Milestone-Based Biotech Financial Modeling: Forecast Runway, Costing, Probabilities, and Fundraising Strategy

Why Standard Financial Models Fail in Biotech

For an early-stage biotech company, a standard financial model is not just insufficient; it’s misleading. Unlike a software business with predictable monthly revenue, your path is defined by long, capital-intensive R&D cycles punctuated by high-stakes clinical and regulatory events. A traditional forecast obscures the central challenge of biotech startup cash flow forecasting: managing a variable, high-stakes burn rate between distant value inflection points. The key is not to predict monthly profit but to secure enough capital to survive the journey from one major scientific achievement to the next. This requires a milestone-based approach, a model built around scientific progress, not the calendar. It’s a tool designed to answer one critical question: how much runway do we need to create meaningful, fundable value? See our hub on building financial forecasts for more context.

The Foundational Mindset: Why Milestones Matter More Than Months

A milestone-based financial model fundamentally reframes cash flow. Instead of projecting monthly inputs and outputs, it maps the capital required to get from your current stage to the next major value inflection point, such as a successful Phase 1 readout or an approved IND application. This is a critical distinction from recurring revenue models. A SaaS company models growth based on acquiring customers and increasing monthly revenue. A biotech startup models survival and value creation based on achieving scientific and regulatory goals.

Each milestone you achieve significantly de-risks your asset, making the company exponentially more valuable and attractive for the next round of financing or partnership. A positive preclinical data package makes a company more valuable than one with just a hypothesis. A successful Phase 1 trial is a massive step up from preclinical data. Your financial model, therefore, becomes a story about value creation, told through a sequence of funded R&D objectives. It’s a strategic map that guides your biotech fundraising strategy by clearly linking capital to concrete progress.

Mapping the Journey: From Pre-Clinical to Regulatory Approval

Before you can cost the journey, you must map the route. For a biotech startup, this means defining the major development milestones that lie between your current discovery and an approved product. This roadmap is your strategic guide to navigating the complex world of drug development and is essential for accurate R&D funding forecasts.

Start with the Target Product Profile (TPP)

Your strategic map is guided by your Target Product Profile (TPP), a document that outlines the drug’s desired characteristics from the perspective of the patient, prescriber, and payer. It defines what the drug aims to be, including its intended use, dosage, and clinical endpoints. A well-defined TPP acts as a north star, ensuring that every decision, from preclinical study design to clinical trial recruitment, aligns with the ultimate commercial and clinical goals. It forces discipline and prevents costly R&D detours.

Define Key Development and Regulatory Milestones

The typical journey includes key milestones like IND-enabling studies, filing the Investigational New Drug (IND) application in the US (or a Clinical Trial Authorisation, CTA, in the UK/EU), and navigating the three phases of clinical trials. Each stage has a distinct purpose and cost structure.

• Preclinical / IND-Enabling Studies: This stage involves laboratory and animal studies to assess safety and biological activity before testing in humans. Key activities include toxicology, pharmacology, and CMC (Chemistry, Manufacturing, and Controls) to produce a clinical-grade drug substance.
• Phase 1 Trials: The primary goal is to evaluate the safety, dosage range, and side effects of the drug, typically in a small group of healthy volunteers or patients.
• Phase 2 Trials: Here, the focus shifts to efficacy. The drug is given to a larger group of patients to see if it works for the intended disease and to further evaluate its safety.
• Phase 3 Trials: These are large, pivotal trials conducted on several hundred to several thousand patients to confirm efficacy, monitor side effects, and compare the drug to commonly used treatments.

The final major milestone is submitting a Biologics License Application (BLA) or New Drug Application (NDA) to regulators like the FDA in the US or the EMA in Europe for marketing approval.

Understanding Regulatory Approval Timelines

Understanding the regulatory approval timelines is crucial for realistic planning. These are not short journeys. A 2021 analysis by BIO, Informa, and QLS Advisors found the average time from Phase 1 start to approval is 9.7 years. Looking at it from a slightly earlier stage, the same report found that from IND filing, the median time to approval is 9.4 years. These timelines form the backbone of your model, establishing a long-term canvas on which you will layer costs and probabilities. While your near-term focus is the next 18-24 months, seeing the full path is essential for long-term strategic decisions and communicating the full scope of the opportunity to investors.

