Several forces--rapid technological obsolescence, the impact of information technology on health care, merger integrations, and the need for double digit revenue growth--have caused increasing numbers of large pharmaceutical and medical device companies to create new corporate venture capital groups. But compared to traditional VC firms, whose only goal is to make money for limited partners, corporate VCs have a heavy agenda. They must choose portfolio companies while balancing often-competing goals of strategic benefit and financial return.

Cambridge Drug Discovery was formed in 1997 by four Pfizer scientist who wanted to exploit expertise in assay development, high-throughput screening and informatics, to accelerate the drug discovery process. One of the company's discovery platforms is used to discover small-molecule modulators of G-Protein Coupled Receptors.

Kinetix Pharmaceuticals hoped that a focus on a particular class of targets that shares structural similarities--the protein kinases--would yield small molecules for a variety of therapeutic areas. But in order to realize synergies between multiple research projects in protein kinases, the company couldn't partner the projects out to numerous pharmaceutical partners, each requiring exclusivity and confidentiality. After technological rival Vertex signed a multi-million dollar protein kinase development partnership with Novartis, Kinetix began to rethink its original business model. A $170 million acquisition offer by Amgen Inc. made strategic sense for the start-up.

Big Pharma's valuations are depressed; biotech is red-hot. Alliance volumes have fallen, but average deal values are up. The valuation divide masks the subtler cracks dividing biotech's elite from a mass of undifferentiated technology providers. Drug companies are recognizing that basing discovery programs around new, proprietary targets is highly risky and lengthens R&D time. Targets themselves, absent optimized lead compounds, are increasingly commoditized. Therefore, companies who don't provide integrated discovery capabilities aren't going to get the high-value deals that will justify their current, sky-high valuations. Meanwhile, companies with integrated solutions must back up their promises of productivity enhancement with their own money--though they also get a richer share of the end proceeds.