CAMBRIDGE — Stefan Oschmann came courting biotechnology start-ups last week, a trans-Atlantic visitor promising not only pharmaceutical industry expertise but also cash.
Oschmann, who made his pitch to several dozen area life sciences insiders at the Charles Hotel, isn’t an investment banker or venture capitalist. He’s chief executive of Merck Serono, the German-based multinational drug maker that owns the EMD Serono biotech division in Rockland and life sciences toolmaker EMD Millipore in Billerica. Increasingly, however, Oschmann is playing a role as a partner to smaller biotechs — and also as an investor in them.
Last week, Merck Serono said it was boosting its worldwide venture outlays from $51.4 million to $128.6 million, establishing a formal venture arm called MS Venture, and dispatching an executive to scout for potential portfolio companies in the Boston area. In doing so, it became the latest biopharmaceutical firm to jump into the risky business of early-stage investing.
“We very happily embrace uncertainty,” Oschmann told his local audience Thursday, speaking in German-accented English. “If we find something that is truly attractive, we find the money.”
Susan J. Herbert, executive vice president for global business development and strategy at Merck Serono, said the company is not only on the hunt for promising drugs in the fields of cancer, immunology, and neurodegenerative diseases, but it is also looking for “new indications, new formulations, and new geographies” in which to expand treatments already in its pipeline.
“We can’t do it all alone,” Herbert said. “The imperative for us is to find the right partners. We used to think of research and development as a stepped process. But today it’s more of a networked approach. You have to link up to make your development engine function.”
Merck Serono has plenty of company among its peers. At a time when traditional venture firms have scaled back funding for biotech start-ups — partly because it’s taking longer than ever to conduct clinical trials and navigate the regulatory approval process — drug makers are picking up the slack.
‘Most of these investments are going to have some kind of option included in them for the right to a product or a technology platform.’
On May 16, the same day Merck Serono disclosed it had increased its venture commitment, Swiss drug maker Novartis AG and Amgen Inc., based in Thousand Oaks, Calif., said they had signed on as limited partners in a $265 million fund raised by Cambridge-based Atlas Venture to bankroll biomedical start-ups. Novartis and Amgen, which both run research centers in Cambridge, also will be looking to strike drug discovery alliances with the start-ups.
Atlas Venture also is working with Shire PLC, the Irish biotechnology company with a big division in Lexington, to form biotech companies that focus on treatments for rare diseases. And several other drug makers with area operations have created their own venture financing arms, including Pfizer Inc., Sanofi SA, AstraZeneca PLC, and Merck & Co., the US pharmaceutical giant that is a separate company from Merck Serono, based in Darmstadt, Germany.
While some of these companies have been bankrolling biotech firms for years, investment has become more visible — and more focused on early-stage businesses — as traditional venture capital activity has slowed. They are also concentrating more on companies with experimental drugs that can save lives or on game-changing technology that can be used to create new treatment standards, rather than on medicines that compete with existing therapies already on the market.
As patents on their blockbuster drugs have expired in recent years — creating opportunities for rivals to offer low-cost generic versions — major drug companies are hungry to replenish their pipelines. Most have concluded their in-house research efforts may not be enough, according to Kevin Gorman, managing partner at life sciences consulting firm Putnam Associates in Burlington. So they want the first rights to license, acquire, or commercialize experimental drugs developed by the biotechs they fund.
“They’re not just being altruistic” in providing research and development money, Gorman said. “Most of these investments are going to have some kind of option included in them for the right to a product or a technology platform. One has to assume that’s part of the quid pro quo.”
With more pharmaceutical companies from out of state or abroad setting up shop in Boston, Cambridge, or along Route 128, the competition to find promising new biotech partners is also heating up. Coming in with an early investment can give drug makers an edge later on.
“There are fewer and fewer products getting to Phase 2 or Phase 3 (clinical trials) that aren’t already committed” to a large drug maker, Gorman said. “For these companies, the assumption is if that you’re making eight or 10 bets early on, a few of them are going to pay off.”
Merck Serono, which is closing a large office in Geneva, is going through the kind of restructuring that has become commonplace in the pharmaceutical industry. Looking forward, the company will concentrate more heavily on “external innovation,” Oschmann said. “Biotech companies are a critical source of innovation for our future,” he said.
Thus far, Merck Serono has been scouting for investment opportunities most intensely in Europe, Israel, and on the US West Coast. But with the assignment of Nilesh Kumar, director of MS Venture, to the Boston area, that may be about to change.
“Boston is, for our company, right after Germany —