Avoiding Cost Overruns: Funding Strategies for Biotechs
Explore common sources and impacts of increased costs in biotech development, identify strategies to avoid them, and boost investor confidence.
In recent years, the biotech market has faced significant fluctuations — peaking in 2021, followed by steep declines in 2023. Though the market began to stabilize in 2024, recent changes in the economic, political and regulatory landscape are fueling uncertainty. These shifts are impacting investor confidence and intensifying the already fiercely competitive investment environment for biotech companies.
The venture capital, angel investors and private investors biotechs rely on for funding want to invest in companies that deliver on their promise. With more start-ups vying support than there are funds to go around, in addition to the high risk, high reward nature of biotech investing, the onus is on the company to clearly articulate and live up to their value.
Often in drug development that’s easier said than done. Many assets show promise in the earliest stages of development, but the fact is 90% of clinical drug development fails. And with the average cost of successful drug development totaling $172.7 million ($515.8 million when cost of failures is included), it comes as no surprise that investors want to be confident that the biotech companies they invest in efficiently use capital investments and deliver a strong return on investment.
No biotechnology company embarks on an asset development journey expecting to fail. But in a field ripe with uncertainty and complexity, complications arise that can prevent an asset from achieving its full potential. Expecting the unexpected with strong, upfront planning enables biotech companies to better anticipate and mitigate the challenges that tend to surface throughout the clinical development process — without devastating budget overruns.
Common cost overruns
The high cost of drug development is top of mind for biotech leaders. In a 2024 survey of drug developers, they cite the rising cost of clinical trials and the lack of funding as the top two challenges they face, and for good reason. The complexity of clinical development means common, costly pitfalls can occur at any stage. Any delay or missed deadline incurs significant costs, and these overruns have far-reaching financial and operational consequences.
Recruitment delays
It often takes longer than anticipated to enroll the required number of participants in a study. These delays lead to extended recruitment periods — and increased costs. Additionally, if a study experiences high participant dropout rates, further recruitment efforts will be needed, adding to the escalating expenses.
Regulatory compliance
Unforeseen changes in regulatory requirements can necessitate additional studies or modifications to the trial protocol, which increase costs. Delays in obtaining regulatory approvals can also extend the trial timeline and inflate costs.
Site management
Operating multiple trial sites in multiple geographies involves significant overhead, including site initiation, monitoring and management costs. Underperforming sites may require additional resources or replacement, leading to higher expenses.
Operational challenges
Changes to the trial protocol based on interim results or unanticipated issues can lead to additional costs for retraining staff, updating documentation and implementing changes. Additional costs can also be incurred through increased operational complexity in data collection and management, including data cleaning and analysis.
Manufacturing and supply chain
Disjointed touch points between trial suppliers can cause investigational product costs to spiral out of control. Unanticipated issues in the manufacturing process or supply chain disruptions can lead to increased costs for producing and distributing the investigational product.
Technology
Technological and analytical costs can also be higher than initially projected. Employing advanced technologies for data collection, monitoring and analysis can be more expensive, and incorporating additional biomarker or genetic testing based on interim findings can add significant costs.
External factors
Economic fluctuations and global events can further impact costs. Inflation, tariffs or changes in exchange rates can affect budgets, especially for multinational trials. Global crises such as pandemics, wars or natural disasters can disrupt trial operations, leading to increased costs for mitigation and recovery.
The impact of cost overruns
Unforeseen costs in clinical development are, to some degree, unavoidable, but most biotech companies aren’t operating with a blank check. When unexpected cost overruns occur, several potentially painful scenarios are possible. Awareness of the downstream impacts of cost overruns is of the utmost importance to avoid the following undesirable outcomes.
Increased scrutiny and oversight
Investors are likely to demand more detailed financial reporting and increased oversight of the company’s operations to understand why the cost overruns occurred and ensure better financial management going forward.
Strategic changes
Investors may push for strategic changes within the company — including changes in management, shifts in business strategy, or even cost-cutting measures — to better control expenses and improve financial stability.
Revised valuation
The biotech’s valuation may be reassessed, potentially leading to a lower valuation than initially anticipated. This can affect the terms of future funding rounds and the overall perceived value of the company.
Loss of investor confidence
Cost overruns can erode investor confidence in the biotech company’s management and its ability to execute plans effectively. This loss of confidence can make it more difficult to secure future funding and may lead to more stringent terms or conditions for additional investments.
Higher cost of capital
Due to increased risk perception, investors may demand higher returns for providing additional capital. This can result in more expensive financing terms, such as higher interest rates on debt or more favorable equity terms for new investors.
Potential for reduced funding
In some cases, investors may be unwilling or unable to provide additional funding, forcing the company to seek alternative financing sources, such as loans, grants or new investors. This can be challenging, and any additional funding sources may come with less favorable terms.
Impact on future fundraising
Cost overruns can negatively impact the ability to attract new investors in future fundraising rounds. New investors may be wary of investing in a biotech that has previously failed to manage its budget effectively.
