announcing it attracted a big-name advisor in Tachi Yamada, the former head of global health at the Gates Foundation, he left to take a new job as chief medical and scientific officer of Takeda Pharmaceuticals in Japan.
Frazier says he doesn’t expect any big changes in strategy in the next fund. About 60 percent of the money will be allocated toward growth equity/buyouts, while the rest will go toward biopharmaceutical and medical device venture investments. The growth equity piece typically focuses on buying profitable healthcare companies (think kidney dialysis clinics) that Frazier believes can grow revenues quickly with an infusion of $25 million to $50 million. “Those companies are very dependable, delivering 2.5x to 3.5x kind of returns,” Frazier says.
One of the big themes he’s watching for are companies that don’t necessarily have a hot new drug or device, but do have a way of delivering healthcare more efficiently. “I see that as a great place to look to invest. Everything we do plays into saving the health system money,” Frazier says.
Looking at the more innovative side of the portfolio, there is more to worry about: the lackluster IPO market, concerns about unpredictable FDA regulations, and an increasingly tough climate for winning reimbursement from insurers. But Frazier says he still likes the model of building lean operations like Calistoga for sale, because those type of single-asset companies—when successful—can still attract an average of 10 bidders from the ranks of Big Pharma and Big Biotech, and generate 5x or better returns. The idea is to invest in a Series A round, a Series B round, generate some promising clinical data, and sell the company after holding it for three to three-and-a-half years, Frazier says.
“We’ll do preclinical work, Phase 1 work, and sell at the end of Phase 2a or 2b,” Frazier says. “It’s a predictable strategy. It’s not a matter of ‘do we wait around for the next IPO bubble to get our realizations?’ We can wait for good clinical results and go to the [acquisition] market.”
One of the tricks with biotech startups will be to invest in areas where the FDA is “friendly,” as Frazier put it. Those areas include niche cancer populations, anti-infectives, and drugs with companion diagnostics. Mass markets like diabetes, obesity, cardiovascular disease, and neurology are areas to stay away from because the regulatory hurdles are too high, he says.
Partly because of FDA requirements, the next Frazier fund will only look to make one or two medical device investments. But the FDA is only part of the reason. There’s also been so much medical device industry consolidation that the best startups there can typically only generate acquisition bids from two or three big players, Frazier says.
Just like in medical devices, there are almost surely going to be fewer big players in biotech VC land. And while that might mean fewer innovative ideas get funded, Frazier says it could end up being a healthy thing for the industry.
“There’s enough money out there to do a nice job on biopharma,” Frazier says. “The win/loss ratio will be better, and fewer bets will be made, but they’ll be made with more experienced entrepreneurs. I think we’ll come out more healthy.”
