Challenging labor and capital markets in biopharma

Biopharma and biotech companies continue to struggle with cash management, given that capital markets remain slow. This is the case for both private financing and initial public offerings. Additionally, companies are still hard pressed to find quality talent. Despite layoffs, however, unemployment in the industry remains at historic lows.

One of the key measures of health in the biopharma sector is the availability of private equity and venture capital funding. With the U.S. Federal Reserve continuing to raise interest rates, disruption in regional banks that serve biopharmas, biotechs and venture capitalists, and a hangover caused by high valuations in prior years, it should come as no surprise that 2023 has had a sluggish start when measured by deal count or capital raised.

Private equity and venture capital investment in biopharma*

The first four months of 2023 had the lowest volume (246) of deals since 2013 (213) and a 38% decline from the same period last year. Over the past 15 years, on average, the first four months of the year accounted for 36% of the deals for the full year. If that trend continues, we expect approximately 675 total deals this year, which would be the lowest volume since 2014.

Life sciences IPO activity–U.S. exchanges

Public markets are faring even worse than private markets, with only five IPOs so far in 2023 and with no companies going public in either March or April. The prior two years started off at a much higher pace, with 14 offerings in 2022 and a staggering 45 in the same period of 2021. The beginning of 2023 continues the steep drop-off seen throughout 2022, with few signs of that changing as the year progresses.

For a sector so dependent on raising capital, this presents a challenging start to the year. For this outlook to change, we would need to see interest rates stabilize, new banking partners to replace the troubled or failing banks that served the sector, and a drop in the valuations that founders and existing investors are expecting based on prior-year fundraising.

U.S. unemployment remains extremely low, despite rising interest rates and a slowing economy. Low unemployment rates are good for workers, ensuring they are able to change jobs when desired and creating upward pressure on wages. This is true for the overall job market but is especially true for job seekers with a bachelor’s degree or higher, like those employed in the biopharma sector. The unemployment rate for the U.S. overall in March was 3.5%, but for people with bachelor’s or advanced degrees it was only 2%.

Unemployment remains near record lows

Unfortunately, for the biopharma sector, this means hiring continues to be a challenge. Despite layoffs in other sectors and challenges in raising capital, the tight labor market means executives are still struggling to make strategic hires. This is compounded by the pressure on valuations from the stalled capital markets. In-demand hires often expect to receive valuable stock options as part of their compensation, but the risk of a down round for a biopharma company makes these options less desirable.

The takeaway

The biopharma sector has faced numerous headwinds so far in 2023, and unfortunately, it looks like these challenges will continue well into the year. For biopharma executives, cash management has become a critical concern to ensure they maintain a sufficient cash runway to survive until the capital markets become more receptive to deals. Unfortunately, running counter to this need is the continued tight labor market for biopharmas and the wage pressures that accompany it.