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?
