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Pharmaceutical and biotechnology giant Merck is starting drug development and commercialization operations in Israel. The company will sign an agreement this week and join the chief scientist's program for international cooperation between small Israeli firms and multinational companies.

Under the agreement, Merck Serono, the company's new division for innovative small molecules and biopharmaceuticals, will cooperate with Israeli startups in developing pharamceuticals, and will later be able to buy the rights to the drugs or help market them around the world.

The Industry and Trade Ministry will finance half of the research and development costs of these companies, through its Chief Scientist's Office.

This is a dramatic step forward for the Israeli biotech industry, which has had a hard time taking off. Even though Israeli biotechnology research is considered among the world's most advanced, the industry is finding it difficult to produce successful firms. Studies of this failure have noted that one of the ways to open this bottleneck would be for a major international giant to enter Israeli biotech research and development.

Merck will enter Israel before Pfizer, another international pharmaceutical giant, which is also considering opening development and commercialization operations here. Pfizer is negotiating to buy an Israeli biotech hothouse, but has still not signed any agreements.

Teva will now find itself with competition on its home turf. Merck, which bought Serono at the beginning of 2007 for $14 billion, now is a direct competitor of Teva in the muscular sclerosis market, with its product Rebif.

Teva has had almost exclusive access to Israeli biotechnology and pharmaceutical research, since international firms have kept away. Now, with Merck and Pfizer on the way, Teva will lose its exclusivity and face real competition here for the first time.

As for Serono, this is a real U-turn. Rebif is based on technology from the Weizmann Institute, and was produced by Interpharm in Rehovot. But Serono almost completely closed down Interpharm and moved production to Europe. Ironically, it will now find itself back in Israel.