Patient Capital: Corporate VC and Productivity in Pharma and Biotech Companies
In the aftermath of the 2008 financial crisis, regulators around the world have sought to reduce the amount of capital that global banks can commit to illiquid or risky asset classes. This resulted in a reduction in potential investors for traditional venture capital (VC).
Furthermore, while other investors, such as funds-of-funds, also reduced their allocations to riskier illiquid assets such as VC, corporate venture capital (CVC) has increasingly filled the void, especially in some sub-sectors (like biotechnology) in the pharmaceutical industry. In our study, we examined the financing of pharmaceutical firms and analyzed whether the type of financing is correlated with the success rate of drug development.
We hand-assembled a large dataset from two sources: proprietary data on all drugs under development in the U.S. from 1980 until 2014, and data on VC and CVC investments that company founders have received from 1987 through 2014.
We find that VC and CVC investors invest in more novel compounds, and their compounds are likely to reach Phase II of development. However, compounds coming from large pharmaceutical companies that don’t rely on VC investments are more likely to be successful and be granted approval by the Food and Drug Administration (FDA).
Our results are robust to the inclusion of various controls, including measures of compound novelty. The results are not explained by the timing of VC investments (most of these occur before the compounds reach Phase I). Further, the higher success rate of large pharma companies is not replicated in their acquisitions – compounds acquired (not developed) by pharma companies are not more likely to succeed than VC-backed compounds.