Introduction
As previously mentioned in our product portfolio strategy guide, within the research reagent and IVD sectors, strong science isn’t enough. It must be combined with a strong commercial strategy, leadership and corporate governance. Sustainable growth relies on these and other factors. Within this article, we will discuss the importance of understanding what your financials are telling you and how to act upon them. Whether you’re scaling an assay or reagent manufacturer, building an IVD portfolio, or growing a distribution business, the right financial KPIs can transform your commercial path.
1. Revenue Trends: The Most Important Underutilised Indicator
Most businesses look at total revenue, but investors, partners, and acquirers look at revenue trends.
Why trends matter
- A single down year may be noise.
- Multi‑year revenue decline signals a structural issue: market access, regulatory disruption, or channel saturation.
- CAGR (Compound Annual Growth Rate) is far more predictive of long‑term health than year‑end totals.
Target benchmark
Aim for 8–15% CAGR as a baseline for reagent and Research Use Only (RUO) assays. High‑growth diagnostics sectors often push toward 20–30%. Anything less than 6% suggests you are losing relative market share.
2. Gross Margin: Your Hidden Strategic Advantage
Biotech businesses typically enjoy high gross margins (GM) due to IP, specialised production, and technical barriers.
Why gross margin is important
- It is the first measure of underlying profitability
- It defines how much you can reinvest towards growth and business development.
- High GM enables sustainable investment even at modest revenue levels.
- It allows you to be more competitive in areas such as pricing without undermining core profitability.
Target benchmark
There is significant variance in expected gross margins for businesses within the life science reagents space across RUO, raw materials into diagnostics. There are examples of manufacturers generating 60%-99% GM, though on average, the norm is 75-80%. For OEM or distribution organisations however, GM is significantly lower with distributors averaging 30%-50% and OEM in the region of 50%-70%. Maintaining these margin ranges signals operational excellence, market positioning and strong pricing power.
3. EBITDA: The Core Measure of Business Health
While revenue tells you how big you are, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) tells you how well you’re running the business.
Why EBITDA matters
- Investors rely on EBITDA to value life science businesses.
- It reflects operating efficiency without accounting distortions.
- It shows whether the business’s commercial side is working.
Target benchmark
Aim for at least 15% trending to and above 20% EBITDA margin to demonstrate operational maturity and investment readiness. World-class is above 50% however, these are rare. There is a direct correlation between EBITDA margin and size in that the more efficient you become as you grow, the better the EBITDA.
4. Salary‑to‑Revenue Ratio: The Silent Profit Killer
In life science companies, people drive product development, but they can also overwhelm cost structure.
Watch this ratio closely
- Healthy, scaling, manufacturing businesses typically operate at ~25% salary‑to‑revenue.
- Ratios rising above 40–50% signal that revenue growth is not keeping pace with fixed overheads.
How to improve it
- Grow commercial functions (sales, marketing, channel management).
- Automate or streamline repetitive production tasks.
- Align roles with direct value creation.
We expect to see ratios in the region of 20% ( i.e. your people costs represent 20% of revenues). Efficiencies due to automation can reduce this significantly, however it is well known in our industry that there is under investment in Sales and marketing, including digitisation. What is really important is the trend, especially when investment occurs, and you are waiting for the ‘lag’ in revenues to have an impact.
5. Regulatory Impact: A Financial Risk Many Underestimate
Regulatory frameworks (IVDR, FDA, ISO) have a direct impact on finances.
Why this matters financially
- Validation and certification change requirements and deadlines can freeze revenue in certain channels, geographies and for specific products.
- Products may require redesign or documentation upgrades to remain sellable in regulated environments.
- OEM partners often delay purchasing during regulatory transition periods.
The fix
Map regulatory events into your financial planning:
- Identify which SKUs are affected.
- Prioritise high‑value product transitions.
- Build buffer time into revenue forecasts.
- Consider discontinuing products with poorer sales or transitioning them to RUO status to avoid spend on costly regulation transition.
6. Build From the Future: Use a Revenue Target to Plan Backwards
Ambitious companies reverse‑engineer their growth.
How this approach works
- Set a target (example: £2.5m revenue in 3 years).
- Determine required EBITDA (e.g., 20% = £500k).
- Build hiring, marketing, and NPD plans around that destination.
This method ensures strategic clarity and helps avoid over‑ or under‑investment.
7. Sales & Marketing Investment: The Engine of Growth
Underinvesting in commercial activity is a common reason life science businesses fail to scale.
Recommended spend
Allocate 5–10% minimum of revenue to:
- Distributor support
- Brand-building
- Digital presence
- Customer education.
This is essential in a global market where buyers expect proof, visibility, and trust. Marketing teams must be given the budget with which they can achieve those goals.
8. Operational Efficiency: Protecting Margin Without Cutting Quality
When revenue dips or stalls, efficiency and not cost‑cutting is the smarter way to protect profitability.
High‑impact improvements
- Optimise batch sizes.
- Automate manual steps.
- Improve workflow documentation.
- Standardise product lines.
These adjustments defend your gross margin and support future scalability.
9. Build a Scalable Cost Base from the Beginning
A high fixed‑cost structure can stall SMEs before they hit growth stride.
Create cost flexibility by:
- Mixing in variable manufacturing partners, where sensible.
- Outsourcing low‑complexity tasks.
- Auditing low‑performing SKUs.
- Reducing stock‑ and portfolio‑related overheads.
A scalable model is more resilient and far more attractive to investors.
10. The “Investor‑Ready” Financial Profile
If your long‑term goal is investment, partnership, or an eventual exit, these are the KPIs buyers look for:
| KPI | Target |
| CAGR | 20%+ |
| Gross Margin | 80–90% |
| EBITDA Margin | 20%+ |
| Salary/Revenue Ratio | <30–35% |
| Marketing Spend | 5–10% |
Businesses meeting these criteria achieve higher multiples and if the long term goal is to sell, then you will attract more buyer interest.
11. The rule of 40
Investors often consider life science an attractive market because of the opportunity size and the ability to grow in a market less developed than many others. The software and tech industries use the rule of 40 (and rule of 50) to measure the performance and overall health of a company. This ratio is often used in our industry to help compare and contrast investments across the industry.
The formula is:
Growth rate (%) + profit margin (%) > 40%
Where: Growth rate = year over year (CAGR) and Profit Margin = EBITDA
A business that is delivering 20% CAGR and 20% EBITDA margins is achieving more than 40% and therefore compliant with the rule.
This ratio also allows for businesses that grow quickly but deliver less profitability in the early years or vice versa with low growth but high profitability.
It also allows companies to consider the trend over time using variant forms of CAGR (2 year, 3 year etc).
Summary
Monitoring these essential KPIs of business health allows you to identify issues with your business before they become problems. Falling behind previous performance on any of these KPIs should immediately trigger a set of investigations to determine the root cause. Once the root cause is identified, a plan should be developed to remedy the issue, be it marketing, branding, go-to-market, competition entry, pricing etc. Once the plan for resolution is enacted, KPIs should then be used to demonstrate its efficacy and monitor a return to growth.
