Auxilius + Deloitte: Audit Readiness and Operational Efficiencies

Participants from across the life science ecosystem join a session focusing on how biotech companies are improving audit readiness by moving away from Excel for R&D and clinical trial spend. Sharon Langan, VP of Partnerships at Auxilius, shares her career background and involvement in life sciences, while Kevin Conrad from Deloitte works extensively with life science companies.

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Introduction to Biotech Audit Readiness

welcome to all of you. Great to to see you all here today. We're here today with Deloitte. We're going to be illustrating how today's biotech companies are improving audit readiness by lifting themselves out of mundane and risk laden Excel reliance for what is really the largest cost category for most companies in this space, and that's r and d and clinical trial spend.

Alright. So we're going to dive into a number of important topics. You're not going to hear it all from me. But just quick background, my name is Sharon Langan. I'm a VP of partnerships at Auxilius.

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Introduction to Speakers' Background

I started my career, about twenty three years ago in big in the big four at Deloitte in the Boston office.

And then from there, segued into organizing life sciences, accounting, and finance conferences in partnership with the big four, and many other firms. And I, you know, see a lot of familiar faces here today, so it's it's good to see you. Devoted myself to this community and understanding the issues. And for that reason, was really, kinda crystal clear on the importance of this topic, was got to meet the auxilius team and was enamored by the fact that this is such a purpose built company to solve one of these big challenges in the industry.

So I've done with Arzilia since September of twenty twenty two, and that's that's enough about me. I'm pleased to introduce Kevin Conrad. Kevin is in the audit practice at Deloitte in San Diego office. He works extensively with life science companies and understands not only the intricacies in these topics, but the needed level of the rigor and the expected FCC and regulatory scrutiny.

So, Kevin, do you wanna give a little bit more about your background?

Thank you, Sharon. Looking forward to speaking with all of you today.

A little bit more about me, I do spend almost all of my time serving early stage and mid market life nights companies. So, a lot of my time ends up being spent on r and d accruals working through, clinical progress and turning that into a number we can rely on for the financial statements and then translate, translate that into, you know, proxy to progress, as well as trying to think through that from an internal controls perspective, how companies can be, better prepared and to work their way through, really owning and and managing this process given how, how significant it is from an investor perspective, but also how much time it can take from an audit perspective to get someone like me who has to come in and and work their way through it and and try to learn your process and learn your learn, your clinical status in a very short period of time.

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Introduction to Auxilius Team

Thank you, Kevin. And leading from Anzillius, is Erin. She's going to walk us through an illustration what this looks like in the Anzilius platform.

Erin is our president and COO. She lives and creates clinical trial finance and accounting, working at the front lines with customers as well as the Azelius product development team. Erin, I would love to hear more about your background.

Yes. And thanks everybody for joining. Erin Warner Gwill, president and COO. As Sharon mentioned, I oversee everything customer.

From the auxiliary perspective.

My background, I've spent my whole career at the intersection of health care and finance, former investment banker, private equity investor, so, you know, So, you know, we understand that nearly ninety five percent of biotech finance and accounting leaders have said that they struggle, with estimating their r and d spend, and that's why we're here today to talk about this.

It's concerning. This is heavy. This is hefty, and it's a hairy portion of the financial statement. It lives largely in remote Excel spreadsheets.

In recent years, though, we've observed a measurable shift in how the industry is approaching this, and the standard is actually changing. Today's capital constrained market, life science companies, large and small, we see, you know, again, small companies, both private and newly staged public companies all the way to large pharma, are leaning into automation via SaaS tools to streamline and control that.

So in listening to hundreds of companies, and we and we talk we talk to many of you, in partnering across the life science ecosystem, we understand that trials are complex.

There's near constant change, as you know. A hundred percent are going over budget on a typical basis, ten percent finishing time. Costs are often hidden within your contracts, and that can be exacerbated by delays. And we know that nearly all of you are experiencing change orders, just within a within a twelve month, period.

There's a lot of pet notacity around clinical, investigator spend and those pass through costs. There's also lack of trust and lack of confidence, completeness, timeliness in which you're getting your vendor estimates. And we've talked to many of you. Eighty eighty seven percent of these vendor estimates are time lagged anywhere from two to six months.

Eighty percent, of these companies are lacking confidence in the efficiency of r and d spend. And, again, in today's environment, that's not a place where we wanna be, uncertain.

