VCs, Big Pharma join forces to tackle market challenges

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Atlas Venture partner Jean-Francois Formela

Venture firms have generally had poor returns over the past decade. And Big Pharma has been rapidly trying to reinvent the way it brings new medicines to market. Both camps are under pressure to engineer major turnarounds, and now venture groups and large life sciences companies are putting their heads together to improve their fortunes.

In a high-profile example of this trend, Indianapolis-based drugmaker Eli Lilly ($LLY) revealed plans in September to invest up to $150 million in three external venture funds--naming only CMEA Capital of San Francisco as a recipient of its capital--with the idea that Lilly would have a first option to buy experimental drugs developed by biotechs in which the Lilly-backed venture firms invest with its funds.

In recent weeks, Cambridge, MA-based Atlas Venture and St. Louis-based seed giant Monsanto ($MON) said that the two would collaborate on finding new early-stage life sciences investments. This collaboration builds on Monsanto's investment in Altas' latest fund, which was closed at $283 million in 2009. Atlas also has one unnamed large biotech that invested in its latest fund, according to Jean-Francois Formela (pictured), a partner in the life sciences group at Atlas.

There are a number of factors driving these collaborations. Lilly, Monsanto, and other large life sciences have lots of cash and need new products. Meanwhile, the venture industry saw a scary drop in capital available for new funds after the financial meltdown in late 2008. While VC fundraising bounced back early this year, firms raised just $12.5 billion in 2010 for their funds compared $31.1 billion in 2007, according to data from the National Venture Capital Association and Thomson Reuters. Yet outfits like CMEA and Atlas have lots of experience in funding and building early-stage product developers. Big Pharma's strong suit isn't building new businesses. Together, however, life sciences companies and VCs might have the capital and expertise to form new entities to efficiently discover and develop new products.

To be clear, Big Pharma companies are no strangers to the venture capital game and investing in biotechs. GlaxoSmithKline and Novartis, among others, have established venture funds of their own. What seems to be changing, however, is the frequency of and strategies behind partnerships between drug companies and VCs.

"There has been a very significant change in the amount and quality of interaction between venture groups and large biotech, large pharma, and large life sciences companies," Atlas' Formela said. "It's true that today we see far more interactions with large companies in our space than we did certainly 10 years ago or even five years ago." Next page >>