Lilly Ventures and Protagonist: To Be or Not To Be?

Lilly Ventures and Protagonist: to be or not to be?

Eli Lilly and Company (Eli Lilly) is a pharmaceutical company developing a growing portfolio of best-in-class products by applying the latest research from its own worldwide laboratories and from collaborations with eminent scientific organizations. Headquartered in Indianapolis, Lilly is one of the major pharmaceutical and health care companies in the industry. Starting in the early 2000s, Lilly decided to set up a corporate venture capital investment division – New Ventures at Eli Lilly - in order to leverage on the strategic benefits associated with the synergies that emerge by funding and supporting biochemical start-ups. In 2005, New Ventures was faced with the important decision of making an appealing yet controversial Series A investment for an early-stage biotech start-up – Protagonist. Located in Brisbane in Australia, the chemistry-engine technology company seemed extremely promising, as it was attempting to introduce a systematic method into the drug discovery business through HTS. Hence, because of several risks and challenges surrounding this project, questions arose regarding the feasibility and success potential of this investment opportunity.  

This essay aims to evaluate the case of Eli Lilly’s corporate venturing branch. Specifically, it seeks to assess the decision of investing in Protagonist. First, the essay reviews the notion of corporate venturing and explores the value of this practice for Eli Lilly. The second part delves into analysing the investment decision and examines the benefits and disadvantages of this project. Third, by applying theoretical frameworks on the case for corporate venturing proposed by Lerner (2013) and Chesbrough (2002) to the practical case of Lilly Ventures, the analysis sheds light on the case for and against investing in the start-up and advances recommendations for the company.

The case for Corporate Venture Capital

Corporate venture capital refers to the investment of corporate fund directly in external start-up companies (Chesbrough, 2002). As opposed to traditional Venture Capital companies, which invest in start-ups with the sole purpose of financial gains, Corporate Venture Capital favours a focus on the strategic benefits associated with funding start up companies. Corporate venture investments are generally used as an instrument for strategic growth by exploiting synergies between the parent company and the new venture. Despite the cyclicality of corporate interest in venture capital, there has been a recent wave of corporate venture investments (Lerner, 2013). A corporate venture capital fund for investing in outside start ups can help a company understand and respond rapidly to changes in the business landscape (Lerner, 2013).

As it recognised that its survival might hinge on its ability catch up with technological disruptions, Eli Lilly decided to launch a corporate venture capital branch in order to get involved with cutting-edge biotech start-ups. Many of these collaborations gave its parent company valuable knowledge into the science of developing drugs. For Lilly, it was a mean to remain relevant in the market and gain access to technological breakthoughs and innovation. It enabled it to move faster, more flexibly and at lower costs than conventional R&D in order to respond and adapt to transformations in technology, market and business models and helped it gain insights to understand competitive threats beyond its areas of expertise. Moreover, CVC is a tool to create a favourable ecosystem that increases the growth possibilities of the company. Finally, while not being Lilly’s main focus, one needs to take into account the purely financial aspect of venturing – “an added benefit for a tool that helps capture ideas that may ultimately shape an organisation’s destiny” (Lerner, 2013:3).

There are several reasons that might lure companies into corporate venturing. Following the framework advanced by Chesbrough (2002) to understand when one should embark in corporate venturing, the next section seeks to assess the main advantages that Lilly Venture can obtain by investing in Protagonist. The first defining dimension to consider when preparing a new deal is whether the investment is in line with the strategic objectives of the company or just aiming at financial returns. The second defining characteristic of a CVC is the extent to which companies in the investment portfolio are linked to the investing companies current capabilities – its resources and processes e.g. infrastructure, distribution channels, technology or brand and business practices.

The Protagonist project: advantages and disadvantages

Investing in Protagonist, would help Eli Lilly meet its strategic objectives. Protagonist’s activities and enabling technologies have the potential to anticipate future trends in drug discovery and drug development process. In fact, due to a rising discontent with combinatorial chemistry and HTS, “rational drug design” emerged as a novel approach. Hence, it would help Eli Lilly acquiring new information through external exploration (Hill and Birkinshaw, 2008) as well as providing both an inside look at new tech fields. This is extremely relevant as Lilly operates in the pharmaceutical industry, where companies need constantly to keep up with fast progresses in bioscience that can threaten to render the chemistry-based expertise irrelevant. Protagonist’s cutting hedge technology can serve well the innovative aspirations of Eli Lilly, especially at a time where new drug development is necessary and the company faces resources constraints and new competitive threats.

Furthermore, Protagonist is approaching Phase 3, which is in line with Lilly Venture’s objective of investing in companies that are at relatively advanced development stage prior to the Series A investment. The start-up’s tangible results and achievements are a proof of its great potential. This means greater capital efficiency, which is further enhanced by the fact that Protagonist technology has the potential to reduce the costs associated to drug discovery. The location of Protagonist is also in line with Lilly Venture’s idea of being capital efficient, as it would invest in a firm where labour and facilities costs are lower than Boston and California.

Moreover, the risks related to the survival of Protagonist in the long-run are mitigated by the fact that its supportive infrastructure (IMB) ensures that the company will persist for many years. This implies that Lilly Ventures equity stake will be protected. From a financial perspective, Lilly Ventures needs a relatively low initial investment (6% of its portfolio), and possesses a significant financial upside in the long-term. This means that funding Protagonist is aligned with a CVC strategic investment approach rather than a pure CV cantered solely on financial gains.

...