The biopharma world seems caught between two extremes: excitement about current valuations for early-stage companies and small companies (essentially, acquisition targets), and anxiety about the massive R&D layoffs that have beset large pharma.
Yet both of these trends arguably reflect the same underlying phenomenon: the transition of the industry from a model where big pharmas do much of their own research and development to a model where a lot of the innovation comes in from the outside. The idea is to move a lot of the early-stage risk from inside to outside, allowing big pharmas to selectively acquire just the most promising products.
The evolution from R&D to S&D (search and develop) – which I’ve discussed here and here – brings with it a number of predictable consequences: (1) smaller internal R&D organizations at big pharmas, especially in discovery; (2) expanded and more scientifically savvy business development functions in big pharma; (3) greater premium on promising external products and companies, for which there is now a seller’s market, at least for the minority of startups and small companies that succeed in overcoming the high risk and manage to develop something that seems robust and enticing.
Rather than lament the R&D layoffs, and cheer the hefty acquisition price enjoyed by successful startups and small companies, we need to see these as integrated phenomena. I don’t see pharma R&D layoffs as suggesting that either R&D or R&D talent is devalued now, but rather that its place in the ecosystem has shifted, from large companies to smaller ones.
Increasingly biotech will become like the tech world, where some of the best talent is attracted to the opportunity and potential of small companies, which if successful, are pursued and acquired by larger ones. While large tech companies may place a greater premium on retaining the talent of the acquired company (hence the concept of the acqui-hire, see here), there is still a tremendous recycling of talent back into the startup pool, which is exactly what I believe we’re now seeing in biopharma as well.
Historically, transitioning from a large company to a startup might have been much more challenging for biotech R&D talent than for tech talent, given the geographical separation between pharma R&D (Pennsylvania/New Jersey) and startup/small company life science R&D (Cambridge or San Francisco). But with the increasing co-localization of large pharma R&D and life science startups/small companies in Cambridge and the Bay area, the transition from big pharma to startup becomes much easier, at least for the talent fortunate enough to live in one of these hotspots.
Unfortunately, if not surprisingly, many but not all of the pharma R&D layoffs are occurring in places like North Carolina and Pennsylvania, where the life science startup landscape is extant (Durham-based Pharmasset, acquired by Gilead for about $11B, comes to mind) but comparatively limited.
Two final thoughts:
First, while many wonder if there’s a life science bubble, my sense is that while there’s clearly some frothiness (especially in areas like immuno-oncology), big pharmas continue to need promising products, and their shift to S&D means that they are unlikely to generate these internally. Hence, there will remain a durable market for promising life science startups, so long as there’s an attractive commercial market for pharmaceutical innovation (still true in the U.S., arguably not so much in many other places).
Second, biopharma R&D talent need to adjust career expectations, and see themselves not as permanently affixed to a large pharma, but rather likely to work for a series of companies, offering a trajectory perhaps characterized by greater promise and interest, but less stability.
