Alan Frazier has been on record for a long time saying that the traditional biotech venture model is broken, and in severe need of updating. He’s been working on a new strategy for the past seven years or so, but the approach is facing its biggest test ever as Frazier prepares to raise his first fund in the wake of the Lehman/Fannie/Freddie/AIG financial calamity of 2008.
Frazier is the founder and managing partner of Frazier Healthcare Ventures, a 20-year-old Seattle and Menlo Park, CA-based venture firm that has $1.8 billion under management. The firm’s last fund, Frazier Healthcare VI, assembled $600 million in November 2007 to put to work in biotech, medical device, and healthcare growth equity opportunties. Frazier hasn’t formally initiated a fundraising process with pensions, endowments and other institutions, but on average he has raised new venture funds roughly every three years. “It’s time for us to raise a new fund,” he says.
The big story this year in biotech venture capital is the sheer number of funds—most estimates are between one-fourth and one-half—that are thought to be slowly winding down as they struggle to show the returns that are needed to keep raising new funds. Frazier, during an interview at the JP Morgan Healthcare Conference last week, said he expects many peer firms—but not his—to “go into hibernation.” He’s forecasting his fund will be one of the survivors because it decided back in 2005 that it no longer made sense to build biotech companies that intend to go public, and that they needed to be tailor-made to be acquired by Big Pharma and Big Biotech companies.
“For a long time, we in the venture business created the wrong companies for [big companies] to buy,” Frazier says. “We’d build something with 150 employees and four projects, when what they want are 25 people and one project.” The payoff, he says, “has been pretty dramatic. Obviously, it takes a while for that kind of strategy to evolve.”
Like any firm that’s been around for a while, Frazier has its share of wins and losses (and it obviously prefers to talk about the wins). Seattle-based Calistoga Pharmaceuticals represented a 3.74x return on Frazier’s investment when it was acquired by Gilead Sciences last year for $375 million up front, although the return could rise to 6x Frazier’s investment if certain milestones are met. Other portfolio companies like Oakland, CA-based Cerexa, San Diego-based Calixa Therapeutics, Carmel, IN-based Marcadia Biotech, and Cambridge, MA-based Alnara Pharmaceuticals all ended up getting acquired in the last two years at multiples between 3.39x times original investment on the low end (Alnara) through 10.67x times investment on the high end (Marcadia), according to data published in a Frazier newsletter. There was even one rare IPO in the portfolio, from Boulder, CO-based Clovis Oncology (NASDAQ: [[ticker:CLVS]]).
Of course, there were less-happy events for Frazier in the past year, too. Seattle-based Calypso Medical Technologies—which raised more than $175 million in venture capital since its founding in 1999—was sold for $10 million last year, plus undisclosed milestones. And just a few months after
