Editor’s Note: This article, Part 2 of a two-part series, is excerpted from “The Continuing Evolution of the Pharmaceutical Industry: Career Challenges and Opportunities,” published in December 2007 by Michael Steiner and colleagues at RegentAtlantic Capital, LLC. Where Part 1 offered an overview of the issues shaping pharma, Part 2 focuses on individual career and financial planning.
Given the changes transforming the pharmaceutical industry, summarized in Part 1 of this article, every pharmaceutical industry professional must develop a career strategy that takes advantage of his or her unique human capital. This type of career planning is a very personal activity involving many variables and can be quite complex. There is no “one-size-fits-all” career planning strategy, but here are some prerequisites.
Assess Your Tolerance for Risk
From a top-down perspective, the pharmaceutical industry today is similar to the structure shown on the left side of Figure 1.
Over time, we believe that it will more resemble the structure on the right. Much of the growth in the numbers of small companies and independent contractors in the future will result from pharmaceutical companies embracing outsourcing on a much grander scale. Many future employment opportunities will be with smaller companies and contractors.
Determine Your Best Culture
An important step in any individual’s career planning process is determining which type of corporate culture offers the best personality fit for the employee. Despite the challenges that we outlined in Part 1, large companies will continue to offer excellent long-term careers in the pharmaceutical industry. However, the cultures of large pharmaceutical companies will change as their business models evolve, de-emphasizing R&D and increasing focus on marketing and sales and short-term, rather than long-term, results.
Assess Risks vs. Rewards
Understanding the risk involved in each employment opportunity, as well as one’s ability to bear risk, is paramount. All career choices involve some degree of risk. Everyone in the industry knows of someone who joined a start-up and made millions of dollars. What is often not discussed, however, is the risk that the individual took in pursuing this type of career opportunity.
Only about one in five venture-backed biopharmaceutical start-ups succeed. This issue of risk — and one’s ability to bear it — often becomes a dominating factor when making career choices. Many people can’t choose to work for a start-up or become an independent contractor because they simply lack the financial resources necessary to maintain an acceptable lifestyle should their career bet fail.
The Economic Impact of a Career Change
Because people who work in the pharmaceutical industry typically have a wide variety of investment assets, it can be difficult to gauge the exact value of what they own, in addition to what type of lifestyle those assets will support. For example, a senior manager who has worked for a pharmaceutical company for many years will often have many different financial assets. These might include: numerous sets of stock options with different strike prices and vesting dates, company stock acquired from different restricted stock grants and/or purchased through the company’s employee stock purchase plans, a defined benefit pension plan (i.e., traditional pension), and nonqualified deferred compensation.
Additionally, senior managers will often own mutual funds, as well as individual stocks and bonds purchased through their company’s 401(k) plan or with savings using after-tax dollars. These high-level executives typically also have material real estate investments in the form of a primary residence and, oftentimes, a vacation home, too. With so many different types of assets, determining one’s resources is a complicated exercise. It is an even more complex exercise, however, when one must include the effect of taxes in this analysis.
Determining Your Financial Situation
Consider a typical pharmaceutical industry executive’s case. The individual has spent his or her entire career with a single employer and most of this person’s net worth is invested in one form or another in that company’s stock. For purposes of this example, assume that the individual is 55 years old and holds investments worth $2 million. Over time, if the portfolio appreciates at a rate similar to that of the expected returns from a typical diversified portfolio – that is, one with 30% invested in U.S. large company stocks, 5% in U.S. small company stocks, 20% in international and emerging markets stocks, 25% in bonds and 20% in alternative investments – this portfolio would be worth almost $5 million in 20 years. The next step is to determine how much — in terms of after-tax dollars — this individual will need every year to support an acceptable lifestyle.
Assume that he or she plans to work for 10 more years and currently spends about $150,000 per year after taxes. When considering the effect of inflation, in 20 years this person will need more than $270,000 plus taxes per year to maintain a similar lifestyle and more each year thereafter. The good news is that with a $5 million portfolio in 20 years, it is highly likely that this individual could maintain his or her lifestyle to age 95.
It is important to note, however, that this example is overly simplistic.
- The tax treatment for each of the assets is different, and is tied to how and when the funds are used or the assets are sold.
- Investments such as stock options have finite lives and the timing of their exercise likewise significantly affects the value achieved.
- This individual must pay taxes on all gains recognized each year on his or her after-tax investments.
Most importantly, nearly three quarters of this individual’s portfolio is invested in the stock or stock options of his or her employer. From any rational investment perspective, such an asset allocation is extremely risky. Vioxx provides an example of what can go wrong. Consider a hypothetical Merck employee.