Clarus Ventures Adjusts to Unpredictable Biotech World

1/20/12Follow @xconomy

[[Correction: 11:20 am ET]] It’s never been easy to make a buck in biotech venture capital, but there used to be more predictability and logic to it, according to Clarus Ventures’ Nick Galakatos.

You’d invest a few million, or tens of millions, and push a new drug or device toward some scientific validation in a few years. The world would recognize the value, you’d cash out, and repeat the process.

But in the strange way the market has worked for biotech since the financial crisis of 2008, that’s not always how it is anymore.

“For any VC firm to be in business, you have to raise another fund, and to raise another fund, you have to have exits,” says Galakatos, the co-founder and managing director of Clarus. “When you think about exits, there are traditional ones, like IPOs and M&A. But the IPO market is not a healthy market, and the M&A market is idiosyncratic. And idiosyncratic is really the right word. You can’t predict the M&A market very well, you can’t probabilize that. Five years ago, you could say ‘I’ll create a company, and do X, and there will be five buyers.’ You can’t say that anymore.”

Galakatos, a 20-year veteran of biotech ventures, spoke philosophically at times about the state of biotech venture capital during an interview last week at the JP Morgan Healthcare Conference. Clarus, a firm with $1.2 billion under management in biopharmaceutical and medical technology companies, is feeling the same heat others have in this industry. Biotech VCs have all been pushed to show returns to their investors that justify their high-risk endeavors, especially when investors have plenty of other ways to put capital to work.

This will be an important year for Clarus, which will go a long way toward determining what its future looks like for the next five. The firm raised its last fund, worth a reported $660 million, in February 2008 just before the financial collapse. Clarus was “exceptionally fortunate” to raise the fund (now worth $700 million, Galakatos says) when it did. But now that four years have gone by, it will probably be just a few more months before Clarus hits the fundraising trail again, Galakatos says. “Probably in the latter part of this year, we’ll go out and raise a new fund,” he says.

[[Correction: the returns cited below are for current partners at Clarus, but their investments were made previously at MPM Capital, not Clarus.]] The partners at Clarus have had a strong run of returns. Before the financial crisis struck in 2008, the partners at Clarus were able to claim success when Rinat Neuroscience was bought by Pfizer for $500 million, Syrrx was acquired by Takeda Pharmaceuticals for $270 million, Tercica was bought by Ipsen for $373 million, and CoTherix was snapped up by Actelion for $420 million.

In the post-financial crisis era, Clarus has pulled out a few wins, but not as many. ESBAtech was sold … Next Page »

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  • Krassen Dimitrov

    Well, Nick can certainly blame the lack of IPOs on the financial crisis, but VCs themselves deserve some of the blame for bringing crappy companies with flawed business model to the public market, only to see them crash and burn. Case in point is Complete Genomics ($GNOM), which went public last year with a fee-for-service model that had been proven unworkable in the life science tool market.

    I’ve asked Nick on many occasions to distance himself from the incompetent OVP Venture Partners, and specifically Chad Waite (who is behind the Complete Genomics disaster), however so far he has done nothing but defend and protect him. Now Nick is talking up Nanostring, but let’s see now how easy it will be for a good company to IPO, if it is associated with such losers and scammers. Moreover, let’s see how easy will be for him to raise a new fund if he has proven that he cares more about protecting a fellow VC than protecting the value of the assets of his fund and his investors.