SAN DIEGO – When it comes to big-pharma strategic corporate venture capital (CVC), biotech entrepreneurs should cast a wide net and be unafraid of multiple funders, but beware build-to-buy arrangements if the first money isn't plenty.

Such was among the advice dispensed on a three-member panel that dealt with whether "smart money" from giant drug developers is the right way to go, and when, and why.

"It's difficult to attract other financially oriented investors to join you to diversify the risk [of a build-to-buy deal] because of the capped upside," said Elaine Jones, director of Pfizer Ventures, part of New York-based Pfizer Inc. "But if you're going to do it, make sure the money you get for your option is enough to power the work you have to do to get to some very clear, bright-line achievements: IND filed, proof of mechanism in man, plus some runway beyond that. Because if your build-to-buy partner says, 'I ain't exercising my option' and you're out of cash, that's worse" than the CVC simply pulling out of the pact.

"Lilly's not here so we can trash them," Jones said. "They did a bunch of [build-to-buy deals]" and haven't exercised the option on any. "Really think about what your price is that you'd be prepared to sell that option for. It's not just to run the absolutely necessary studies. In some cases, we've said to the guys, 'Look, we need this, but we want some f-you money that allows us, if you say no, to get to the next study.'" Another panelist, Marianne De Backer, vice president of Johnson & Johnson Innovation, part of New Brunswick, N.J.-based Johnson & Johnson (J&J), noted that such deals also take "an extremely long time." The model came into being at a time when it was otherwise "difficult to get access" to early stage technology any other way, she added.

In general, Jones said "it's incumbent on you as entrepreneurs to really study up on the various CVC teams. J&J has an army of people and a multiplicity of tools. At Pfizer we have five people. We're not going to be starting companies. We don't have the bandwidth to do that. We're series A, series B type of investors. We never invest by ourselves. J&J will do that on occasion. We're in a completely different class. I would say, the most exciting deals we've done lately have been in collaboration with other corporate investors who are going early," especially on platform technologies. "Frankly, it's been difficult for us to find a large swath of financial guys who are highly attracted to that, so it's a long play. You've got to invest in biology, which is often very complex and throws up surprises that you'd rather not have. But we've been finding like-minded investors in the corporates."

Proving value goes both ways

De Backer said it's "important for entrepreneurs to know that having several [CVC] strategic investors as your investors is perfectly fine" and "not something that antagonizes" one against the other. Nor does the fact that one CVC passes on an opportunity mean anything with regard to the chances of another taking it on, said Margarita Chavez, senior director of Abbvie Ventures, part of North Chicago-based Abbvie Inc. "I think we've all come to the realization that Abbvie, J&J, or Pfizer may not always be the best partner for the company, may not be in the best position to optimize an asset. May the best pharma win. We all bring something to the table."

Jones agreed. "If you're just designing a program for Abbvie or J&J or Pfizer, I think that's a very risky strategy. The best thing you can do is understand generally what dataset might be compelling to a number of partners and CVCs really help smaller companies understand what that value proposition needs to be. The other thing you need to know is that, once we become an equity holder in your company, I'm pretty confident that mother Pfizer can take care of herself. We are your advocates. We're trying to make sure that you succeed because that's the only way we're going to make any money on our investment. Hopefully we're in [negotiations] because Pfizer would be a potential partner, or Abbvie, or J&J. They may not win, but we want the company to win, to get the best partner with the best deal structure for the company at that time. You also should be confident that most of our big companies are very concerned about liability, so if there's a business development transaction and we're part of it at the board level we're not involved in any decision-making about what partner company A chooses to go with. That's done by management, other independent directors, etc. I would love for Pfizer to buy one of my portfolio companies; it's one of my aspirational goals. I have yet to succeed. I mean, they're bidding; they're just not bidding enough."

Jones pointed out that CVCs have an associated pharma company to which they must prove value, and this bears on how investments are made. "The easiest metric is to measure financial return," she said. "We do measure that. If we lose money, we're all going to lose our jobs. But the way we measure strategic value is, how many of our portfolio companies have some type of relationship with Pfizer? Are we using a piece of equipment they've generated; are we using a technology; do we have a licensing deal? Every corporate venture group struggles with how they show strategic value back to the corporation."