A major challenge facing the development of new therapies is the high level of compound attrition in late-stage clinical studies. A key factor in reducing these unsustainable levels of attrition is the successful evaluation of the level of drug effect on its target pathway in early development, otherwise known as testing the compound mechanism. Incorporation of PD biomarkers into Phase I/II trials to demonstrate compound binding to its molecular target and the subsequent modulation of downstream pathways enables early testing of compound mechanism and provides a data-driven framework for decisions on compound progression. This review will discuss the identification and validation of such 'fit-for-purpose' PD biomarkers, and case studies illustrating their use and value in dose selection and accelerating the clinical development of small-molecule drugs will be described.