Merck Teams With Flagship to Bankroll Early Biotech Ventures

4/10/12Follow @arleneweintraub

Cambridge, MA-based Flagship Ventures said today it has formed a partnership with Merck Research Ventures Fund—the $250 million fund the Whitehouse Station, NJ-based drug giant set up last year to foster biotech startups. The two companies will collaborate to find and back new companies that are developing drugs to address unmet medical needs. As part of the deal, Merck Research Ventures Fund (MRVF) became an investor in Flagship’s fourth venture capital fund, which closed in January. The financial details of the Merck partnership were not disclosed.

Merck (NYSE: MRK) established its fund in the fall and has made four fund-to-fund investments so far. MRVF’s managing director, Reid Leonard, who works out of the Boston-based Merck Research Labs, says the company was looking to team up with a Boston-area VC firm that was well-connected in the startup community. “We have excellent relationships with all the firms here, but we had a strong feeling Flagship would make the best partner,” Leonard says. “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.”

Merck’s role at Flagship will be one of a limited partner, Leonard says. That means Merck will have no control over Flagship’s investing decisions, nor will it have special rights to take investment stakes in portfolio companies. Rather Merck Research Labs will act more as an advisor. “We’re creating a number of touch points between our scientific organization and Flagship’s partners, so we can provide our best thinking around areas of opportunity,” Leonard says. “We will also provide scientific consulting to Flagship’s portfolio companies.”

Noubar Afeyan, managing partner and CEO of Flagship Ventures, says he believes the partnership represents a new model for Big Pharma investing. “We get access to the expertise of Merck Research Labs, and they get exposure to early innovation,” Afeyan says. “But it’s innovation that isn’t encumbered by financial concerns.” He adds that Merck’s technical expertise will provide insights that should be valuable to Flagship’s portfolio companies in their formative years. “Those insights will be ours to employ, to help shape and preserve our companies, with no strings attached.”

Leonard says the Flagship partnership is part of a carefully staged rollout of MRVF. On March 26, Merck announced that it had partnered with Lumira Capital and poured $35 million in to the Merck Lumira Biosciences Fund, with the intention of supporting pharma startups in Quebec. MRVF has made two additional fund-to-fund investments that have not been disclosed, Leonard says, and it will likely close its fifth such investment soon. Merck will spend the rest of the year firming up those partnerships. “The first phase has been about setting up geographically distributed partnerships in early-stage life sciences funds,” he says. “This is a way to foster the growth of those early opportunities.” MRVF will spend the rest of this year refining its own investment strategy, Leonard says, with the goal of making its first direct investments in startups next year.

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