Standish Fleming Interview – June 12, 2014

  • Interviewee: Standish Fleming
  • Interviewer: David Caruso, PhD
  • Date: June 12, 2014

CARUSO: Today is the 12th of June, 2014.  This is David Caruso with Stan Fleming for a second session as part of the San Diego Technology Archives Project.  Again, we’re in San Diego, California.  Last time, we were kind of getting into the early 2000s, and I think that’s what we’re going to pick up and focus on today.  Just to recap quickly, I believe what you mentioned was that with Forward Ventures IV, there was a greater focus on biotech and biopharma.  Then you brought up with Forward IV, where there was a focus on the companies Ambit and Nereus.  Is that right?


CARUSO: I think you mentioned Forward V reflected a shift to products.  But we really didn’t have time to get into much detail about the evolution of Forward Ventures.  So I think that is what we were really going to be focusing on today.  So I’m going to turn things over to you.

David, thanks for coming by and for the opportunity to continue the discussion or the monologue.  What I wanted to talk about in this session is the evolution of the venture program at Forward Ventures as a venture company from about 2000 to the present.  Much of the attention in the venture business is focused on the investment programs, and I think there’s a widespread belief, even in the venture community, that the business is really just one of investing.  People give you money, you evaluate opportunities, you invest money in those, you harvest them, and it’s all at the portfolio level.  My interest has been as much or more at the firm level, even transcending the level of the portfolio.

So you have your individual investments.  You have the collections of those in the portfolios, and you raise funds that build portfolios periodically, and then you have the overall program of managing a venture firm.  As I say, most of the attention goes in at the portfolio-investment level.  I remember talking to Duane Roth about a venture program he was thinking about sponsoring with CONNECT to work with pharmaceutical companies.  Duane had support of some great entrepreneurs and good opportunities in town here but neglected to put any experienced venture managers or managers of the venture business into the program, just because it wasn’t perceived as a needed element.  Duane’s background is as an entrepreneur, and certainly his capabilities as well as his experience at the company level were really outstanding.

My point there being that one as experienced as Duane either didn’t feel it was necessary or didn’t realize that this kind of experience [firm management] would be an important contribution to a management team. I got into that [firm management] perspective right from the outset in my business.  When Ventana hired me in 1986, it was to work primarily on marketing the firm.  So my early jobs were drafting offering memorandums, helping with the marketing, helping present [the firm].  So my first introduction to venture was really on the theory and practice of venture capital management rather than at the [investment] level, which is very heavily technical.  At that time, we were doing both IT and biotech.

So as I evolved into biotech, I met Ivor Royston through Genesis Therapeutics, and then shifted my focus to biotech.  I didn’t bring a very strong technical background, but, finance and strategy were my specialties.  That’s an element of venture investing that I’ve always enjoyed.  I think it’s an important element in the development of venture.  Some of the experience at Forward will illustrate and support that perspective.  I think it’s somewhat unique in the sense that most of the venture people, if you ask them what they do or what the business is, most of the discussion is at the individual investment level.

So quick recap, I left Ventana in January of 1992, and helped Ivor with a little family fund, Forward Ventures, he had at that time.  We talked about raising a larger fund with the help of our first million dollars from Sequoia Capital and some key introductions they made.  We were able to get to a first close in on that first fund, Forward Ventures II, in April of 1993 on $5 million.  We ultimately ended-up raising 12 and a half million dollars for that first fund, which was a very successful fund.  The focus there was big science.  Our most successful investment was Triangle Pharmaceuticals, which was the Burrough’s Wellcome team. They developed a compound called FTC that was acquired by Gilead and became Emtricitabine [Emtriva] as a product.  It is still sold today and is a very successful product for the treatment of HIV.    

The Forward Ventures II was followed in 1996 by Forward Ventures III, which was a 42 and a half million dollar fund. I was running the venture business.  During the first fund, Ivor was full-time on the faculty at UCSD.  In the second fund, which was Forward Ventures III, he was in the process of starting the Sidney Kimmel Cancer Center, and so that was his primary focus.  Again, I was running the business and handling the details of due diligence and interactions with limited partners and whatnot.  In Forward III, we were joined by Jeff Sollender, whom I had introduced. Jeff had come to see me in my Ventana days.  Jeff had tried to raise funds for a biotech-oriented fund in Chicago earlier without success.

