Frazier Healthcare Aims for First Biotech VC Fund After Financial Crisis

Xconomy Seattle — 

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: 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 … Next Page »

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8 responses to “Frazier Healthcare Aims for First Biotech VC Fund After Financial Crisis”

  1. observer says:

    It is unfortnuate to have him eliminate diabetes, cardiovascular, neurology as areas in which to work. These are not areas that have been solved or that do not have huge medical needs.

    These are actually the central challenges of medical research and drug development for the coming healthcare cost crisis in the US and around the world. I would say be more venturesome, more visionary, more discerning, pick better. In short, HELP!

  2. Bob WilcoxBob Wilcox says:

    If I’ve followed the details correctly, our most visible local VC is going to invest in one or two medical device companies in the next three years. Puget Sound has several leading efforts in neuro, including device companies, research organizations, and treatment facilities. Local Angels and large device companies are taking advantage of investment opportunities in large and small neuro device companies here. Entrepreneurs in the medical device space, including neuro, are working to bring jobs and investor returns to our region. I encourage our friends in the local investment community to reexamine the opportunities in our Neural Neighborhood.

  3. I applaud Alan Frazier’s assertion that he decided back in 2005 that biotechs need to be tailored to be acquired by big Pharma. I heard a very similar story from Brenda Gavin at Quaker BioVentures about the same time. Brenda was of the opinion that venture firms had to give up expecting their portfolio companies to exit after 5 years. She said Quaker had set their expectations for an exit after about 9 years – just about the time needed to go from lead identification to proof of concept in the clinic.

    I also applaud Fred’s comment about big Pharma wanting to buy companies with one project. We have seen quite a few venture backed firms build up staffs of 50 to 150 and then get caught in a funding crisis when new investments were needed. By the time these larger biotechs had gone through $100M or more, new investors were unwilling to add in more capital in what would become a down round. The consequence is many of them have gone out of business. It seems like capital efficient biotechs are getting more popular these days.