Accelerating costs of drug development and uncertainty surrounding the feasibility of many compounds to reach the marketplace have lead large pharmaceutical companies to resort to independent research organizations for early stage drug development. This helped pharma companies focus on license-proven, later-stage development of compounds with a record of safety and efficacy.
Recently, however, pharma companies have become interested in biotech firms. Roche acquired Genentech in 2009, and Sanofi-Aventis has just agreed to takeover Genzyme.
Eli Lilly also wants to move upstream. The company is joining forces with venture capitalists to launch three new funds ($750 million) that will finance pre-clinical and early stage clinical tests on molecular technologies by standalone firms in partnership with external researchers. This will help Eli Lilly develop more drugs faster, and give it preferential access to potential successes. Here is the Financial Times piece by Andrew Jack.
Why is Eli Lilly deal clubbing with VCs instead of going it alone? Can’t the company raise $750 million? Presumably Eli Lilly has a limited ability to raise funds. More important, public markets for equity and debt are ill suited to back highly risky ventures. Institutional and retail investors prefer bets they can make sense of, benchmark to the stock market index, and quick returns.
Perhaps the main reason for Eli Lilly’s foray into early stage R&D is that it provides the company first right of refusal after proof of concept. Acquiring licenses and seeking agreements with independent labs after an initial success can be expensive and frustrating, as many pharma companies compete fiercely for a miniscule number of technologies that show real promise at preclinical trials. In this sellers’ market, by retaining preferential treatment Eli Lilly wants to avoid being drawn into aggressive contests that might end into costly failed bids or inflated purchases.
Eli Lilly is redefining its boundaries. On paper it appears to be a smart move for a company that is anxious to rebuild its declining portfolio of patented drugs. But as with every strategy, success will be determined by how well it is executed. Sharing costs and risks is not obvious when Eli Lilly is the only insider, the buyer and user of the fruits of research also funded by other outside investors.
Similarly with the management of partnerships with freewheeling and independent minded external researchers who want to maximize the value of their exit options when Eli Lilly has a right that effectively distorts an otherwise competitive market.