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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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February 24, 2011

Is Big Pharma Killing Startup Companies?

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Posted by Derek

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. . .

Comments (31) + TrackBacks (0) | Category: Business and Markets


1. anon1 on February 24, 2011 9:32 AM writes...

This is pretty ridiculous. Many small companies (driven by VC backers) that I've seen will have objective for an "exit strategy" from the get-go, essentially defined as "how do we recover our investment money with a nice profit margin in the shortest time, pass on the longer term risk with higher development costs & with the least money invested."

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2. wwjd on February 24, 2011 9:41 AM writes...

No one is forcing the biotechs to do the deals. Funny a VC guy complaining about unethical behavior. Talk to some employees of biotechs sold at a fire sale. The VCs always seem to walk away with their money, the employees are last in line.

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3. Hap on February 24, 2011 9:50 AM writes...

No, but even Khruschchev knew that killing your cash cows may get you one very good dinner and a lot of starvation.

Since drug companies have decided that finding their own drugs is not part of their business model, it seems like a good idea for them to preserve that capacity in biotech (otherwise, they'll be dead too). If screwing VCs ends up killing you, then it's a bad idea, regardless of your dislike for them.

Considering the lack of forethought of pharma management, nihilism seems like a highly plausible theory for their behavior, and one that won't end so well for us.

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4. David Formerly Known as a Chemist on February 24, 2011 10:19 AM writes...

Kinsella's comments are certainly biased toward the interests of VC financiers. There are so many articles floating around about how inflated the price of drug candidate licensing has become due to the dry pharma pipelines, with multiple pharmas competing for the same assets. Who's telling the truth? I'm sure there are plenty of examples on both sides of the argument. My guess is that the better, more promising assets are attracting high prices, while other, less attractive candidates sell at desperation prices. If Kinsella's biotech portfolio is being outmaneuvered by those slick pharma/former Wall Street BD guys, perhaps he should take a more active role in helping his portfolio companies negotiate better deals. I'm sure his VC fund has a board seat, he should take a more active role in making sure his investments don't get screwed. Hard to feel too much pity, and frankly I don't buy it.

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5. HelicalZz on February 24, 2011 10:37 AM writes...

I don't blame the guy for venting. His options for exits are limited, thus his ability to negotiate those exits are as well. But this is a surprise to who exactly? I summarize the opinion as 'we don't want the revenue struggles of big pharma to spill over to affecting our business strategy'. Well, they are going to, plain and simple. Perhaps if the pharma / venture buyout deals of yesteryear had led to better or more success stories that would not be true today. Pharma is cautious by experience, so get used to it. The 'more sustainable ecosystem for drug development' isn't the old way, or making sure the venture guys make their returns. If the venture community doesn't want the risk, they don't deserve the returns anyway.

This part bugged me.

“One might say that all this is just the way capitalism works, and on a micro level, I can’t argue that,” Kinsella says. “But on a macro level, I’m gravely concerned about what it means for the venture-biotech ecosystem. The providers of venture capital need to see a return, as do all participants in any ecosystem.”

First, I wonder if the micro/macro mixup is an 'oops' or due to his perspective. Second, he seems to want to public shareholders of pharma companies to willingly continue to pass on their 'returns', so that venture can continue to get theirs. As a public shareholder of a few pharmas, that offends me.

Pharma is struggling to adjust its business model, venture capital must do so as well. In a market economy 'booms and over corrections' are the natural state of things. Unfortunate, but it still works better than any other system I know of.


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6. barry on February 24, 2011 11:35 AM writes...

maybe I'm an overly-reductionist scientist, but I would point at the weak market for IPOs as the main cause and downplay the rest. If getting bought is the only game in town, start-ups are not going to start up.

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7. Lester Freamon on February 24, 2011 11:50 AM writes...

We all long for the days when all you needed to get a $250M buyout from big pharma was a sexy target, flashy website, and phase I data showing your molecules don't kill anyone, but we need to get real.

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8. Hap on February 24, 2011 12:00 PM writes...

I hate to take the side of vulture capital, but if there's no payout (or not enough) in funding a biotech, they will simply fund something else. No fnding means no biotech, and no compounds for pharma to inlincense. Since pharma seems to have relinquished its committment to actually finding drugs, that seems like it might eventually be a problem, no?

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9. entropyGain on February 24, 2011 12:11 PM writes...

Shit rolls downhill...

@2 is correct that the employees are at the bottom of the hill. Brass knuckle tactics of pharma are nothing compared to tactics of many VCs (although Kinsella has a reputation for being one of the good guys, more or less). Liquidation preferences etc often leave the founders/mgmt with nothing after the exit that the VC's may force upon them. And of course management will make sure it gets fed before employees.

VCs are getting increasingly cut out of the deal and that segment of the industry is shrinking as well. Why should the limited partners pay VCs to try to flip crappy discarded drugs or invest in publicly traded companies?

The real question is sustainability of our ecosystem and overfishing is not a bad analogy. Maybe clear cutting old growth forests without replanting is another, but I wouldn't want to get distracted by tree-hugger arguments.

