A “deluge” of opportunities presented themselves to Merck Serono after the Switzerland-based biotechnology company lifted the lid on its corporate venturing fund last year and provided almost immediate justification for the decision to start a €40m ($49m) in-house venture capital operation.
Receiving more than 400 business plans in the first nine months, however, caused some difficulties. The Merck Serono Ventures team of two under Roel Bulthuis was swamped, and their commitment to respond to all applications meant the team had to be doubled in size almost immediately.
However, the result of the launch has been beneficial to the group formed only three years before in 2007 out of the acquisition of Serono by Germany-based Merck KGaA for $13.3bn. Bulthuis said: “Of the 400 business plans we received in the first nine months,about three quarters were relevant to the organisation [for potential investment, licences or partnerships] and we [at Merck Serono Ventures] are working with 30 potential deals. Outside the two deals already done, we aim to give feedback to everyone within three to four weeks.”
Acting as an entry point for entrepreneurs to deal with one of the world’s largest pharmaceutical and biotech companies had been a positive, he added, and this process had been eased by the strategic and operational work undertaken since the formation of Merck Serono.
Bulthuis said: “Merck Serono is quite a young organisation, formed in January 2007 as a biotech and pharmaceutical division of Merck. So it had a largely new management team and structure and could think through the internal organisation and external connections through business development, licensing, mergers and acquisitions and integrated them in an optimised approach.
“Part of that thinking was how we networked with global venture capital firms and whether we should have an internal VC fund. The board agreed the business plan I presented in mid- 2008 to set up Merck Serono Ventures and implemented it by March 2009, so it moved fairly quickly.”
The goal of the ventures unit is both to deliver financial returns and to act as a strategic division to access external innovation. With his team paid a normal salary plus corporate bonus rather than performance fees from the fund, Bulthuis reports to Christop Huels, vice-president early-stage licensing at Merck Serono, and he in turn to Vincent Aurentz, executive vice-president of portfolio development, and then to the chief executive Elmar Schnee.
Merck Serono delivered €5.35bn in turno- ver, more than half its German parent’s revenues of just less than €8bn in its previous financial year, which was up 6.6% but dependent on just five products to contribute 60% of sales. Bulthuis said: “The reason the venture fund was set up was because Merck Serono was seeing exciting technologies and products in line with our strategy and sectors but they were too early to license. So by having a corporate venturing fund, we could have creative con- versations with entrepreneurs about positioning their company for an eventual licence and so on.
“It is instrumental to use venture money and develop the close relationship that comes from having a board or observer seat in order to be involved in technical discussions such as how to use technology and what biology to apply that might lead to a licence but without us having the formal rights to [have a licence].”
Of the 400 business plans seen, Merck Serono Ventures has already agreed two deals and expects to do three or four more both this year and next to investthe €40m funding. Now, a year after the launch, Bulthuis said it was a fortuitous time to have been raising a fund. He added: “We launched at a great time as there is increasing reliance on corporate venturing as general VCs were in difficulty. This means our two deals have been in great syndicates with larger VCs.”
The first two deals were Anaphore in May 2009 and F-star Biotechnologische Forschungs-und Entwicklungsges in January, both agreed as consortia of independent VCs and in-house corporate venturing divisions as extensions to previously-announced series A rounds. However, Merck Serono had previously taken equity as part of a partnership before the launch of its ventures division, such as the $10m invested in Ambrx in February last year.
Bulthuis said this openness to having large pharma companies in an early syndicate was a change in approach by companies and VCs. He said: “Especially in the US, they are now more open to having a corporate venturer on board as they have a more realistic view of our impact. Three or four years ago they felt it restricted the exit, which is definitely not the case and the corporate venturers can benefit the exit valuation. Companies are pragmatic that there are few exits to the capital mar- kets [through a flotation] and so they must prepare for M&A or partnering deals by being positioned optimally for a pharma company.”
Kevin FitzGerald, chief executive of Austria-based F-star, who joined the company in May 2009 having previously founded and run UK-based biotech start-up Isogenica, said: “The main attraction for having Merck Serono as an investor is that it provides F-star with the opportunity to gain insights into the technological requirements of a company that clearly represents a key potential customer.
“Few businesses are offered such a clear view of what their customers are really looking for and biotech companies in particular often have to rely quite heavily on guess- work and presumption in terms of how best to develop and, more importantly, apply the technologies they are developing. “In addition to providing solid contributions to board meetings and other internal discussions, in which a valuable pharma perspective is provided, our relationship with Merck Serono has given us the opportunity to meet with senior representatives from relevant research areas within the pharma organisation.”
Both of Merck Serono Ventures’ first two deals were effectively extended series A rounds agreed in stages over more than a year. Bulthuis said this indicated its strategy and reflected that more mature companies with multiple previous investment rounds often had relatively high post-money valuations. He said, at a series A round, management incentives and pre-clinical value were often intact.
Fact box – Merck Serono
Formed: March 2009
Funds: €40m
Key people: Roel Bulthius, head of Merck Serono Ventures
Recent deals
Anaphore, California, A $38m. Consortium, excluding Merck Serono, SR One, Aravis, 5AM Ventures, Versant Ventures, Apposite Capital
F-star, Austria A €21m Consortium, excluding Merck Serono, MP Healthcare, Atlas Venture, Aescap Venture, Novo Ventures, TVM Capital