Frazier Healthcare brings in experts

Frazier Healthcare Ventures has hired a crew of big-name biotech and pharmaceutical executives to help figure out how to get more bang for its bucks in drugs and medical devices.

The Seattle-based venture investor, one of the nation's largest health-care venture firms with $1.2 billion under management, is trying to adapt to the rough reality of biotech investing. The days are gone when a firm could sink $50 million into a startup, gather evidence a drug works, then take the company public at a value of $350 million. Most biotechs fail, and even success stories can gobble up $100 million and go public for a $150 million value — hardly the stuff of venture dreams.

The new blood at Frazier includes venture partner Michael Gallatin, the former chief scientist at Bothell-based Icos; and an in-house entrepreneur, Dr. Robert Hershberg, the former chief medical officer of Seattle-based Dendreon.

Dr. Tadataka "Tachi" Yamada, the executive director of Global Health at the Bill & Melinda Gates Foundation, and a former research and development leader at drug giant GlaxoSmithKline, also has signed on as a part-time senior adviser.

Managing Partner Alan Frazier said he wants the group to scrutinize neglected drug candidates within pharmaceutical companies, build startups around them with experienced managers, and run "lean" clinical trials to see if they work in another disease. That way, Frazier can get a big ownership stake in the startup, without spending too much time or money. If the trials succeed, Frazier said, the fund could cash out by selling the company to a pharmaceutical giant, or build it into an independent public company.

To get the payoffs Frazier desires, the plan shifts most exploratory research — which can take 10 years or more to bear fruit, if ever — onto other organizations.

"Time is the enemy here," Frazier said. "When you put your dollars in, you want to see things go as fast and as well-managed as possible. So having people who have done it before, and have a passion for it ... is valuable."

It is not a novel strategy — Frazier has done it before with Seattle-based Calypso Medical Technologies, XenoPort and QuatRx Pharmaceuticals. One alternative, Frazier said, would be to elbow into second- and third-round financings of hot companies with other venture capitalists, which would cost more and yield a smaller slice of ownership. Another option would be to start an incubator, which would create large ownership chunks but also carry big risks of failure.

Historically, Frazier's returns have been slim. None of its funds from 1996, 1998 and 2001 has delivered greater than 5 percent returns through Dec. 31, 2005, according to the Washington State Investment Board, one of Frazier's investors.

Frazier says the performance was dragged down by some bad bets in health-care information technology and services. Excluding those losses, he said, the firm's performance is among the top quartile of firms specializing in biotechnology and medical devices.

Frazier, who spends two days a week at the firm's Palo Alto, Calif., office, did not say the plan means big things for Seattle. One of the two companies Gallatin is building will be local because he lives here; and Hershberg said "a component" of his company, VentiRx, will be local. Over 15 years, Frazier has invested $65 million in Washington companies — about 5 percent of its capital.

Stewart Lyman, a Seattle-based biotech consultant, said Frazier's strategy makes sense financially, but big companies may be reluctant to license away drugs, for fear they might miss out on a hit or be held liable if patients are harmed in a clinical trial. He also said the industry's future is weakened when venture capitalists shy away from basic science.

"If the venture capitalists aren't willing to fund basic research in biotech companies, then who is?" Lyman said.

Luke Timmerman: 206-515-5644 or ltimmerman@seattletimes.com