Life sciences companies are subject to the same financial reporting standards as any other type of company, and they must comply with all applicable rules and regulations. That said, there are a number of financial reporting and legal issues that may have particular relevance to companies in the life sciences sector, depending on their specific circumstances. Additionally, there are factors life sciences companies should consider when choosing professional services providers, such as accounting firms and legal representation.

Intellectual Property Is a Key Issue “There are a lot of different roles professional services providers play for life sciences companies, and the nature of intellectual property figures large in most of them,” says Leslie Gladstone Restaino, Esq., an attorney with Sills Cummis Epstein & Gross, P.C., and herself a scientist. “The nature of intellectual property raises issues in both the legal and financial reporting arenas.”

Among those issues on the financial reporting front are questions relating to revenue recognition, collaborative agreements, net-vs.-gross treatment of revenues, expensing of research and development costs, and merger and acquisitions.

“The situation can become very involved very quickly where intellectual property is concerned, and intellectual property is at the core of most life sciences companies,” Restaino says. “For example, if you are the holder of intellectual property, you may be a licensee, a licensor or both. You have to report any revenues flowing from the licenses involved, but you may also be paying royalties to yourself in some cases. That’s a tricky situation from a financial reporting perspective. It can become very convoluted, and it’s something that must be considered carefully.”

“It is really important for life sciences companies to find professional services providers that are familiar with the entire industry, well-versed in both the science of the technology and what it takes to leverage it, and capable of analyzing and providing guidance on all relevant regulatory and reporting requirements.”

Regulations and Guidance Issues such as those mentioned by Restiano can crop up in a variety of financial reporting areas. A sampling of some of the regulations and guidance that may apply includes, but is not limited to, Staff Accounting Bulletin No. 104, Emerging Issues Task Force No. 99-19, Emerging Issues Task Force No. 00-21, Financial Accounting Standards Board Statements Nos. 2, 141 and 142, and other generally accepted accounting principles (GAAP) guidance.

SAB 104, for example, deals with recognition of various revenue elements in a collaborative agreement, something common to many life sciences companies. EITF 99-19 provides broad guidance on net-vs.-gross treatment of revenue, but interpreting it appropriately for a life sciences company’s specific situation requires specialized skills and expertise.

Finding a Professional Services Company with Deep Expertise “Therein lies the problem,” Restiano says. “One of the things I have seen is that many life sciences companies retain professional services firms that may be good at certain things, but are not well-versed in all the important issues affecting this sector.”

For example, a company might retain legal counsel that is skilled at writing patents, but not at understanding the issues involved in leveraging intellectual property commercially and managing product lifecycle—two big issues for many life sciences firms, she says.

“The same thing applies on the financial reporting side,” Restiano adds. “It is really important for life sciences companies to find professional services providers that are familiar with the entire industry, well-versed in both the science of the technology and what it takes to leverage it, and capable of analyzing and providing guidance on all relevant regulatory and reporting requirements. I’m not sure enough of them do that.”

In subsequent issues of Finance & Accounting View, we will examine other financial reporting and professional services issues unique to the life science sector in more detail, with a focus on the challenges involved and how companies can meet them.

For more information, please contact Stash Lisowski at slisowski@gellerco.com.