2005 Outlook: Biotech II –

Alan Frazier is among the most successful biotechnology investors. He started out in industry and was once the CFO at both Immunex and Affymax (at different times, of course). He turned his attention to venture capital in 1991, founding Frazier Healthcare Ventures in Seattle. His first fund was a meager $5 million. Since then he has raised four more totaling more than $750 million. Of the 75 investments made by the firm, 19 have gone public and another half dozen have been acquired.

Q What are you most excited about this year?

A I’m most excited about what I think is going to be the second leg of the IPO window and the increased quality of the companies that are going to be going out. In the first leg of the window, in the last 12 months, many of the companies that went public were specialty pharma-type companies that had licensed-in products without a product engine. Now you’re starting to see interest from bankers in companies that have an engine or a deep portfolio. A good pipeline seems to be more important now, which I think is a healthy change.

How many venture-backed companies do you think will go public this year vs. last year?

Best guess is about the same or slightly higher. We believe the average raise will increase, which will reflect higher-quality companies.

Are there any macro trends that could have a positive or negative impact on biotech this year, like importing cheap drugs from Canada?

I don’t see importation of cheaper drugs as being a huge issue this year. The products that would get hurt most by importation of cheaper non-U.S. drugs are typically not in the leading-edge product categories that are typically backed by VCs. A bigger issue is that we continue to be very dependent on the FDA, and we have to be slightly worried about the recent events at Merck and elsewhere. There is a risk that the FDA will become excessively risk averse due to political issues. We believe that the best hope here is that the Administration will successfully appoint a strong FDA head soon who can manage these issues.

Where will you focus your energy this year?

Small molecule drugs will probably be high on our list. That’s probably our No. 1 big area. It’s using smart chemistry with a greater understanding of the mechanisms of the disease. We really like to focus on teams and opportunities that can produce a platform of novel therapeutics in areas where early clinical trials can be designed to yield signs of early efficacy, and thus reduce overall clinical risks.

Please explain “small-molecule” drugs.

As opposed to large molecules (e.g., proteins), small molecules are typically derived from medicinal chemistry and can be orally administered. In addition, in theory they can address the entire spectrum of pharmaceutical targets, both inside and outside the cell. Biotech companies have gotten much better at identifying and developing these types of compounds, and we believe they are poised to further exploit this area.

Do you expect more investments in small-molecule companies this year?

Yes, because there are more such companies to invest in. We continue to invest in biologics, but they tend to have higher capital requirements.