Corporate Venture Capital in a Global Pharma and Biotech Company

 

Project Background

In recent years, pharma and biotech companies have navigated a complex competitive landscape. The emergence of startups, the increased focus in digital, analytics and AI, the growing healthcare spending worldwide, and the explosion of biotech VC in recent years all pave the way for increased opportunities for pharma and biotech companies to develop transformational medicines.

One way many pharma companies have gained access to the rising number of innovation centers is by establishing a corporate venture capital (CVC) fund. These funds, with varying degrees of autonomy within their corporations, invest in early-stage companies both to generate financial returns and to accelerate the achievement of the company’s strategic goals. Many top pharma companies have all set up a CVC fund.

Project Objective

Our client was a top-25 global pharma and biotech company, with a preeminent position in many relevant therapeutic areas. We were asked to support the strategic discussion on whether to set up a CVC fund and, if so, what are the keys to success? Our client was interested in understanding how a CVC could help attain strategic goals such as greater access to innovation, stronger pipeline formation and higher financial returns. In particular, our client was keen to understand if a CVC could help the company reach its ambitious 2030 targets, both in revenue and in earnings.

We carried out this project with the client’s corporate team, led by the Executive Vice President of Strategy and Business Development. Our team - comprising students from Columbia’s Business and Mailman School of Public Health - kept weekly meetings with the client to respond to the fundamental question: Should they establish a CVC fund and, if so, what are the keys to success?

Project Approach

We had a 12 week engagement with a two-phased approach. We shared our findings with the client team (EVP, VP, and Director of the Strategy and Business Development Team and the Portfolio Decision Strategist) on a weekly basis and jointly discussed the way forward and how the organization could benefit from the project’s output.

We organized our project into three core work streams:

  1. Define the biotech VC ecosystem:

○       Current state and main trends, with breakdown per geography, therapeutic area, company profile, investor profile

○       Top VCs in the ‘traditional’ and ‘corporate’ sides, their approaches and deal track record

  1. Understand the organization of VC and CVC funds:

○       Overview of VC positioning for the largest pharma companies

○       Key features of VC and CVCs

○       Differences between CVC funds

○       Success cases for CVCs; common pitfalls

  1. Deep-dive on strategic options for our client and make a strategic recommendation:

○       Market conditions necessary for success in each path

○       Internal/organizational enablers for each strategic option

○       Final recommendation on capital allocation and key enablers

○       Fit of recommendation within the company’s overall strategy

○       High-level roadmap with next steps needed for execution of strategic recommendation

○       Timeline for roadmap implementation

Work streams (1) and (2) were completed in phase I, and work stream (3) was completed in phase II.

To conduct our initial research, we utilized both primary and secondary data available on proprietary data platforms (‘Pitchbook’, ‘Cipherbio’ and ‘CrunchBase’) to summarize information on deal flow, valuation, exits, revenue multiples, fund sizes, acquisitions, and competitor outlook in reference to forming Corporate VCs. Early findings showed that most peer competitors had their own CVC, these CVC’s invested across a range of capabilities beyond the molecule and that significant investment, of $100M or more, was common across the successful groups. We also conducted interviews with executives at VC and CVC funds (Pfizer Ventures, J&J Innovation, Touchdown Ventures) and pharma companies. Through our conversations, we gained a deep understanding of the biopharma CVC ecosystem and articulated the advantages/disadvantages of establishing a CVC fund to our client. To strengthen our research, we built a number of case studies on various CVC funds to showcase what success looks like.

We then laid out the strategic goals and strategies for our client to consider in order for us to provide a final recommendation. Our first priority was to determine if a CVC could accelerate strategically-aligned goals and whether the lack of a CVC might hinder our client’s growth potential. When deciding if establishing a CVC was the correct decision, we also had to consider the range of scope the CVC would focus on. Lastly, we showed additional resources needed to create a successful CVC, in addition to the funding amount. We also developed a high level execution roadmap. Finally, we quantified potential financial return scenarios and projected a timeline for execution and profit generation.

Key goals and strategic choices

Based on our discussions with the client, we identified 4 key goals against which we would analyze the option of establishing a CVC fund (as well as relevant alternatives):

  1. Preserve our client’s leadership in their core therapeutic area
  2. Develop a pipeline consistent with our client’s long term revenue target
  3. Gain insight on new market opportunities and improve our client’s access to innovative technologies
  4. Develop necessary accessory capabilities in data analytics and AI for emerging digital landscape

We then outlined 4 possible strategies to reach our goals:

  1. Focus resources on R&D and BD (status quo)

○        Continue to invest in internal R&D and BD operations

  1. Invest indirectly in institutional VCs

○        Invest as an LP in a traditional VC firm, which in turn invests in early-stage biotech companies

  1. Create an accelerator to drive growth

○        Develop an acceleration program to attract top talent and host innovation

  1. Establish a Corporate VC fund

○       Set up a CVC fund aligned with the company’s strategic goals

Recommendation

Of the 4 strategic options outlined, we realized choices 2 and 3 would not bring material enhanced contributions to the 2030 targets beyond what was already underway at the company. As such, we were left either with the status quo scenario or with establish a CVC fund. Our assessment is that a CVC would only provide a valuable contribution to the company’s targets if the company could execute specific winning factors/conditions: (1) leadership support to set up a CVC fund with the minimum viable scale, (2) successful, experienced CVC team, (3) necessary diligence capabilities to lead funding rounds, and (4) ability to create value through synergies between its own R&D teams and any CVC-funded early venture.

If our client is able to execute on these 4 success factors/conditions, we believe they should form a CVC. They would unlock value creation and guarantee a more competitive resource allocation. However, if these requirements aren’t feasible, we recommend the company maintain status quo.

Final Thoughts

Overall, this was a rich and rewarding experience: we benefited from an engaged and constructive client, from a complex challenge that can materially impact our client’s future performance and position, from a set of industry experts and leaders that guided us with valuable advice and from the helpful guidance of our Columbia professors.

 

All throughout, we were immersed and learned much about the pharmaceutical and healthcare VC industry workings through our research and interviews with industry leaders. We were also able to leverage our collective skillsets and experiences during our weekly class workshops and team meetings.

Contributors: Jhoan Dutton, Shimon Gordon, Luis Belchior, Angela Qian, Shirin Ahmed