In this sector, revenue follows access rather than demand. A product that is approved and listed for reimbursement sells; one that is not, does not, regardless of how good it is. That single fact changes what a buyer is actually acquiring: a commercial organisation, a registration position, or a pipeline of projects that may never reach either.
The diligence questions are therefore about the gate — what has been registered, for which indications, in which provinces, and on what price basis — and about the cash cycle that follows once the gate is open.
Revenue follows registration and access
Before testing a sales ledger, establish the commercial permissions behind it. Three things are worth documenting for each significant product:
- Registration status. Which products are registered, for which indications, and when the registration was granted or renewed. A registration close to expiry is a renewal risk, not a routine formality.
- Reimbursement position. Whether the product is listed for reimbursement, at what level, and whether that position has changed in the period. A price reset through a tender or a reimbursement adjustment can remove a large part of the margin without any change in volume.
- Channel structure. Whether sales run through distributors or directly to hospitals, and whether the distributor takes title and risk.
Where distributors are used, the sell-in versus sell-through distinction decides what the revenue number means. Reported revenue measures what was shipped to the channel. If channel inventory is building, the reported figure is running ahead of what hospitals are actually using, and the correction arrives after closing. Ask for sell-through data and for channel inventory ageing; where it cannot be produced, treat the reported growth rate as unverified.
Hospital consignment and title
Consignment is common in this sector: the product sits in the hospital or in a hospital-operated store, and remains the company's inventory until it is used. The accounting question is when control transfers, and the practical question is whether anyone knows what is sitting where.
Three tests resolve most of it:
- Consignment stock by site, reconciled to the inventory ledger, and supported by a count or a third-party confirmation.
- The contract terms that establish who bears loss, obsolescence and price risk while the goods are on site.
- Whether revenue is recognised on delivery to the hospital or on usage — and whether that treatment has been applied consistently.
A consignment arrangement that is recorded as a sale on delivery carries a double exposure: revenue recognised before control transfers, and inventory that belongs to the company but no longer appears on its balance sheet.
Receivables from hospitals and distributors
Long receivable cycles are structural here, and they are not by themselves a problem. What matters is whether the cycle has been lengthening, and whether the ageing reflects commercial reality or collection difficulty.
Two measurements are worth making: the lag between invoice and bank receipt, and whether that lag is longer at period end than during the year. A lengthening lag is a leading indicator of either hospital payment pressure or channel stuffing. Matching bank receipts to invoices for the top customers over twelve months is the procedure that resolves both at once.
Provisioning deserves separate attention. Where the ageing has deteriorated but the provision has not moved, the earnings base is being held up by receivables that will not be collected at face value.
Clinical and registration spend
Development spend in this sector arrives in two forms: internal cost, and payments to contract research organisations and clinical sites against milestones. Both need to be tested for period allocation and completeness.
For milestone payments, the question is whether the cost has been accrued in the period the work was performed, or only when invoiced. A cut-off that lags the underlying activity understates cost in the current period and overstates the first period of new ownership. Ask for the milestone schedule per project and reconcile it to the expense recorded.
Where development costs are capitalised, the same test applies as in any other sector: is the threshold applied consistently across projects, and are projects still being capitalised after the commercial case has weakened? The useful output is a sensitivity — what operating profit would have been under a more conservative policy.
Where the four diligence areas land
- Revenue — registration and reimbursement status, tender resets, sell-in versus sell-through, consignment, and customer concentration among a small number of distributors.
- Cost of sales — input cost and imported components, subcontracting, inventory ageing and write-downs, and whether outbound logistics sits in cost of sales or selling expenses.
- Operating expenses — clinical and registration spend, the four-way payroll reconciliation for a sales force, and shared costs provided by an affiliate.
- Related parties — founder-linked distributors and suppliers, premises leased from a related party, and funding or guarantees between affiliates.
What to request
- Registration certificates by product and indication, with expiry dates
- Reimbursement listing status and any tender or price-reset documentation from the period
- Contracts with the top distributors, plus sell-through and channel inventory data
- Consignment stock listings by hospital site, and the underlying agreements
- Sales sub-ledger by customer and product for three years, and bank statements covering receipts
- Receivable ageing with the provision analysis, by customer category
- Project-level development budgets, milestone schedules and payments to CROs or sites
The most common practical obstacle is that registration, sales and clinical records are held by different functions and produced on different schedules. Asking for all of them in the first data request is what makes this sector resolvable within a transaction timetable.
This page describes a general approach. It is not accounting, tax, or legal advice for a specific transaction. Figures and examples are illustrative. Views are my own and do not represent any firm.