SEC Insights and ICFR of Clinical Trial Costs and Accruals – What's Enough?

Life science companies incur significant research and development costs, and innovation is pulsating through the sector at record pace, evident by over 434,000 registered studies as of November 2022, more than 3x the number a decade ago (according to khn.org). Against this backdrop, SEC comment letter trends are signaling a heightened regulatory focus on R&D expenses and the quality of related disclosures. Across the life science sector, the SEC is calling for disaggregation of R&D costs by product or program, enhanced disclosures and a thorough explanation of how clinical costs are managed, accounted for and reported within the organization. Often this constitutes a Critical Audit Matter, requiring judgement and strong internal control over financial reporting.

Coupled with record clinical innovation, recent years were prolific for the biotech IPO market, with many opting for the SPAC path. Analysis by Bedrock AI (September, 2022) finds that nearly half of annual and quarterly financial filings by de-SPACs reported material weaknesses or ineffective internal controls.

For clinical-stage life science companies a huge portion of financials rests in R&D and trial spend. It is critical that study sponsors gain control around clinical trial accounting, minimize surprises and mitigate risk of material weakness in financial reporting.

Financial management matters.

It’s not enough to rely on vendor estimates 

For biotechs, R&D expenses are highly material and uniquely challenging given the outsourced and opaque nature of clinical R&D. Per ASC 730-10-25-2(d), costs of services for R&D activities performed by third parties should be accounted for as R&D costs of the entity and expensed as the entity becomes contractually obligated for such costs. The complex and dynamic nature of clinical trials makes this incredibly challenging. Investigator spend estimates are particularly problematic to complete in a timely manner due to EDC data lags, leaving sponsors largely in the dark on investigator accruals (which can represent anywhere from 40-60% of budget). Estimates that reconcile between costs incurred, work performed, timing of payments and contractual obligations are highly exposed to risk of error, incompleteness and lag time.

Excel or industry-agnostic tools are not enough

Scaling biotechs not only need strong internal control over financial reporting but need a process that is sustainable and that adds valuable financial foresight. In spreadsheets changes are not logged, users are not permissioned, granularity is lacking and a clear audit trail becomes near impossible. Your Excel model is only as strong as your user and the loss of one team member may capsize months of work.  

Auxilius fills this void by providing your biotech with the financial intel it needs as well as the compliance-centered process it requires. Uniquely designed for the complexity of clinical trials, Auxilius gathers and aggregates disparate data from your clinical and financial tech stack (ERP, EDC and more) to guide key workflows across forecasting, accruals, and reporting – all in a user-specific, SaaS technology platform that is aimed at auditability and scale. Our biotech customers often uncover notable and unanticipated discrepancies in their spend, allowing them to better plan and perform.  

Audit-ready processes, 20-20 clinical + financial vision, and vendor oversight are within reach for clinical stage life science companies.

Get in touch with our team to learn more. 

References:

https://khn.org/news/article/business-clinical-trials-private-equity/

https://bedrock.substack.com/p/almost-50-of-de-spac-filings-reported