Formation raises $600 million to fix AI's biotech bottleneck
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We've written about how AI thus far has been much better at discovering drugs than developing them, which is a bit like being great at grocery shopping but helpless in the kitchen.
Driving the news: Formation Bio also sees the stubborn bottleneck, and just raised a $600 million "drug development accelerator" fund to help address it.
The big picture: This effort is unusual.
- Formation Bio is not a venture capital firm. It's a biotech startup backed by some of the world's most successful and deep-pocketed investors — including a16z, Sequoia Capital, and Thrive Capital — and was valued at $1.7 billion when it last raised funding in 2024.
- But it is definitely reminiscent of a venture capital fund, with Formation Bio serving as general partner (including carried interest) and the LP base consisting mostly of university endowments, foundations, and hospitals (many of which are LPs with Formation's actual VCs).
- CEO Ben Liu says that his goal is to build a large pharma company, on par with an Eli Lilly or Sanofi, and that this structure will help Formation Bio "take more shots on goal" without having to risk diluting existing shareholders by raising additional equity. In fact, Liu says Formation has no plans to do another venture round.
Zoom in: The fund will buy molecules and drug programs that Formation will then help bring through development.
- Formation's key innovation, Liu believes, is that it's using AI and centralization to create a more efficient clinical research organization. Specifically, he argues that nearly half of drug development costs come from CRO margins — driven by billable hours — with Formation believing it can reduce spend by between 30% and 50%.
- "CROs have perverse incentives," Liu says. "We can't really save on manufacturing, which is expensive, but we can cut a lot of the redundant headcount, extra site visits and other things that cause clinical trials to cost so much."
Look ahead: Each company acquired by the fund will become its own NewCo, with any early successes to be sold to Big Pharma. Basically the latest iteration of the hub-and-spoke model.
- "That's only a short-term strategy to lower our cost of capital," Liu explains. "We do think we've found a category that we would hold onto, which we'll share in a couple quarters."
The bottom line: Curing disease is becoming AI's holy grail, the inarguable good that could offset the feared bads.
- Formation and other CRO startups may or may not help crack the code. But, to borrow a phrase from Liu, it's worth taking more shots on goal.