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Organizational Effort and Manual Process

There's a lot of organizational effort, as you know, that goes into alignment across finance and accounting and the technical operations teams that you work with. This is a highly manual process. In Excel. It exposes companies to financial waste and regulatory risk.

Kevin, anything that you would wanna add to that before we move into some of the regulatory risk parts?

I just highlight that whenever you bring in a CRO, you're effectively adding in several stakeholders to the organization that you're ultimately responsible for. And so being able to understand where they're at and governing that process, is is very important for this this overall, you know, I'd say accounting cycle. You know, we think about it a lot more from a where we I think it gets framed a lot more from an operational perspective, which is, you know, where am I at? How am I go how am I doing? How's my data looking? Things like that. But, also, ultimately, at the end of the day, this results in some sort of financial impact and making sure that that's squared away when it comes to either year end or quarterly reporting.

Anything that you can think of to to make this process easier along the way and help you govern it is is gonna pay off in the long run.

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Governance and Risk Exposure

Absolutely. On the governance side, there's, you know, exacerbates exacerbating the organizational headaches on the resource strains, is the fact that there does remain a high level of risk exposure, and in clinical trial accruals. So r and d expense accruals are commonly a critical audit matter.

Accounting for r and d is a high area of r and d, and, is high area of audit scrutiny. So when we think of the materiality of of this cost category, the fact that it's heavily outsourced with a large third party reliance and requires significant judgment is sort of a trifecta, that leads to what would be a critical audit matter. Sixty three percent of companies are not currently in or have not currently established a materiality threshold for r and d expenses, and that's probably more the smaller companies, but needs to you really need to have that established, documented, and controlled.

From a detail level perspective, the SEC does expect and look for program level reporting, at a detailed bubble. Restatements we often see are arising from from this area and from inaccuracy in these accruals.

Lastly, I would say there's a lot of disparity in practice, and this is never a great thing, from a regulatory perspective. We see a range of approaches in terms of how companies are receiving and utilizing a vendor estimate ranging from getting nothing from your vendor to maybe quarterly or radically timed, data coming in, sometimes overly basic one line item estimates with minimal supporting details.

And then on the best end of the spectrum, consistent monthly estimates that are very granular in nature. But I would ask all of you to consider where are you at in that range in terms of your vendor estimates, how you use those.

And, really, we're we're we're going to show that regardless of that legacy practice, there is a solution that puts you back into control with a higher level of accuracy.

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Risk Exposure and Audit Muster

Kevin, anything that you would add here in terms of sort of the risk exposure and kind of the audit muster, that that you apply in this category?

Yeah. I'd say, generally speaking, the the more advanced that a company can be in in their preparation for this, the the better. You know, sometimes it's maybe not the biggest priority to get the financial sign statement impact squared away, but making sure the clinical side is is up to speed is usually where the focus can be, especially in a smaller company where maybe there's only a scientist running the the head of the company. You'll have maybe a VP of clinical operations or maybe regulatory affairs, maybe a controller, perhaps that's outsourced. You know, the the structure for companies is is significantly variable depending on the size and scope.

And so making sure that this process has a a proper governance from start to finish, I think, is just important, selfishly from an audit perspective. It's it makes my life a lot easier. But I think it also can help companies make sure that, you know, from a CRO reporting perspective that their activity is there. Usually, there's someone in the company already, whether that's in clinical or regulatory, that knows exactly where every patient is. They know where every site is. They know every element of this trial.

And it's just making sure we connect that knowledge to the finance and accounting departments as well as legal from, like, a change order perspective or any types of amendments or adjustments to these trials, which, as we all know, those come, from anyone who's ever tried to do a human based trial. I mean, I don't even think animal based trials can, be immune from this either.

But making sure that that information is flowing back and forth between the two groups or three groups depending on how it's structured is critical. And then as that that information kind of flows between the parties, that r and d accrual or prepaid, whatever position you're in, depending on the structure of your trial, tends to follow that. So I think it's a matter of just connecting some of the processes that are probably already going on in your organization, with the other stakeholders. And if if we think of if we think of a a risk here, you know, risk from a financial pro financial reporting perspective is typically understanding, right, did did this happen or not, and then when do I get it reported to me?