Time to plant some saplings

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10. processchemist on February 24, 2011 12:37 PM writes...

The problem of a sustainable ecosystem never bothered a financialized economy.
IMHO the absence of IPO exits is not such a bad thing. Some serious biogarbage has been quoted in the last 15 years, and most overhyped startups waving cutting edge tech are now dust or penny stocks.

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11. CMCguy on February 24, 2011 1:19 PM writes...

I have observed this from both sides and agree there are now more definite problems of the type Kensella notes, however like other commentators view VCs are no less blameless in lack of start-ups (founding or surviving). For Biotech/Entrepreneurs the choices seems to be swim with White Sharks (Big Pharma) or with Piranha (VCs) with neither being good for your health. The "Greed is Good" mentality strongly predominates both and ultimately does not care what products are, or the people who discover/make them as long as profits roll in (at predetermined levels). While I understand and believe in role of drug industry R&D being part of a business, otherwise I would be one to advocate just let NIH do it regardless of cost and inefficiency, the majority of Pharma seems to have lost touch with science and the majority of Biotech has no clue how to convert science to meds and all this selfish finance stuff just gums up the works.

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12. Rick on February 24, 2011 1:31 PM writes...

First off, it's just kind of dumb to attribute the problems to a single cause. It reminds me of the way news reports for genomics companies have for years said things like "Whiztech discovered that gene X causes disease Y!" It's intellectual dishonesty that crosses many ethical, if not legal, lines.

At the barest minimum, there are two parties responsible for problems with these transactions: a buyer AND a seller. Kinsella would do well to ask what made the sellers (which happen to be people like him) so gullible/venal/short-sighted/mean as to go into deals like this?

If this is the best that highly respected figures like Kinsella can come up with, then as you say Derek "The chances for mutually beneficial partnerships are... going down rather quickly..."

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13. Cellbio on February 24, 2011 2:44 PM writes...

As usual, great comments, and mine are in line with those above.

VCs made a killing selling overhyped assets to Pharma prior to the captial market collapse. In the good ole days, the risk was passed onto Pharma, and I am sure many of us have been the unlucky fools on the technical side that had to work with the crap bought for 10s of millions, only to be found to be lacking (actually known to be lacking in quality before the deals was done). I myself have seen 20MM dollar deals and 200MM dollar deals and 2 Billion dollar deals all that had no ultimate, sustained value in the purchased assets.

Now, with fewer investors as one driver, wiser buyers as another, VCs must expect to maintain portfolio companies longer, and actually advance to a point when value is more apparent. This model is kind of like the early days of biotech, except the public markets do not offer further financing that helped the Genentechs and Amgens in the 80s. This is a real problem, but to me the answer is clear. They need to employ more technical people, and very few of the McKinsey trained types that dominate the firms today. The financial types don't know how to move a drug down the pipeline, don't have a deep appreciation of what is real value. The market changes mean it is no longer about how to detail an asset, and do a deal based on financial model valuations and market comps, but how to execute wisely to display real value that differentiates a product.

Anybody out there have 500MM or so? This audience of Derek's could do a better job of investing than almost all of the VC firms. We would even employ a few financial types as well. Someone has to keep the books.

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14. emjeff on February 24, 2011 3:21 PM writes...

Boo-hoo, woe is me....

This is business, folks...

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15. Ex-VC on February 24, 2011 5:33 PM writes...

Kinsella, like most VC's live in a world of hubris and self-adulation. Though pharma is a tough negotiator at times, the real demise of the biotech industry has been the well-documented idiocy of the venture groups who move like lemmings and believe their own drivel rather than listening to the science. The cure is to eliminate the majority of the large VC funds and start anew with smaller more nimble funds that understand drug discovery & development.

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16. SmokingWhat? on February 24, 2011 5:40 PM writes...

I can commiserate with all the comments but especially @16. Even the corporate venture groups seem to have lost their way. Look at SR-1 led by a consummate BS artist who runs his own fund on the side AND was selling resveratrol OTC via the internet and making a personal profit! How can any group expect quality, un-biased decision-making in such an environment.

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17. bbooooooya on February 24, 2011 7:57 PM writes...


A VC who, if he's like most successful VCs, negotiated the biggest percent ownership he possibly could at the best terms with bright eyed scientists, is now whining that someone else is trying to do the same to him?

This guy is full of crap, if he were truly an altruist he would donate all his money to (name your disease) research and step away. Zero chance he does that. He's a capitalist who is being hoist on his own petard.

There's nothing wrong with being a capitalist, but own up to it.

I wonder if he sees the irony in speaking on the biotech bubble of '00 (a bubble which, based on his years in the industry, he likely helped create)? Sounds like he may have too much money clouding his vision to grasp this.

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18. cancer_man on February 24, 2011 10:58 PM writes...

"....although my first thought after reading that was "GSK should have hired some of those guys before doing the Sirtris deal".

Not so fast. Sirtis brings good things to life.