So he relocated out here.  Jeff was doing individual investments for Bill Farley who was a major leverage buyout guy based in Chicago at the time.  Jeff made a number of investments for him, and at the same time, he worked with us; helped us in Forward III.  So I was full-time, Jeff was part-time between the Farley funds and Forward.  Ivor was part-time between Sidney Kimmel Cancer Center and Forward.  In 2000, the three of us set out to raise Forward Ventures IV, and the timing just happened to be perfect. 

CARUSO: Dot com.

FLEMING: The dot com bubble.  We had our first close in April of 2000, and I think we had a final close in April of 2001.  We were able to combine Jeff’s track record with a number of the companies he was getting public and our track record.  The timing was just perfect.  The market peaked in March of 2000 I believe.  There was plenty of money and interest in the institutional world for venture in general, biotech in particular.  I can remember running to meetings in New York with Jeff in the back of the taxi, calling in to get the latest price quotes on our companies, and marking-up or at least discussing [with prospective investors] the step-up in valuations that were taking place literally in real time.

So it was a very heady time in the industry.  We were very fortunate.  I believe we set out – I don’t have the numbers right in front of me – to raise 200 million.  We ended up finally at 256 million.  So when that fund closed, Ivor came on full-time.  At that point, he decided there was enough substance to the venture business, and that’s really where I think his passion was at that point.  But it wasn’t until we closed that fund that Ivor came on full-time.  So it was Jeff, Ivor, and myself.  We then brought in Joel Martin who – actually, I introduced Joel.  Joel had been working with Kevin Kinsella, as an entrepreneur-in-residence and a venture member and that type of stuff for Avalon.

So Joel joined us.  Then the three principals in the firm at that time were Ivor, Jeff, and myself.  We invested that fund fairly aggressively.  In retrospect, the funds that were the class of 2000 were the worst performing funds by vintage year in that entire era.  It was the result of excess capital available; that’s the nature of the venture business.  But we were able to get that [money] in the ground fairly quickly.  So the three of us, Jeff, Ivor, and I set out to raise Forward V with Joel, and then we later brought on Stuart Collinson as well.  We set out to raise the Forward Ventures V in the 2002 timeframe with Ivor, Jeff, and me as the principles, at that point. 

We were approaching an initial close on that fund in late December of 2002, when Jeff was killed in an automobile accident here in town, and that left Ivor and myself.  We were able to regroup and get to a first close in April of 2003.  Clearly, we missed Jeff.  He had been an early part of the firm, and he had a very unique perspective.  He had a more public markets perspective, and it was a nice complimentary skill set.  What I didn’t appreciate at the time was Jeff’s critical role in helping us with decision-making.  So again, we get back to the dynamics at the firm level here.

Because Ivor and I were the managing members, it was our business.  Stuart and Joel were employees along with the rest of the staff.  Now they were employees of elevated stature, but still, they worked for us at our pleasure.  So the principal decision-making process needed to take place at the senior level, which was initially Ivor, Jeff, and myself, though Jeff did not participate in the first close of Fund V.

In order to operate the firm, we [Ivor and I] each owned half of it at that point.  We had to have an efficient decision-making process.  Now Ivor and I are very different people, and that was the strength, but that was also a potential problem.  Ivor tended to be rather compulsive. I had the finance and the management strategy background.  Ivor has a technical background: science and oncology.  He is a very impulsive decision maker.  He tends to come to decisions rapidly right off the top of his head, and it’s generally not a conscious, rational process for him, in the sense of starting with a data set and working through observations and conclusions and whatnot.

Ivor tends to be very spontaneous in his decision-making.  It’s not to say one [style of decision-making] is better than the other, it’s just that they’re different.  The fact is that we could make a strong team because of the range of styles and strategies here.  But as it turned out, and I didn’t really appreciate it at the time, Jeff played a critical role in the decision-making process. Typically, when we came up against a decision, often, Ivor would be at one end and I’d be on the other end, like balancing a teeter-totter. The farther out one went, the more one dug his heels in, the farther out on the other side the other partner would go in order to maintain the balance. 

Jeff—in my vision—sat in the middle and leaned one way or the other.  We [Ivor and I] both got along with Jeff; we had our differences, but Jeff was pretty consistent.  Jeff’s real focus was maintaining the value and the integrity of the business.  I think we all sort of agreed with that.  We might have disagreed with him on a particular decision, but as he leaned one way or the other, his focus and priorities were to maintain the balance and an effective working relationship there.  When we lost that, Ivor and I really had no effective decision-making process.  Worse than that, we had no way of working towards decisions.

