Your fund was doubled from €150m ($170m) to €300m recently. How has the strategic vision behind it evolved?
We started out as MS Ventures in 2009 as a healthcare-only fund at the time. In those days, Merck had the ability to access external innovation through licensing and mergers and acquisitions (M&A) but the rationale was we also needed to have more active participation in the startup environment. We wanted to have a better ability to support companies early on with capital and help them develop with insights, which we thought would give us a wider view on external innovation and allow us to strike relationships with other key investors and entrepreneurs, which could eventually lead to the adoption of their technologies by Merck.
We have always worked, from the very beginning, on a mixed, strategic and financial mandate. We make investments in technologies and products that we believe could be relevant to our parent over time, without any rights or options for Merck. At the same time we think the only way to make successful strategic investments is by investing in companies that generate a financial return.
And so we started rather small, with €40m, back in 2009, but we eventually built out the healthcare fund from €40m to a €150m evergreen fund. And that fund has done quite well. It has been successful in making strategic investments to the extent that several of our portfolio companies struck partnerships with Merck. At the same time, we have also managed to show that we are capable of returning capital to the organisation, allowing us to make strategic investments in a self-sustaining way.
What is the current fund structure?
Last year we announced the creation of three new funds. That is when we made the jump from €150 to €300m of assets under management. At corporate level, Merck has three major areas of business – healthcare (pharmaceuticals), life sciences and performance materials. As the Healthcare fund has proven its value over the past few years, we decided we wanted to create funds to be able to support all three business fields. We also wanted to have the ability to cross over between these fields.
Merck is an old company and will celebrate its 350th anniversary in 2018. But in terms of science and technology base, it is a very exciting company, especially with the trends we see right now. We see a lot of convergence between healthcare, life sciences and material sciences, allowing a broad set of new approaches to diagnose, treat, monitor and support patients. In addition, we see significant advancements in digital health and digital medicine and broadly digital technologies that could have an impact on our business going forward.
That is why we have set up a fourth fund under our umbrella, which we call “new businesses”. It allows us to cross into fields like digital health and digital medicine. What this means is that the healthcare fund is sized at €150m and the three new funds – life sciences, performance materials and new businesses – have an initial commitment of €50m each. And for those three new ones, our ambition is to grow them into self-sustaining evergreen funds like the healthcare fund.
Why did you undergo the rebranding from MS Ventures to Merck Ventures?
It is actually quite simple. The healthcare fund was under the umbrella of our pharmaceuticals business that was called Merck Serono for a long time. With the expansion of the fund into new areas, we are now investing strategically for the entire Merck organisation. So, if you look at its branding today, you will see that it is called simply Merck. Even our pharmaceutical business is called just Merck. It should be simply Merck Ventures to be in line with the overall corporate branding.
What are the synergies of your unit with other divisions of the corporate parent?
We are organised separately from Merck. We manage our investments behind a Chinese wall which we believe ensures our investment independence and discipline. However, we do have a very active working relationship with many divisions of Merck. Thus, our healthcare investment team is in continuous dialogue with Merck´s pharmaceutical division, for instance, as we want to make sure we understand their needs, their interests and that we also benefit from their expertise. They also benefit from our vantage point on external innovation.
Furthermore, we also get involved in discussions on Merck’s research and development division due to our expertise on startup innovation, to help them manage projects in the same way you would do it in a startup and try to bring in the best of both worlds.
In addition to minority stake investments, Merck Ventures is involved in the creation of spinoffs. How does that process normally occur?
We think that it is very logical to put spinoff creation under the wings of a corporate venturing unit. That is how one could make the most out of the expertise we have built up in funding companies and supporting management teams by creating businesses that are relevant and successful.
The selection process for a spin-off is very similar to our selection process for an external investment opportunity. Anything that Merck deems assets they cannot or will not develop internally for whatever reason but worth pursuing comes across my desk. We look at these with the eye of an investor, as if they were external investment opportunities. We want to see a relevant product or technology and the key people behind it. So we help those people, in most cases the principal scientist behind the programme, to work out a business plan and see if it is investable.
The difference from external investments lies in that, for spinoffs, we do the initial two to three years of financing ourselves before we go on to raise more funding externally. This is because it is often very difficult to attract external investment when the originator company parts with its assets. In our model, we make sure that we build an independent team and organisation that shows it can operate and validate its technology external to Merck before we syndicate these deals.
When you look at some of our success stories, like ObsEva, which floated on Nasdaq earlier this year, and Asceneuron and Prexton Therapeutics which both raised significant rounds of VC financing from top-tier syndicates, it is a model that works and these are very exciting investment opportunities for us.
What is the stake you tend to retain in such enterprises, after you have already started raising funds for them externally?
We are initially majority owner and, as we start raising external rounds, the ownership stake gets diluted. However, we remain a significant investor with the ability to participate in follow-on financings in later-stage rounds.
Aside from spinoffs, what do you look for when considering investment in a startup?
The term that we often use when it comes to our investment is that we want to see what we call a “commercially relevant product” which sounds somewhat trivial, but we find that, as an investor, we often have a role of helping startup teams think beyond their science, beyond their technology, with translation into what would or could be a commercially relevant product. That is a basic principle for all of our investments.
Contrary to the common practice of building a business case from the bottom up, with science as its basis, we reconstruct the business plans of our companies from the top down – starting from the commercial proposition and down to the experiments we need to undertake to drive our products there. We generally refer to this as the “commercial relevance” of our assets and the experiments to get there are therefore focused on achieving proof of commercial relevance rather than proof of concept.
