J. Bradford DeLong's Blog, page 2071
March 10, 2011
Friends Really Don't Let Friends Support the Republican Party in Any Way
Outsourced to Jim McDonald:
Making Light: Radical Islam: I read:
A congressional panel looking into the radicalization of Muslim Americans convened Thursday to hear testimony, some emotional, from proponents of stronger action to limit the threat of homegrown terrorism as well as critics opposed to sweeping stereotypes.
Despite strong criticism from Muslim Americans and accusations of a McCarthyist revival, House Homeland Security Committee Chairman Peter King, R-New York, defended the controversial hearing as neither “radical or un-American.”
That’s Peter “I Lurve teh IRA” King.
I tell you what, if I were a Muslim American, this set of hearings would go a long, long way toward radicalizing me.



Andrew Jackson: A Report on What Brad DeLong Said in Ottawa at Canada 2020 Last Night...
Andrew Jackson writes:
The Progressive Economics Forum » Gloomy Days Ahead?: I attended an interesting forum on the economic outlook yesterday afternoon. Organized by Canada 2020, the speakers were noted US economist Brad DeLong (UCal Berkley, former senior Treasury official under Clinton, and Paul Krugman soul mate on macro issues at least), and our own David Dodge (who needs no intro.).
De Long’s main focus was on the US, and his key point was that - to his consternation and surprise - continued very high unemployment and an economy operating well below potential are now failing to prompt an appropriate textbook macro-economic response. The original stimulus package was too small, and further stimulus is not on the table as the US focus turns to fiscal austerity. Meanwhile central banks are desperately seeking exit strategies from extraordinary monetary policy measures which helped save the day after the financial crisis. Ditto in Europe. That adds up to continued stagnation for most of the advanced industrial world.
Dodge did not directly challenge this rather gloomy outlook. He did, however, argue that fiscal restraint today - while perhaps a bad idea in macro terms - is needed to restore confidence that there will be restraint in place down the road. He conceded, however, that the US will not get the help that Canada got in the 1990s in the form of falling interest rates and rising exports which helped offset the macro impacts of deep spending cuts.
DeLong and Dodge agreed that the current global economic situation remains extremely fragile, noting that the big crisis they had both expected before the Great Recession - a possible financial crisis precipitated by global financial imbalances and the huge US current account deficit - could yet take place. If there is hope on that front, it is that China will see the need to shift to at least some degree to domestic demand driven growth, and will see currency appreciation as a tool to fight a growing inflation problem. Absent that, and rebalancing will have to be via sharp cuts to US consumption which will sink the recovery.
In some brief remarks on Canada, DeLong pointed to our obvious symptoms of Dutch Disease and counseled us to stave off the loss of manufacturing capacity by sequestering high resource rents in a sovereign wealth fund invested outside the country on the Norwegian model.
Needless to say, Dodge dodged that one.
I am always bad at remembering what was said--the adrenaline rush of being in front of a crowd seems to make me very bad at transferring short-term into long-term memories--but I thought that Dodge agreed that handling the current oil price shock via the Norwegian model would be a good thing for Canada, but that there were major difficulties caused by the structure of Canadian federalism: a federal Canadian excise tax on energy exports to fund a SWF invested abroad would be viewed as--and would be--a confiscation of the government of the Province of Alberta's resource holdings for the benefit of the voters of Ontario...
And Bank of Canada Governor Carney assured me at dinner that the amount of snow falling outside was not unusual for Ottawa in mid-March, and that I should return to Ottawa during their two weeks a year of summer sometime, and told a story about how Robert Zoellick's security team had not felt up to dealing with the polar bear threat...



Mark Thoma: Initial UI Claims and the Trade Deficit Both Increase
Joe Nye Did too Disclose to TNR the Circumstances of His 2007 Trip to Libya
UPDATE: Joe Nye writes that Franklin Foer is simply wrong when he claims that Joe Nye did not disclose to TNR the circumstances of his trip to Libya:
It is important to emphasize that I disclosed my connection with the Monitor Group when I wrote the article.... When Mother Jones asked The New Republic if I had disclosed that Monitor had paid me as a consultant, TNR maintained that I had not.But this was mistaken. I dug out the first draft I sent to TNR, and it says clearly, "I was in Libya at the invitation of a former Harvard colleague who works for the Monitor Group, a consulting company which has undertaken to help Libya open itself to the global economy. Part of that process is meeting with a variety of Western experts whom Monitor hires as consultants." The final sentence of this disclosure was dropped by the editors at TNR. I have sent the original to both TNR and Mother Jones and asked for a retraction of the false statement that I did not alert them...



