Biotech Layoffs Hit Hardest In Discovery

As the financing drought continues and their cash supplies dwindle, biotechs are resorting to big layoffs to drastically cut back on spending (See exhibit 1). But however rigorous a company's turnaround effort, the target of the layoffs always seems to be discovery research, with the remaining employees focusing on clinical programs.

As the financing drought continues and their cash supplies dwindle, biotechs are resorting to big layoffs to drastically cut back on spending. (See Exhibit 1.)

Some of these layoffs look to be part of fairly systematic restructuring processes. For example, at BioTransplant Inc. , CEO Donald Hawthorne, hired in June to replace Elliot Lebowitz, uses one-on-one interviews with the executive team and meetings with all department heads to assess the value of every corporate program. Once he's done so, he says it's critical to make decisions quickly, ensure that the cuts are deep, and assume "no project is sacred." As such, after just 21 business days, the Board approved a detailed operating plan that reduced the workforce by 23% and the burn rate by 25%.

Hawthorne, who's led six turnaround efforts, maintains that the work doesn't end after the expenses are reduced. "A lot of people focus on the financial component. This is necessary, but not sufficient," he suggests. "It is also critical to focus on people and operating goals. You need to ensure that the team continues to have a sense of purpose."

But however rigorous a company's turnaround effort, the target of the layoffs always seems to be discovery research, with the remaining employees focusing on clinical programs.

In August, for example, EntreMed Inc. announced a decision to direct its resources towards the "continued development of its three lead drug candidates, all currently in Phase II clinical trials." The narrowed operation will lose 25% of its workforce, a cut that along with other measures (like partially deferred salaries for senior management) will trim operating expenses by 30-40% beginning in Q4 2002.

Likewise, in September, Dyax Corp. announced that the firm will focus more on therapeutic product development and scale back discovery research. Largely thanks to cuts in research staff, Dyax reduced its workforce by 16% and the annual burn rate by $4-5 million. Dyax's CFO, Stephen Galliker, also points out that the company is reducing expenses by consolidating purchasing, leasing unused space, and reducing reliance on consultants.

Sometimes the restructuring has an impact on collaboration efforts. Back in May, Ted W. Lowe, MD, CEO of Hyseq Pharmaceuticals Inc. , ended a research collaboration with BASF AG [See Deal] earlier than planned so that Hyseq management could focus on "consolidating our research efforts to allow us to continue to move aggressively into the clinic." SVP and CFO Peter Garcia explains that Hyseq's goal is to reduce the monthly burn rate from $4 million to $2.5 million by the end of Q4 2002. Savings will come from "realigning research groups" and eliminating 79 employees. Additional efforts include cutting back on facilities expenses.

But in other companies, clinical efforts are themselves a luxury. Earlier this year, NeoTherapeutics Inc. reduced its staff from 105 to about 43 in the process of focusing nearly all of its efforts on the Phase III oncology compound, satraplatin. But new CEO Rajesh Shrotriya, MD, appointed in August, was forced to reduce the monthly burn rate still further: to chop it from $1.7 million to $500,000, he laid off another 23 employees, and along with three other senior executives, deferred his entire salary until the company strengthens its cash position. As a consequence of the reductions, Shrotriya has now had to give up satraplatin. He licensed it to GPC Biotech AG , which will incur all of the estimated $30 million in development costs [See Deal]. NeoTherapeutics will receive $2 million up front plus an additional $2 million when the first patient is dosed in a Phase III study, and the possibility of a further $18 million in milestone payments.

Are these changes good for the industry? Friedrich von Bohlen, PhD, CEO of Lion Bioscience AG in Heidelberg, Germany feels that the current financial conditions will cause companies to "find the valuable core." Hyseq's Garcia commented that firms would be "generating value rather than news."

And certainly such cutbacks and focus on lead clinical candidates have helped other biotechs before this current crop survive and even thrive. Amylin Pharmaceuticals Inc. endured the loss of 80% of its employees and the sacrifice of nearly all discovery momentum in 1999. Today, thanks to a single-minded focus on its two latest-stage compounds, the company is sitting on $96.1 million in cash and short-term investments and has a new and rich partnership with Eli Lilly & Co. [See Deal]. (See "Amylin/Lilly: Resurrections and Conversions," in this issue (Also see "Amylin/Lilly: Resurrections and Conversions" - In Vivo, 1 Oct, 2002.).) What's less clearly visible, at Amylin and at the current set of biotech belt-tighteners, are the pipeline gaps opening up behind the later-stage compounds as these companies are forced to pass on research opportunities.