Industry Contex

I believe that in order to better understand the situation, it is important to define the industry context. In the years ’90 new discovery on the human genome and technological development, created an increase in the targets for therapeutic intervention. Eli Lilly in the same moment had a product portfolio that was threatened by the expiration of patents. In other words, Eli Lilly was in need to add some product to its pipeline in a moment in which the R&D costs in the industry already touched the 20% of the sales (In 1998, Astra Zeneca spent 19.8 % of sales, Hoffmann-La Roche 19.1%, Eli Lilly 18.8% ). In order to overcome this problem and remain a competitive player in the market, Ely Lilly could have faced three options, any of them with its pros and cons:

1_M&A. As we know, M&A is the highway for growth. Among the acquisitions, in 1996 the company acquired Hybritech, a promising and innovating firm that concentrated its effort in synthetic molecules (the same area as Protagonist). The pro of this deal was that Hybritech was an already established company. Eli Lilly had to pay a high price; indeed Hybritech not only had other bidders but also a tangible product and potential growth. In 2005 acquiring a new company would have been probably too expensive, given that already 19% of sales invested in R&D.

2_Increase R&D. Internal innovation is one of the most successful way to create competitive advantage. Unfortunately, in this case it was not feasible. Internal innovation indeed required time and talents, especially in the pharma industry. Eli Lilly was not a first mover in synthetic molecules and given the average 10 years to develop a drug they were not really on time for internally develop innovation (3/6 years for discovery, 1 year Phase I, 2 years Phase II, 3 years Phase III).

3_CVC: Corporate Venture Capitals. As a pro, Eli Lilly could literally expand beyond its edges. They could have accessed the talents of the industry and the most innovative solutions. The co-investment with others VC firms would have lowered the risk, assuring professional partners and management experience. As the greatest pro, they would have acquired company with low bargaining power (unlike Hybritech) and thus they would have paid a relatively small amount to obtain great benefices for the parent company. Protagonist had also a competitive advantage: thanks to its location, the labour force was cheaper than the competitors in California or Boston and Eli Lilly was in the position of lowering the initial valuation in order to protect themselves against a possible drop in value for the next rounds of financing. It is also important to mention that Protagonist had access to the IBM facilities; they could have used the advanced technologies of the university without incurring in excessive CAPEX expenses. On the other side, there were many disadvantages. The investment was risky and at a very early stage. As I briefly mentioned before, the pharma companies are subject to regulatory approval times; the average time for a molecules to be discover and commercialised in a cure takes an average of 10 years. For this reason, many of the early stage