Econ 210a: Memo Question for March 16
Econ 210a: Memo Question for March 16: Read Walter Bagehot's Lombard Street. Think about the recent financial crisis and economic downturn. To what extent did policymakers in the recent financial crisis follow the model of crisis management set out by Bagehot, and to what extent did they deviate from it?



March 9, 2011
Canada 2020
Canada 2020 http://canada2020.ca/:
: What: US economist Brad DeLong keynote and David Dodge, former Governor of the Bank of Canada, as respondent. When: Wednesday, March 9: 4:00 PM - 6:30 PM. Where: Chateau Laurier, Drawing Room, Ottawa



Felix Salmon: John Cassidy vs the Bipeds
FS:
John Cassidy vs bipeds: Aaron Naparstek has a masterful demolition of John Cassidy’s bizarre anti-bike-lane rant, but he somehow skips over the most wonderful bit of all:
I view the Bloomberg bike-lane policy as a classic case of regulatory capture by a small faddist minority intent on foisting its bipedalist views on a disinterested or actively reluctant populace.
Yes, you read that right: the New York populace, it seems, is basically comprised of cars, to the point at which bipeds are “a small faddist minority”. Now it so happens that I’ve met Mr Cassidy a few times and he’s always looked perfectly bipedal to me. And for all that he enjoys parking his Jaguar XJ6 on Manhattan streets — he’s just written 1,250 words on the subject, after all — I’m quite sure that he always gets out and saunters happily among the other New York pedestrians as he makes his way to his dinner in the West Village. It can hardly have escaped Cassidy’s notice, on his regular peregrinations from car to restaurant and back, that New York’s streets are positively bustling with bipedal life... 8 million or so bipeds — birds not included.... His Jaguar XJ6 takes up about 100 square feet of street space; if everybody in Manhattan was so greedy, we’d turn the city into something more akin to Manhattan, Kansas.
And so New Yorkers turn to other modes of transportation. Primarily, we walk, taking up very little space while doing so. When we don’t walk, we cram lots of people into efficient vehicles like subways or buses. And sometimes we bike.... Driving a car, on the other hand, is an enormously expensive thing to do, with most of the costs being borne by people other than the driver. Yet here’s Cassidy, the economics correspondent of the New Yorker:
From an economic perspective I also question whether the blanketing of the city with bike lanes—more than two hundred miles in the past three years—meets an objective cost-benefit criterion. Beyond a certain point, given the limited number of bicyclists in the city, the benefits of extra bike lanes must run into diminishing returns, and the costs to motorists (and pedestrians) of implementing the policies must increase. Have we reached that point? I would say so.
Well yes. If indeed the limited number of bicyclists in the city was a given, then Cassidy might have a point here. But it’s not. Bike lanes attract bikes no less effectively than roads attract cars and the number of cyclists in New York has been growing just as fast as the city can create new lanes for them....
[Cassidy's] message... is that cars can and should be able to go anywhere in the city they like — that’s part of what makes them so great. Bikes, on the other hand, should be confined to a few “heavily used and clearly defined routes”, which would probably run parallel to existing subway lines....
Sorry, John... you surely know, even if you’re loathe to admit it, that traffic expands to fill the roads available.... Cassidy is convinced that the addition of bike lanes has increased the time he spends stuck in traffic, or looking for his beloved free on-street parking. (As Naparstek notes, his argument can basically be boiled down to “Street space should not be set aside for bike lanes. It should be set aside for free parking for my Jaguar XJ6″.) But the fact is that impatient motorists will always want to blame someone else for traffic, when, clearly, they themselves are the main culprit in that regard. Cassidy has no problem with the vast number of parked cars which take up precious road space in New York because he regularly aspires to transcending his bipedal nature and becoming one of them himself. But if you replace those parked cars with a healthy, efficient and effective means of getting New Yorkers safely around town, then watch him roar. Jaguars — whether they have four wheels or four paws — are good at that.



