02 May Perspective: The Life Science Industry Post SVB
An interview with DeeDee DeMan
Were you surprised by the news of Silicon Valley Bank’s collapse?
Not at all. Many of us lived through multiple banking crises, including the failure of the entire S&L sector over 40 years ago. Banking executives may be younger (or have shorter memories…) and have forgotten the painful, yet relevant lessons from that disaster.
I have a deep respect for banking regulations and guidelines and was concerned about the VC-like brand and business model of Silicon Valley Bank (SVB). SVB was considered the ‘cool bank’ for the emerging growth market, both tech and life science. Banks should not be deemed “cool” but instead focused on the conservatism of the fundamentals and responsive to clients’ faith and trust that their banking institution is making well-vetted, rock-solid investment decisions. And they certainly should not function with the same mentality and risk profile as venture capital firms are capable of taking on. They have a duty to inform their clients, at all times, of the inherent risks of the model.
The life science industry, and especially emerging growth companies, are already suffering with the lack of access to capital that drove the 2022 downturn and remained through Q1 2023. That said, the 2023 JP Morgan conference indicated some glimmers of hope, with investors taking meetings and showing a bit more interest in companies who have achieved substantive R&D milestones. The financial reality for emerging companies targets the need to preserve or raise enough operating capital to at least get through the end of 2024, or early 2025, hoping for a new window for more significant fundraising or a return to IPO opportunities.
The chilling effect SVB’s fall from grace has had on other financial institutions is profound. And so goes the even tighter constraints on lending as a route to access to capital. Further wake turbulence is seen with other forms of investor scrutiny, particularly notable as to investors’ appetite for hanging in with early-stage companies requiring patient investors who are prepared to play a long game.
Ultimately, this will be a setback for innovation. Big pharma will place even more pressure on the innovator companies to take more and longer risk. My sense is that in the next 5 years this will play out to where we see fewer new and innovative assets in late-stage development, or at approval.
What should life science boards be doing now to minimize the fallout from our current banking challenges?
As I mentioned, the collapse of SVB places greater strain on an already tenuous operating environment for biotechs, requiring deeper cuts into drug development programs and personnel to survive the next 12 to 18 months. As such, boards need to pivot and adjust their thinking as well. The new environment has shifted some of the heavy lifting to other parts of the board. What’s interesting is that it was just a few years ago Independent Directors wanted to avoid Audit Committee, preferring Governance and Compensation Committee seats. Now Governance is equally, if not more time consuming with inherent complexities as we see valuations dramatically drop with understandably aggressive shareholder response. Compensation is also far more scrutinized, particularly as it relates to CEO compensation. Shareholders’ tolerance level has lowered significantly for elevating comp packages for C-suites as they are in the midst of staggering downturns in valuation.
What is your advice for biotechs to rebound from this downturn?
Sadly, a number of companies will not survive. They will be acquired (at a bargain), sold for parts or simply closed. We will continue to see quantum pressure toward survival of the fittest. Layoffs will continue as companies prioritize programs, and cut others, to extend their cash runway.
I believe a new breed of tiger is needed in the C-suite – a more aggressive return to servant leaders who are doers and hold themselves up as accountable leaders. That’s where Bench is most needed. Our very rigorous, multidimensional candidate assessment is designed to find candidates who not only possess the technical skills, but those who possess the behaviors, beliefs, adaptability, and the guts to effectively manage change, often very painful change.
Companies must also rethink how they compensate and incentivize key executives. I am already seeing more milestone performance equity being put on the table, rather than just huge cash salaries and cash compensation without milestones heretofore required. As a milestone accountable search firm, we thrive in this environment that requires us to stand and deliver.
On a positive note, as an industry, we have made progress in the DE&I realm and that needs to expand. I am seeing a breakthrough for women in the less classic roles of CFO, general counsel, chief business officer, and chief operating officer. Companies are not just looking at women as leaders because they need to satisfy some sort of requirement. Enlightened boards and C-suite leaders understand the inherent value of diversity within their ranks and want a true balance. And those are the types of companies we completely throw ourselves into, in order to get it right and support their ability to thrive in this ‘interesting,’ world.