Adapting to Changes in Human Capital Imperative for Delivering on the Promise of Biotech
Biotechnology has been a driver of investment in life sciences. The level of VC funding in private biotech companies steadily climbed consistently from 2010, peaking in early 2021 before falling back in 2022 and 2023. The IPO market has also been receptive to biotech companies over recent years, with 2021 representing a stand-out in new issuance, with 152 offerings raising over $25bn, before the market window essentially closed. This sustained inflow of capital to fund pioneering science across numerous areas of biology has created a golden era for biotechnology.
As indicated, the sector has experienced a tighter funding environment since 2021, triggered by a rising interest-rate environment and other macro headwinds that saw equity prices decline significantly across the industry. However, private financing from venture capital has remained relatively robust despite these pressures, albeit far from the level seen in recent years (-50% from 2021). In addition, increasing levels of M&A in 2023 are gently stimulating the market.
The inherent risks associated with pushing ahead with these scientific endeavours remain high, and programs fail with persistent regularity, sometimes leading to the closure of companies and job losses. Broadly though, the sector has enjoyed a period of incredible expansion that has led to exceptional demand for expertise and talent.
Meeting this demand has led to intense competition for human capital, and attracting people has become challenging in a persistently tight talent market. Whilst a compelling hiring proposition might increase the volume of prospects coming through the door, competition means that existing employees have become targeted more frequently and aggressively, leading to higher staff attrition rates that can be difficult to slow. As a result, a company’s ability to recruit, manage and engage its employees has become a high-priority issue for most CEOs as it can be a growth limiting factor.
This demand has either led to or been influenced by several other changes that have taken place. All of which have continuously pushed human capital up the agenda. But companies have also needed to adjust to these many changes while working through an accelerated shift in the workplace, as the changes imposed by the pandemic in where, when and how we all work, continue to percolate. The longer these alternative approaches to working went on, the more they would become habitually embedded, and so it has proved. Attempts by bosses to return to pre-pandemic place-based working patterns have been met with stiff resistance. With a job market that has shown greater resilience than many expected in a tightening monetary policy environment, enforcing office-based working conditions remains tricky.
The reality is that the ship that is remote and hybrid working has set sail, leaving the harbour for a new and undefined destination. While some bosses wish to use the port of departure as the last known reference point and head back, most are happily bobbing around on the high seas, waiting for coordinates to the new land. Many things remain to be worked through regarding this new virtual working world. For now, though, companies can embrace the new hiring opportunities for place-based or remote roles.
Much of this transition has been enabled by technology, of course. Technology continues to disrupt many aspects of business, including how we find and engage employees. Finding new employees has become increasingly complex with the advent of a more fragmented and distributed market comprising many different platforms and social media channels. It is worth remembering that when biotech started on its upward trajectory after the 2007 credit crisis, LinkedIn had less than 15 million members and no presence in international markets like the UK, France or Spain. By 2011, it had already ballooned to 100m, and today exceeds 930m people in more than 200 countries. This apparent hyperconnectivity has mainly been an enabler. However, it has not always produced the efficiencies and results that companies seek, and standing out on a vast platform can be challenging.
Alongside all of this sits the growing pressure of environmental sustainability. Companies have chosen to take very different stances on this issue, but increasingly, their position on matters of this kind drives individual choices about where to work as they seek companies that mirror their values. This is increasingly true across the ESG (environment, social and governance) agenda. Society is shifting its views on the constituent issues of ESG, bringing about individual and collective behavioural change. Naturally, business leaders are individuals from across society, so cognisance for these matters is perceptible in the policies they promulgate throughout their companies.
Over the past two decades, the transparency introduced by the internet has meant that employees, prospective and current, are rigorous and comprehensive in their research of employers. As a result, the days of choosing a job based on the role description and line manager are behind us. Instead, employees, today are far more likely to select a role based on their analysis of a company’s prospects, board and leadership, organisational culture, funding and finances, potential for making a difference in the world, and the company’s purpose.
Investors and regulators have moved to increase the degree to which companies report on material factors, and human capital has become a vital pillar of this movement for more disclosure. With approximately 90% of the value of S&P 500 companies sitting in intangible assets, most of which is human capital, investors are keen to understand better how businesses are effectively managing this resource. In the US, changes to the regulatory landscape mean companies must now report on human capital in their 10-K annual filings, and companies listed in the UK (Companies Act, IFRS) and Europe (NFRD, CSRD) are already required to report on various human capital indicators. In addition, there are moves to increase the human capital reporting requirements, and the SEC is currently looking at this.
Wrapped up in the ESG bundle are diversity, equity and inclusion. The need for greater diversity in the workforce, from the boardroom to the lab, means that companies across the biotech ecosystem have been grappling with the challenge. However, leaders of companies seemingly need help with the complexity of increasing diversity while making their organisational culture more inclusive. There have been signs of good progress on single issues, such as adding a diverse candidate to the board or initiating community outreach programs with underrepresented groups. However, more companies still need to implement comprehensive DE&I strategies successfully.
The push for diversity has shifted how companies approach hiring and the talent pools they fish in. Long-term, there is a considerable change in the projected population demographics, and tomorrow’s talent is a part of the underrepresented today. It means more people in many new places could be future employees. Unfortunately, the promise of abundant talented new employees from different sections of society has not commonly translated to easier hiring, where diversity has been a goal or significant consideration.
Companies with a long-range view, for example, large-cap companies, have been keen to adapt to these new practices. At the enterprise level, they have been developing DE&I practices and tools many smaller companies have sought to emulate, with varying success. However, for companies whose future depends more on surviving the next data package or funding round, DE&I is only sometimes a priority, however strong the argument is.
Companies have bolstered their human resources teams in response to these demands. The past few years have seen the Chief People Officer established as a ‘must-have’ among c-suite appointments, with Chief Diversity Officers also popular. In addition, companies have built in-house recruiting teams, often picking the best talent the executive search companies have to offer. Venture Capital firms have also provided their portfolio companies with hiring support, establishing talent acquisition teams hunting the requisite skills needed by their innovator companies.
We’ve seen a stream of people migrating from large pharmaceutical companies, fleeing cumbersome global structures and bureaucracy for the agile and fast-paced dynamism of start-ups. As a result, equity ownership has become favoured over bonuses and benefits. Additionally, we have experienced a boom in the gig economy. This mobile, flexible, and adaptable branch of the workforce has been a valuable resource to companies that experience gyrating spikes in activity as drug development programs move through the phases.
Anyone making decisions for a business is typically more interested in what comes next than what has been. But looking back, sometimes not that far, crystalises how the workplace, and the people that inhabit it, are evolving. The past 10-15 years have underscored how important people are in the success of the life sciences industry and its companies.
Technology disruptions are part of everyone’s future, and the vast opportunities of AI and machine learning will likely drive the next few years. The workforce composition will transform as the strategies and policies for greater inclusion are implemented and improved, and employee demographics change. Employees’ relationships with their employers will continue to develop in new directions, and how and when they choose to work will also. The value of human capital and how to manage it will become strategically more important. How human capital is measured for its value, cost, and returns will increasingly integrate into the performance reporting of companies large and small. With natural and financial capital already core to any business, effective deployment and management of human capital are imperative.