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Understanding Financial Impact and Reporting

You know, sometimes we'll hear things like, oh, well, we just booked to the invoice, and, you know, that's problematic because that reporting is sometimes on a lag, you know, anywhere between two and six months, maybe longer depending if you've got international, sites that perhaps operate under a different regulatory framework than they do in the United States. And so, really understanding when that activity happened is crucial too for understanding your cash runway and then how that dovetails into whether or not, you know, your next inflection point is is on track from both a data perspective and then ultimately a financing perspective, since the data tends to drive, you know, the valuation and the financing, impact to that.

And so making sure that that's all there is very important. And then for our public companies, if we think through, you know, the the concept of a CAM, you know, that audit report is is potentially going to be calling out what this process is and how it's being done and what what that auditor has done to, to address that. And so if you think about that optics, right, that's right in the the opinion. That's right in the the the report itself.

And so it's it's calling it out to an investor's attention that, hey. We think about these things, and and these things are where we spent the most of our time. And then, lastly, if I think about how that flows through into, like, the the SEC's perspective, we do commonly see the SEC challenging companies on disclosing more information about r and d, particularly if they are still in that r and d phase pre commercialization. So, you know, working through that that regulatory process to get their data, they they wanna understand how that's being tracked, how that's being spent.

Where is it going? Is it by indication? Is it by program? How how is that going? And so having that information is also extremely helpful because that's something that they know, users are looking for, especially in this industry and in this cycle. And I'm I'm certain most people can probably speak to it offhand from where their company is and all that. So it's a matter of connecting that information and that level of understanding into the financial reporting process.

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Disparity in Practice and Vendor Estimates

Mhmm.

Thank you, Kevin. You know, one other thing I would just note in terms of disparity in practice, you know, some companies are, split between straight lining, versus a bottoms up patient level build on their accrual estimates. And when you think about some of these, like, higher cost clinical trials, oncology in particular, this can be extremely problematic and can lead to, the inaccuracy that could that could give give way to having to to, produce and and do go through a restatement, which is always a painful process.

You know, this this is something that always, I think, gives us pause and I think for our audit partners as well. You know, more than half companies that split rely on their vendor estimate, but yet we find them as talking to companies under ten percent of you have full trust in the completeness and accuracy of that vendor estimate. Yet we know that that is one of the most important things from an audit perspective, is to be able to have a defensible position and the documentation around the accuracy of these accruals. So, Kevin, does this give you some pause as well as an auditor?

Well, it makes me happy that nine percent fully believe in the vendor estimate off the bat, because I think that's the right perspective, and that's not necessarily because it's, inherently wrong. I think it's just, again, going back to my comment about the amount of stakeholders. If we think of when you start a trial, you now have doctors and nurses at a clinical site that then get reported up, to a investigator or perhaps a series of investigators at the CRO who then is then aggregating that data and trying to communicate it. And so depending on how many patients you have, how many sites you have, how many countries you might be operating in, that's a lot of information that is coming in.

And there's there's, I'd say, always a a pretty strong risk that that information is not coming up on time in terms of when the billing is coming through. The okay. I I saw this patient. I took vitals.

I dosed. I did the imaging I was supposed to do. Here's the invoice. That might come, you know, three to six months after that patient is seen just given the amount of time that it takes to process that paperwork and all that versus the activity itself is probably logged the day of or near near term when it happens.

And so being able to see that activity level data is going to help you get from that nine percent bucket into that sixty one percent bucket of, you know, making sure that that's correct and hopefully getting that number up to where you feel a lot lot more comfortable with what you are ultimately reporting. Because at the end of the day, you know, when when those financial statements get filed publicly or when the audit's wrapping up and you're signing the representation letter, it's ultimately management's name that's that's going on that financial statement impact. And so making sure that everybody's comfortable with it, I think, is very important.

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Complexities and Challenges in Process

And I do think that, it it makes me happy to see that most people, understand some of the complexities and challenges with this process, And I do agree with them, and and you mentioned straight line. If I hear in a human based trial that someone's using, you know, straight line expense, it's already kind of an area of concern because some parts of it could be straight line, but we have to kinda get there and we have to prove it. And I think that's getting to that proving point is is sometimes challenging.

And, you know, I think the better understanding and someone in the organization typically has that understanding of that patient level data that that or patient level activity. Let me rephrase.

It's just it's just connecting that dot. Someone somewhere typically knows exactly what happened. I've I've seen it at my clients where I've been in a meeting and they had to step out because an adverse event happened in the trial and they were called that day. You know, so it's it's unlikely that that information is not necessarily there. It's just coordinating it, bringing it all into into one location, to come up with a robust estimate of do I owe or I'm in a prepaid position and then, of course, understanding how that fits into your clinical trial budget and structure.