Paul Krugman: Keep the Government's Hands Off My Medicare Watch
PK:
Republicans and Medicare: Hoocoodanode? Politico suggests that Republicans are in a bit of a bind: they want to cut Medicare — in fact, they’ve always wanted to cut Medicare — but they
funneled millions into TV ads last year accusing Democrats from Pennsylvania to Missouri of “gutting Medicare” and “hurting seniors” — charges that compelled older voters to swing en masse toward the GOP.
I have to say that this was the great scam of the 2010 election... pos[ing] as defenders of Medicare was truly awesome, a testament to voters’ (and the news media’s) short memories.



It Has Nothing to Do with "Fair Use": It Is About Giving Credit Where Credit Is Due
Bruce Bigelow of Xconomy is angry: Megan McArdle takes the best third of the interview with Kevin Kinsella and puts it on her weblog without including the words "Bruce Bigelow" or "Xconomy" anywhere on her webpage.
Now Megan McArdle says that she is "mystified" at the anger, and has taken down her post entirely...
I'm with Bruce on this. If I ever conduct an interview worth quoting from, I want my name attached to the quotes--and will be very pissed if it is not.
Megan McArdle:
The Fuzzy Edges of Fair Use: Last week, I wrote a post, Is Big Pharma Strangling Biotech Startups in Their Cradles?, in which I linked an Xconomy interview with VC founder Kevin Kinsella. Yesterday, I received a note from them, complaining that my article didn't name them, but only linked them on the phrase "easting their seed corn", and that I used 740 words out of an interview of about 2100 words.
I won't disclose the contents of our correspondence, since the editor who emailed me has requested that they remain confidential. I think I may disclose that they are very upset about what they see as an egregious fair use violation. I attempted to rectify the situation by trimming down the excerpts, and naming the site from which they were drawn, but this seems to have somehow only made them madder--perhaps because this is so rare in my ten years of experience blogging that I was mystified rather than sufficiently apologetic. But of course I support their right to control lengthy dissemination of their work, so I have taken down the offending post. I cannot, of course, get rid of the cached versions on the internet, but I assume they'll clear in time.
The reason I'm writing this post, however, is that the comments still seem to be active, so I don't simply want to rip down the post without explanation. The comments are interesting, and don't use Xconomy's content, I've left the post up, simply noting that the content has been redacted at their request. (Note: I posted this and then edited it down to the essentials).
Here is the original McArdle post:
Is Big Pharma Strangling Biotech Startups in Their Cradles?: Kevin Kinsella, the founder of VC firm Avalon Ventures, says that big pharmaceutical firms are essentially eating their seed corn--letting greed drive them into cutting deals that fundamentally undermine the health of the biotech industry that provides a lot of their innovation:
--Structuring Completely Back-Ended Deals: During one buyout negotiation, Kinsella says, "The acquiring 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.
As IPOs have dried up, for a number of reasons, deals with Big Pharma are increasingly the major source of capital for biotech firms. And biotech firms, in turn, are one of the major sources of pharmaceutical innovation. With pharmaceutical pipelines looking a lot thinner these days, this matters. A lot.
Kinsella also says that this is affecting the choices of what projects VCs will fund:
One consequence of not being able to rely on Big Pharma to play fair, Kinsella says, is that venture syndicates are less willing to take on the risk of developing drugs for chronic diseases. The current ecosystem is such that a drug must get approved pretty quickly, which rules out clinical trials with thousands of patients. It helps to explain why so many venture-backed biotechs prefer to develop new treatments around drugs already approved by the FDA, and why they are so reluctant to develop novel drugs for heart disease, neurological disorders, osteoporosis, and other chronic conditions.
"Almost anything of that genre is absolutely not financeable today because it requires too much capital, too much time, and pharma is so predatory and unreliable," Kinsella says. An increasing number of biotech venture funds won't fund a deal unless there is enough money around the table in the venture syndicate to finance the typically one-product biotech through Phase III or even NDA approval. At that point, Kinsella says, the pharma companies know how to properly value a biotech asset and will have to participate in an auction to buy the product or company.
