Give us a brief introduction to yourself.
I have been the managing director of Merck Ventures since its inception originally as MS Ventures seven years ago in 2009. My background is initially as a very unsuccessful scientist who went into business, became in investment banker, and then joined Serono just before Merck acquired Serono. At Serono I was initially responsible for running structured deals as part of business development, and established the Merck Serono Venture Fund in 2009 to invest in strategic innovation – strategic to the Merck healthcare business at that point in time.
Introduce your fund and its relationship with your parent organisation.
We established the fund as part of our pharma business. Merck, based in Darmstadt, Germany [rather than US-based Merck, a separate company] is a company with three businesses. We have a pharma business, the Merck and previously Merck Serono business, which is currently called Merck Biopharma. Merck Biopharma has a portfolio that is focused on the fields of oncology, immune-oncology, inflammation. We have a fertility business and a broader, mature business in the endocrinology and metabolic diseases space.
We have a large life sciences business that is really focused on materials and reagents that are applied in the lab industry. A big part of that business comes from our acquisitions of Millipore about five years ago, and then more recently Sigma-Aldrich, which we added to the family in 2015.
The last part of the business is a performance materials business. We have a large business in the LCD field, the display materials field and other high-end materials that go into micro-electronics, and we have a pigments business – so a very broad conglomerate of science and technology businesses.
I report to Stefan Oschmann, Merck’s CEO, with a mandate to invest in each of these three businesses. We have a €150m ($166m) dedicated fund for our healthcare businesses, with an evergreen commitment. We have also just announced an initial commitment of €50m dedicated to our life sciences business, and a €50m fund dedicated to our materials business, with the ambition to build these out to a similar size to the healthcare fund over time. Then we have an additional commitment of €50m that allows us to invest in blue sky areas where, based on the science and technology base of Merck today, we try to anticipate what new businesses our corporate parent organisation would engage in over time.
Describe how that venturing and fund approach has changed over the years.
When we started the venture fund discussion in 2008 with the board, we were at the time in the middle of the financial crisis and still in the middle of a transition of our parent organisation’s business. So the initial commitment was €40m, a one time commitment, with very limited expectations from our parent organisation.
We have evolved that over time. We have added a €10m seed fund in Israel, and we have our own incubator facility there, started in 2011. We set up a spinoff fund from Merck of €30m in 2012, at the time primarily driven by the closure of our R&D facility in Geneva. With that we have helped build, in the meantime, six companies, on the basis of assets that were deprioritised at Merck but are now the basis for some successful biotech companies.
Since 2013 we have upped the overall commitment to €150m for healthcare, since last year an evergreen commitment. So what has really changed in the perception of Merck over time is that we have now been able to show that, from a strategic perspective, which is our primary mandate, we have been able to start and seed companies that have developed assets that have turned out to be very relevant for the Merck business. We have generated significant financial returns that have given a lot of confidence to the Merck organisation.
What are the key technologies and the new business models that you are seeing as opportunities or threats?
We invest in opportunities. We do not see the venture fund as a structure to protect our businesses from threats in the business. The opportunity for us here is to access innovation across our businesses and help shape that innovation into products that would be relevant for our business.
In our healthcare portfolio we have been doing quite a bit of company creation in the field of oncology, new biology and new target biology in oncology. We are investing in new therapeutic modalities with the increased understanding that we have of the biology of cancer and of inflammation. There is a need to invest in new therapeutic strategies to address that biology, to capture that biology.
In the new funds, the strategy is emerging. This is something that we are aligning with the business as we speak, but you can imagine that with the portfolio we have on the life sciences side, we will be looking to expand that into high-growth areas. We have a significant market position in disposable reagents that are used in the diagnostics and companion diagnostics field. We have a large capacity in the manufacturing of proteins and very complex therapeutic modalities in that life sciences space.
With the emergence, on the healthcare side, of a lot of cell therapy and gene therapy products, you can see that we would also cross over there to see if we can find new technologies.
In the advanced materials space, the display technology field alone provides a significant amount of opportunities, but also the use of some of the specialised materials that we have in displays or in our pigments business for new types of businesses creates a lot of near-term opportunities for us. So there is a fairly broad spread of opportunities.
Introduce us to some of the team members and how they try to engage with the core business and your corporate venturing.
For now they will be primarily focused on our healthcare team because we are in the process of establishing the other teams. Besides myself, in terms of senior leadership, Jasper Bos is heading our healthcare fund. I hired him when we started the first fund, he has been instrumental in building the healthcare organisation together with me. Other senior investment managers in life sciences are Hakan Goker, who came from Atlas Ventures and then Aescap Ventures, and Bram Vanparys, who is a former investment manager at PMV, a Belgian venture fund in the life sciences space.
Beyond that we have a very strong group and a very smart group of younger people who have joined us over time. We run an internship programme, very focused on talent management, getting smart PhDs on board and bringing them into the venture environment, growing those people into associate and then principal roles.
How do you work with people within your organisation with regard to governance and validating your investments, and then connecting your investment portfolio to your business units?
On the governance side we have a one-step process for investment decisions. We too want to have corporate sponsorship and that means that we have senior leaders from the organisation endorsing our investment proposals. That is on the basis of a verbal commitment, not a budget or a financial commitment from their side. For us it is very important that, with the risk of investing in innovation, that resource allocation is always going to be impacted by more mature products, and that is something that we want to prevent. It is very important that the money that goes into venture investments comes from a dedicated pool of money.
