Strategic finance for pharmaceutical innovation and stability

Melagiri Sridhar, Chief Financial Officer, Bafna Pharmaceuticals in a recent interaction with India Pharma Outlook, shared his views on how CFOs in the pharmaceutical industry should balance investments in advanced stability-enhancing technologies with cost-control strategies, how finance leaders should balance investments in stability-driven packaging with overall cost-saving strategies and more.

Given the high costs of formulation development, how should CFOs in the pharmaceutical industry balance investments in advanced stability-enhancing technologies with cost-control strategies?

We, as finance professionals, always need to think about how to monetize the products. If a product is developed, we must ensure that it sells. Once it starts selling, we should implement ways to collect revenue from it.

In terms of stability investments, we allocate funds for stability chambers and essential equipment. To compensate for these costs, we charge customers stability fees throughout the product’s shelf-life. Stability testing is indeed a mandatory process, and this being the case, we make sure to monetize the value provided in monetary terms, ensuring that our investments are recouped effectively.

Protective packaging is essential for drug stability, but it can also significantly increase costs. Given this trade-off, how should finance leaders balance investments in stability-driven packaging with overall cost-saving strategies?

Today, modern regulators believe that efficacity alone is not enough; they require good stability of pharmaceutical products, especially solid dosage forms like tablets and capsules. In my experience with industry and regulatory authorities, packaging has a vital role in meeting such stability specifications. Hence, for solid orals, lots of regulators request specific formats for packaging like blister packs or oral packs. Customers understand the need for compliance with any of those regulatory requirements; therefore, they are usually willing to take on the cost in the pricing that is associated. Thus, such compliance does not usually provide a big hurdle in selling the product.

Expired and unstable drugs can lead to significant revenue loss. How can financial strategies help mitigate this risk effectively?

The pharmaceutical market operates on two major types of business models: the CDMO (Contract Development and Manufacturing Organization) business model and the one which sells own-brand products. In these two models, the management of product expiry risks is completely different. In the CDMO business, the products are built to order where the chances of expiry-related losses happening are extremely low.

Contrarily, own-brand products have a much higher risk of expiry liability attached to them. Thus, it becomes very relevant to instill in the supplier an education of sorts and deploying strict supply chain management practices with major thrusts on making sure the First In, First Out mechanism is adhered to. An example that comes readily to mind, based on our experiences, is that of Raricap-a brand purchased from Johnson & Johnson in 2011. Between 2011 and 2015, during the period of marketing it in India, a controlled system was put into place whereby all batches were sold on a FIFO basis. Such a strategy greatly reduced the chances of loss by expiry. That truly guaranteed efficiency in inventory management.

How can a CFO foster collaboration between R&D, manufacturing, and supply chain teams to ensure stability-related financial decisions align with broader corporate goals? Additionally, what strategies can be used to strengthen this cross-functional collaboration?

The system functions on two core principles, one that is based on invention, while the other relies on innovation. Invention takes a long time and consumes a lot of resources, while innovation, which is aimed at improving the effectiveness of products, consumes less time. Hence, the big prize is a fast commercialization of benefits, which brings significance to the development in order to assimilate it in a manner that pays off.

Stability still shows to be a significant player, but as the customers ultimately pay the price for such services, the pricing includes the cost of them. Nevertheless, after a product is developed, it should never be left on hold. It must be commercialized quickly to recover the development costs and maximize returns, a fundamental lesson learned in the industry.

In your experience as a CFO, what has been the most challenging aspect of the role? What is the most difficult problem you have faced that you believe is also relevant to other CFOs in the pharmaceutical industry?

The pharmaceutical industry faces an enormous challenge in terms of capital management, given the sheer enormity of funds involved. There are two modes of business: Contract Development and Manufacturing Organization and own brand product sales; both are quite different from one another in terms of finances.

For the CDMO business model, it is quite simple: the products are ordered, manufactured, and sold at an agreed price and under accepted terms, ensuring timely payment and low financial risk involved. Working capital management is, therefore, simpler as no additional cost for marketing and distribution falls on it. On the other hand, selling one's own products in the branded business involves far more of a financial challenge.

The branded model has, unlike CDMO, very high marketing, distribution, and supply chain costs, all of which have huge impacts on cash flow. The major concern here is to manage working capital cycle such that revenue recovery from the market cycle is less than the payment cycle to the vendors. They must think through their finances at every stage in the supply chain-from procurement, manufacturing to selling products, and collecting revenue. Any delays in the cycle would tie capital up, piling on financial pressure. Therefore, optimization and lowering supply chain time is the key to keeping cash flow efficient and costs in the working capital cycle manageable.

CFOs are responsible for allocating capital in a way that balances immediate revenue goals with the long-term need for stability-driven R&D investments. How should CFOs approach this challenge to ensure both short-term profitability and long-term growth?

The pharmaceutical industry depends more on continued investments in research and development. R&D is the backbone of every pharmaceutical company. If the industry does not have a strong R&D offering, survival becomes increasingly difficult; the world is constantly threatened by new diseases and changing healthcare needs.

While inventions may be less frequent, innovation is critical—especially given modern lifestyle demands. Patients want immediate relief, not endless treatments. For instance, in the past, paracetamol was taken several times a day, the new generation of patients expects a one-shot deal for the same effect.

Such a trend makes the R&D investments that were highly effective more and more important. Therefore, the companies have to make investments where they can push new technologies further along their potential useful continuum within the shortest time period and possible highest market demand. Such in-house R&D investments do not only improve product efficacy but will also expeditiously shorten the commercialization circle, making the industry survive and be competitive.

To all the financial experts in the pharmaceutical industry, what do you believe is the most critical aspect of finance that is currently being overlooked or not receiving enough attention?

As regards challenges faced by financial professionals in the pharmaceutical industry, a major one is the absence or inaccessibility to real-time data. With no clear sight into what their process flows look like from the first to the last, it becomes hard for them to locate pain points or even anticipate them in the future. The real-time availability of data is crucial for informed financial decision-making, facilitated cost control, and operational efficiency.

Becoming a CFO requires more than just qualifications - it demands dedication, commitment, and a strong willingness to learn. The world of finance is vast, much like an ocean. When you first enter, you may not know much, but through observation, questioning, and continuous learning, you develop the expertise required to succeed. Observation plays a key role in understanding how things function, how decisions are made, and how financial strategies evolve. Asking questions such as what, why, how, and when helps deepen understanding, as without questioning, finding answers becomes difficult.

Similarly, learning to earn something is itself of no value unless it is earned out into a practical scenario. While the means to recognition comes from learning, the true test of a great finance professional lies in how well these learned concepts have actually been applied in real-life scenarios. Through this boost of skills, aspiring CFOs will drive themselves right up to the churning turmoil in financial management, be it pharmaceuticals or, for that matter, a different industry altogether. The end result of observation, continuous questioning, and world application will always lead to success.