CRO model



  • 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

Case Study

Therapeutic Pharmaceuticals


Rapid Outsource Partners

PGCPM 14th June 2012

suggested lessons learned
Suggested Lessons Learned
  • Open bidding
  • Communicate! Communicate!! Communicate!!!
from within the industry
From within the industry
  • Project Budget
    • complete
    • accurate
    • timelines
  • Unspent budget at the and of the year may not be carried forward!
financial management

Financial Management

1. The Wonderful World of Finance

PGCPM 14th June 2012

speculate to accumulate 1
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
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
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
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
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 shares1
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
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
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 market1
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
Health Warning!
  • Savvy investors make money in Bull and Bear markets.
  • You can lose money in Bull and Bear markets.
company ownership
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
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 management1

Financial Management

2. The Financial Crisis

the perfect storm
The perfect storm
  • “The main lesson to draw from the events of the credit crunch is that in the economy, when the hurricane strikes the earthquake is not far behind. When things go wrong, everything goes wrong at once.
  • It's worth having an understanding of this variant of Murphy's law because in general, when life is stable we are good at imagining all sorts of things that can turn sour. But what we are not good at preparing for, is everything turning sour in one go.”

Evan Davis


I suspect the reason that bad news comes in waves is that economic systems are far more integrated than most of us realise. You change one piece of the machine (turn house price rises to house price falls, for example) and more things are affected than you could have imagined.

  • And in the economy, because so many different variables are upheld largely by confidence or sentiment, a knock to confidence in one area can easily be the trigger for a knock in confidence somewhere else as well.. (for example, sub-prime disasters in the US damage confidence in the reliability of UK banks .. so no-one lends to them for non-sub-prime mortgages).

Evan Davis

paradigms lost
Paradigms Lost
  • the confidence of the financial sector has taken a knock, and with it the presumption that the future of our economy lies in expanding the city ever further
  • the reliance on consumer spending in the UK (and US) is no longer seen as being able to carry on sustaining the economy - saving is cool again
  • the unipolar economic world order, centred around the United States, has been significantly diluted as Asia strengthens in relative terms, and the US even depends on exports to Asia to cushion its slowdown.
  • the idea that raw materials can permanently be cheap has been challenged - commodity price hikes have alerted the world to possible shortages

Evan Davis

the great debate
The Great Debate
  • Reduce debt
    • By cutting expenditure?
    • By boosting growth?
financial management2

Financial Management

3. The Accounting System

not something new
Not something new

1340: Venetian merchants noted to use double entry bookkeeping: the City of Massri Treasurer’s Accounts are in double entry form.

1485: Codified by Luca Pacioli in his“Summa de ArithmeticaGeometricaProportionalita”

1500s: Concepts of “Going Concern” and “Accruals” develop.

1673: Code of Commerce in France requires biannual balance sheet reporting.

4 key principles
4 key principles
  • Going concern
  • Prudence
  • Matching
  • Consistency
double entry bookkeeping
Double Entry Bookkeeping
  • Every transaction is recorded as a movement of funds from one account to another.
  • One account is debited (dr), the other is credited (cr) - “double entry”
  • These transactions are recorded in the Journal or Day Book as they happen, and are numbered consecutively #1, #2, #3, etc
the accounting system explained
The Accounting System Explained
  • When a company starts it has an opening Balance Sheet reflecting what it consists of (“what is has, where it came from”)
  • It trades. The results of the trading are reflected in the Income Statement
  • At the end of the year the company’s Balance Sheet shows the effect that trading has had on what it has and where it comes from.
  • The Budget is our map to get from the beginning to the end.
the accounting system explained1
The Accounting System Explained
    • is a snapshot at a point in time
    • tells us what a company has and where it got it from
    • tells the story of a period of time
    • demonstrates how we moved from one BALANCE SHEET to the next
the accounting system simple
The Accounting System - Simple

Opening Balance





Closing Balance


the accounting system less simple
PGDPM/BrAPP 6th June 2007The Accounting System - less Simple

