Merck the Venture Capitalist

An interesting piece I came across on In Vivo blog was about a new venture that Merck are undertaking. In short, they are putting money into the Merck Research Venture Fund, an effort to find new drug candidates in the early life cycle of biotechs and small pharmaceutical companies. Interestingly, the deal includes lending the support and advice of Merck scientists – they are not just throwing their money around hoping to get a nice return on it later. They are looking for an inside track on finding the next big drug, something to help refill their pipeline.

They are not alone in doing this, as other companies are doing it and have been doing it for some time. The recent deal that Pfizer made to acquire local company Icagen came about because Pfizer had a project with Icagen and it was clearly going well enough that Pfizer wanted the rights to that discovery. Similar collaborations have been seen in the industry and end happily with the acquisition and everyone making some cash from their now much more valuable stock. But this concerted effort in VC is consistent with the shift in the research paradigm that big pharma seems to be taking. They are retaining some expertise in house, much reduced, as the number of lay-offs will testify, but a drug company cannot live on cuts alone and so they need their research to produce more results for less money. Smaller companies were thought to hold the key, assuming that they could find the funding to get started. That last point was in doubt as venture capital for pharmaceuticals was being shifted into something more directly profitable. So Merck start a fund to partner with VC groups to find worthwhile investments. A stimulus package for the biotechs that will hopefully pay their benefactors back down the line.

Another interesting side effect of the smaller internal pharma research and development was reported on Pharmalot: Contract Research Organizations (CROs) are doing great business, as a result of more spending on outsourcing by big pharma. Their revenues are up and there is investment interest. In fact, North Carolina based PPD is being acquired according to reports (an article that also hows how much more difficult it is to get financing these days, with a leveraged buy-out a non-starter).

It seems to me to be the beginning of the new way of doing business, but more than that, it seems to be giving us the first idea of what that will look like. The cost of doing business with the CROs will go up, because the companies need them to get their products to market. That price rise may go back along the discovery pipeline, making competition for the early stage research companies greater. In theory, cutting away all but the core and using the services of research and development when they are needed makes sense, because you don’t have to pay for it when you are not using it. Perhaps you can shop around for a better deal if you don’t like the rate the guys you were using now charge. But I have to wonder if it really will make drug discovery cheaper. And I have many many doubts about whether it will make it more effective.

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