Xconomy
by Bruce V. Bigelow
Almost two months ago, Kevin Kinsella of San Diego’s Avalon Ventures, fired off some shots heard ’round the world, saying that Big Pharma’s hardball acquisition tactics and mercenary business practices have been pushing biotech ventures to the point of extinction.
In Paris, France, Antoine Papiernik of Sofinnova Partners responded by contacting me and saying, in effect, “So what?”
So what if the balance of power is skewed in favor of Big Pharma? So what if pharma companies walk away from buyout deals after months of negotiations? They do it because they can. And so what if biotechs are accepting buyout offers with unfavorable terms? It just reflects how weak biotechs and their venture capital backers have become.
Sofinnova Partners was established in 1972 as the first venture capital firm in France. Papiernik, who joined the firm in 1997, has invested in life science companies that have gone public on stock exchanges in Zurich, Stockholm, Milan, and Belgium. He received his MBA from the Wharton School of Business at the University of Pennsylvania.
And how did Kinsella react?
Antoine Papiernik
“It’s like the French do,” he told me with a shrug and a brief fluttering of his lips, a snort-like gesture of dismissal that he says the French call “buffo.”
“He basically took refuge in the notion that, ‘Oh, times are tough. They’ve been tough before. They’ll get better, and then they’ll get tough again,’ ” Kinsella says. “But if it was just sort of the normal warp and woof of our industry and its relations with pharma and so forth, I wouldn’t have said anything because that’s not remarkable,” Kinsella says. “That’s a ‘dog bites man story,’ and who cares? But this is a ‘man bites dog story’—or maybe it’s more of a Pharma bites biotech story.
“Papiernik’s point of view is very Darwinian, and that’s fine,” Kinsella says “But it doesn’t go to the issue that I was trying to point out, which is that it’s not just a matter of entities at the margin that are going extinct. It’s the core of the [biotech] ecosystem that is threatened.
“He seems to be saying that the weak will be left by the wayside and the strong will survive,” Kinsella adds. “But after a certain point of damage to the ecosystem, the strong won’t have anything to eat either.”
Kinsella maintains that venture-backed biotechs are backing away from developing drugs for chronic diseases of aging—the toughest categories of metabolic disease, cancer, and neuro-degenerative disorders—because the costs and time required for extended pre-clinical development and extensive clinical trials have moved beyond the scope of venture capital, or even venture capital syndicates.
Venture biotechs are instead focusing their resources on easier bets with lower risks, by focusing on late-stage drug development, orphan drugs, and so called “me too” drugs that improve on existing compounds, or repurpose existing drugs for a different use than the FDA approved.
Kinsella says that during a recent dinner with a dozen biotech venture capital leaders, not one “was willing, from an investment thesis perspective, to build a bridge halfway across the chasm. “That other partner in the old days was pharma, and they’re just not there for you any more,” Kinsella says. “They want to beggar your investment thesis and grind you to the bone, or walk away from a deal. The default assumption today is that if you need a pharma company to step into your shoes at any point prior to Phase 3, it’s almost guaranteed that you’ll get a crappy deal. So why would any biotech investor or biotech executive want to beat their head against the wall?”
If you are a venture capitalist or you’re in biotech and you have a crappy deal on the table, you’ll have to ask yourself if it’s better than nothing—and “Yeah, probably, it is almost certainly better than nothing,” Kinsella says. “But if you’re a VC, is that a deal, or are a series of deals like that going to establish your reputation as a competent investor? Hell no.”
If you think of venture capital investing as a pure financial asset play, where VCs are just investing in biotech, or high tech, green tech, or social media, Kinsella says, “venture capitalists don’t need the biotech industry. They’re perfectly jolly making money however they can. But pharma needs products. Pharma needs the biotech industry.”