Opening Balance







Closing Balance


Annual Budget

Cash Flow

financial management3

Financial Management

4. Financial Statements

financial statements
Financial Statements
  • All firms produce Financial Statements
    • income statements
    • balance sheets
    • cash flow statements
  • Financial statements form the context for measuring financial performance
    • of the firm
    • of units (divisions, profit centres, cost centres) within the firm
    • of projects
financial statement uses
Financial Statement—Uses
  • To manage the business (internal)
  • Provide information to shareholders (external)
  • Meet statutory reporting requirements for governments and taxing authorities (external)
financial statements required
Financial Statements - Required!
  • Financial statements are required country by country, and requirements are different from country to country.
  • So, for example, Quintiles produces
    • Local country Financial Statements to meet statutory requirements in individual countries
    • Consolidated US Financial Statements for its primary investors.
mind the gaap
Mind the GAAP!
  • Generally Accepted Accounting Principles (GAAP)
  • Vary from Country to Country
  • International Financial Reporting Standards (IFRS)
income statement content 1
Income Statement Content (1)
  • A CRO

Gross revenue

less: Pass-through Expenses

Equals: Net revenues - prime external measure

less: Direct or Variable Expenses

Equals: Contribution Margin

less: Overheads

Equals: Operating Income

income statement content 2
Income Statement Content (2)
  • A Pharmaceutical Company


less: Cost of Sales

Equals: Contribution or Margin

less: R&D expense

less: Selling, General and Administrative Costs

Equals: Operating Income

income statement content 3
Income Statement Content (3)
  • Beyond Operating Income

Operating Income

less: Other Costs/Income (eg FX, Interest, etc)

Equals: Earnings Before Tax

less: Tax Charge

Equals: Net Earnings

divide by: Number of Shares

Equals: Earnings per Share (EPS)

balance sheet
Balance Sheet
  • The key...
    • The Income Statement presents the story for a period of time
    • The Balance Sheet provides a snapshot of the business at a point in time
balance sheet1
Balance Sheet
  • The Balance Sheet tells us:
    • What we have (“assets” or “debtors”)
    • Where is came from (“liabilities” or “creditors”)
  • It also distinguishes assets which are readily available for use or conversion (“current”) from those which are not (“fixed” or “long term”)
balance sheet assets debtors
Balance Sheet - Assets (debtors)
  • What we have:
    • Fixed Assets
      • tangible
      • intangible
    • Current Assets
      • cash (in hand; at the bank)
      • accounts receivable (money I am owed)
      • inventory
balance sheet liabilities creditors
Balance Sheet - Liabilities (creditors)
  • Where it has come from:
    • Current Liabilities
      • overdrafts and loans (“from the bank”)
      • accounts payable (“from our suppliers”)
      • tax payable (“from HM Revenue & Customs”)
    • Long-term liabilities
      • share capital (“from the shareholders”)
      • retained profits (“from trading”)

"Annual income: Twenty pounds, Annual expenditure Nineteen pounds nineteen and sixpence: result happiness. Annual income Twenty pounds, Annual expenditure: Twenty pounds ought and sixpence: result misery".

Wilkins Micawber

Debtors’ Prison

cash flow1
Cash Flow
  • Cash is the lifeblood of any company.
  • Cash Outflow > Cash Inflow = Trouble!
  • Profitable companies fail because they have inadequate cash flow
cash flow example
Cash Flow - example

Traditional Fee for Service Billing














Best case scenario: Days Sales Outstanding = 75 days

corporate governance the new world
Corporate Governance - the new world
  • The roles of the audit committee and the Finance Director have changed in the post-Enron/-WorldCom/-Tyco world.
    • The Sarbanes-Oxley Act (Sarbox) requires CFO and CEO of US companies with publicly traded stock or debt to sign the numbers: “These numbers are correct, but if they’re not please send me to prison”.
    • Audits focus on “True and Fair” view AND, separately, on the adequacy or otherwise of internal controls.
    • In the UK, Derek Higgs has encouraged better practice in the transparency and visibility of corporate reporting.
internal control
Internal Control
  • The board of directors has a fiduciary duty (“duty to demonstrate good faith”) to the owners of the company
    • Formally the responsibility of board of directors
    • Personified in the Finance Director or Chief Financial Officer
the audit committee
The Audit Committee
  • Small group of non-executive directors
  • Works closely with Finance and Auditors to assure financial control
    • solid processes
    • “encourage” whistle-blowers
    • brake on executive greed
internal control1
Internal Control
  • The processes by which the company decides things, and particularly by which payments and financial commitments are approved.
  • Examples of Internal Controls
    • Authorisation limits
    • Chart of Accounts
    • Credit Policy
    • Capitalisation Policy