Matching Supply and Demand Is Easier Said Than Done

In biotech, layoffs typically happen for two reasons: It turns out a product can't get approved because it doesn't work, or it gets approved but the expected demand isn't there.

I've written about the former -- and how investors should be focused on getting to the finish line -- but the latter seems to be a growing concern. Earlier this month, Dendreon (Nasdaq: DNDN  ) let go of 25% of its workforce after a slower-than-expected ramp in sales of its prostate cancer treatment, Provenge. And this week Pacific Biosciences of California (Nasdaq: PACB  ) announced a 28% reduction less than a year after its IPO.

Pac Bio sells third-generation sequencers and apparently the demand isn't as great as the biotech was expecting; shares dropped more than 23% on the news yesterday. Investors are rightfully worried that the lower-than-expected demand isn't just for the Pac Bio RS machine but for all sequencers in general. Both Illumina (Nasdaq: ILMN  ) and Life Technologies (Nasdaq: LIFE  ) , which sell competing machines, traded down yesterday. Even Complete Genomics (Nasdaq: GNOM  ) was down, although it doesn't sell sequencers but is a service-based company that sequences genomes for researchers.

It's a tough spot for companies to be in. Do you plan for the best and cut your losses? Or plan small and try to expand quickly if demand picks up? The latter can be just as costly. ViroPharma (Nasdaq: VPHM  ) ended up supply-constrained with its hereditary angioedema treatment Cinryze after demand outstripped supply and the FDA didn't sign off on its plan to expand manufacturing.

While no one wants to see people lose their jobs, layoffs are a necessary evil of high-growth companies trying to maximize profits. I'd much rather Dendreon and Pac Bio conserve their cash now in the hopes of being cash-flow positive at some point than have to dilute their shareholders even further through capital raises to pay the additional salaries.