Big Pharma has maintained radio silence since Avalon Ventures’ Kevin Kinsella launched a verbal attack last month on what he called the industry’s “predatory business practices,” saying they are doing “enormous damage to the life sciences venture capital ecosystem.” The San Diego biotech investor, in an exclusive interview with Xconomy, argued that pharma’s brass-knuckled M&A tactics are pushing life science ventures “almost to the point of extinction.”
In San Diego, Kinsella’s throwdown prompted the San Diego Venture Group to organize an April 19 debate over the merits of the longtime investment model for life sciences startups. The local venture group recruited Canaan Partners’ Wende Hutton and Versant Ventures’ Camille Samuels to make the affirmative argument for equity investing in biotech, while Avalon’s Kinsella and Frazier Healthcare’s Robert More will take the “con” side of the question.
Kinsella’s critique also hit a nerve on the far side of the world—felt by Antoine Papiernik, a managing partner in the Paris offices of Sofinnova Partners, established in 1972 as the first venture capital firm in France. Of L’Affair Kinsella, or perhaps Le Provocateur Kinsella, Papiernik told me recently via Skype, “One should not accuse the other, finger-point, [saying], ‘It’s you, the pharma, who is destroying the biotech industry.’ Bullshit.”
Sacrebleu! Such words.
Papiernik says Kinsella might have good reasons for his tirade. But the French VC contends the pharmaceutical industry’s bargain-hunting strategy is predictable, given the incredibly weakened state of biotechs and their venture backers today. And he says you can’t blame that on Big Pharma.
What follows is a transcript of our conversation, which has been condensed and edited for clarity:
Antoine Papiernik: [Kinsella] is blaming the pharma industry for something that, well OK, maybe something [was] coming from pharma. But I see it mainly as a rapport de force, a balance of power, and the balance of power has been skewed in favor of pharma.
At the same time, if you think back over the past 15 years, our business is much, much better. As a venture capitalist backing biotech companies, I say it’s much better than it ever was. We have the proof in the pudding. We can say that we have managed to bring NDAs [new drug applications], new products, to the market, things that pharma has been very poor in doing.
So, “A,” we have been incredibly successful as an industry, [especially] if you look at things in comparison with pharma. And “B,” and most importantly in the last 15 years, the pharma [industry] has totally, totally been reshaped. Look at Pfizer today, this is just humongous change among the biggest of the biggest pharmas. They all are throwing the baby with the bathwater, totally changing what they call R&D into S&D, you know, Search and Development.
So we should be on top of the world. We should think, God! Yes! we have proven we can innovate, from early innovation to the market.
Basically what Kevin is saying is that it’s so unfair. We get a deal and we’re [supposed to be] so happy to get our money back and the hope of potential earn-outs that never come. That is basically because the venture industry is at an incredibly weak position, because the cash has not been forthcoming from our own limited partners, and we are under pressure. [VC] funds are under pressure, there are no more funds for some of them. Because of that pressure cooker of the venture industry, we are pressing our companies for liquidity. We are pressing them for liquidity, maybe a touch too early for what the companies can do. That’s my hypothesis.
There are deals where the balance of power is not so skewed, and there are a number of such deals, where you have five term sheets for an acquisition. Those deals a pharma has to do. They are bidding actually quite high prices for products that are still in the making. What Kevin is describing is that we as an industry basically need that cash so badly that we are agreeing to bad deals.
Xconomy: Is it different Europe, or do you and Kevin share a global perspective?
AP: It’s totally global. Our companies get sold to global companies in Europe and the U.S. On the IT side, I think it’s quite different. Social media is happening in the U.S. But in the life sciences, I would say it’s a totally global industry. The pharmas have no preconception where they buy companies. They are buying companies for the compounds they have or the technologies they have. From San Diego to Paris, it’s precisely, exactly the same.
X: Kinsella pointed to three specific areas of abuse, as well as a kind of overall, hardball business posture that isn’t really conducive to sustaining the venture biotech ecosystem.
AP: So why do they do it? Because they can. To me that’s it. The equilibrium only happens if you have the same pressure on both sides. And there isn’t. I think it’s because of the weakness of the venture-backed companies, partly because of the weakness of the venture groups.