The problem is that if Kinsella's right, this may be a nasty equilibrium: all pharmaceutical companies (and people) would benefit if the deals were a little more generous, but every individual firm benefits from driving the hardest deal possible. If that's right, I don't know how we fix it, other than to shift away from the pharma model, towards prizes or the alternative system Dean Baker has proposed where the government would directly do pharma research. For a variety of reasons, I think the latter system is unlikely to do much good, but I think it's certainly worth trying to see if the government can out-perform the private market in terms of cost-effective drug development.
Of course, it's always worth keeping in mind that just like pharma, Kinsella has financial interests--in this case, in getting the most generous possible deal for the biotech firms he invests in. So you have to take what he says with a grain of salt. Derek Lowe, from whom I got the link, also offers cautions: "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!' " So maybe the apocalypse is not quite upon us. Still, add another item to my long list of worries about pharmaceutical innovation.
And here is Bruce Bigelow at Xconomy:
Avalon’s Kinsella Calls Out Big Pharma for “Bad Behavior” That’s Pushing Biotech Ventures “Almost to Point of Extinction” | Xconomy: past couple of months. The 28-year-old firm raised $200 million for its ninth fund, which was oversubscribed by 33 percent. Avalon, which invests in both life sciences and Web technologies, also took some winnings off the table with the recent sale of a portfolio company, Boston, MA-based BioVex Group, for $425 million (with another $575 million in potential milestone payments). In addition, two other Avalon portfolio companies were acquired in December (reportedly at significant multiples of invested capital): San Francisco-based Cloudkick went to Rackspace and AOL acquired New York’s Pictela.
And then there is Avalon’s Series A and B round bets on the Zynga Game Network, which was recently valued at $7 to $10 billion and is expected to be the firm’s best investment ever.
With Avalon riding high, there may be no better time for Avalon founder Kevin Kinsella to raise a matter that he finds deeply troubling.
“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.”
Kinsella concedes that Big Pharma CEOs might not even realize how their companies have been undermining the well-being of the biotech startups that Kinsella says are their chief source of new drug candidates. Talk to a Big Pharma CEO, Kinsella says, and he or she will glibly tell you that the next generation of products is coming from biotech, “while two floors below in business development, they are wreaking havoc on biotech startups.”
How is this happening?
In a series of interviews over the past three months, Kinsella has talked with me in detail about some of the egregious business practices in the pharmaceutical industry that he’s encountered, which he likens to overfishing by commercial fisheries. As a respected biotech investor with a 30-year record, Kinsella says he’s seen industry cycles come and go. But he contends the pendulum has gone too far this time, and it may be too late to set it back on its bearings. He’s calling out Big Pharma, and arguing for a more sustainable ecosystem for drug development. It’s not the whole story, but rather the opening fusillade in a debate that’s long overdue. Here at Xconomy, we welcome your response.
Kinsella lumps Big Pharma’s bad behavior into several piles:
—Structuring Completely Back-Ended Deals: During one buyout negotiation, Kinsella says, “The acquiring 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 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.”
Their influence has wreaked havoc on VCs, according to Kinsella. “Unfortunately, there really hasn’t been an IPO market in biotech since 2000,” says Kinsella. And the bankers-turned-business-development mercenaries “correctly perceived that the IPO exit doesn’t really exist any more. So Big Pharma companies—whose numbers have been halved in the last 20 years—are now really the only game in town.” And Kinsella says Big Pharma has been exploiting its “oligopolistic advantage” with ruthlessness.
“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.”
In calling for an end to the hardball mercenary tactics, Kinsella says Big Pharma’s conduct is comparable to predatory overfishing by the Atlantic bluefin tuna industry. And in calling for a more sustainable ecosystem in drug development, he says, “Sometimes individuals don’t stop their behavior until all the great Atlantic bluefin tuna are gone.”
One consequence of not being able to rely on Big Pharma to play fair, Kinsella says, is that venture syndicates are less willing to take on the risk of developing drugs for chronic diseases. The current ecosystem is such that a drug must get approved pretty quickly, which rules out clinical trials with thousands of patients. It helps to explain why so many venture-backed biotechs prefer to develop new treatments around drugs already approved by the FDA, and why they are so reluctant to develop novel drugs for heart disease, neurological disorders, osteoporosis, and other chronic conditions.
