How to Successfully Extend the Cash Runway to Growth in Early Commercial Stage Life Science Companies

By Andrew Levitch, Patrick Nugent

This article is the second in a 4-part series reviewing financing solutions for the Life Science sector.

Life Science venture capital and private equity-funded startups are constantly chasing capital to extend operating cash runways, driving value inflection milestones such as clinical trial data and funding growth for commercial-stage entities. Understandably, these organizations need cash and liquidity to fund investments in product development, marketing, key hires, equipment, and more to navigate financial challenges, seize growth opportunities, and appropriately scale. However, knowing when to make these critical investments vs. conserve cash couldn’t be more important. 

Before we explore these ideas surrounding investments and cash in greater detail, we must recognize there are distinct stages for Life Science companies for us to consider. Each stage requires specific development strategies.

• Stage I: Research & Development
• Stage II: Manufacturing
• Stage III: Clinical & Regulatory
• Stage IV: Product Commercialization

Cash runway strategies depend on the company’s lifecycle stage. In Stage IV, for example, the company may adopt a more efficient sales distributor model or execute partnerships instead of hiring large sales teams.

To this end, a Life Sciences client of FLG Partners recently decided to secure a partnership with one of the nation’s largest labs rather than hire a sizeable sales force to launch a cancer diagnostic test nationwide.

Meanwhile, in Stage III, we want to review the optimal pathway to obtain clinical data. Perhaps it’s best to leverage CROs rather than use more in-house people power to complete clinical trials.

By extending the runway of available funds, Life Sciences organizations can ensure obtaining important milestones plus sustained growth and stability in an unpredictable market. However, knowing when to make these critical investments vs. conserving cash is a delicate balance with potential risks

The path to financial success has been significantly redefined in recent years. The “growth at all costs” mentality for commercial stage entities can no longer be the most critical metric for management — emphasis has necessarily shifted to long-term, sustainable profitability and growth.

Understanding the Life Science Company Cash Dilemma

In today’s tight capital markets, there is a restricted pathway to funding available to support differing Life Science business models. Of course, numerous examples of private and public healthcare companies are successfully raising funding today. Companies focused on cancer diagnostics and diabetes, for example, are targeted at diverse and large addressable markets where funding for these subsectors in Life Sciences is readily available.

Still, more competitive capital markets increase the need for cash preservation so that companies have a longer runway to achieve milestones before being forced to make their next raise. By extending the runway of available cash, Life Sciences organizations can ensure sustained growth and stability even in today’s unpredictable capital markets. And while there’s some truth to the “spend money to make money” adage, every spending decision should always be prioritized based on its potential to deliver stronger company valuations and ROI.

Adopting a Path Around Measured Growth

Investors are more focused than ever on sustainable growth and want to see a clear path to long-term company profitability before bankrolling its future. A “growth at all costs” mentality is especially risky in a pre-revenue business such as life sciences.

So, it’s not just about growing as fast as possible anymore. Companies are now focusing on growing smart and controlled, managing their expenses, and finding creative ways to raise the money they need.

To counterbalance funding challenges, many commercial-stage Life Sciences companies choose to operate with measured growth rather than growth at all costs. These companies effectively manage operating cash burn, cash preservation, and creative financial solutions. 

Cash Management Strategies for Funding Growth

When considering your cash flow runway and cash management priorities, the successful CFO must put a stake in the ground around the timing of cash breakeven performance and milestone achievement. Particularly in the Life Sciences space, significant sums of financing are necessary to drive to an inflection point, profitability, or cash flow breakeven. Preserving cash reduces the pressure to raise this capital.

Here are four recommendations for building a company-wide approach to extending your cash runway at a life sciences company:

1. Understand investor expectations.
   Companies need to focus milestone achievement and cash spending priorities around the expectations of potential investors. Consistently ask and be able to answer what investors want to see to invest. Maintain transparency and consistency in your ongoing communications while anticipating their needs and questions so you can be proactive in addressing concerns.
2. Spend cash on what matters.
   Focus company-wide spending on activities that will directly impact the advancement of the company in measurable and value-enhancing ways. Get creative in stretching dollars. Develop a detailed financial and cash forecasting model.
3. Evaluate different scenarios for funding growth.
   Critically evaluate the various approaches for reaching your goals. Look at both short- and long-term implications. For example, adding fixed costs (vs. variable costs) has both short- and long-term impacts that must be accounted for. Evaluate executional risks and probabilities.
4. Focus on right now.
   Cash put toward areas that will help meet the expectations of potential investors is always money well-spent as is planning for future financial success. However, when it comes to spending at-risk dollars, identifying actions that can be executed concurrently can be crucial to bringing that success faster to fruition.

For additional FLG Partner commentary about trends in financing for Life Sciences companies, please view our recent Panel Roundtable, Creative Financing Solutions for Life Science Companies. Or, read Part I. Trends in Financing in Life Sciences: 2024 Updates.