Thursday, September 15, 2011

Merck's $500 Million Venture Bet -- Industry's Latest and Largest Attempt to Get Closer to VCs

Today in the newly released September issue of IN VIVO we're reporting that Merck & Co., until recently one of the few large pharmaceutical companies seemingly disinterested in playing venture capitalist, is placing a significant corporate venture bet.

Two bets, actually. We told you a little about the first one -- The Global Health Innovation Fund -- back in March, but back then details were thin. And since the Spring that fund, set up to invest in non-pharmaceutical health care spaces, has doubled in size to $250 million (and it may yet grow some more). It's led by ex-J&Jer Bill Taranto and has a remit to invest capital in service-oriented businesses like home health as well as health IT, and other so-called 'adjacencies' where Merck may see itself as a future player. Internally the GHIF strategy is referred to as 'Pharma Plus'; so far it has made a handful of (undisclosed) investments.

Meanwhile Merck has been quietly shopping a second initiative to prospective venture partners. And here's where it gets very interesting.

The Merck Research Venture Fund, also staked with $250 million, is an effort to partner up with traditional VCs to gain access to innovative companies early on in their life-cycles. Merck plans to invest in a handful of funds as a strategic LP (in the US, in Europe, in China, and elsewhere), provide 'advice and guidance' from Merck scientists to those funds' portfolio companies, and hope it secures an inside track on those biotechs or their programs when they mature to the point that Merck's business development group can step in. So far Merck has teamed up with one (undisclosed) venture fund.

The initiative has echoes of Lilly's Mirror Portfolio, though Merck SVP and head of worldwide licensing and knowledge management David Nicholson avoids the explicit comparison and notes that Merck isn't routinely taking options on nor contributing assets to the biotechs in which it invests. As Merck may sometimes invest in a side-car structure it has also drawn comparisons to the MPM Capital-Novartis tie up and others like it.

All of these structures are part of industry's efforts to access innovation earlier on in the value chain, externalize increasingly large portions of their own R&D efforts, and pump money into a venture community that has served as the lifeblood of its future product opportunities.

Response to the MRVF among venture capitalists we talked to has varied from deep skepticism to reluctant acceptance. No doubt there are plenty of life sciences venture funds out there that could use Merck's money and see the idea of guidance from Merck scientists as a plus. But the idea, voiced by Nicholson, that Merck's involvement would fundamentally enable greater financial returns for the funds' other LPs was uniformly questioned.

Will the best entrepreneurs want Merck poking around in their companies? Will Merck's early involvement put off other potential pharma investors or acquirers? Does the value of Merck's involvement -- again it's just 'advice and guidance' -- outweigh the potential drawbacks?

The fact that its first venture partner prefers to remain anonymous, for now, suggests to some that the answer to this last question is no, at least for venture firms who have fundraising options. "Only the funds that need their money will accept it," said one VC we spoke with.

That was a fairly common sentiment, but one Nicholson shrugs off and one that is hard to measure. The success of the MRVF -- and indeed the GHIF and other pharmas' initiatives to get closer to venture firms and their portfolio companies -- can't be gauged for years.

Only when Merck starts signing deals with these now-fledgling biotechs -- or failing to do so -- will we know whether its $500 million was money well spent.

You can read the whole feature here. Or come see us at next week's Pharmaceutical Strategic Alliances meeting in New York where we'll be discussing the MRVF and pharma's other R&D experiments.

image courtesy flickr user spaceyjessie used under creative commons license.

1 comment:

Trista said...

Thanks for the interesting info! When I first read the headlines I thought Merck was starting a VC fund, so thanks for delivering the details accurately, as always.