Avalon's founder, Kevin Kinsella, says that Big Pharma predatory deal practices are about to destroy the life science or biotech VC community (or ecosystem as he calls it). Since 2000, Kinsella says the situation has deteriorated. In an article in Xconomy-San Diego, he cites the following types of practices from Big Pharma's business development groups as particularly detrimental:
- Deals with biotech have become completely back-ended. Big Pharma is only providing enough upfront payments in deals to compensate the original VC investment. All other upside must come from future milestones that are in the distance. [Ed. note: I don't find that surprising given some of the large front loaded deals of the past that didn't come close to paying off for Big Pharma. Sounds like a little VC whining to me. Likely will reduce VC activity in this area though]. The upshot is that VC's will be less than enamored to invest in early stages and to provide follow on funding.
- Bad faith negotiations. Kinsella cites an increase since 2005 in instances where Big Pharma negotiated acquisition deals to completion and then walked away with no explanation. The motive appeared to be deal shopping in some instances. [Ed note: I agree this is highly unethical practice - especially if occuring with increasing frequency. It will make biotech's and VC's gunshy].
- Partnerships without risk. Big Pharma is increasingly leery of funding any early stage work. Kinsella characterizes anything being offered prior to phase III as a "crappy deals". In many cases, he claims Big Pharma may be more interested in tying up IP than developing the property to commercial. That means VC's have to raise more money and absorb bigger risk. The liklihood is that fewer of these projects will get funded. [Ed. note: My take is that it is rational for Big Pharma to want to do this given the past failures. However, Kinsella is undoubtedly correct that this will result in less VC activity and fewer funded projects in this area under those conditions. Also Big Pharma will end up bidding against itself for those fewer phase III projects - driving up their price. This is likely unsustainable if all Big Pharma tries this approach].
Kinsella says in the article, "One might say that all this is just the way capitalism works, and on a micro level, I can't argue that." So don't, I'd say.
However, Kinsella warns that VC's are less willing to assume risk of developing early stage drugs in chronic disease areas - and are more inclined to go after more me-too applications in defined areas. That will reduce investment in innovation needed for areas like heart disease, neurological disorders, osteoporosis, and other chronic diseases.
Almost anything else requires too much capital, too much time and too much reliance on a predatory Big Pharma BD team. This results in aversion to risk, lower innovation, fewer venture funds for life science, less capital to invest and fewer biotechs.
Isn't that cheery?
Posted by Bruce Lehr Feb 19th 2011.