Venture capital firm Flagship Ventures has joined with Merck Research Laboratories and its $250 million Merck Research Ventures Fund to launch and back biotech startups focused on developing new drugs in areas of unmet medical need. The Merck & Co. fund invested an undisclosed amount in Flagship Ventures Fund IV L.P., a $270 million oversubscribed VC fund that closed in January and the largest of Flagship’s four VC funds.
"Usually pharma and biotech transact rather than interact," Flagship co-founder and CEO, Noubar Afeyan, told the Boston Business Journal. "But if you look at how innovation happens, it’s about sharing ideas."
By sharing ideas, Afeyan said, Merck expects to realize a future competitive advantage, since it has the option to buy startups resulting from the partnership with flagship. But that option is not exclusive, so Merck’s pharma rivals also have the chance to snap up those startups, which hope to get on the right path to commercialization sooner: “The biggest waste is to work on the wrong problem early in a company’s life, when pharma would want work on a different set of problems,” Afeyan added.
Reid Leonard, the Merck fund’s managing director, told Xconomy that Merck was looking to team up with a Boston-area VC firm with strong connections among startups: “We had to be aligned on whether the firm had an open fund, whether the size of that fund would meet our needs, and how the relationship would work. We have excellent relationships with all the firms here, but we had a strong feeling Flagship would make the best partner.”
Founded in 2000, Flagship Ventures launches startups through its Venture Labs, which lists 16 current portfolio companies; then finances them through its Flagship Venture Capital unit, whose portfolio includes 19 therapeutics makers and 15 developers of diagnostics and other medical technologies, most in seed or early stages.
Flagship begins with initial investments that can be as small as a $500,000 seed funding and as large as $10 million in a syndicated Series A investment. More typically, however, Flagship invests between $7 million to $15 million as part of a syndicate of co-investors, taking the role of lead or co-lead investor. The firm targets 20% to 30% equity ownership and slightly less in later stage companies.
The Merck fund was formed last fall to invest in a handful of funds as a strategic LP in the U.S., Europe, China, and elsewhere. To date, the Merck fund has made four fund-to-fund investments. The fund provides advice and guidance from Merck scientists to those funds' portfolio companies and aims to secure an inside track on those biotechs or their programs when they mature to where Merck's business development group believes it can step in and commercialize them.
The Merck fund was one of two venture initiatives launched by Merck; the other was the Global Health Innovation Fund, which doubled in size last year from the initial $125 million to $250 million as of September 2011. That fund on April 4 announced that VirtualScopics, a quantitative imaging firm focused on to accelerating drug and medical device development, completed the first closing in a sale of convertible preferred stock to the Merck Global Health Innovation Fund, for a purchase price of $3 million with an additional $3 million tied to achievement of milestones.
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