A lifesaver in the troubled biopharma financing waters has emerged in the form of Merck Serono's new €40 million ($53.7 million) corporate venture capital fund, which could carry the early assets of a dozen or so companies until they reach licensing or merger and acquisition ports.

Formally christened on March 23, Merck Serono Ventures will take equity stakes in from 12 to 15 companies over the next five years. Initial investments will range from €500,000 to €2 million per company and another €1 million to €2 million for each will be held on reserve for future financing rounds.

The fund is geared toward early-stage products and technologies that hold promise - but are not yet ready - for licensing and M&A opportunities with Merck Serono.

Just last week, U.S.-based EMD Serono unveiled a disease-focused venture fund developed jointly with Fast Forward, the new venture capital arm of the National Multiple Sclerosis Society (¹ Also see "EMD Serono Buys $19M Seat At MS Society’s Research Table" - Pink Sheet, 20 March, 2009.).

Along with the Fast Forward deal, the fund will help fill a gap in Merck Serono's deal-making toolkit. The company stresses that its focus is on developing early-stage products and direct investments.

"Early stage is a real challenge for us. Longer term, this is really what we want to explore," said Vincent Aurentz, executive vice president of portfolio development in an interview.

"We are not firewalling it, as some other companies have done. That is not in our interest, the endgame is not a return on investment - it's access to technology and products to feed our pipeline," he added.

But while the new venture fund was not specifically set up to take options, these deals may emerge down the line.

"We will look at it on a case by case basis," Aurentz said. "My guess is that in some cases, we will make new investments as a pure investor with no additional rights, but in others we may make an investment with an option."

Fund aims at core therapeutic strengths

In line with Merck Serono's R&D vision, the venture fund will be mainly focused on three core therapeutic areas: oncology, neurodegenerative disease, and autoimmune and inflammatory disorders. Projects related to the firm's other areas of interest - fertility and endocrinology - will also be considered.

Although Merck Serono has a leading position in multiple sclerosis through its Rebif (interferon beta-1a) franchise, the new fund may not necessarily be active in this space, at least not initially. EMD Serono and Fast Forward are likely to be on top of developments in MS. Merck Serono does not want both funds to be focused on this one disease at the expense of missing opportunities in other therapeutic areas. However, the corporate venture fund will not exclude MS either.

Aside from requirements that companies be involved in early stage research related to the target therapeutic areas, Merck Serono's doors appear to be open. Interested companies can get in touch via the firm's website.

"As opposed to looking for hard and fast criteria, err on the side of contacting us if you aren't sure," Aurentz said.

Operating on an informal basis since the end of 2008, Merck Serono Ventures has already been fielding interesting opportunities, Aurentz said. Executive Roel Bulthuis is heading the new fund and will report to an internal investment committee including Aurentz and executives drawn from R&D and corporate finance.

"This formal kick-off makes things official. We have a dedicated team and a dedicated [amount] of money to invest," Aurentz said.

Is the time right for corporate VC?

Among the many corporate venture initiatives developed over the years are Johnson & Johnson's Johnson & Johnson Development Corp, GlaxoSmithKline's SR One and Novartis Option Fund (See also ² Also see "Corporate Venture Capital's Complex Agenda" - Scrip, 1 June, 2002. and ³ Also see "Corporate Venture Capital's Complex Agenda" - Scrip, 1 June, 2002.).

There is reason to believe the time is right for corporate VC. Venture capital firms have increasingly been gravitating toward later stage assets and shorter investment cycles, leaving early stage opportunities by the wayside. And the economic crisis has obviously had a dramatic impact on exit strategies.

"The IPO is no longer the exit," Aurentz said. "Venture capitalists are now looking for a strategic transaction, a sale to a company, and want to know how we are thinking, what is valuable to us."

Consequently, fears about conflicts of interest that might have scared investors off from corporate venture deals in the past have lost steam, in Aurenz's view.

After looking at the models already put into in action, Merck Serono decided they did not want a fund that was centered on options. The company also did not want a fund geared toward producing a return on investment as this may not lead to products that feed the pipeline, Aurentz explained

"We felt strongly that we wanted to run a fund to access early innovation," he said.

Merck Serono also wanted to ensure the venture capital team had full access to the company's full set of personnel, including scientists, clinicians and other experts as needed.

Meanwhile, the company continues to explore other sources of innovation, including alliances with academic institutions, and it will continue scout for opportunities to build its portfolio.

"Merck Serono believes strongly that to be successful in the future, we have to collaborate more and more openly. Innovation is not going to happen like it did in decades past," he said.

- Emily Hayes (e.hayes@elsevier.com)

Merck Serono Builds $54M VC Bridge Over Troubled Waters

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