Lilly investing up to $150M in VC funds

Eli Lilly and Co., facing competition from cheaper copies of its top-selling drug next year, plans to invest as much as $150 million in three venture capital funds to aid development of new medicines.

The funds may be worth a total of $750 million, up to $250 million each, and Lilly will contribute as much as 20 percent of the money, Darren Carroll, vice president of the Lilly group that oversees venture investments, said Wednesday in an interview. CMEA Capital, a San Francisco venture-capital firm, started raising money in August for one of the funds with Lilly, according to two people with knowledge of CMEA’s plans.

Lilly is seeking new treatments as drugs accounting for more than 45 percent of its 2009 sales are set to lose patent protection in the next three years, led by its top-seller, the antipsychotic Zyprexa, in 2011. The Indianapolis-based drugmaker spoke with more than 80 venture-capital and private-equity firms over a year before choosing partners, Carroll said. He declined to name the two in addition to CMEA.

“A lot of pharma companies have their own venture funds,” said Les Funtleyder, an analyst with Miller Tabak & Co. in New York, citing London-based GlaxoSmithKline Plc and Swiss drugmaker Novartis AG. Pfizer Inc., the world’s largest drugmaker, also has a fund. “To Lilly’s credit, they’re trying new things. Lilly has more to do than some others in terms of developing its pipeline.”

The company halted trials of a late-stage experimental Alzheimer’s disease medicine last month, one of eight products in the third and final stage of testing generally required for U.S. regulatory approval. Effient, a blood-thinner introduced in the U.S. in August 2009, “got off to a slower start than we anticipated,” CEO John Lechleiter said in July.

In 2013, Lilly will lose patent protection on the antidepressant Cymbalta and the insulin Humalog. Zyprexa and the two medicines brought in almost $10 billion of the company’s $21.8 billion in 2009 sales.

Lilly shares rose 27 cents, or less than 1 percent, to $34.81 each on Wednesday. The shares have lost 2.5 percent this year.

The company’s goal is for each of the three venture-capital funds to work on up to 20 potential medicines, Carroll said. Of the possible 60 new drugs, he said Lilly would hope as many as 15 to 20 would reach a “clinical proof of concept,” meaning the point in development when the medicine proves to be safe and hits the right target. Lilly would have the right to buy some of those at fair market value ahead of competitors, Carroll said.

“At that point, what’s really critical here, we will have discharged an enormous amount of risk,” he said. “We’ll have a good indication not only about safety, but also we’ll know something about the efficacy of the drug.”

The three venture-capital firms Lilly ended up choosing have, on average, been in the business for more than 20 years, have more than $1.5 billion under management and have worked with more than 40 companies, Carroll said.

“We really wanted to work with very highly experienced folks who had a track record that we could evaluate and who we trusted,” he said. “These are long-term relationships and require a great deal of trust.”

Biotechnology was the biggest industry for venture funding in the first half of this year, with investors pouring $2.1 billion into 243 companies, according to the National Venture Capital Association, which tracks 17 categories. Industrial and energy was second at $1.94 billion.

Lilly is bolstering its venture business after a quarter in which overall fundraising declined. U.S. venture funds brought in $1.9 billion in the second quarter, a 56-percent drop from a year earlier, the association said.

The strategy is “another way in which companies can spread research and development dollars to more emerging opportunities without necessarily having to buy a company or make a direct investment,” Tony Butler, an analyst with Barclays Capital in New York, said. Still, it won’t fill the revenue gap the company faces in the next few years, he said. Any new drugs arising from the partnerships would come “way beyond 2015.”