Merck beefs up bankroll for biotech startups

Merck has emerged as one of a handful of Big Pharma companies that is fueling early-stage venture funds, and the strategy could remedy some--but not all--of the funding woes of newly hatched biotechs. And those that do win funding from the drug giant ($MRK) could boost research of risky science that some traditional venture investors have abandoned for safer bets in later-stage projects.

As MIT's Technology Review reports, Whitehouse Station, NJ-based Merck recently backed a $270 million fund from Flagship Ventures to invest in early-stage companies, dipping into a $250 million effort that the drugmaker revealed last year to gamble on research at young biotech companies. In addition to investments, recipients of Merck's venture money can get advice from the pharma group's experts on their R&D programs. It could pay off to bend Big Pharma's ear early in a biotech's research, as startups try to develop new treatments that suit the needs of drugmakers.

Drugmakers, of course, have decided to gamble on startups for various reasons, with some companies seeking early access to R&D at fledgling biotech groups while others are taking a more hands-off approach. At Merck, the company is making venture bets as part of broader strategy to access brains and science outside of the mammoth organization. Indeed, many drugmakers such as Sanofi ($SNY), Pfizer ($PFE) and GlaxoSmithKline ($GSK) have emphasized advancing new products via partnerships rather than going it alone. As many insiders understand, the externalization of R&D comes after a decade or so of stagnant product development in pharma that left the industry hungering for new drugs as blockbusters lose patent protection.

"We are going toward external innovation. We're dealing with more academics and biotechs than we ever have," said James Schaeffer, Merck Research Laboratories' director of West Coast licensing and external research, at a recent conference in California, as quoted by MIT's Technology Review.

The participation of Big Pharma in early-stage venture investing hasn't been enough to fill the coffers of many biotech startups, as was evident in the steep drop in initial rounds of financing for drug developers in the first quarter of 2012. Yet empirical evidence suggests that, without big drugmakers' boosted role in backing early-stage biotech, the situation would be much worse.

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