By Deborah Borfitz

January 13, 2026 | With the close of 2025 came the end of a prolonged biotech winter marked by reduced funding, massive job cuts, investor skepticism, and initial public offering (IPO) slowdown. The experience, while painful, helped mature the biopharma industry with operational discipline and a new playbook for how to make the case with investors moving forward, according to Kelly Smith, founder and CEO of consulting firm V2 Clinical.

The lessons learned, often the hard way, is that emerging biopharma companies need to be strategic about how they allocate funds and technology, be willing to wear multiple hats, and to stay tight at the hip with regulators at the Food and Drug Administration (FDA) “so there are no surprises,” he says. Boards and clinical leadership want their young firms to easily identify and explain risks and be capital-minded about problems that could arise and how to remedy them. 

“Having that roadmap of expectations beforehand is absolutely critical,” stresses Smith, who literally wrote a book on the subject. He’ll also be sharing his strategic and operational insights at the upcoming SCOPE event in early February.

Running a small biopharma company has always been highly challenging, capital-intensive, and fraught with risk. Historically, about 90% of them haven’t survived long enough to bring their scientific innovations to market, he reports. Reasons for those failures are predominantly lack of clinical efficacy (50%), unmanageable toxicity (30%), and poor planning, including flawed cost calculations and misalignment with regulators (10%).

Investors, understandably, want an exit strategy built into their funding contracts with companies. But the rationale isn’t simply to limit their losses, since the deals can be lucrative even before a product hits the market through licensing deals, asset selloffs, or acquisitions by a larger firm, says Smith.

Rising expectations of biotechs will translate into increased merger and acquisition (M&A) activity in 2026, he predicts, and the number of IPOs could hit 20—double the number in 2025. These will uniformly be companies with “a very good story, a great market, and a highly competitive pipeline.” 

Milestone-Based Funding

Many of Smith’s clients are founders of early- to mid-stage companies who come from academia or big pharma and oftentimes are unaccustomed to the harsh financial realities of the biotech world. They need help constructing their roadmap, so they come to understand the wisdom of milestone-based funding paid out in tranches where the company and investors share risk, he says.

Currently, “multi-faceted” uncertainty best characterizes the industry, Smith continues, specifically citing new government leadership, fewer FDA employees, the imposition of tariffs, the One Big Beautiful Bill (BBB), most-favored-nation pricing on prescription drugs, and recently issued guidance on artificial intelligence. It doesn’t help that personnel changes at the FDA have caused a misalignment between what the agency has said on podcasts and in more recent public statements.

The uncertainty has caused a degree of paralysis among would-be investors. But the dust seems to have settled, and “we’re starting to see some green shoots,” says Smith. Their go-forward strategy includes a lot of expectations tied to their investment dollars “versus just the big checks that used to be given in the past.”

This gets back to the necessity of a roadmap guiding decision-making about when to pivot and partner. “I’ve seen a lot of people being challenged with the why” of their choices regarding study design, vendor and country mix, and overall spend profile, he says.

Investors, meanwhile, need to understand the “time to decision, not just time to data” and the cost to them for meeting milestones, adds Smith. Gone are the days when payments were doled out based purely on happenings like study start and first patient in (FPI); today, the expected dates tied to those milestones generally need to be met or the disbursements get reduced by a certain percentage for each day thereafter. As primary financial stakeholders, they’ve been wronged one too many times because of studies failing and money running out.

One key challenge for biotechs is to do more with less, since extending their runways and realizing good margins requires cutting people out, Smith says. In 2025, biotech companies reporting major layoffs were reducing their employee headcount by an average of 43%.

Contractual Realities

Investor-driven metrics tied to milestone payouts tend to be for the achievement of specific goals such as completion of an animal study showing the expected positive result, on-time submission of an Investigational New Drug application to the FDA and achieving FPI by the planned date, Smith says. Before, “two guys and a molecule” might be enough to attract $10 million from investors.

The actual cost of reaching a milestone that is “wildly variant” relative to expectations “is going to provide a flag for investors,” says Smith. So is covering the shortfall using general and administrative funds that biotechs are expected to cut to extend their cash runway. 

For oncology-related investments, as established by major firms like OrbiMed, the rule of thumb is to provide more limited amounts of funding until an investment has been derisked by the achievement of key milestones as a product progresses through the regulatory and clinical development pipeline, he adds. 

