‘Is this cyclical?’ If it is, that’s part of what we deal with as investors—thinking through how and when to invest. Unfortunately, we don’t think it is. Or if it is cyclical, it’s cyclical beyond the time horizon of our fund. It’s not the place to put our LPs’ money, despite our belief in the opportunity. As the time increases, your multiple goes down, your internal rate of return goes down.
We spent a lot of time talking about this over the course of the summer. We eventually said this is the right thing to do for the fund. Our job is to optimize the return of the fund by finding the right companies to invest in.
We have great entrepreneurs on the healthcare side, and they too are extremely frustrated. You might have seen the ‘Vital Signs’ report that the NVCA [National Venture Capital Association] put out. They founded this group called the Medical Innovation and Competitiveness Coalition, or MedIC, and I was the chair last year, and the thesis we have is that the FDA is making it uneconomical to invest in this sector. We are not saying that the FDA should willy-nilly give free passes to companies. But there are ways you can improve the process so that they feel comfortable they are not walking into another Vioxx or Celebrex.
X: What will Lou Bock and Mark Brooks do, now that they won’t be out fundraising or looking for deals?
KM: They will manage the portfolio. There aren’t any deals where you can just take your hands off the wheel. They are both going to stay actively involved. Lou is an active member in MedIC and we are going to stay active in that, probably more active. Lou worked at the bench at Genentech and went on to Gilead and he is? the perfect entrepreneur-investor; to have him not be able to invest is a good example of why the FDA needs to find some balance in their approach.
X: Stepping way back, I think it’s fair to say that biotech has not led to the discovery of as many revolutionary, life-changing drugs over the last 30 years as many observers hoped it would. So manufacturers fall back on making knockoffs and variations on older, approved drugs. I’m wondering whether part of what’s going on here is that this is just a lot harder than we thought, and biotech is simply a risky business—maybe too risky even for the venture industry.
KM: I think there certainly has been a lot of focus on me-too drugs. We should be focusing our dollars on things that are revolutionary, not evolutionary. But I think the bigger issue is the regulatory pathway. Look at how quickly countries in Asia and Europe are picking up the new technologies. You could get a stent in Europe long before you get could a stent here. There is something wrong with our approval process. That is the kind of risk we can’t underwrite.
X: You said in your blog post announcing the shift yesterday that this shouldn’t be seen as a signal that life sciences investing is over in the venture world, and that there may still be early- or late-stage funds that figure out how to make it work for them. How so? How do the issues at the FDA affect them differently?
KM: Talk to Ed Hurwitz at Alta Partners. He’s an early-stage biotech investor who has had a series of successful M&A outcomes, where before they get into expensive trials, they sell the company. Large pharmaceutical companies want
