A Fresh Start

IN THE HALLS of Boston's convention center during the Biotechnology Industry Organization's annual meeting last month, Merck Serono's presence was inescapable. Flags adorned with the logo of EMD Serono, the company's U.S. arm, waved every few yards, and the opening night's party in Quincy Market was sponsored by the firm. The message was clear: The newly merged company is intent on becoming a major player in the biotech arena.

Yet those ubiquitous flags also brought home the need for Merck Serono, the prescription drug business of Merck KGaA, to establish itself in the U.S. The German firm has for decades been a strong competitor in Europe, but it had not made a name in the U.S. until its purchase of Serono early this year. The new company hopes that its global presence and fortified R&D and manufacturing capabilities will make it the partner of choice for biotech firms.

Both Merck and Serono, limited by the size of their R&D organizations, had been looking for a match for some time. Last spring, Merck made a hostile bid for Schering AG, only to be beat out by rival German drugmaker Bayer. Meanwhile, Serono began looking for a partner in late 2005, but abandoned its search around the time Merck was courting Schering because it had failed to find a sufficient offer.

Although Serono, which is largely active in biologic drugs, couldn't be more different than Schering, a more traditional small-molecule company, Merck Serono executives argue that the union makes sense. The $13.3 billion deal created a manageable-sized company with critical research mass, manufacturing capabilities in both biologics and small molecules, and the commercial expertise to bring both kinds of drugs to market, says Fereydoun Firouz, president of EMD Serono. "The combination of Merck Serono together makes a more competitive company than each individual company alone," he contends.

"One of the keys was certainly scale and the ability to be very active in all major territories around the globe," agrees Vincent Aurentz, head of portfolio management and business development for Merck Serono. The scale of each company on its own had been "suboptimal," Aurentz says, making it hard to convince biotech companies that it was the right drug development partner.

Furthermore, Merck was eager to enter the U.S. market, where Serono had a strong presence. In the past, Merck ended up licensing away the U.S. rights to key products because it lacked the infrastructure here, points out Stewart Adkins, an independent consultant covering the European pharmaceutical industry. The prime example is its 1995 licensing deal with Bristol-Myers Squibb for the diabetes drug metformin, which went on to become a multi-billion-dollar product in the U.S.

The acquisition also strengthens Merck's manufacturing base with biologics capacity. In the past, Merck was tied to third parties for its biologics production needs, Aurentz says. The most notable case is ImClone Systems' Erbitux, a successful cancer drug that Merck markets in Europe.

For its part, Serono was looking to accelerate a move into oncology by building a pipeline of small-molecule drugs, yet it didn't have the chemical manufacturing or commercialization expertise it needed.

Now, Aurentz points out, Merck Serono's approach to drug discovery and development can be completely "agnostic" when it comes to the types of molecules it pursues. The infrastructure—research, development, manufacturing, and commercialization—is in place to support efforts in both small and large molecules.

YET THE NEW ENTITY is aware that merely filling in the geographical and portfolio gaps is not enough for success. Merck Serono is working to start off with a clear strategy, which means sifting through the legacy portfolios of each company to determine which compounds fit into its three core research areas: neurology and autoimmune diseases, oncology, and endocrinology. The idea of this portfolio review, says Steve Arkinstall, head of research at EMD Serono Research Institute, is to avoid the "big disconnect" that can plague big pharma research programs, where scientists spend years and many research dollars working on a project that in the end doesn't fit into their companies' portfolios.

According to Aurentz, Merck Serono has no specific goals going into the portfolio review aside from choosing the right products. "Numbers and productivity models don't tell the whole story," he says. Some projects will be dropped or out-licensed, he adds.

As part of the close inspection of its pipeline, the company will also identify a strategy to bridge gaps in its research skills and product line. "We don't have the portfolio we need in our three core areas," Aurentz acknowledges. The gaps will be filled through internal research as well as partnering and acquisitions.

Yet a major challenge going forward will be promoting the Merck Serono name to attract innovative partners, particularly those in the U.S. Both Merck and Serono brought rather modest new drug pipelines to the merger, Adkins, the consultant, notes, which means the combined company's "success or failure will depend upon its ability to partner or business license."

When choosing a partner, small drug companies are looking for a balance between "money and commitment," Adkins says, and Merck Serono will need to convince them that their projects will flourish more there than within the walls of bigger drug companies.

Aurentz believes the company offers several advantages that will help win deals. Merck Serono's R&D organization is more manageable than that of a big pharma company, meaning a partner's project will be a priority. "We aren't so big that compounds get lost in the shuffle," he says.

At the same time, company executives say they have the financial muscle and small-molecule expertise that biotech companies seek in a partner. "We really feel like we're in the right zone where we have the resources—both cash and expertise—in every major territory to be a preferred partner," Aurentz says.