Biotech Burn Rate and Runway: How to Build a Cash Forecast That Holds Up
We’ve all heard the expression “time is money,” but nowhere is it more meaningful than in biotech. In this industry, cash is the clock. Every dollar spent either moves a project forward or delays progress towards a milestone. Unlike most sectors, biotech startups often operate for years without revenue, underscoring the importance of understanding and managing cash burn and cash runway.
While your forecasts don’t have to be precisely accurate, they should be able to stand up to pressure, and that’s what we’ll discuss today.
Why Burn and Runway are so Critical in Biotech
Burn refers to the speed at which you’re spending. Runway is the time until the cash runs out. In biotech, however, these items are a little more nuanced.
You’ll need to distinguish between fixed burn—salaries, rent, infrastructure—and variable burn, which is typically tied to the programs themselves.
So, now that we understand that, let’s dial it back to the timing discussion.
If your cash runs out midway to a key data readout, you’re negotiating from a disadvantaged position.
The result? Programs may be cut entirely, or the company may be forced into a down round, in which shares are sold at a lower price than in the previous funding round.
Though biotech spending is (at best) uncertain, useful forecasts can account for the uncertainty and build it into the financial plan.
Most biotech burn is program-driven. The expectation is that there will be stepped changes in spending as the project evolves (from pre-clinical to clinical, for example). Still, in reality, it can scale dramatically, and with scale will come significant spending spikes.
Before you even attempt to create a forecast, it’s vital to understand these dynamics, as it can help you prepare.
How to Define the Runway
Typically, we calculate runway as cash divided by monthly burn. But in biotech, burn is not constant. As the project matures, you’ll hire more people, and external costs will increase. With that in mind, the smart way to model runway is to base it on monthly projected cash flows.
You can also distinguish between total spend (gross burn) and spend minus incoming cash from grants or investment (net burn). Net burn will provide a more accurate picture of how quickly you’re going through cash.
Ideally, you’ll want to adjust for hypothetical scenarios, such as trial delays or rising costs, because they happen. And if you don’t account for them, your projections won’t hold water.
A solid biotech forecast is built on a foundation of operational reality. You’ll need to consider:
Clinical timelines. Enrollment rates, site onboarding, and patient retention can all affect the financial model, with even small delays leading to failure.
Regulatory milestones. Feedback from regulators can push timelines back, compounding complexity and increasing spending.
CMC manufacturing costs are often underestimated and can vary based on circumstances beyond your control, such as poor vendor performance.
Headcount growth. You will likely need to hire more people, which directly impacts fixed burn.
Third-party dependencies. CROs and other partners compound cost and uncertainty, another factor generally beyond your control.
We all want to be optimistic, but keeping it real will ensure your forecast holds up no matter what.
Top-Down or Bottom-Up?
In biotech, a bottom-up approach is more reliable than a top-down one.
Basically, this means you’re building costs from the ground up, trial by trial, function by function. For example, rather than focusing on a single clinical budget, you would model each study’s costs based on expected enrollment, site count, and duration.
To get started, structure your model across the following three dimensions:
Programs (i.e., per drug candidate)
Functions (clinical, CMC, G&A)
Time increments (monthly is sufficient for startups)
Monthly forecasts will capture when invoices are paid or milestones reached.
Quarterly forecasts, however, can sometimes overlook important details, as greater instances of non-responses from managers during earnings calls have been linked to increased analyst forecast errors and uncertainty.
It is also important to consider the effects of trigger-based spending. Some costs may only arise when certain milestones are reached, so building these in from the outset will ensure you are prepared when they do.
Stress-Testing Your Forecast
No matter how based in reality you think your forecast is, a stress test is essential to ensure it holds up.
Think about what could happen. What if enrollment is slow, or manufacturing costs increase? Consider what variables would have the biggest financial impact, then create scenarios to model them.
Your “base case” is the most likely outcome.
The “downside case” reflects delays, cost increases, or both.
An “aggressive case” assumes faster advancement and higher spending.
As you might imagine, each of these scenarios will result in a different runway outcome.
With that in mind, you must plan for a cash buffer. The timelines you’re working with won’t be precise, so it’s prudent to expect the unexpected. Building a buffer that will carry you through several months can make all the difference.
Where Your Forecasting Might Go Wrong
Building an accurate biotech burn-and-runway forecast is challenging in itself, but following these suggestions might make it a little less unpredictable. In truth, even experienced teams often fall into these traps. Like establishing a startup in the first place, it’s important to stay objective.
Don’t give in to optimism about your timelines. Most trials take much longer than initially estimated!
Understand your CMC costs, as they can be more involved than you think.
Don’t ignore payment timing. It’s vital to know when money leaves the bank.
Update your models regularly. Biotech projects are dynamic, and your forecasts should reflect that.
And don’t worry about being perfect. Stay disciplined and consistent, and you’ll keep on track.
The Bottom Line
You can’t predict the future, but you can prepare for the uncertainty you know is around the corner. Think dynamically, stay grounded in reality, and prepare for the unexpected.
Align your projections to possible scenarios and acknowledge what you don’t know. In biotech, timing is everything, and if you plan well, you’ll always have a strategic advantage.