What is really going on in the Life Sciences field?

There appears to be a highly polarized narrative surrounding the Life Sciences space in regard to how it is doing and what the future looks like. On one hand, I hear Life Science industry groups and Venture Capital (VC) leaders talking about how Life Science is resurging and 2024 will be the year of the rebound. I even saw yesterday an article describing that "Deal flow has never been better" in Life Sciences. However, at the same time my Linkedin feed is filled with Life Science companies closing down and Scientists looking for work. In seeing this juxtaposition, it must be asked "what is really going in the Life Sciences field?"

To understand what is happening in the Life Science field, it is critical to understand what is happening with VC funding. VC funding is the life blood of Life Science companies as they are by their nature long tail investments which have long lead times but potentially enormous financial gains. It is therefore VC funding which directly impacts the flow of Life Science companies and is the only asset class which can truly tolerate the high risk/high reward nature of many Life Science companies.

From 2000 until 2014, VC funding into Life Science companies was flat at around $4B per year. Between 2015 and 2019 it began to increase rapidly and averaged $10B per year prior to the COVID19 pandemic. From 2020 through 2022, VC funding spiked to over $30B in 2021 and averaged over $20B during this period per year. Much of this spike during COVID was due to an exuberance in Life Science brought on by the desire to develop a COVID19 vaccine and an overall general excitement about technology companies.

Coming out of the COVID period, VC funding into Life Sciences has plummeted to $12B according to CBRE which is in line with pre-pandemic levels. An important note on this number is that the absolute number varies much by source (Mckinsey, Cushman & Wakefield, Pitchbook NVCA, CBRE) as the definition of Life Science varies (i.e., does it include health tech?) and also some data sources only report segments of funding (i.e., post seed round). However, the trend is consistent across these multiple sources. Some in the Life Science community have praised this as a normalization and are looking forward to the Life Science industry coming back. However, when you look at this number more closely, things are much worse for the Life Science field than they appear.

Throughout the COVID period, the creation of new money spurred significant inflation across all areas of the economy. However, this was particularly acute in Life Sciences where the excitement around the vaccines and biotech in general manifested in the doubling of VC funding into the overall Life Science field. One of the key side effects of this which all Life Science executives and HR professionals are familiar with is the distortion that it caused to the labor market.

Specifically, wages increased faster than wages outside of Life Sciences (37% between 2019 and 2023 vs 22% for the overall economy) and many individuals were promoted simply because a large amount of capital was chasing a very limited supply of qualified talent. Therefore, while positional wages increased 37% over this period of time, individual compensation actually increased faster than this as individuals were promoted much more quickly. Overall operational costs (e.g., rent, reagents, equipment) also increased at similar if not quicker rates.

While the Life Science field might have gotten back to pre-pandemic levels for absolute VC funding, in reality the productivity of this funding (# of companies, # of therapeutics, # of employees) is going to be much lower. For example, $12B in VC funding today will achieve what $7.5B or less in VC funding in 2019 achieved. This means that the # of jobs, # of companies and # of therapeutics that the market can support is about 75-80% lower than it was during the COVID19 Life Science peak. This productivity is more in line with what was seen during the early 2000's.

To answer the original question, this means that things currently in Life Sciences are going very badly for everyone except those experiencing "great deal flow" in that they can buy distressed assets for pennies on the dollar and many companies are looking for an exit. For everyone else, there are simply 75-80% less jobs within VC funded Life Sciences than there were 2 years ago which explains my Linkedin feed. This negative current state of course does not predict the future state of the Life Sciences field, but it is important to recognize where the field is truly at to understand where it can go.