Wait-- that was GE.


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19. JGault on February 25, 2011 12:51 AM writes...

Come on!
I think this may be the most self delusional piece of nonsense I have seen since O.J. professed his innocence. Bottom line, Kinsella is actually saying that big pharma should not try to get the best deal they can with biotech because his funds do not want to invest long enough to remove the risk of failure. Really? Having been on both ends of the table I can tell you, while Pharma has done some nasty crap, I would score it about 1 to 4 compared to the crap science biotech has tried to peddle.

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20. cliffintokyo on February 25, 2011 4:56 AM writes...

There seems to be quite a lot of business expertise among the excellent comments on this post.
How about all getting together....and starting a science-based R & D pharmaceutical company....

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21. processchemist on February 25, 2011 7:53 AM writes...

In Europe there are currently few public financial initiatives that are slowly growing in the field of seed and venture capital. Ironically, most small public funds were born over a decade ago to fill the gap with US in the sector of venture capital. And now, in a moment when BA and VC have developed a total risk adversion, these funds are de facto the only resource available. Small, but available.

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22. henry's cat on February 25, 2011 8:59 AM writes...

Question: how do you make a small fortune?

Answer: take a large fortune and start a science-based R & D pharmaceutical company.

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23. newnickname on February 25, 2011 9:10 AM writes...

My time in biotech was an eye-opener. I think there is a direct correlation between VC greed and incompetence and there is an awful lot of both.

I'll read the source article later but my observations are that short sighted exit strategies and quarterly or two year timelines are corrupting the SCIENCE (and many scientists) behind our work (or our desired line of work for those of us no longer in science). Unfortunately, with a few rare exceptions, the most corrupt or corrupted "scientists" I knew are the ones who survived -- the smart ones? -- to hype more data, promise more results and prepare the glitzy powerpoints for management and VCs to propagate the scam upstream to Big Pharma.

One "solution" is for VC and other investors to recognize that biotech - pharma R&D is not like investing in software games (where characters are supposed to get killed off and resurrected; not so with real drugs) or electronic gizmos. If VCs are so smart, let them come up with investment and funding strategies that match the actual R&D process instead of corrupting that process to fit their preferred and only existing financial strategies.

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24. buddyroo30 on February 25, 2011 11:17 AM writes...

What do people think of the idea of big pharma itself becoming biotech venture capitalists? For example, Lilly seems to be trying this:

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25. processchemist on February 26, 2011 2:38 AM writes...


As far as I know Lilly is mostly looking for advanced (phase III) candidates.

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26. newnickname on February 26, 2011 1:24 PM writes...

@24: Other Big Pharma (and even some medium Pharma) have investment groups that already look do that or invest directly in start-ups. In the case of the story you cite, Lilly is putting $150 MM into existing VC funds, not operating its own in house VC-type investments. Those VC funds will probably just conduct business as usual ... and squander most of it.

Just to get in a few digs on Lilly management:
- Oraflex fiasco, 1982: several deaths and criminal charges (I think there were 24 criminal indictments).
- PCS Pharmacy Benefit Plan: acquired for $4 billion, $2 billion write down a year later, sold for $1 billion a year after that. But CEO Tobias was a genius! ... not.
- InnoCentive program to buy R&D on the cheap and screw scientists out of royalties.

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27. Anonymous on February 27, 2011 8:45 PM writes...

Just look at how Roche is killing genentech. Actually, all the Nutley, NJ severence packs and benefits from Roche's reorg are coming out of genentech!! Yes! Hummmmm...what does that mean? If I were a nutley employee who was spared for now, I'd seriously get my resume on! You guys are living on borrowed time....

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28. cliffintokyo on February 27, 2011 10:43 PM writes...

What a skeptical kat. I did not suggest using our own money ;-)
Agree with you, after reading the later posts about big pharma efforts to encourage science.

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29. David Q on February 28, 2011 12:47 PM writes...

1) the relative success or failure of the sirtris deal is not yet known
2) I hate when people lump resveratrol and sirtris - Resveratrol is an incredibly promising molecule - it is like associating global warming with Al Gore - just because you don't like Gore's politics does not make global warming any less real. And just because you don't like GSK, or Sirtris, or have doubts about Sirt activation does not make resveratrol any less real. Emotional analysis = bad business.

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30. Major on February 28, 2011 1:14 PM writes...

Ridiculous drivel.

Pre-clinical assets are worth what they are worth. Sometimes a lot, sometimes nothing, sometimes currently invested capital.

Given the track record of VC backed biotech, nothing to currently invested capital is about right.

Kinsella is probably lucky to get his invested capital back sometimes - it sure is better than nothing. Well, maybe not for him as it kills is business model. But it doesn't look like he is too concerned for his investors.

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31. exMrk on March 1, 2011 11:52 PM writes...

Hiring ex-biotech bankers laid off during Wall Street’s financial purges?

Bruhahahaha ... future success is assured. NOT.

Pharma needs more bean counters like a hole in the head.

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