company spent more time asking questions about the cap table [to decipher the amount of venture capital the company had raised] than about clinical trial data.” The first buyout offer that came in was exactly equal to the total venture capital invested in the company. Kinsella contends that the industry’s “default” offer has become a buyout that just returns investors’ money in the up-front payment, with everything else in speculative back-end milestone payments for hitting certain future goals. “It doesn’t take a financial genius to tell you that having money in the ground for three to six years, and your upside is just getting it back—and this is for a ‘success’—is not a sure-fire recipe for venture capitalists to raise follow-on funds from their LPs,” Kinsella says. As a result, the aggregate number of biotech venture funds is shrinking, and the survivors are raising smaller follow-on funds. “While this hasn’t affected Avalon’s fund-raising,” Kinsella says, “it is doing great damage to the ecosystem in which we all live. Avalon would get no pleasure from being the last man standing.”
—Bad Faith Negotiations: Kinsella says Big Pharma companies are routinely walking away from buyout deals that have been fully negotiated. Kinsella says his first brush with Big Pharma’s new imperious ethos came in 2005. “We had a fully negotiated deal with [a major Pharma] to acquire a company. But because of their CEO’s travel schedule, the deal didn’t get signed before the Christmas holiday. When the CEO came back, he had changed his mind. This was a signature-ready buyout that took at least six months to negotiate. And [the company] just walked away. No explanation.” Since then, Kinsella says, “There have been numerous instances of pharma companies walking away from deals that were fully negotiated. So this behavior is not a blip; it’s been going on for over five years.”
He cites another example of bad behavior that occurred in 2006 while an Avalon portfolio company, Sytera Ophthalmics, was negotiating with a major pharma. Sytera was simultaneously negotiating with the Harvard Technology Licensing Office for rights to a related technology that was viewed as a potential backup to Sytera’s own technology. The pharma argued that it could negotiate a better deal with Harvard than Sytera itself. Kinsella says he was worried that the pharma might step in front of Sytera and run off with the Harvard technology—leaving Sytera at the altar—but he was reassured by one of the pharma’s representatives that the “ethical” company would never do that. Yet Kinsella says that’s exactly what happened. “Their well-deserved comeuppance was that the Harvard technology didn’t work, and the $3 million the pharma paid went down the drain,” Kinsella says.
—Partnerships Without Risk: Kinsella maintains that another consequence of Big Pharma’s mercenary mindset is a refusal to assume the risk that goes with early stage drug development. “If you try to partner with Big Pharma on anything earlier than Phase III data, then you are almost always going to get a crappy deal,” Kinsella says. “And many of these partnerships seem to be aimed more at pharma tying up proprietary biotech products and research teams than in carrying new technology forward.”
Kinsella sees a confluence of forces that came together after
