Layoffs In Biotechnology Signify Growing Pains For An Industry In Transition, Analysts Contend

Only half of today's firms are expected to exist five years from now, but a similar decrease in jobs is notnecessarily in the offing FEELING FINE: Analyst Joyhn Wong sees biotech layoffs as part of a "healthy cycle". The past year has been a turbulent one for biotechnology. While 1994 saw the first genetically engineered food approved for sale Calgene's Flavr Savr tomato it also witnessed disappointing failures in clinical trials and other industry setbacks. Many investors have deserted biotech, leaving a serious cash crunch in their wake. The industry has responded with a wave of business failures, acquisitions, mergers, and strategic alliances. A number of the companies that have survived are cutting back on programs and staff. BioWorld Today, a daily publication that watches the industry closely, has reported at least 21 companies that have laid off employees since the beginning of 1994 (see table on page 4). And, according to the publication's managing editor, Lynn Yoffee, this list excludes biotech companies that are quietly laying off employees without public announcements, as well as firms in closely allied industries, such as diagnostics and blood substitutes. But some observers contend that these layoffs may not be as detrimental to scientists as they seem, and that the downsizing may even be helpful to the industry in the long run. "I think we're going through a cycle here," says John F. Wong, a Los Angeles-based biotech-industry analyst for the San Francisco investment banking firm Van Kasper and Co. "I think its a healthy cycle. We're not going to get the overspending that had been occurring in the industry, the rush to do clinical trials that weren't well thought out. Companies are going to be a little less arrogant and more realistic about their goals." The 21 companies mentioned by BioWorld Today laid off a total of 1,197 employees, about 1.2 percent of the 103,000 who the Biotechnology Industry Organization (BIO) says are employed in the biotech industry. However, the Bureau of Labor Statistics calculates the total 1994 unemployment rate in its "drugs" category which includes the pharmaceutical, biotech, and related industries as just 2.8 percent, compared with about 7 percent for the U.S. work force as a whole. In its latest annual report on biotechnology, the accounting firm Ernst and Young, whose life sciences industry services office is based in Palo Alto, Calif., reports that 50 percent of the public companies in the industry will run out of cash in two years or less, based on their current "burn rate." And half of those firms have less than a year's worth of cash. The industry as a whole lost $4.1 billion in 1994, up from $3.6 billion in 1993. Company Number of Layoffs Date Alkermes Inc. 30 Sept. 1994 Alpha Biomedicals Inc. 17 Oct. 1994 Celtrix Pharmaceuticals 50 Nov. 1995 Chiron Corp. 75 April 1995 Creative Biomolecules Inc 34 Sept. 1994 ESCAgenetics Corp. 15 Feb. 1995 Genta Inc. 35 March 1995 Glycomed Inc. 30 July 1994 Greenwich Pharmaceuticals 44 May 1994 Houston Biotechnology 10 Feb. 1995 Immunex Corp. 51 July & Oct. 1994 ImmunoGen Inc. 100 Dec. 1994 Parnassus Pharmaceuticals 25 Oct. 1994 Pharmos Corp. 20 Nov. 1994 ProCyte Corp. 29 Oct. 1994 Repligen Corp. 111 July 1994 Scherer Healthcare Inc. 29 Nov. 1994 Synergen 375 Aug. 1994 Telios Pharmaceuticals Inc 88 Nov. & Dec. 1994 TriGenix Inc. 10 Nov. 1994 Zynaxix Inc. 19 Oct. 1994 Total 1,197 * These numbers are derived from BioWorld Today archives and represent only pure-play biotech companies. BioWorld Today covers, primarily, companies researching and developing biotech pharmaceuticals. It does not cover a number of companies self-labeled biotech that work on things like diagnostics, test kits, and blood substitutes. In addition, this list includes only layoffs that were announced publicly. But the news isn't all bad. Ernst and Young also reports that although losses increased, so did sales, from $10 billion in 1993 to $11.2 billion in 1994. More important for scientists employed in the industry, total R&D expenditures rose 23 percent during that same period, from $5.7 billion to $7 billion. Industry employment rose 6 percent, the accounting firm found, and a survey of CEOs revealed that only 10 percent of them plan layoffs in the coming year. Both the number of biotech companies (1,311) and the number of employees (103,000) reached historic highs in 1994, according to Robert A. Browne, Ernst and Young's senior manager. But the upward trend has reversed as of this year. "We're seeing a mass consolidation in the industry," Browne says. "We're expecting the overall number of companies to decrease this year." And other experts expect this decrease to continue in a dramatic fashion in years to come. Wong of Van Kasper and Co. expects that only half of those 1,311 companies will still exist five years from now. Ed Bocko, Jr., head of PROTRAN Resources Inc. in Sharon, Mass., an employment consultant to the biotech industry, speculates, "That may even be a high number. I'd liken it to the way the automotive industry used to be. The country used to have well over 1,200 or 1,400 automobile manufacturers back in the first two decades of the 1900s. Now it's arguable that we're down to three or five major manufacturers in this country. I'd be impressed if there were more than 100 biotech companies five years from now." Reductions in the number of firms, however, will not translate into unemployment, according to Bocko: "I think you'll see an employee population that will probably double or triple." "I've heard predictions that by the year 2000 there will be just 50 companies," says Carl B. Feldbaum, president of BIO, the industry's trade association. "I happen to think that's wrong, and I'll tell you why. I've seen an enormous impulse to start a biotech company. Even in the last two years, when money has been extremely tight, we've seen the continual birth of new biotech companies, and I have a feeling that will continue. I don't think there are too many biotech companies. I don't think there