That's the contention of venture capitalist Kevin Kinsella (of Avalon Ventures) as reported in this piece at Xconomy
“There have been numerous instances of what I refer to as bad behavior—combined with short-sighted, brass-knuckle negotiating tactics—by some pharma companies that really go to the heart of whether this partnership between Big Pharma and biotech can really continue,” Kinsella says. He maintains that the pharmaceutical industry is doing enormous damage to the life sciences venture capital ecosystem. “Their predatory business practices,” he says, “are pushing the sector almost to the point of extinction.”
He likens the process to commercial overfishing, and says that some CEOs may not even realize how much damage is being done. He lists several examples of bad behavior (see the article), but the common thread to them (to me) seems to be the attempt to keep every bit of the risk with the smaller company, until there's clearly money about to be made, at which time the money starts flowing to the larger outfit.
Trying to structure things this way, though, is how I've always understood the process to work. I'm not saying it's a good idea, just that it's not a new one. Maybe it's just been getting worse, but the big drug companies have always wanted to jam in those heads-I-win-tail-you-lose clauses. The way I heard it expressed 20 years ago was "So, you need a deal real bad? Well, here's a really bad deal!"
But here's the getting-worse-recently case:
Kinsella sees a confluence of forces that came together after the tech and biotech bubble burst in 2000, and has continued with the mortgage meltdown and ensuing capital crisis. As financial institutions scrambled to save themselves, they shed much of their payroll—including most of the Wall Street banking talent that had focused on the biotech sector. The investment banks that biotech built—Hambrecht & Quist, Robertson Stephens, Montgomery Securities—did not survive, and Kinsella says no “serious” banks remained to serve life sciences startups, or to underwrite biotech IPOs.
Another consequence of the Wall Street meltdown, Kinsella says, is that Big Pharma companies have been hiring the biotech bankers laid off during Wall Street’s financial purges. As he puts it, “The sell-side guys were going to Big Pharma [companies] and saying they can cut better partnerships or buyout deals since they have an ‘inside baseball’ understanding of venture-backed biotechs, and they know how to wring the most concessions from a biotech’s board.”
He may well have a point there, although my first thought after reading that was "GSK should have hired some of those guys before doing the Sirtris deal". But Kinsella goes on to argue that there's not much of an "IPO exit" any more, and hasn't been for several years, so smaller companies are more dependent than ever on doing deals with the larger ones. And his worry is that we're eventually going to end up with fewer small companies, and that disproportionately stocked with outfits trying to go it alone. The chances for mutually beneficial partnerships are, if he's right, going down rather quickly. . .