I had this somewhat systematic kind of logical decision-making process.  Ivor had an impulsive one.  So I always wanted to de-convolute everything and look at each individual aspect and see if we could find something [common ground], and Ivor just had a decision.  There was nothing more to talk about.  It was just a yes or no kind of thing.  So we really didn’t have any basis for reaching a common ground. Ivor had always been part of the program up until then, but he had been totally focused on the technology, on the investment side.  He really had no interest or no involvement on managing the venture firm.  He just left that completely to me.

When he came on full-time, suddenly he had the responsibility.  He’d always had the responsibilities because we were equal partners up until then, but in addition to the responsibility, he had the interest in the venture operation.  Ivor was very interested in running, controlling the business. I didn’t really expect that, because he hadn’t shown any interest in that aspect of the business up until then.  But once he came onboard, he became very interested in it. [18:33] Transcript redacted.  Selection restricted through June 2025. [24:39].

The long and the short of it [our new management arrangements] is that they [Ivor, Stuart and Joel] now control the Forward franchise.  Again, I had responsibility for my board seats and my companies, and I participated and helped with the running the firm, but had no interest going forward in anything new.  As I say, over time, that relationship became more and more constructive, and Stuart and Joel came to play the role of Jeff in the sense of helping break ties.  You know, obviously I was concerned that it would be to my disadvantage, but, Stuart and Joel are basically business guys, and so they share certain common ground of what is in the best interest from a business and financial perspective. They agreed with me about as often as they agreed with Ivor, so that process worked.  I say it got better over time as we were able to heal wounds and build trust, but it left those three without a dedicated venture fund/firm manager.  They were very preoccupied with the portfolio investments, their own individual investments. 

Venture firms tend to run in kind of two flavors: one being collections of individuals who invest individually and happen to share an office, and some have been very successful; and the other is more hierarchical in which you have more of a team approach where people bring different skills and everybody participates on each deal.  There’s a fundamental difference. That was my vision of the way a venture business should work, and theirs was much more in the silos.  They were able to really exploit the silo model when I stepped to the side.  At first, they were successful with Forward V.  I mean we [they] were way ahead of the curve in that fund very quickly with early returns.  We had one company [Proprius Pharmaceuticals], I can’t even remember it, where we decided we weren’t going to go forward with a funding and stepped back.  It was a company we were invested with Atlas.  They were able to find a buyer for it, and we ended up getting paid like two and a half times our money, and we had walked away.  We hadn’t even participated in the last round of financing.

It was just spectacular the progress they made with their focus on the portfolio companies as individual investors.  At that point, they really were in a position to go out and raise another fund.  They could have written their ticket. Though the LPs were aware of the friction, we were able to solve it and at least paper it over. They appeared as a very strong investment team based on their track record. I think they were in a position to go out [without me] and raise another significant fund in the 2007-2008 timeframe.

They didn’t perceive that.  They were working on the portfolio companies.  They didn’t see the long-term timing cycle for fund [raising] at the firm level. I kept waiting for them to go out.  They never made a move, and they could have in the fall of 2007 through the first half of 2008.  They could easily have raised a fund at that point.  They missed that.  We got into the second half of 2008, and I think everybody knows what happened at that point.  There was the meltdown, and that precluded fundraising at the venture level at any point. 

In the time between 2008 and 2010 or 2012 despite best efforts—it’s just the nature of the uncertainty that’s inherent in the pharmaceutical business—the portfolio saw a regression to the mean over time [closing the door on their ability to raise money].  In other words, we were fortunate, we had early successes; then they were balanced by some losses, and less successful outcomes over time.  So performance of that fund, which was well in the top decile early in the process, fell down to where we may be top quartile, on a given day, but I think we may have even fallen below that curve, depending upon the outcome of some of our current clinical trials.  So the fund, as I say, saw a regression to the mean.  The institutional money was not available.  It became pretty clear that over time that fund was not getting stronger.

The lack of a follow-on fund in 2007-2008 made it difficult for us to look at new deals that might have been possible.  So a lot of the time and effort then went into trying to maximize the value of our existing companies.  They have struggled.  We had setbacks in CancerVax, Favrille fairly recently; so they didn’t have a big impact on the fundraising in this time. About a year ago in the 2012-2013 timeframe, Tioga had a failed trial. The drug could have revived us. So again, the fund has struggled since then.  No fault of our own, just pharmaceutical development.  But it left the firm in a position where it was really unable to access institutional money, and, barring some major changes here, [that] probably is still going to be the case. 