Costing the Journey: A Hybrid Approach to R&D Funding Forecasts

With your milestone map in place, the next step is to estimate the costs required to travel between each point. This is where clinical trial budgeting and R&D funding forecasts become tangible. For early-stage companies without historical data, a hybrid approach works best: detailed, bottom-up budgeting for the near-term and benchmark-driven estimates for later stages. This balanced method provides granular accuracy for your immediate biotech cash runway needs while maintaining a realistic long-term perspective.

Near-Term (18-24 Months): Detailed Bottom-Up Budgeting

For the next 18-24 months leading to your next major milestone, build a detailed budget from the ground up. This involves getting quotes, speaking with vendors, and meticulously planning your expenses. Break down costs into three main buckets:

1. Direct R&D: This is the core of your scientific work. It includes costs for Contract Research Organization (CRO) services for preclinical and clinical work, manufacturing (CMC), purchasing lab supplies, and fees for expert consultants on topics like clinical trial design or regulatory strategy.
2. Personnel: This is often your largest and most predictable expense. It includes salaries, taxes, and benefits for your scientific, clinical, and administrative teams. Plan for key hires needed to achieve the next milestone, such as a Chief Medical Officer or a head of clinical operations.
3. General & Administrative (G&A): These are the operational costs of running the business. It includes legal fees for incorporation and IP protection, patent filing costs, rent for lab and office space, and software subscriptions. These costs can be tracked within your accounting system, using features like Classes in QuickBooks (for US companies) or Tracking Categories in Xero (for UK startups), to allocate expenses to specific projects or development phases.

Long-Term: Benchmark-Driven Estimates

For later-stage milestones beyond your immediate 24-month horizon, rely on credible industry benchmarks. It is impractical and inefficient to build a detailed bottom-up budget for a Phase 3 trial when you are still in preclinical development. Research shows that costs escalate significantly as a program advances. A 2018 study in JAMA Internal Medicine estimated the median cost of pivotal trials at $19 million, with a range from $5M to $347M. Costs vary widely by therapeutic area, trial design, and geography.

Per-patient costs also rise dramatically. A 2022 study by the Tufts Center for the Study of Drug Development cites median out-of-pocket costs per patient from $46,900 (Phase 1) to $86,700 (Phase 3). Using these benchmarks helps you create a realistic, long-term biotech burn rate forecast. This demonstrates to investors that you understand the full capital requirements of the journey, even if the immediate focus is on the next milestone.

Quantifying Risk: Incorporating Success Probabilities (PTRS/LOA)

An honest biotech financial model must confront a difficult truth: most drug development programs fail. Ignoring this reality is the fastest way to run out of money and lose credibility with investors. The solution is to layer in risk using the Probability of Technical and Regulatory Success (PTRS), also known as the Likelihood of Approval (LOA). This metric quantifies the historical success rates of drugs moving from one stage to the next.

The numbers can be sobering. According to BIO's 2021 data, the overall likelihood of approval (LOA) from Phase 1 for all drugs is 7.9%. This means more than nine out of ten drugs that enter human trials will never make it to market. These probabilities vary significantly by treatment area. For example, the likelihood of approval from Phase 1 is just 5.3% in Oncology, while it is 24.4% in Hematology (BIO, 2021). Understanding the historical benchmarks for your specific indication is critical for setting realistic expectations.

From Valuation Tool to Strategic Cash Planning

In corporate finance, PTRS is often used in complex risk-adjusted net present value (rNPV) calculations to value assets. However, for an early-stage, single-asset biotech, this application is often overly academic. The immediate goal is not to derive a precise valuation but to ensure survival. In practice, we see that early-stage teams use PTRS primarily for strategic cash planning. Knowing the high probability of a delay or setback in a trial means you must build a significant buffer into your biotech cash runway. Your model must account for the likelihood that things will not go exactly as planned.

Using Scenario Analysis to Manage Uncertainty

The most practical way to apply this risk-aware mindset is through scenario analysis. Your spreadsheet model should include at least three scenarios for your biotech startup cash flow forecasting:

• Base Case: This is your Plan A, where the trial proceeds on schedule and within budget.
• Best Case: Everything goes right. Patient recruitment is faster than expected, or strong interim data allows for a smaller or shorter trial, saving time and money.
• Worst Case: A significant setback occurs. The FDA might place a clinical hold on your trial, a key CRO might underperform, or the trial data may require a cohort to be repeated or the protocol redesigned. Model the impact of a 6-to-9 month delay and the associated increase in your biotech burn rate.

