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AF: ZymoGenetics is perhaps a tough one to bring up because of their stock price, but they are an example of a company that has the technology that can address these specialty products with a high degree of success. Trubion would be another example, although I have to disclose that it’s in our portfolio. Clearly, this is the decade of monoclonal antibodies, and these newer generations of antibodies that are more targeted, and smaller will lead to a new set of amazing products. Obviously Calistoga is another one in our portfolio that’s a great example of this kind of semi-virtual model that we like that takes a product in a later stage, and brings in an incredible amount of experts to make sure it’s developed correctly. Then there’s the excitement about the Institute for Systems Biology and spinoffs there. The challenge for all these companies in Seattle is capital. Are they realistically developing a company that’s going to work in this kind of environment? This environment is not going to change for the next year or two.
X: Do you think Seattle biotech is stronger or weaker than it was five years ago?
X: Really? Why?
AF: We’ve obviously had a few companies go away, so it’s not an obvious answer. Corixa, Icos, and Corus Pharma have gone away. Why? I think we’ve seen some strong companies come along in that period of time, like the ones I’ve mentioned. The Accelerator, the offshoot of the Institute for Systems Biology, has done a fabulous job of getting smart young companies well-financed, and at least in its incubation period, capital-efficient. Good companies can get money here. Bob Overell (a former Frazier partner) just started an RNAi company, PhaseRx. I’m sure it took him longer to raise money than it might have before, but the quality of the syndicate is there. Look at the quality of the syndicate at Calistoga. Good people can get money here. Good people live here and they can start good companies here, and it will attract folks from around the country.
X: What about your strategy? I know you raised a $600 million fund a year ago. How much do you have left, and what’s your strategy in terms of the number of companies and how you want to allocate it?
AF: We have invested about 12 to 14 percent of it. So we still have quite a bit left, as we do from earlier funds. So, our strategy is to do about half in growth equity. These are cash-flow positive companies. We’ve been investing in them for about 13 years, even though it’s something we’re not known for. Unfortunately, it reflects a more conservative view of venture capital. We are investing a little more than half in biotech, and the balance in medical devices. We are, for sure, doing less startups and more later-stage companies. We do a lot of new companies, still, probably one-fourth of our companies are new companies. But a lot of them are like Calistoga where it starts out with a product pretty much ready to go, where we pull it from someone else and try it in a new indication.
X: What do you mean by growth equity? Does that mean highly-liquid stocks?
AF: No, it’s all private securities. It can be services, specialty pharma, medical devices. These are companies that already exist that are cash-flow positive. We buy them, we invest growth capital into them.
X: How is Seattle comparing with other regions you visit? I know you’ve expanded your office in Menlo Park, CA.
AF: As a sustainable place for venture capital, it’s probably fairly consistent with us being around No. 5 or so. We have been continually hurt by all of our companies being taken out, like Icos or Immunex or Corus. We seem to have some bad luck. We haven’t lost, but we haven’t moved up the tables.
X: What trends in healthcare do you see over the next five or 10 years that will endure beyond the downturn?
AF: The trend is toward smart pharmaceuticals that address smaller populations, narrower indications, with better results. It’s based on a better understanding of disease from genomics and proteomics. You’ll see more targeted drug delivery. You’ll have incredibly focused pharmaceuticals, which will take care of some of the safety issues you read about.
X: Any days you just don’t want to get out of bed?
AF: (laughs.) It would have been nice to go on sabbatical the last couple of months. From January 1 to now, the microcap part of biotech has gone down about 60 percent.
It’s all true, but we can go too far sometimes with getting depressed. There’s a lot of innovation out there. The traditional VC model is broken or severely damaged, but that doesn’t mean you just go home and forget about it. You’ve got to get smarter, and innovate new business models.
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