When it became apparent that they were not going to be able to go forward, we let Joel go.  Ivor and Stuart had worked on some things [raising new funds], and they may still be working on them.  I have worked on a couple of schemes without success. I think the long and the short of it is that we were not able to raise a follow on fund to Forward V. Without fresh money and funding, the firm really does not go forward.  We’re in the process of scaling down the firm.  We’re finishing off the investments that we have.  There’s still some really substantial potential value in the firm, and the fortunes could change [but it is unlikely that Forward will continue in its present form]. 

I can’t speak for Ivor and Stuart in terms of their plans at this point going forward.  However, the thing that has come to interest me when I look at it at arm’s length, over time, I think the failure of Forward to build a long-term franchise in the bio-venture industry really stems from an inability to manage the human capital that we had. We had some extraordinary human capital in the partners. The inability to operate as a team, the decision of the three to work in a siloed fashion, and in that format, the inability to bring a broad range of disparate perspectives to bear on the venture process meant that decisions were made without the full benefit of the skill set that we had.

The specific thing [missing] in the skill set was again, a real focus or experience at managing venture firms.  I mean I had been in the venture firm management since 1986.  As I said, I started on the administration rather than on the portfolio side, and so by 2003, I had 17 years or so experience in that area. None of them had ever run a venture fund.  I was sort of disappointed.  I thought Joel might have had more, but he was at the portfolio/investment level with Avalon.  Certainly Ivor and Stuart had never run venture funds.  So I think that that lack of experience and a lack of appreciation for what was missing at that level resulted in missing the critical opportunity to go forward.

The first rule of managing a venture business is when money is available, take the money.  [Biotech portfolio companies are running clinical trials.]  You’re running clinical trials.  You’re going to wake up the next day and find you’ve had a death in a trial, and suddenly your flagship project is worth nothing.  So the firm ended in neglecting the basic rules of operating a venture firm, and it paid a price for it.  It’s a shame.  I don’t see that it needed to happen, but, in retrospect, one becomes resigned to it, and it’s interesting to contemplate at a distance.  [The mistakes involve] a  lot of the basic rules of business of leadership, of team building, and all that, [the stuff] that venture guys love to lecture [their companies] about.  

That our inability to execute in those areas [resulted in] was really a failure of the business isn’t exactly a fair characterization, because Forward has had a very successful career.  We’ve developed some very important products and companies.  We’ve made nice returns, certainly, in a number of cases.  However, you get older, like Ivor and I are – like I am, anyway, you look back on what could have been, should have been, and would have been.  That’s one area that I think that could have been much more than it was, when we were ahead of the curve or they were ahead of the curve in the first say three to four years of that fund [Forward V] before it regressed to the mean.  Now they’re in danger of falling behind the curve because the other funds that did raise money in that timeframe made investments in the time between 2008 and 2012, [which proved to be a very good time] in the venture business, as opposed to the 2000 vintage fund where capital was plentiful and too many companies got funded.  In the last half of that decade few investments were made [2008-2012]. The reduced supply of companies and supply-and-demand pricing [made venture investing] more effective then.  The other element of it is that—what people didn’t anticipate—was the window opening up in the public markets.  The amount of liquidity that is available in the industry today, starting about 2012, or certainly ’13-14, is absolutely staggering.  It certainly far exceeds liquidity I think at any time in the history of the bio-venture industry.  Obviously there is a sharp contrast between 2014 and 2000. 

That changed the landscape entirely, and the venture funds that were positioned to take advantage of that influx of capital in the public markets were the ones that benefitted. That’s the new generation that’s going forward, similar to the way we were able to benefit from the 2000 window that opened up. Now a lot of venture funds like ourselves got left behind. But again, with a 2007-2008 fund, it would have been opportunistically positioned for a repeat of the 2000 kind of window opportunity. Missing the opportunity to raise funds in 2007 meant that we weren’t positioned to take advantage of the next window that came open here in 2012-2013.

The result is that we continue to fall behind the curve in terms of access to capital, which is unfortunate. But again, it stems from that fundamental focus on individual portfolios among the partners at the company level rather than managing the venture business.

CARUSO: So a couple of questions about this. One question about this period of time more specifically, and then a couple of general questions that follow on. The first is, in this span of time from 2002, in the various future ventures, were you focusing on companies that were—not necessarily similar—but in a certain area of science?