We believe this philosophy induces our management teams to think harder and make better decisions about their product development, driven by the market and not just by their basic scientific hypothesis. Our financing plans are structured around the critical path towards proving commercial relevance and we aim to define relevant data points on that path as a basis for refinancing decisions. We ask our management teams to model their budgets around these milestones and strictly manage resources in order to have six to nine months of cash beyond these data points that serve as a basis for refinancing.
Through 2016 and 2017, you expanded your team significantly – 16 new people joined Merck Ventures during that period. How challenging is it to find talent for the investment unit?
If there is one thing we are really focused on, it is recruiting and retaining people. On the upside, what we have shown in the last six to seven years as Merck Ventures is that we have constantly expanded the mandate and the amount of capital available. So we see a lot of people who are excited to be working with us.
It is not just the investments that we make but also the culture that we have in-house. It is a young culture where people are given a lot of empowerment. We have junior people on the team who take leadership in transactions. So that attracts quite a lot of people, and we see we are able to recruit people from traditional funds, which allows us to fill in some of the senior positions.
As for the junior position, we also have a very active development programme for young people, mostly analysts that come to join our six-month traineeship program once they come out of their PhDs or MBAs and are keen to get experience in venturing. Sometimes they are willing to stay in investment. Sometimes they move on to become part of the teams of our portfolio companies.
What trends have you been seeing in medical technology and therapeutics recently and which of them are likely to remain hot in the near future?
We see a broad range of exciting opportunities in fields our funds are focused on – healthcare, life sciences and performance. To address the convergence of medical science with digital technologies and new materials development, we have also created an investment arm to invest in what we see as potential new business areas that we could support with our background in these individual fields, as I mentioned.
In healthcare we continue to see new approaches to disease biology in oncology, immuno-oncology and immunology. We have recently started companies that target the metabolism of cancer cells, changes in the tumour micro-environment and importantly approaches that harness the patient’s immune system to fight cancer. In many cases we develop these drugs in combination therapies to increase effectiveness and reduce the impact of tumour escape mechanisms.
With the increasing knowledge we have about disease pathology, more and more of these therapies can be tailored to individual patient needs. On the technology side of life sciences, we see a lot of exciting developments in fields including synthetic biology, gene editing and what we call the democratisation of diagnostics.
We are also intrigued by developments in the human-technology interface both in sensor technologies for smart disease monitoring and performance measurement as well as the opportunity to use technology to impact disease directly in the digital medicine space.
What have been the most interesting developments in the performance materials realm?
We have seen major developments in the electronic materials space, mainly driven by the ever-increasing interconnected world we live in. Nowadays, much effort has been put into creating ultra-light flexible cost-effective and user-intuitive electronic devices that will become part of our daily life, ranging from smart homes, wearables such as smart watches or autonomous cars, and we at Merck think that this trend will accelerate even more over the coming decade.
Merck has played a major role in enabling next-generation electronic devices. As a material provider, Merck for instance helped with liquid crystal displays (LCDs) becoming main stream and Merck is still the world leader in supplying liquid crystals to display manufacturers.
While integrating liquid crystals into displays clearly has been a great success story, we at Merck Ventures are looking into startups that enable curved LCDs – for example for the automobile industry – or integrate liquid crystals into new applications such as smart antennas. One of our other investment interests lies in the next generation of display and lighting materials ranging from organic light-emitting diodes (LEDs), micro-LEDs, and light-emitting quantum dots. In addition, we are looking into companies developing novel manufacturing processes to deploy these next-generation materials and forward-integrating these materials into electronic devices contributing to the ever more connected world.
When it comes the convergence of medicine with the digital world, what have been your most interesting investments in digital enterprises?
We have some interesting examples from our portfolio. There is a Boston-based company we invested in called Akili. They work in the field of what we call digital medicine – using digital technology to impact diseases directly, which is a broad field but you see a rather small proportion of companies in our portfolio that we think are commercially relevant. Akili develops cognitive therapeutics though a very cool video game.
They used academic research that has identified certain cognitive triggers that can improve a patient’s ability to make decisions and improve their condition. So with diseases like ADHD [attention deficit hyperactivity disorder] or schizophrenia, we believe this could have the same or better effect than traditional therapeutics.
The other example I can mention is an Israel-based company called MediSafe which is a leader in medication management. It is a cloud-based mobile platform with personalised content to support patients in their drug use.
Crispr Therapeutics recently announced a major breakthrough in testing a treatment that could obliterate the HIV and the Zika virus. How are such advances in gene editing and gene therapy going to change the landscape in healthcare?
We are mostly talking about gene editing at this juncture and it does not always necessarily translate into gene therapeutics. It has a huge impact on the field of cell therapy. In general it is a major advancement in science and in our ability to make new drugs. Will it directly lead to gene therapy? We still need to see a lot of validation from the market there.
In terms of oncology and immuno-oncology, what are the biggest breakthroughs you expect to see?
Immuno-oncology has been hot for the past two or three years in pharmaceuticals. Both we and our corporate parent Merck have been investing in the field for a long time already. Merck has been investing in it for the past 10 years and we have been investing in it since the inception of the venturing unit.
There is a lot of new data coming out on checkpoint inhibitors [drugs that blocks certain proteins that prevent immune response to cancer cells] and so far quite successfully. Merck just managed to get its first approvals for bladder cancer and Merkel cell carcinoma treatments. There is a lot of development and discovery in the field of other regulators of immune responses in the tumour micro-environment. We also see that in the whole immunity cycle around cancer cells. There are a lot of other factors playing a role for the ability to fight cancer with an immune response. There are indeed various approaches and modality to enable us to tackle this.
