In this third article in our ‘How to…’ series, we reflect on what we learned from Martin Curry, STEM Healthcare, in his training session on managing the money.
What is a profit and loss table?
A table detailing all business transactions showing all incoming and outgoing cash activity. This will inform potential investors and credit sources how your business will generate its income and manage its costs. Documenting this information is important to show the progression (improvement) over a period and to forecast whether your business is set to make a future profit or loss.
So why is forecasting important?
A profit and loss table give businesses an idea of where the business is headed financially.
If your forecast suggests that profit levels will be low and therefore capital will be limited, it can help you to become more cautious with your credit and supply chain arrangements. Having this level of insight can help you to manage your risks and allow you to rethink your strategy in order to reduce loss and increase profitability.
Monitoring your manufacturing costs is critical in order to represent the efficiency of the production process. There are two types of costs: fixed and variable.
Fixed: rent, rates, employee, insurance,
Variable: raw materials, transport, utilities,
Keeping track of the manufacturing costs will allow you to review the expenses associated with all the resources spent in the process of making the finished goods. To maximise the productivity of each unit of materials you use in the manufacturing process, ensure you review your procedures, materials and ensure waste is reduced to its minimum during the process.
Awareness of the market is key to impressing potential investors; knowing what the key drivers are and understanding the risks and the market demand. Having this information enables you to provide evidence that you can effectively evaluate the commerciality of the project.
In summary, investors will be able to learn a great deal from the financial figures of a business. Thus, preparing a profit and loss account (detailing the business transactions) is critical to providing an insight of the business’s overall position within the market.
Often, the pharmaceutical industry is characterised as the ‘bad guy’ of equality in healthcare. This is particularly evident in the United States, with cases such as Martin Shkreli, whose company Turing Pharmaceuticals infamously increased its leading HIV and malaria drug by over 50 times its value overnight, and a lack of regulation in advertising. The latter is accused of influencing prescriptions of certain brands based on consumer demand, which could lead to unnecessary treatment and addiction.
With stories like these dominating the media, it is no wonder the public if often found to harbour a negative view towards ‘Big Pharma’. However, the actions and motives of this industry are rarely fully understood. Here are five facts about pharmaceutical manufacturing you might not know:
1. Out of 5,000-10,000 compounds tested at the pre-clinical stages, only one drug will make it to market
The drug discovery and development process explained. Video: Novartis
This may seem like slim odds, but there are many stages that come before drug approval to make sure the most effective and reliable product can be used to treat patients.
There are four major phases: discovery and development; pre-clinical research, including mandatory animal testing; clinical research on people/patients to ensure safety; and review, where all submitted evidence is analysed by the appropriate body in hopes of approval.
2. If discovered today, aspirin might not pass current FDA or EMA rules
Some older drugs on the market would not get approval due to safety issues. Image: Public Domain Pictures
Problems with side effects – aspirin is known to cause painful gastrointestinal problems with daily use – mean that some older drugs that remain available might not have gained approval for widespread use today. Both the US Food and Drug Administration (FDA) and European Medicines Agency (EMA) run programmes that monitor adverse side effects in users to keep consumers up-to-date.
Tighter regulation and increased competition mean that the medicines we take today are arguably more effective and safer than ever.
3. The average cost of drug development has increased by a factor of 15 in 40 years
Back in the 1970s, the cost to produce a drug from discovery to market was $179 million. Today, drug companies shell out $2.6 billion for the same process – a 1,352% increase! Even considering inflation rates, this number is significantly higher.
With the average length of time needed to develop a drug now 12 years, time is an obvious reason for the high costs. However, the difficulty of finding suitable candidates at the discovery stage is also to blame. Pre-clinical stages can be resource-intensive and time-consuming, making pharmaceutical companies look towards other methods, such as the use of big data.
4. The US accounts for nearly half of pharmaceutical sales
The Statue of Liberty. Over 40% of worldwide medicines sales are made by US companies. Image: Wikimedia Commons
The US is the world-leader in pharmaceutical sales, adding $1.2 trillion to the economic output of the US in 2014 and supporting 4.7 million jobs. The country is also home to the top 10 performing pharmaceutical companies, which include Merck, Pfizer, and Johnson & Johnson.
While the EU’s current share is worth 13.5%, this is expected to fall by 2020 with emerging research countries, such as China, projected to edge closer to the US with a share of 25%.
5. Income from blockbuster drugs drives research into rare diseases
Rare diseases are less likely to receive investment for pharmaceutical research. Image: Pixabay
Diseases that affect a large proportion of the worldwide population, such as cancer, diabetes, or depression, are able to produce the biggest revenue for pharmaceutical companies due to the sheer volume of demand. But rarer diseases are not forgotten, as research into these illnesses is likely funded by income from widespread use of the aforementioned medicines.
Rare – or ‘orphan’ – diseases are those that affect a small number of the population, or diseases that are more prevalent in the developing world. With the increasing cost of producing a drug, it becomes risky for pharmaceutical companies to create a fairly-priced drug for a small fraction of patients.
However, this seems to be changing. Researchers from Bangor University, UK, found that pharmaceutical companies that market rare disease medicines are five times more profitable than those who do not, and have up to 15% higher market value, which could finally provide a financial incentive for necessary research.