Yeah. And and that coordination can take and Aaron knows this and and has seen this with our customers. That coordination internally between within companies, between stakeholders can be extremely time consuming.

It takes Flintocs off the ball and off their focus to be able to spend the time to translate that that activity information to finance and accounting for the needs that they have. There's a there's a lot of effort and time that goes into that coordination, so, that can't be underestimated from a resource perspective.

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Coordination and Resource Perspective

There's a lot of clinical stage company companies here today, but also for those of you that maybe in prior roles worked at commercial companies or have commercial products, you can maybe sort of relate this to engrossed to net sort of the challenges with bringing in all of that disparate data from so many different sources you're dealing with, you know, government pricing, states, multiple payers, PBMs, and and and health plans. And there's a there's a lot of coordination that happens there, and, that that data being in one place can be, extremely, extremely valuable and streamlined.

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Introduction to Auxilius Solution

So we'll go real quick on this piece because, really, we're gonna get into product. But at the end of the day, that's why we created auxilius.

Auxilius was first to market with a purpose built SaaS solution.

We're both SOC one and two compliant for clinical trial financial management needs that are unique to life science companies. So really built from the ground up for this exact issue.

We at I'm so used, it's by ingesting disparate contractual, financial, and clinical data into, the software that is, again, purpose built to tee up highly configurable driver based forecasts and give insight into things like investigator spend on a rolling basis, scenario planning, and ultimately an efficient financial close process.

Just a little bit our team, and I'll tell you why auditors love Axilius. I'd rather hear why Kevin loves Axilius. But our team is is comprised of a number of CPAs and former big four auditors. So between our experience and the experiences of our customers, we recognize what's going to move the needle when it comes time to prepare, your financial flows and having that external view. So, again, so one, two compliant, automating workflows that are otherwise susceptible to mistake, evidence in a documented audit trail on a monthly basis, and lastly, clear segregation of duties with appropriate commit permissions.

So, Kevin, why do you as an auditor, how does the you know, what does automation mean to you in terms of derisking a process?

Definitely. I mean, broadly, automation tends to reduce human input error. If we can if we can simplify and and allow, you know, the machines to do some of the work, and be able to verify that, it makes our lives easier. For those of you who've ever opened a CRO, like, like, reporting workbook with the, you know, probably hundred and something tabs, formulas upon formulas.

It takes, you know, probably five minutes for it to fully load and refresh if it doesn't already lock up your computer, and cause it to have all sorts of issues, around that. You know, if if I think of that, you know, being able to process that information consistently and in a a observable manner is is helpful for when I come in and then have to ask those questions. And, Sharon, you had mentioned a a really good point that I'd like to emphasize, on the previous slide, which is, you know, getting or two slides ago, which is, you know, getting people back into their their day job. On the on the audit side, we don't necessarily wanna be, you know, that interrupted.

We we wanna be collaborative with you and and work through those those issues and making sure that we can understand it, and make sure that, you know, we're also not distracting the clinical team from, you know, what they should be doing, which is overseeing the trial and making sure, you know, you guys are completing the r and d that you need to complete, to to, you know, support your mission. And so the to the extent that we can get information in a in a consistent way from an automated system and then, again, having that clear, It It just goes a long way, for both private and public companies.

Obviously, private companies, the internal control standards are not as rigorous as Sarbanes Oxley would require, and what a PCOV audit would require. But I do think it's it's something to be prepared for because that market exit and that ultimate registration is typically a a common goal across these these emerging growth, r and d biotechs. And so understanding where that information is coming from, automating it to the extent that you can, You know, and I'll caveat that with not all processes can be automated. There is still a human element, and I think the human element of oversight and making sure that that information is there and is correct is still very critical, but there's not every step of this is something that needs, someone to kind of, you know, line by line touch.

You know, something like comparing invoices to where I'm at from a clinical trial perspective. That's something that doesn't necessarily, I think, need to have a ton of of human interaction. And if you can have a give me if you can have a process that says, this is what I'm seeing, this is what's in your AP ledger, here's a delta, I can definitely help with with making that analysis cleaner and faster.

Ultimately, at the end of the day, you know, we we just need to make sure that that process is functioning and that we can see evidence of that process functioning. So the more we can get on that, the better.

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