Biotechs can and do fall short of expectations for some good and understandable reasons and, provided these possibilities have been identified early on (e.g., target might not be hit), anchor investors will probably stick by their side—particularly if scientists are noticing a signal somewhere else. The golden rule for nearly a decade now is that investors should never be surprised, says Smith, or it’s likely to be a hard pass moving forward.  

At that point, they’ll want to recoup as many costs as possible. A lot of contractual work is focused on exit strategies because investors want the “freedom to terminate,” he says. “If it’s an embedded cost that they can’t get out of, they’re going to want to be able to pivot ... or shut it down entirely very early versus keep waiting and funding a zombie company that’s not really doing anything.” 

Exit Strategies

In terms of exit strategies in investor-supported drug development, it’s imperative to “start with the end in mind,” says Smith. Most of the time, investors aren’t going to run with a project to the commercialization stage because that requires one to two billion dollars.

“Because money is constrained, they’ll maybe go up to phase 2 and then sell off the assets,” he continues. This is where significant profits can be realized, including situations where a primary endpoint wasn’t met but there’s a secondary endpoint worth pursuing in a different country. But any new investors are going to need “plenty of information to make sound decisions on whether this is good science, you have the right team, there is manageable toxicity, and the drug’s properties are in line [with expected values].”

If a potential M&A is the part of the planned exit strategy, companies need to demonstrate both that the asset is derisked and that they have made good use of capital versus having expensive and non-negotiable milestones (e.g., large phase 3 study) that still need to be paid out regardless of what happens, points out Smith.

The expectations around IPOs have also crystalized, in terms of having “a good narrative tied to the science and where it is going to hit the population,” he continues. For contrast, he cites as an example Crinetics Pharmaceuticals, which went public in 2018 and in September 2025 received its first-ever FDA approval for Palsonify (paltusotine) for treating a rare hormonal disorder.

Crinetics “didn’t have a clearly validated entryway, had a very small population, and didn’t show that commercialization was going to be strong,” says Smith. The company made its first $5 million in the final quarter of last year—literally a “drop in the bucket” relative to the one to two billion it spent getting to that point.

Today, any IPO coming forward would need to aim for four times that product revenue with the expectation of ongoing incremental increases year over year. Crinetics currently has a solid and diverse pipeline, Smith adds, but having its first asset go into an IPO “probably wasn’t the smartest idea and probably won’t happen now.” 

BBB and Tariffs

Emerging biotechs cannot ignore the impact of changes on the political stage, most notably the BBB and sweeping tariffs on most imports, says Smith. The federal statute is highly focused on “domestic investment and putting money into America,” which is beneficial to corporate spinoffs.

The BBB has also created heightened focus around long-term asset value creation, Smith says, meaning drugs that are going to be valuable to America over time. “Clinical programs are increasingly going to be framed in terms of strategic durability,” such that phase 1 and 2 studies are primed for the next stage of development and have the potential for open label expansion.

With tariffs, there is greater operational attention being paid to the global supply chain, import/export dependency, and manufacturing geographies, he says. When making or shipping a drug, companies need to be thinking about their depots (strategic logistics hubs) for manufacturing, storage, and shipping.  

A company that has been manufacturing a drug in Belgium that it stores in Ireland and then ships across Europe, for example, should now consider the “downstream cost sensitivity” of those choices since these countries are expected to be significantly and disproportionately impacted by tariffs. Much more diligence is being applied to how and where money is being spent and what’s necessary versus opportunities elsewhere where there is potentially a bigger patient population to serve.

On the strategy side, companies also must think about vendor and material risk exposure, says Smith. That is, in the event of a tariff being applied, is a product potentially going to be sitting on a dock and causing costly delays?

This is in addition to planning around acquisition readiness and early evaluation for termination readiness. If a drug has significant adverse events, doesn’t meet its endpoints, and studies are having trouble enrolling, that clinical program needs to be able to terminate. 

But if the program is moving along and acquisition ready, the questions to consider relate to scalability in terms of potentially adding studies and indications and having a more global impact. Here, Smith cites a now-defunct early-stage company with a treatment for patients testing positive for the Epstein-Barr virus (EBV). Although 95% of the world is impacted by EBV, it is tied to the development of cancer primarily in parts of Asia and Northern Europe and the company inexplicably conducted its trials in Brazil where it faced regulatory delays and low patient enrollment.

“We can do better as an industry,” says Smith, noting there is ample room for improvement. “We have the tools, and if we collectively work together, we can definitely do so.”