Institute For The Future

Corporate Incubation: Big Pharma's Bold Move

I've been meaning to write about this for a few months now, but the news this week about GlaxoSmithKline's cutbacks in internal R&D (I'll post something about this later in the week) brought me back to a March 2008 piece in Nature Biotechnology about the establishment of corporate biotech incubators at Biogen and Pfizer. (Nature Biotechnology, "Start-ups weigh benefits of corporate incubators", March 2008)

 

The pharmaceutical industry is a great place to look for future R&D models, even more so than information technology - where we have traditionally sought inspiration - because the industry is in such a massive innovation crisis it's willing to try anything and go all-out on it. Year-on-year, no matter how much money they throw at R&D, the big drug companies face diminishing returns on R&D. Given enough time, they simply won't be able to produce new therapies. They need to source ideas from outside their walls.

 

Most of the big firms are now active in the venture space. As Nature reports:

 

New Brunswick, New Jersey–based Johnson & Johnson, Gaithersburg, Maryland–based MedImmune and Eli Lilly of Indianapolis all have established distinct venture arms. Other companies operate their corporate venture groups more like an extension of their business development department, with goals ranging from pure financial return to gaining rights to ideas or technologies. For example, the Novartis Option Fund, part of the venture arm of Basel-based Novartis, invests equity in seed and series A private rounds, then provides cash payment for the option to one specific therapeutic program.

 

 

But Pfizer and Biogen are moving even more aggressively to capture startup-led innovation earlier by creating incubators. Biogen's incubator in Cambridge, Mass. and Pfizer's in La Jolla, Cal. will each house five to six startups (plucked from over 100 applicants) and provide startup funding in the neighborhood of $3 to 10 million.

 

As I reported last week at Science In Place, in the media/tech world people are asking some serious questions about whether corporate incubators provide the proper incentives and growth environment for startups. Put simply, if your corporate benefactor declines to fund additional rounds of expansion, where else are you going to go? However, as Nature argues, there's a lot to be gained for startups from corporate paternalism:

 

The incubators appeal to founders who want a clear and early exit strategy, and academics who don’t want to bother with raising venture capital are particularly attracted. The big perk is that start-ups get access to some of the larger company’s coveted resources: expertise, expensive instrumentation and animal facilities, for example; and some at Pfizer get access to the company’s chemical library.

 

 

Are corporate incubators risky? Of course. But again, it's the desperation that's driving the industry to these radical measures. The Nature article quotes Orin Herskowitz, head of tech transfer at Columbia University in New York: “In the past seven months we’ve had every major pharma company come talk to Columbia about looking for new ideas on how to partner early. My guess is you’ll see more of these incubators.”

 

Interestingly enough, it seems that this model might be emerging at the bottom of the food chain in the Web 2.0 startup world as well. John Borthwick, founder of Betaworks in New York, tells me that he is trying to reverse the incubator model, by sending startups to the market for traditional incubator services (legal, financial, etc) and instead providing basic innovation infrastructure like shared code, server infrastructure and focused engineering talent.

 

Still, I'm not sure about the corporate venture model, or incubators with corporate financing for tenant companies. Fred Wilson, a Web 2.0 investor in New York makes the argument against corporate venture funds thus:

 

Corporate investors don't really share the profit motive with the entrepreneurs... That's the big problem with corporate structures for venture investing. One time gains in corporations don't make anyone rich. Wall Street ignores the gain. The company can't put the gain into the pocket of its management. So it just doesn't matter very much. I do think that venture investing is not the best use of a corporation's capital and that it is inevitable that it will produce sub-par returns at best and significant losses at worst. And as a Google shareholder, I'd prefer to see them do something else with all that money they are making.

 

 

Maybe in IT, but if it has any chance of priming the innovation pipeline for big pharma, these incubators are probably worth a shot.