We have an investment committee with members of the Merck executive board and divisional leadership. We can call them together on an ad hoc basis. It takes us a couple of days to prepare them but we can act at least as fast as any of our core investors in the corporate venturing and VC space.
The other question is very important to us. Our relationship with our portfolio companies is driven by our board seats. We take board seats in all our companies. We try to be active investors, really support our companies beyond the capital that we provide, insights into strategy, business development, technology, science. We have the ability to reach back into the Merck organisation if that is of interest to our portfolio companies, if there are specific resources or capabilities that we find in the Merck organisation that could be relevant for them, and bring that in on request.
We try to facilitate a regular update with key decision-makers in our brand organisation. That for me is very important. That is a relationship that needs to be built between our management teams and our parent organisation directly. I can facilitate that, but I am not going to be part of those discussions. We organise an event every year where we bring our portfolio companies and some of our core investors together with key decision-makers in the Merck organisation to keep that network up and running. It is a very important part of out business.
Building a new technology, new business models and creating what I describe as innovative new value chains is really a challenge in that core business. Give us some insights into some of the challenges you are seeing, and whether the business model and the process is changing in your core business.
I would take two examples, or two levels. One of them is when we think about developing new technologies or businesses that are within our current divisions, the challenge we find there often is when you really want strategic innovation, really look at new products, new product categories, new technologies, you can make the decision to invest in something new and see it through for the first year, but then you get to a point where you have to rediscuss your budget, you have to redo your resource allocation, whether that is capabilities, budget or whatever. Quite often that new technology will lose from some of the more mature products that are in that portfolio.
So it is challenging in itself to start new projects, even with all the work our current organisation does in R&D – our pharma business has an annual R&D budget right now of €1.4bn, so there are significant investments in it. But when we really want to create something new we do not always have the right environment to do that.
With the structure of our company and the three different businesses, there is an added challenge for us, or maybe an opportunity. There is a lot of overlap between our life sciences and our healthcare business for instance, but also between our materials and our healthcare business when it comes to new opportunity.
With our display materials, LCD and older technologies, you could see applications that are on the healthcare side. With our assay development, and with our reagents and with our diagnostic tools in life sciences, again there is overlap – manufacturing proteins, manufacturing cell therapies.
Because of the way we have structured our business, it is not obvious how you would invest in a new technology that goes across those businesses. The venture funds allow us to cross over between businesses, create assets that are relevant for both businesses, without directly hurting or touching the divisional budgets.
How do you measure your financial and strategic performance?
I guess financial performance is the easy one, right? We assume or have the ambition to generate a market return, even if we start with a strategic trigger to make our investment. We will only do that when we see that we have companies that are investable and where we can create strong syndicates, so really believe we should have the same drivers as the broader venture community.
On the strategic side there is a set of key performance indicators (KPIs). Obviously the very straightforward part of that is: do we see all the relevant dealflow, do we have access to all the relevant deals, do we make investments that turn out to be relevant for our organisation, initially and over time?
We have been able to deliver on that mandate for several of our portfolio companies, and we also accept, given that we make early-stage investments, that the probability of an initial investment turning into a strategic relationship is not very high, as you can see across the industry.
Beyond the obvious, we also try to measure the spinoff of having a venture fund in terms of dealflow generation for our business development and M&A organisation, and the relationships we create with our syndication partners in the broader VC community, when it comes to sharing dealflow and ideas with Merck as an organisation.
What is really hard to measure is our belief that our venture fund, in terms of Merck’s reputation as a company that invests in innovation, is important for us overall as an organisation. If we can find a good KPI for that we will do it.
Illustrate what you have described with a couple of examples of recent investments or partnerships.
The one example I often use to describe why we do venture and how we do venture is one of our earliest investments from the healthcare fund. The company is currently called Progyny – when we invested it was called Auxygen. It is a San Francisco-based company, a spinoff from Stanford University’s fertility clinic. We started that company in 2010 with [VC firms] Kleiner Perkins Caufield & Byers and TPG to develop a device to help embryologists in an in-vitro fertilisation (IVF) clinic with selecting the most viable embryos in an IVF procedure.
Our parent organisation has had a pharma business and a very strong market position in the field of IVF for a long time. We wanted to see if we could take those developments beyond drugs and if we could use technology to improve IVF treatment. The Eeva system, the technology that came out of development, has turned out to be a very effective tool to standardise the evaluation of embryos in an IVF setting.
At the same time it has been an important investment for us, to show that we back technologies, we work with great investors, and we still have a company that has a very valuable business in the field of fertility healthcare benefits.
An example of financial return is a company we started about 16 months ago, together with Atlas Ventures, Johnson & Johnson Development Corporation and what is now Medicxi Venture, formerly Index Ventures, in the inflammation space. A Boston-based company called Padlock Therapeutics raised a €20m series A financing. Again the trigger to invest there was strategic – this is new biology, a completely new take on the treatment of auto-immune diseases. But already, at a very early stage, there was a lot of interest from pharma and large biotech companies in acquiring the company. It ended up in a sale to Bristol-Myers Squibb, announced in April this year, generating quite a significant financial return.