FLEMING: Yes. You raise a good point, David. The bio-venture business has always been a business in flux in the sense that there has been no overriding business model that has been vetted and proven to be effective and can be relied on to provide the levels of returns that are required for institutional investors. I think there’s somewhat of a contrast between life sciences and IT in that regard. In the early to mid ‘90s, the focus was on big science. In fact, through the ‘90s entirely, Sidney Brenner, one of our advisors, used to refer to these areas of basic biology as the “omics:” genomics, proteomics, and those sort of large-scale science things.

I think we were relatively successful in that space. But those large-scale platform companies did not pay out in the public markets. The public got burned significantly in investing in those companies. For instance, our genomics company was called Sequana that we did with Avalon was in major competition with Millennium, and both failed as genomics platforms. Millennium was able to even license some compounds and ended up doing fairly well. We had a combinatorial chemistry company, CombiChem.

Starting in 2000 going forward, as the industry evolved some [venture firms] went into platforms; some went products. We went into products, which I think was overall a good strategy. However, neither Forward nor many of our venture colleagues had a lot of experience really working in pharmaceutical development, and so it took a while to get the learning curve going in that regard. You’re in a high-risk business when you’re in the business of developing pharmaceuticals and returns are based on clinical trial results.

So I think that the 2000 fund in that vintage suffered from this transition from science to platforms and products, and the industry was really at a disadvantage in all three of those sectors. The 2003 fund was more focused on products. We were able to get access to products that were farther along or closer to the clinic, and in some cases in the clinic. Those funds, at least potentially, fared better than the 2000 vintage, though again, subject to this high pharmaceutical development risk. In the 2007/2008 funds, again, we were not active. We didn’t have a fund at that time.

Companies that have done well in that space have tended to be product-based companies with some platform work, but primarily product. You know, given the nature of the pharmaceutical development, the unpredictability of these outcomes and whatnot, having more entries in the process was a significant advantage in terms of finding products that really paid off. So having a narrow portfolio in that environment was a significant disadvantage. The 2007 groups were able to have a broader range of opportunity and options, and as a result, had more success with product-based companies when the window came open.

So it evolved. We were not optimally positioned to take advantage of that. Also, over time, the venture industry, both individually and collectively, became much more sophisticated in pharmaceutical development. We were not in a position to draw on that. Some of that is the result of substantial layoffs in the pharmaceutical industry, which made incredible talent available in the entrepreneurial and venture markets, but that process really didn’t start until 2008 or so. So again, we did not have the benefit of that skill set that other venture groups with those later funds did.

CARUSO: So part of the reason I wanted to ask that question is – and I know this is kind of a chicken and the egg sort of question—is I’m curious to know your perspectives on what you think overall the VCs influence on the trajectory of science happens to be. I could see it as two things. There are a lot of companies that are interested in a certain sector, and so VCs are going to move towards supporting some of those companies because in some ways, science is defining the way that it wants to go. But I could also see VCs coming in, saying, “You know what? There’s a whole group range of companies out there. The ones that are doing cancer vaccines, for example, are the ones that should be invested in.” In some ways, VCs because they’re investing in those companies and not others, they could also potentially be pushing science to a specific direction. So I’m wondering in your experience if you’ve felt that you were in some ways or VCs in some ways were defining the areas that science was going? Or is it more of just that this is the general area that everyone seems to be, and you’re following where the trend in science is going on its own?

FLEMING: You know, the short answer is yes, both processes work. I think from the venture perspective, there’s more of a feeling that we follow science rather than dictate science, because we tend to see ourselves as opportunistic and responsive to opportunity as it comes in. One of the things that I think – I don’t know, maybe some venture guys would argue with me—is that there’s always the old expression of the drunk looking for the keys under the lamppost because that’s where the light is. If you come to science or the life sciences with a preconceived shopping list, you’re going to miss a lot of the good stuff that you hadn’t anticipated. What we’re talking about here is this unpredictability of both the science and the clinical development side, and the venture guys want to be in a position to take advantage of it as it rises.

Then also, there is the unpredictability of business opportunities because the pharmaceutical industry is a very dynamic industry. So assets are always being traded and turned over, and you want to be in those streams as well. That said, the ability to advance science in general – and the question of whether it’s applied science or pure science is getting to be more and more blurred as you go on—clearly the more capital that’s available for applied science or science applied in particular areas, the more data that’s generated, the more information, the more opportunity there is. So I think there is a feedback loop there to some degree.

