Kinsella Redux: Charting a Way Back for Life Sciences Startups

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industry consolidations, big biotech and drug companies have been making some dramatic cuts in their own in-house R&D. As they look to resupply their drug development pipelines, Kinsella says they are faced with a limited pool of startups to partner with—and they are running out of options. “I doubt there’s a Phase 2 [drug] asset out there that hasn’t already been committed to a [corporate] partner,” Kinsella says.

The San Diego investor has drawn widespread attention by singling out “Big Pharma’s bad behavior” as the target for his ire. Still, there are surely larger economic forces at work, as there is plenty of evidence that the life sciences venture industry as a whole has not fared well lately.

For example, at an annual “State of Biomedical Innovation” Conference in June, Jonathan Leff of Warburg Pincus painted a dismal picture of the returns generated by life sciences investors in the previous decade. (A pdf file of all the conference slides is here.) For 24 life sciences funds (including Essex Woodlands, TPG Biotech, Sofinnova, and Frazier), Leff says the average return was 1.4 percent from 2000 through 2008—and the average return on investment multiple was 1x, or, in other words, just breaking even.

What’s more, the latest MoneyTree report for the quarter that ended in June shows that venture investing in the life sciences (biotechnology and medical devices) continued to decline for the second consecutive quarter, with nearly $1.4 billion invested in a total of 174 startups. That was also a nearly 40 percent drop in dollars and a 22 percent slide in deals from the $2.3 billion that VCs invested in 223 deals during the same quarter of 2011.

In the biotech sector alone, the $697 million invested in 90 deals during the second quarter was the lowest total the biotech industry has seen in more than nine years.

As Intersouth Partners general partner Jimmy Rosen recently put it, “As economic uncertainty continues and fewer venture investors remain, VCs are less willing to commit to companies in which capital requirements continue to increase, timelines extend, and regulatory guidance is unclear.”

So what now, in Kinsella’s view?

“The pharmaceutical companies need to go back to the old days, where the companies that get the most benefit from billion-dollar drugs shoulder the most risk,” he says. To get out of their straits, Kinsella says the pharmaceutical companies need to strike deals with the surviving biotech venture funds—“the clever VCs who know how to organize a biotech startup, and how to hire a discovery team, and how to staff it for drug development.”

Ideally, he adds, such deals would be structured like the one that Avalon cut with Sandoz/Novartis for Avalon V.

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One response to “Kinsella Redux: Charting a Way Back for Life Sciences Startups”

  1. This is a strong article well worth reading. Thank you. Much of San Diego thinks things are going great in San Diego’s biotech/pharma/life sciences sector. In fact the sector is a mess.