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It Might Be a Bumpy Ride: Why Life Sciences Companies Should Consider Embracing the New Wave of Change

Jeff Ellis and Dennis Howell
Deloitte & Touche LLP

Changes in technology and geopolitics, coupled with U.S. tax reform and new financial accounting standards, are colliding like weather systems to create possibly the biggest disruption in accounting and financial reporting for life sciences companies since the 2002 enactment of the Sarbanes Oxley Act. Business leaders are bracing for these disruptions and how the disruptions will likely impact their ability to remain compliant and competitive.

But change shouldn’t necessarily breed anxiety. Dramatic technological changes are creating transformative opportunities for life sciences companies. For example, artificial intelligence is helping streamline the drug discovery process by analyzing large data sets from clinical trials. Advances in 3D printing are opening doors to manufacture cell and tissue products. New gene therapies may offer customized, targeted patient treatment. Cloud computing is enabling some life sciences companies to quickly scale their data and analytical resources for research. And blockchain technology stands to disrupt the supply chain by allowing companies to trace drugs from manufacturer to supplier to consumer, which could improve drug safety and provide greater visibility of drugs within the channel. 

At the same time, the geopolitical climate is driving change that may cause life sciences leaders to reconsider business and M&A strategies. For example, the passage of tax reform, progress in Brexit negotiations, and policy clarifications on deal-making with China have cleared up some of the uncertainties that likely constrained M&A in 2017. Tax reform, in particular, may lead to the repatriation of cash back to the U.S., which could spur more M&A deals. Further, the extra capital could possibly fund additional research, business expansion, and job growth.

Similarly, pricing pressures are disrupting life sciences companies in challenging but potentially positive ways. Changes in the payer and pricing environments mean that some companies are rebalancing portfolios to ensure that high priced products are not over-represented, while also helping to maintain broad access to markets. Other companies are executing more value-based contracts with payers that are contingent upon providing better patient outcomes over peer products.

Sweeping financial reporting changes

And while accounting professionals at life sciences companies are facing sweeping financial reporting changes that will likely impact their companies’ reported financial results, many companies are embracing the changes to provide more strategic insight to business leaders, improve the effectiveness of internal controls, and develop talent. For example, changes to the accounting definition of a business could lead to conclusions that more acquisitions or divestitures will be accounted for as asset transactions as opposed to business transactions under previous guidance.  By understanding these changes, accounting leaders may provide strategic insights to operational leaders related to possible deal structures in order to achieve potentially more desirable financial outcomes. 

Similarly, major changes in the revenue recognition standard mean that life sciences companies now face more estimation uncertainty than ever due to the requirement to estimate and constrain variable consideration in a customer contract.  But these same changes provide an opportunity for accounting leaders to identify improvements to internal controls over significant management estimates.        

Medical device companies, and others that provide access to equipment as part of their service agreements, could potentially conclude that more arrangements contain lease elements under the new lease standard than ever before.  The complexity of these types of judgments – and the need to adopt a significant number of new financial accounting standards – provides opportunities for financial professionals in life sciences companies to develop the accounting acumen and project management skills of their teams.  

While oftentimes disruptive, change can present new opportunities for life sciences companies that are willing to be bold and adapt. Change can be the catalyst that unites life sciences professionals across the organization – in regulatory affairs, finance, business development, R&D and leadership – to work together to manage risk and help anticipate the next change to come.  

Learn more about these and other issues in the recent Deloitte publication.

About the authors

Jeff Ellis is an audit & assurance partner and the life sciences industry professional practice director for Deloitte & Touche LLP.

Dennis Howell is a senior consultation partner in the national office-accounting services group and the life sciences deputy industry professional practice director for Deloitte & Touche LLP.

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