Published on: Dec 18, 2023 10:00:20 AM by Jason Oppmann
Updated on: January 30, 2024
The past year has been one of ups and downs for the biopharma industry and workforce dynamics have been significantly impacted. As companies adapt to evolving macroeconomic factors, several other key micro-decisions have driven many early-stage biopharma companies to scale back their workforce.
As with most early-stage companies, traditional fundraising is difficult in times of economic uncertainty, domestic and international political uncertainty, and rapid innovation. What differentiates early-stage biopharma from other early-stage industries is the need for a long cash runway to break even and become profitable, which can be upward of 10-15 years.
Biopharma workforce reductions typically happen in companies that fail a major milestone (i.e., clinical failures, regulatory issues, or later-stage FDA approval failures). This year more than ever, we have seen early-stage workforce reductions, and it begs the question: What is causing these workforce reductions?
The answer is a mix of micro-decisions made by the company and external macroeconomic factors.
Some may think that this is a misnomer, but micro-decisions have nothing to do with the magnitude of the decision as most micro-decisions carry huge ramifications if made incorrectly. At SVA Life Sciences we define the “micro” as something completely within the company’s control (headcount, IT systems, and infrastructure, etc.).
How long will our current fundraising round last? When do we need to start raising more capital? What is our company valuation going into the next round of funding? How do we manage multiple scenarios of cash runway? Who is helping make the strategic decisions for both the near-term and the future?
Many early-stage biopharma companies struggle to answer these questions because they typically have a very remedial financial system that does not allow for proper cash forecasting and budgeting. It is usually a very spreadsheet-intensive exercise that lends itself to mistakes and misinterpretations and does not garner the trust of investors.
These early-stage companies also do not have financial resources in place for advice on how to maximize the current investment.
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In many recent cases, early-stage companies are looking to attract top talent and experienced department leaders, not only to give them the best possible chance to achieve success, but also as a headline for investors to build trust. However, that talent tends to be far removed from execution and what is needed to build a team.
Without proper understanding of the cash runway and proper scenario analysis to understand the ever-increasing cost of clinical supplies and research organizations, many early-stage companies overinvest in full-time employees. This can ultimately force a decision between advancing clinical trials versus keeping headcount.
A similar situation can occur for IT infrastructure. Early-stage companies have a tendency to take on too much IT infrastructure too fast. As the organization gets larger, there is potential to onboard systems that are redundant and a strain on working capital.
SVA Life Sciences describes this overinvestment in both full-time employees and IT Infrastructure as shopping cart syndrome. Leaders from larger organizations with larger budgets relative to an early-stage company tend to try to replicate what made them successful previously without thinking about the price tag.
They will make a business case for both expensive full-time headcount and IT systems without thinking about consulting partners and other smaller-scale systems that can meet their current needs and grow with the business.
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Early-stage biopharma companies are not immune from economic and geopolitical issues and face the same difficulties that are felt throughout the business world. Economic downturns, diminishing funding, and fluctuating stock prices have a direct impact on the operational costs of these companies. In response, many find themselves compelled to implement cost-cutting measures to sustain their businesses.
This often results in workforce reductions, as companies strive to balance their budgets in a less-than-favorable economic climate. Domestic and international geopolitical environments can also influence early-stage biopharma. Domestic legislation targeting drug pricing to supply chain disruptions due to conflict can all complicate the early-stage company macro-economic environment.
Insight: Navigating the Complexities of Supply Chain in the Life Sciences Industry
The early-stage biopharma sector is continuously evolving, driven by rapid advancements in science and technology, as well as changing market demands. This evolution often necessitates a shift in strategic focus for many companies.
As they pivot towards new research areas, technologies, or market opportunities, they may find certain roles and departments no longer align with their revised objectives. This realignment can lead to the elimination of positions that are no longer deemed essential to the company's future direction, thus reducing the workforce in those areas.
Mergers and acquisitions are a common strategy in the broader biopharma industry, allowing companies to expand their capabilities, enter new markets, or enhance their competitiveness.
Typically, a larger company will wait for the early-stage company’s assets to be more developed before a merger, but a merger with a competitor company a little further along in development can cause an early-stage company to re-evaluate their strategy.
Drug development is at the heart of the broader biopharma industry, but it is a field rife with uncertainties. Failure at any stage of drug development or clinical trials can have profound implications and lead to the discontinuation of a project. When key drug trials fail or do not yield the expected results, companies may need to scale back or terminate the projects altogether. This directly affects the workforce involved in these initiatives, leading to layoffs or reassignment of roles.
These often-related factors have led some biopharma companies to make significant workforce adjustments. The response of each company to these challenges varies, depending on its specific circumstances, market position, and strategic objectives. Understanding how these factors can affect your business will allow you to prepare for the challenges that are an inherent part of this industry.
Early-stage biopharma companies have a long journey ahead of them for all the aforementioned reasons and others not covered in this article. SVA Life Sciences has the expertise to help you navigate and answer the micro-decision questions faced on a day-to-day basis, as well as these many macro-economic challenges, and more.
Our ERP for Life Sciences checklist can help you identify where you are in the development process and which capabilities to prioritize.
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Jason is the Director of Financial Strategy and Operations for SVA Life Sciences, a member of the SVA family of companies. Jason has more than 15 years of experience in accounting and financial planning and analysis, including extensive experience in operational and financial processes development and optimization. He has a proven track record of optimizing cash flow, reducing costs, driving operational efficiencies, and resolving complex accounting, reporting, and regulatory issues. Prior to joining SVA Life Sciences, he held finance positions with various pharmaceutical companies.
