Surviving the Life Sciences Funding Cliff

Denise (DeeDee) DeMan

Market changes can occur quickly, but trends take time to emerge from the data. The same can be said for biotech and the life sciences sectors over the past two-plus years. Starting like a rocket shot with a global pandemic propellant, life sciences investment through most of 2020 and 2021 was flying high. Then slowly, toward the end of 2021, venture capital (VC), especially seed and series A, started plateauing and moving downward as strains of COVID-19 weakened and countries started lifting restrictions. The US economy continued its difficulties through early 2022 as rising interest rates, rapid inflation onset, supply chain woes, and the gnawing, continued hostilities in Ukraine all collectively worsened life sciences’ downward trend. If commensurate devaluations and lessening IPOs didn’t expose this trend, April’s public market drop did. The SPDR S&P Biotech ETF (XBI), a bellwether fund for the biotech sector, fell 17.9% in April, bringing the total drop for 2022 to 34.1%—a 46% decline year over year.

Prioritize programs and personnel

These lower valuations could foster increased M&A activity. For example, depressed prices may entice larger life sciences companies to buy up newer startups, giving them innovation as well as an attractive exit for investors. And while VC money hasn’t entirely abandoned the sector, investors are going to be more discerning of companies to back, particularly those years away from profitability. Unfortunately, the likely course for biotech startups will be to hunker down, tighten their belts, and prepare themselves for the potential of a protracted downturn.

As smaller, more vulnerable life sciences companies see their valuations falling, and without additional funding sources, many are left facing difficult decisions. This includes re-evaluating all clinical programs. Flush with funding over the past two years, new programs have likely arisen, but may not be vital to meeting the firm’s mission and strategic goals. Prioritization must ensue, and programs not meeting strict criteria should be placed on hold. With the remaining budget, the c-suite and board of directors (BOD) need to help their company restructure and identify the key programs and key personnel they must retain to continue to move the company’s initiatives forward. And if those key personnel are not currently in the firm, they must be recruited.

Double down on the right team

Restructuring will be a difficult task and best done by straightforward honesty and authenticity. As leadership, the c-suite and BOD must rally the troops and ensure the remaining staff that they are valued and their contributions are important to the survival and success of the business. Ultimately, the goal is to lengthen the firm’s cash runway so that the talented, multifaceted, and committed skeletal team continues forward progress and becomes the core team when the market rebounds and capital flows again. Several human capital issues may complicate the plan.

The Great Resignation is starting to impact the future of the life sciences. Having continued working through the prior two very prosperous years, these “boomer” scientists and engineers born between 1955 and 1960 are reaching retirement age and may decide to hang it up rather than grind through the emerging downturn. This is an awful lot of brain drain and loyalty walking away right when they are needed most.

Many younger scientists also were leaving established companies during the pandemic for startups, taking positions that were significantly beyond their experience level and pay grade. Today, the tides are turning again. With programs being cut and layoffs underway, these “free agents” are on the move again, this time seeking stability in Big Pharma and larger life sciences firms.

But it’s not just about retention or recruitment of key talent, it’s about the commitment to key talent from key talent. This directly points to why finding leaders with a strong cultural fit is so important. Recruiting this type of leadership will take your company farther because they have a shared vision, shared values, shared beliefs, and steadfast dedication to the execution of the mission. None of this is easy, but it is nonetheless vital and, in many cases, non-negotiable, or the firm suffers. And it starts at the top.

Stay positive—we’ve been here before

Luckily, a vast number of CEOs and board members have lived through and thrived in downturns before. It is incumbent upon these leaders to let their team know: This is miserable. This is hard. It will eventually cycle back up. But until it does, we need to operate in a manner that sustains the company and its mission for employees, investors, and ultimately those individuals and patients whose lives we will impact. I think that the life sciences industry, as always, is up to the task.

Denise (DeeDee) DeMan, founder, chairman and chief executive officer, Bench International