I’m not excluding ourselves from that. We have the good situations and bad situations. We have signed deals where we thought, yeah, this is the only exit available and we better take it. It’s a down payment that’s meager, it’s something you [don’t want to] tell your LPs. If after eight years of investment, you make 1X of a potential 4X, we’re dead. We’re dead as an industry. So we cannot afford that over a long period of time. It’s just not possible. If we agree to too many of those kind of deals, it’s like shooting yourself in the knee. That’s why, as a survival instinct, you need to say ‘No’ to those type deals. It’s easier said than done. But that is the only way to conserve the industry.
Look at Plexxikon. I’m not involved with Plexxikon. I saw the deal 10 years ago, and I didn’t invest. Plexxikon got sold for $1 billion, you know, $800 million up front and $200 million in earn-outs. That’s a good deal. [Editor’s note: Daiichi Sankyo agreed to acquire Berkeley,CA-based Plexxikon on Feb. 28 for $805 million up front and potential milestone payments of $130 million associated with the approval of PLX4032.]
It’s normal that some part of the value lays in the future. It is normal, because indeed we are selling the future. We are selling a compound that will go through attrition, you know. It’s a discounted cash flow of the value ahead. Because Plexxikon had a number of suitors, they were able to get 80 percent up front and 20 percent in earn-out. If you don’t, well, it’s very simple. You get 20 percent up front and 80 percent in earn-out.
For me, it’s like negotiating in the souq in Marrakesh. It’s the same. If this guy hasn’t sold a carpet in a month, well, he’s going to go down five times. It’s human nature and [common] business practice. One should not accuse the other, finger-point, [saying], “It’s you, the pharma, who is destroying the biotech industry.” Bullshit. I have had more constructive discussion with pharma over the last five years than in the previous 10.
They have huge problems of their own. And yes, of course, they still come with this initial look of arrogance and they discount anything a biotech company tells them. But a lot has happened. A lot of the management of our [portfolio] companies are ex-pharma guys who know exactly what pharma wants. And big pharma, by the way, is saying, “Yes, innovation and early development has to be done in the small companies because we can’t do it. We don’t know how to do it. We’ve created these monster tankers of R&D, and we have failed. We are fantastic at developing products. We know exactly how to do that, from the sort of mid-stage to later stage. We are fantastic at registering products. We know what it takes to do that. But we are not good at the early innovation.”
I should say at Sofinnova Partners in Paris, we have had $3 billion worth of company valuations exit our portfolio in the last two years. We have sold quite a few. We are the single largest share of that pie, because no other investor was owning more than us. We were in every case the founding and largest investor in those companies. Some of those deals were fantastic deals, others were not so fantastic deals where there was a small upfront [payment] and a large earn-out and we are fighting for those earn-outs. But all-in-all, it’s a pure balance of power. If what you have is worth a lot, and you have three suitors, then you’re going to get what you want.
I can tell you that [during] those discussions, when you have five VCs around a table, one [usually] has not had an exit in five years and is trying to raise a fund desperately. That’s another point. The syndicate behind the company, and each individual situation of those funds can influence that sale. Those companies that have investors who are stable, who don’t absolutely need an exit, those companies have a chance. On the other side, if you have a bunch of guys who need to get out, then the company is in dire straits and they are going to sell at the first offer to come.
X: Hasn’t Kinsella at least provoked a healthy debate?
AP: To be honest, I don’t think so.
I mean, it’s always healthy to say what you think. OK? Don’t keep something back that you want to say. And Kevin Kinsella has been long enough in this industry to say whatever he wants, and that is good. What he describes is a photographic image. Maybe he thinks it’s a film of the past five years. But it’s an image of what’s happening today. Being more of an optimist, I see on the contrary a fantastic chance. The macro of this sector is in our favor much more than it ever was. In science, there is homeostasis, you know, equilibrium. We don’t have equilibrium, and biotech is weak because their founding fathers [in venture capital] are weak. So [maybe] it is a good debate, but what is it going to change?