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fund a deal unless there is enough money around the table in the venture syndicate to finance the typically one-product biotech through Phase III or even NDA approval. At that point, Kinsella says, the pharma companies know how to properly value a biotech asset and will have to participate in an auction to buy the product or company.
“This is actually a terrible position for the Big Pharma companies to be in, having now shot themselves in the foot through their now not-so-clever deal-making tactics,” Kinsella says. “If venture-backed biotech companies shrink in number, go after small markets, and won’t partner earlier-stage products because of the predatory economics offered, the pharmas will have no dependable pipeline with partnered products at various stages, won’t know from one year to the next what new products in which therapeutic sectors they will be marketing, and will be just ‘hanging around the hoop’ with the required fat wallets to try to outbid the next guy to grab a product ready to go to market. This obviously only favors the largest and most well-capitalized pharmaceutical companies and will leave the already shrinking, innovative, far-seeing smaller pharmas out in the cold, further down-sizing the sustainable ecosystem.”
In the golden days of biotech, Kinsella says Wall Street viewed biotechs’ partnerships with Big Pharma as a much-prized stamp of approval—a sign that the underlying science made sense and that the target molecule was worth pursuing. Now, after decimating their internal research programs for failing to deliver approvable drugs, Big Pharma has turned to biotech to supply its new product pipeline. But Kinsella says the industry’s aversion to risk is forcing venture capital syndicates to provide all the risk capital.
As a result, Kinsella says venture-backed biotechs are increasingly wary about entering into pharma partnerships. The partnership deals, like Big Pharma’s buyout offers, are virtually always skinny in the up-front, and the milestones are so long in coming that biotechs must repeatedly return to the venture capital well for more working capital. The result is what Kinsella calls “a dreadful liquidity trap” that requires more venture money to be poured into the biotech company—whose products are ultimately committed to Big Pharma’s pipeline—without building inherent value in the biotech itself, or providing a return for its venture investors.
“The end game is ugly,” Kinsella says. “The biotech’s best products are tied up by crappy deals with Big Pharma; the biotech beast has been continually fed to sometimes enormous size by venture capital, but the company is not an attractive acquisition candidate since its key products are tied up with other pharma companies—who become the only potential buyers in a diabolical oligopoly situation.”
By the time venture capitalists are six years into these investments, Kinsella says they begin to scramble for the exits, since venture funds typically have a 10-year life. The pharma companies then pounce with their default, “we’ll give you your money back” deals, (with all upside on the back end).
In short, Kinsella says he’s never seen the startup biotech ecosystem as challenged as it is today. By behaving, in his estimation, unethically and unpredictably, offering lousy deals to partner biotech products, trying to outwait venture capitalists to force them into negative-return exits, the pharma companies have created and are fueling a vicious cycle that will leave the ecosystem with fewer venture capital funds, less capital to invest, fewer biotech companies, fewer critical and creative therapeutics, and far fewer innovative drugs for pharma’s own pipelines. By their predatory and destructive behavior toward the ecosystem in which they live, Kinsella says, big pharmaceutical companies “will shrink and wither and die. And society will have to bear the brunt of their greed—as it always does—this time by having a paucity of innovative therapeutic products for medicine.”
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