Strategies to avoid common cost overruns
Knowledge of the common drivers of cost overruns — and their potential impact — is key to avoiding them. With so much at stake and so many components that can go wrong, it’s easy to become overwhelmed. However, there are strategies biotech companies can employ to minimize the risk of cost overruns and bolster the confidence of their investors.
The importance of robust planning and budgeting at the earliest stages cannot be overstated. A realistic, comprehensive budget that includes contingency funds for unexpected expenses is nonnegotiable. Having a comprehensive contingency plan in place from the beginning can keep any unforeseen costs from spiraling out of control.
Scenario and risk management planning enable biotech companies to anticipate potential challenges and estimate their financial impact, allowing for better resource allocation. This isn’t the time to be optimistic — things can and will go wrong. Incorporating that reality early will save money and headaches down the line.
Effective scenario and risk management planning should cover all areas that impact clinical development — recruitment and retention, regulatory compliance, site management, operations, manufacturing and supply chain, technology, and external factors — and consider options for optimizing how these elements are managed throughout the trial.
To effectively scenario plan, the biotech company, investors, and any partners, like a contract research organization (CRO), must have a clear understanding of the scope and length of the study. This shared understanding among stakeholders from the outset can prevent significant change orders down the line, such as adding or repeating work, which drive up costs.
This is why choosing a CRO partner is one of the most consequential decisions a biotech company can make. Some CROs may offer a lower cost initially — which is attractive for a resource-strapped biotech company — but there is a high probability those costs will inflate as the study moves forward.
The right CRO partner will have the systems, experience and skills to translate robust planning into implementable strategies — from project management to navigating the regulatory landscape — enabling biotech companies to effectively and realistically set budgets and avoid cost overruns.
Strategy No. 1: Employ effective project management
Skillfully executing strategies to avoid increasing costs starts with project managers who have extensive experience in resource allocation, timeline management and problem-solving in biotech clinical trials. These experts provide regular progress reports and develop key performance indicators to monitor progress and report on any red flags as they arise.
Strategy No. 2: Adopt and use the right technology
Advancements in technology have enabled biotech companies to use electronic data collection tools that streamline work, reduce errors and facilitate real-time data access. While it can be a challenge for a small biotech to know which tools are best for their trial, the right CRO partner has the knowledge and experience to take the guesswork out of the process. Access to a CRO’s clinical trial management system provides the ability to manage and track study activities, including patient enrollment, site performance and budget tracking.
Strategy No. 3: Prioritize data quality and integrity
The need to collect and analyze data in clinical trials is not letting up. Developing and enforcing strict data collection protocols is necessary to ensure accuracy and consistency and reduce data issues. The use of data management systems enables data to be stored, processed and analyzed securely.
Strategy No. 4: Stay on top of regulatory changes
It’s imperative to ensure all biotech trial activities comply with local and international regulations. Because regulatory changes might impact the trial, it’s critical to have a strategy in place to stay informed about the evolving regulatory landscape. Biotechs are also wise to have a thorough understanding of what documentation is needed for which regulatory body to advance any submission without delay.
Strategy No. 5: Make use of adaptive trial design
As the study advances, leveraging experience with adaptive trial design enables biotechs to plan for interim analyses that allow for modifications to the trial based on early results. This can include adjusting dosages, sample sizes or even stopping the trial early. Adaptive trial designs also offer the opportunity to optimize resources for the most promising aspects of the trial, potentially reducing time and costs.
A CRO partner with a biotech mindset
Partnering with a CRO that possesses a biotech mindset enables biotech companies to seamlessly identify common sources of cost overruns, implement strategies to avoid them, and ultimately strengthen investor confidence.
The PPD™ clinical research business of Thermo Fisher Scientific has been at the forefront of providing strategic guidance to biotech companies and venture capital partners for 35 years. We understand the importance of in-depth planning, financial transparency and simplicity, which is why we provide rolling budget forecasts and clear financial breakdowns — providing the level of detail needed to avoid cost overruns.
With projected financial breakdowns in hand at the onset of the study, we collaborate with biotech companies to manage costs and invoicing. We’re able to offer financial solutions that other CROs can’t — and we work with biotech companies to create bespoke, innovative and flexible financial solutions tailored to meet each company’s unique needs. Through our extended terms program, we enable you to preserve cash and better forecast project expenses with added confidence and financial support.
As a CRO partner to biotech companies, we understand the importance of the bottom line. We collaborate with you to get the right patients in, establish the right endpoints, select the best tools and exercise capital efficiency. It’s important for us to do things right the first time, so you don’t face change orders that escalate costs and risk investor confidence — and can instead focus your efforts on bringing life-changing treatments to patients.
Our expertise in trial design, patient recruitment and retention, and project management ensures that your trials are conducted efficiently and cost-effectively. By leveraging technology and scientific insights, we enable high-quality data that demonstrates better ROI to investors. As your CRO partner, we’re invested in navigating the complexities of drug development together and positioning your company for success.