This process transforms your model from a simple prediction into a powerful tool for managing uncertainty. It helps you calculate the true amount of capital needed to not only execute Plan A but also to withstand the inevitable challenges of drug development.

The Model in Action: Building a Compelling Biotech Fundraising Strategy

Your milestone-based model is more than an internal planning document; it is a fundamental component of your biotech fundraising strategy. When you approach investors, the model justifies your funding request by presenting a clear Use of Proceeds. It answers the question, “What will you accomplish with our capital?” The goal is to show that you are raising enough money to reach the next meaningful value inflection point, with a healthy buffer for unexpected challenges.

The reality for most early-stage biotech startups is pragmatic: the model is a strategic communication tool. It’s not about predicting revenue in year ten. It’s about demonstrating you have a credible, well-costed plan to get from a Series A to a value-creating Series B data readout. A funding request is just a number; a funding strategy is a narrative backed by a milestone-driven model. Always document the underlying data and reasoning in an assumption book to build credibility.

Consider a simplified Use of Proceeds for a hypothetical $20 million Series A raise to fund a program through Phase 1 completion. The capital would be allocated to cover a total planned burn of $16 million to reach the Phase 1 data readout over 24 months. This includes $8.5 million for Direct R&D activities like IND-enabling toxicology studies, CMC, and Phase 1 clinical trial costs; $6 million for personnel, covering salaries and benefits for a 15-person team; and $1.5 million for G&A overhead like legal fees and IP filings. The remaining $4 million represents a crucial 6-month operational runway, providing a cash buffer after the milestone to analyze data and secure the next round of financing.

Practical Takeaways for Biotech Founders

Building a robust financial forecast for a biotech startup boils down to a few key principles. Following this milestone-based approach provides a clear, defensible plan for investors and a strategic guide for your team.

1. Structure Around Milestones, Not Months: Frame your financial model from one value inflection point to the next. Your primary goal is to fund the science, not just cover monthly overhead.
2. Use a Hybrid Costing Approach: Employ meticulous, bottom-up budgeting for your near-term plan (the next 18-24 months) and rely on established industry benchmarks for the distant future.
3. Embrace Uncertainty Proactively: Acknowledge the high failure rates in biotech. Incorporate success probabilities (PTRS/LOA) into your thinking and run scenario analysis (best, base, worst case) to understand your true cash needs and build in sufficient buffers.
4. Use Your Model as a Strategic Narrative: Your model is a tool to define a compelling fundraising strategy. It should clearly articulate how much capital you need, what scientific progress that capital will achieve, and how that progress de-risks the asset for the next round of investment.

The goal is not to predict the future with perfect accuracy, but to calculate how much runway you need to create meaningful value, survive the inevitable setbacks, and position your company for its next great leap forward. To continue learning, visit our building financial forecasts hub.

Frequently Asked Questions

Q: How do I forecast costs for a clinical trial with no historical company data?
A: Use a hybrid approach. For the near-term (18-24 months), build a detailed, bottom-up budget by getting quotes from CROs and other vendors. For later-stage trials, use established industry benchmarks and per-patient cost data from sources like the Tufts Center for the Study of Drug Development, adjusting for your specific therapeutic area.

Q: What is a typical cash buffer for a biotech startup after a funding round?
A: It is common to include a 6 to 12-month operational buffer in your funding ask. This post-milestone runway provides critical time to analyze data, prepare for the next fundraising round, and engage with potential investors or partners without the immediate pressure of running out of cash.

Q: How should I use Probability of Success (PTRS) in my financial model?
A: While investors use PTRS for valuation, early-stage founders should use it primarily for strategic cash planning. The low probabilities of success highlight the need for robust scenario analysis (best, base, worst case) and building a cash buffer into your biotech startup cash flow forecasting to handle potential delays or setbacks.

Q: Should my early-stage financial model include potential revenue?
A: No, an early-stage biotech financial model should focus exclusively on the use of proceeds and the biotech burn rate required to reach the next value-creating milestone. Projecting revenue is highly speculative. The model's job is to prove you can use capital efficiently to generate data and de-risk the asset.