The path to an approved therapeutic has always been filled with action and adaptation. But after years of easy money and a record-setting 2021, the life sciences market is in turmoil. As of mid-2022, MarketWatch has identified “over 120 smaller biotech names [trading] below their cash levels” and finds “the average IPO is down 75%” if they are happening at all. M&A is down, layoffs are up, investors are spooked, and market sentiment has eroded.
Source: Financial Times
Biotechs inhabit a curious and sometimes precarious node in this capital marketplace. On a longer horizon, drug discovery is shifting rapidly. Despite a historical landscape shaped by big pharma, biotech organizations now account for nearly three quarters of approved therapeutics (See: Are startups 5x better at R&D than big pharma?), shifting the locus of power onto more nimble and decentralized business models. This fragmentation has introduced new players and new complexity: the outsourcing of clinical trials, a vendor-rich environment, a lean startup worldview for many biotechs. Those who most effectively adapt, manage, and master are poised for success. Throw economic headwinds into the mix, and the stakes become much higher.
All clinical stage biopharma – pre-revenue by definition – live and die from milestone to milestone. Given the unpredictability of trial timelines and costs, financial leaders play an essential role by ensuring that clinical milestones are not only achieved, but achieved cost effectively. Clinical outcomes depend on more than science alone.
There’s a particular cadence to the biotech lifecycle: an idea and a seed round leads to a Series A, then a Series B, then a public offering (or additional rounds). This sequence is down to a science and the past years have seen a steady drumbeat forward; for the past few years, progression through financing rounds to public markets has been rapid and reliable. In 2020, the average time from first VC round to IPO for biotech companies was 4.8 years, down from ~7 years as recently as 2016, according to Pitchbook:
The market is tough right now. As noted by Peter Kolchinsky, “even companies with longer cash runways or lower burn/market-cap ratios must recognize that their fortunes might change [see below]. Any R&D snag or sharp word from the Fed could cut a biotech company’s valuation just as it’s hoping to raise more money. And there will be hundreds more companies that will need to raise tens of billions more in 2023.”
Source: Rapport
And even if fundraising wasn’t so dire, cost constraints are still a reality after you’ve closed a round: most fundraising rounds equate to much less cash in hand than the announced investment. STAT finds that “on average, just 14 percent of the total announced value was paid out upon signing.” With a range of less than a billion to more than $2 billion price tag for drug development, 14 percent of a billion-dollar funding round only gets you so far. This underfunding has consequences: Hwang et al. notes that 22% of the failed phase 3 studies they examined failed due to lack of funding.
Investors play the field, identifying companies with potential for significant return. While it is not a primary motivator, investors do expect a level of financial maturity, accountability, and transparency that can feel at odds with early-stage process (i.e. your CFO spending time themselves gathering data to share on runway, expenses and other pertinent information). Companies can not only differentiate themselves by preparedness on this front, but they also save invaluable amounts of time and effort if their financial management is proactive to the needs of their investors.
Public markets are a similar proposition. With an expected industry timeline of 3-5 years of scaling before public offering or acquisition, a lot changes in little time: teams expand rapidly to meet demand, process is lost in the shuffle, and when that exit appears on the horizon, you don’t want to scramble to be prepared (just ask a biotech colleague if they have ever seen an IPO or M&A transaction delayed due to crazy double-entry bookkeeping fiascos…). As a responsible leader of a biotech, you realize future opportunities arise when least expected; therefore, your information and process must be always organized and prepped for a quick and efficient presentation or audit.
Clinical research and development are uniquely challenging from a financial standpoint. Binary outcomes, a layered and complex ecosystem of outsourcing and regulation, and the sheer cost running trials all conspire toward a massive undertaking by typically understaffed biotech finance and accounting teams. Yet the success or failure of a trial can very well rest with how well you or your team manages through the challenge.
Clinical R&D at first appears like a binary game: you either win (your therapeutic is approved, your exit is secured, commercialization hits full stride) or you lose (safety, efficacy, or financing hobble the drug discovery process). Losses comprise most trials, but when you discover a winner, the financial and clinical outcomes are vast. In this mindset, financial management isn’t top of mind: you spend whatever you must to hit the next milestone, raise more money, rinse, and repeat until you find success or go bust. Many companies operate this way, neglecting financial maturity until the last possible second (usually only spurred by compliance considerations or due diligence requirements).
However, there’s a different way to look at the market: a comprehensive approach to financial management creates freedom within your timeline. With your cash runway managed effectively, you can guide resources efficiently throughout the research cycle, navigate through change, and set expectations for stakeholders inside and outside the company as the tides of capitalization shift. Within a bull market, financial management matters; within a bear market, your business depends on it.
As mentioned, biotech has overtaken big pharma as the genesis of many therapeutics. Within that shift, another profound redistribution has taken place: clinical and trial operations are increasingly outsourced to external vendors, including Clinical Research Organizations (CROs) and a growing set of functional and decentralized service providers. The costs are large (Motley Fool finds that IQVIA has a “backlog of future projects worth $60.4 billion”) and the opacity of pass-through costs and change orders creates frustration. The result is an evolving – and growing – shadow industry that emerging biopharma companies are ill-equipped to manage operationally.
Source: McKinsey & Company
To succeed, biotech finance leaders are focusing on two upfront levers at their disposal: “right-sizing” procurement and consistent oversight of trial protocols.
When contracting with a CRO for an upcoming study, finance leaders can insert themselves into the mix to get a sense of the process, protocols, and expectations that are being discussed – and to put the conversation between the two parties in the context of shared financial goals or timelines. While in the past trials may have “gone after the kitchen sink” as a recent interviewee shared with us, now Clinical teams and finance teams are working hand in hand to write streamlined protocols that only collect the data needed to get approval. This interviewee also mentioned that proper oversight of CROs and other vendors is paramount: by ensuring they are being as efficient as possible, you can appreciably reduce cost overruns and delays (which are increasing due to staffing issues). With financial management as an organizational pillar, you set your company up for resilience and success.
For the biotech of tomorrow, three things are clear: the status quo will not stand, and innovative companies must adapt or vanish; the intelligent deployment of financial capital will be a differentiator for discerning investors and will act as a force multiplier for successful companies; technology will continue to reshape the sector through automation, prediction, and transparency.
Get in touch with our team to catalyze your own clinical trial financial management transformation today.