“Almost anything of that genre is absolutely not financeable today because it requires too much capital, too much time, and pharma is so predatory and unreliable,” Kinsella says. An increasing number of biotech venture funds won’t fund a deal unless there is enough money around the table in the venture syndicate to finance the typically one-product biotech through Phase III or even NDA approval. At that point, Kinsella says, the pharma companies know how to properly value a biotech asset and will have to participate in an auction to buy the product or company.
“This is actually a terrible position for the Big Pharma companies to be in, having now shot themselves in the foot through their now not-so-clever deal-making tactics,” Kinsella says. “If venture-backed biotech companies shrink in number, go after small markets, and won’t partner earlier-stage products because of the predatory economics offered, the pharmas will have no dependable pipeline with partnered products at various stages, won’t know from one year to the next what new products in which therapeutic sectors they will be marketing, and will be just ‘hanging around the hoop’ with the required fat wallets to try to outbid the next guy to grab a product ready to go to market. This obviously only favors the largest and most well-capitalized pharmaceutical companies and will leave the already shrinking, innovative, far-seeing smaller pharmas out in the cold, further down-sizing the sustainable ecosystem.”
In the golden days of biotech, Kinsella says Wall Street viewed biotechs’ partnerships with Big Pharma as a much-prized stamp of approval—a sign that the underlying science made sense and that the target molecule was worth pursuing. Now, after decimating their internal research programs for failing to deliver approvable drugs, Big Pharma has turned to biotech to supply its new product pipeline. But Kinsella says the industry’s aversion to risk is forcing venture capital syndicates to provide all the risk capital.
As a result, Kinsella says venture-backed biotechs are increasingly wary about entering into pharma partnerships. The partnership deals, like Big Pharma’s buyout offers, are virtually always skinny in the up-front, and the milestones are so long in coming that biotechs must repeatedly return to the venture capital well for more working capital. The result is what Kinsella calls “a dreadful liquidity trap” that requires more venture money to be poured into the biotech company—whose products are ultimately committed to Big Pharma’s pipeline—without building inherent value in the biotech itself, or providing a return for its venture investors.
“The end game is ugly,” Kinsella says. “The biotech’s best products are tied up by crappy deals with Big Pharma; the biotech beast has been continually fed to sometimes enormous size by venture capital, but the company is not an attractive acquisition candidate since its key products are tied up with other pharma companies—who become the only potential buyers in a diabolical oligopoly situation.”
By the time venture capitalists are six years into these investments, Kinsella says they begin to scramble for the exits, since venture funds typically have a 10-year life. The pharma companies then pounce with their default, “we’ll give you your money back” deals, (with all upside on the back end).
In short, Kinsella says he’s never seen the startup biotech ecosystem as challenged as it is today. By behaving, in his estimation, unethically and unpredictably, offering lousy deals to partner biotech products, trying to outwait venture capitalists to force them into negative-return exits, the pharma companies have created and are fueling a vicious cycle that will leave the ecosystem with fewer venture capital funds, less capital to invest, fewer biotech companies, fewer critical and creative therapeutics, and far fewer innovative drugs for pharma’s own pipelines. By their predatory and destructive behavior toward the ecosystem in which they live, Kinsella says, big pharmaceutical companies “will shrink and wither and die. And society will have to bear the brunt of their greed—as it always does—this time by having a paucity of innovative therapeutic products for medicine.”



Mark Kleiman Is Puzzled...
Mark Kleiman:
Walker steps in it: I would have guessed that a recently-elected governor would come out ahead in a confrontation with public-sector unions over collective-bargaining rights. But I would have been wrong. In a Rasmussen poll, 48% of Wisconsin registered voters “strongly disapprove” of Walker’s performance. So far, the right-wing echo chamber is still echoing; the facts about public opinion don’t seem to penetrate that darkness any more than the facts about, say, global warming or macroeconomics.
If you have some political cash to give this cycle, the Wisconsin recall effort looks to me like a good target. Picking off even a couple of them would be a big gain; politicians notice that kind of thing. Already, some of the Republicans in the Wisconsin Senate are hearing footsteps. And here’s hoping for a Walker recall next year, as soon as he’s eligible for the boot.



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