can be too many companies trying to develop a cure for breast cancer. From a societal standpoint, that kind of intense competition is good." SEEKING ALTERNATIVES: Laid-off microbiologist Lori Burrows says newly graduated scientists no longer view industry as "a good potential source of employment." "I think the industry has a very large number of companies chasing a smaller and smaller amount of capital," says Paul G. Abrams, president and CEO of NeoRx, a Seattle-based biotech company. "Many choices are being forced upon those organizations, whether it is to cut back on their staffs and focus on particular products as opposed to the whole portfolio, whether to merge with another organization, or whether to be acquired or partially acquired by a larger pharmaceutical company. We're all facing a potential problem of having a lot of mouths to feed and a shortage of capital." Abrams has an intimate knowledge of the effects of a weak market for public investment. NeoRx went public in August 1988, less than a year after the 1987 stock market crash, when investors were leery of all new stock offerings. Because NeoRx couldn't raise enough capital, over the next two years it was forced to reduce its work force from 210 to just 75 people. But many analysts believe that a plethora of small companies is part of the problem. A large pharmaceutical company will be working on dozens of different projects, and even if a large percentage of them fail, a few successes will ensure survival. But many small biotechs have a very narrow focus and pin their hopes on just one or two projects or technologies. If such a company gets unlucky, it's out of business. Wong points out, however, that breadth isn't everything. He notes that a few years ago Amgen Inc. had only two products, and today the Thousand Oaks, Calif.-based biotech is one of the most profitable companies in the industry. When a company is forced to downsize, focusing on particular products, it will often license its abandoned technologies to other firms. This has long been a common model in the industry, and recently it has been taken to its logical conclusion in a type of organization referred to as a "virtual company." RECRUITER: Kathy Beach says that the biotech industry is not dead, "it may be napping." "A virtual company acts as a clearinghouse for product development," says Wong. "A virtual company doesn't have the wet chemistry labs. It doesn't work with test tubes. It basically outsources all the clinical development, all the manufacturing of the product. And it also licenses the right to market that product, so that revenue is generated through the company as sort of a clearinghouse, a middleman. There's low over- head, low cash burn, and less product risk." There are also fewer employees in a virtual company, but that doesn't necessarily mean fewer employees in the industry as a whole. "When you're contracting out, who are you contracting to?" asks Wong. "I think that's a large field that could absorb some of the people who are coming out of the classical biopharmaceutical and biotech companies. There will be companies who are good at doing peptide synthesis, who are good at doing fermentation, who are good at doing scale-ups." As the industry matures, there will also be changes in the demographics of the work force. In the short term, says Wong, "as companies downsize they will be more top-heavy in terms of postgraduate-degree type of people with fewer M.S. and bachelor degrees." MASS CONSOLIDATION: Robert Browne of Ernst and Young expects the number of firms in the industry to shrink. Employment consultant Ed Bocko concurs: "As the companies mature, they're going to move into areas that are far more labor-intensive. They'll be adding people as they move from the pure discovery, into the research and development areas. They won't be using the same people for the next tasks that need to be done: the preclinical work, the clinical work, manufacturing, and sales and marketing. "Right now companies are staffed very well at the Ph.D. level. While you may need some more of them, you're probably looking at a lot more people that are involved in the development process who don't require a Ph.D. You'll have a lot more people at the B.S. and M.S. level." The industry's volatility is having a chilling effect on scientists and their career aspirations. "People coming out of school aren't looking to industry as being a good potential source of employment," says Lori Burrows, a Canadian molecular microbiologist who recently lost her industry job in the hostile acquisiton of American Cyanamid by American Home Products (see Profession, page 15). "It's an alternative, and the money's a lot better than it is in academia, but it's not the sure thing it used to be as far as job security." Recently, though, the industry has shown signs of emerging from the doldrums of 1994. "The good news is that a number of companies are actively recruiting and the industry is not dead," says Kathy Beach of Life Science Associates of Oakland, Calif., which runs biotech job fairs. "It may just be napping. Things have been pretty volatile the past year, but the atmosphere out there is dramatically better than it was six months ago." The number of biotechnology companies may decline, perhaps even dramatically. And the demographics of employment withint the industry may shift as the surviving companies grow, mature, form alliances, and bring additional products to market. But experts agree that the long-term prospects for the biotechnology industry_and the scientists it employs_are bright. Says Wong: "To the scientists out there in the industry, there's only one thing I can say, and that is: 'Keep the faith.' There is definitely going to be a biotech industry in the future. I think it's going to become a major industry in the U.S. It may not be what they're used to seeing today, but there will definitely be a biotech industry." Robert Finn is a freelance science writer based in Long Beach, Calif.

Layoffs In Biotechnology Signify Growing Pains For An Industry In Transition, Analysts Contend

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