Biotech companies rely on outsourced research and development (R&D) to speed innovation, access specialized expertise, and control costs. However, accounting for these outsourced activities, particularly clinical trial accruals, presents challenges that demand financial oversight and strategic planning.

Emerging life sciences companies often engage multiple Contract Research Organizations (CROs) for clinical trials, each with distinct contracts, payment structures, and invoicing schedules. As trials progress, finance teams must track service milestones, estimate unbilled services, and ensure accurate financial reporting. Getting this right is essential for compliance with U.S. Generally Accepted Accounting Principles (US GAAP) and for making sound business decisions.

Clinical Trial Accruals Must Be Accurate to Ensure Financial Integrity

Clinical trial accruals are one of the most complex areas of biotech finance. Companies must record expenses as they are incurred, even before invoices arrive. This means estimating the cost of services delivered but not yet billed—a task complicated by differences between invoicing terms and actual service delivery.

For biotech firms running multiple trials, the challenge is even greater. They must juggle various CROs, manage multiple agreements, and maintain precise records of trial progress. Errors in these accruals can lead to financial misstatements, eroding investor confidence and, in some cases, requiring restatements.

Accurate Accruals Require the Right Methods, Sound Assumptions, and Reliable Data

Accurate clinical trial accruals depend on a few essential elements:

1. Choosing the Right Methodology

Finance teams use different methods depending on the complexity of the trial and the contract structure. In particular, contracts with CROs often fall into three categories:

• Direct Service Fees – Costs tied to specific units of work or milestones.
• Investigator Fees – Payments to trial sites and patient costs.
• Pass-Through Costs – Expenses incurred by the CRO on behalf of the biotech company.

For small Phase 1 trials, milestone-based or timeline amortization methods often suffice. For larger, later-phase trials, companies may need more detailed tracking methods based on patient enrollments, site activations, and study timelines.

2. Establishing Sound Assumptions‍

Since estimates are forward-looking, finance teams must base them on solid assumptions, such as:

• Expected patient enrollment and site activations.
• Trial duration and expected protocol changes.
• Cost per patient and site.

Close collaboration between finance and clinical operations is essential to refining these estimates.

3. Ensuring Data Accuracy

Reliable accruals require timely and comprehensive data, including:

• Patient visit records and trial procedures.
• Milestone progress reports.
• Contract amendments and invoices received.

Maintaining an integrated data management system that centralizes this information improves financial accuracy and efficiency.

Recognizing these key factors is crucial, but companies must also take actionable steps to improve financial reporting and compliance. Implementing best practices can help finance teams navigate these complexities and create a structured approach to clinical trial accruals.

Strengthening Financial Oversight in Outsourced R&D Requires a Structured Approach

To navigate the complexities of outsourced R&D, biotech companies can use this checklist to ensure financial accuracy and compliance:

✅ Establish Clear Accounting Policies

• Do we have standardized accounting policies specific to outsourced R&D activities?
• Are the methodologies for estimating and recording clinical trial accruals clearly defined?
• Are similar outsourced R&D activities accounted for consistently?

✅ Align Internally Before Engaging Vendors

• Have finance, clinical operations, and procurement teams aligned on key financial reporting needs?
• Have internal teams set clear expectations on data collection and reporting deadlines?
• Are roles and responsibilities clearly defined for managing vendor financial data?

✅ Review Key Contract Terms

• Do we fully understand the payment structures and milestone agreements in CRO contracts?
• Are budget assumptions clearly outlined and aligned with financial forecasts?
• Have we reviewed contracts to ensure all financial obligations are captured accurately?

✅ Foster Cross-Functional Collaboration

• Do finance and operational teams communicate regularly to discuss trial progress and financial projections?
• Is there a structured process for sharing real-time updates on cost changes, site activations, or enrollment fluctuations?
• Are clinical and finance teams aligned on trial timelines and budget adjustments?

✅ Regularly Review Assumptions

• Are we periodically reassessing key financial assumptions?
• Do our accrual estimates reflect the latest updates on patient enrollment, site activations, and costs?
• Are there processes in place to adjust financial projections based on evolving trial conditions?

✅ Implement Strong Monitoring and Controls

• Are we reconciling invoices against services provided and accrual estimates regularly?
• Do we have tracking mechanisms to verify the accuracy of financial reporting?
• Are we maintaining a system to document all financial changes and contract modifications?

By following this checklist, companies can ensure that they have a structured approach to managing outsourced R&D accruals while maintaining compliance with US GAAP and fostering financial transparency.

Financial Discipline in Outsourced R&D Drives Long-Term Biotech Success

Outsourced R&D is critical to biotech innovation, but it brings financial challenges. By implementing strong accounting policies, refining assumptions, improving data accuracy, and fostering cross-functional collaboration, companies can navigate these complexities and maintain compliance with US GAAP.

In the biotech industry, financial transparency is as important as scientific progress. A disciplined approach to managing outsourced R&D accruals ensures financial health, investor confidence, and long-term success.