I can remember in the early days, back in the early ‘90s, when we were first getting started, Ivor and I, there was tremendous concern at the academic level that venture – that commercial money in general, venture money in particular – would co-opt the integrity of the scientific community, the academic community. Financial rewards would distort the selection of projects and science and whatnot. I think that’s much abated. In fact, what people have found in the meantime is that there may be some of that to some degree, but really what venture in particular and pharma as well has done for science and the academic community is much more complimentary than competitive or preemptive. So it has enabled scientists to broaden their spectrum, to do things that they wouldn’t otherwise do, particularly now in this era when we’re seeing substantial cutbacks in the NIH and stuff. In a lot of ways, it’s a life-ring for some of these guys, the academic scientists. I include pharma in that as well.

I remember in the old days, I’d say, “Okay, you have a project that you think is worthy of commercial development, and we’re here to fund the commercial development. What can you do? What can we do?” The rule was that they [the scientists] could get funding [from the government] only to cure cancer in mice. If it went beyond mice or maybe dogs, there was no NIH money for that at all. That was purely commercial, and so that’s essentially in a simplistic manner how we divided up the world with those guys.

In that environment, the scientists were quite interested in seeing their discoveries tested in humans. In fact as it turns out, I think they probably appreciated that—maybe even more so today—that humans are a different ballgame from animals. If it was a question of curing cancer in mice, we’d have cured cancer a long time ago. [Humans are] It’s a heterogeneous population. It’s out-bred. It’s complex. The organism is much more highly developed [evolved]. Applying scientific principles, basic science, to the treatment of disease in humans has turned out to be a very complex, very fascinating, very interesting science in itself. I think that the academics feel that they’ve benefitted from, if not actually participating, at least observing that, and seeing the work being advanced into those areas, which they couldn’t have done under the old regime.

So I think most of that work has probably been more complimentary than as I say competitive or preemptive. Still, we’ve got to keep things in perspective. The venture business is a very small slice of the commercial world, the scientific world, and very uniquely focused on specific kinds of deals. We’re really quite limited in the kind of things we can fund, and you know, our appreciation [of our limitations] over time has evolved. We’ve become more and more limited in our perception of our capabilities in the face of the kind of challenges that pharmaceutical development requires.

Really, in most cases, the venture business sees itself as a bridge, a conduit from academic to commercial or from academic to the mainstream pharmaceutical industry. So in that regard, I think the real bulk of the influence of the commercial world on the direction and development of academic science is driven by the pharmaceutical industry. One of the things that has happened over time with the venture guys is as we’ve taken in a lot of these people that were laid off, or not even laid off, just people in the pharmaceutical industry who were more interested in an entrepreneurial environment. Whether it’s at the level of a fund or a portfolio company, the industry has become more and more aligned with the needs and the requirements of the pharmaceutical industry. At the end of the day, that more than anything is driving the direction of applied science in this space.

CARUSO: I actually think you spoke to part of my third question, so it may be pointless in asking it. I was also just thinking about the role of VC. I’ve spoken with some other individuals who are talking about investing in [early-stage biotech]. In the early years, they would take a lot of time to do their own research to meet with the principles of a business to decide whether or not to invest, but now they actually rely more on the VC analysis. If a venture capital firm is interested in some business or some group of businesses, other investors that might be coming in later or coming in as add-ons, now turn to the VC analysis as the source of expertise in terms of whether or not a company is worth funding scientifically or from just purely a business perspective. Like I said, I don’t know if there’s really a question in there, but it’s something that I’ve heard people note, and I think you’ve spoken to that a little bit where, in some ways, you’re establishing a certain level of expertise because of your investment in these companies. In some ways, you’re validating them to a certain degree beyond just your own interests.

FLEMING: Sure. You know, that’s always been the case, and that’s even more so today, and I think for a couple reasons. One, we’re seeing a greater availability of capital in both the public and the private markets, but also a broader availability. More different sources, more high net worth individuals, foundations, disease foundations, like the Multiple Myeloma Society. People like this are participating in biotech company formation and early financing that [they] never did before. At the same time, this evolution that I talked about in terms of the venture community and how Forward sort got on the wrong side of that, got behind the curve, we were certainly not alone in that regard, as you know. I think the number of firms today that are active in the venture investing, certainly the mainstream groups is less than half of what it was back in 2007.

So there’s been a tremendous contraction. Now if you look at the amounts of money raised, I don’t have the numbers exactly, but I think we’re certainly seeing a rebound, the renaissance in that regard, and I would expect that capital raised by venture funds for investment in life sciences is probably comparable if not greater than what was available in the pre-meltdown era. The difference is that more and more money is going into fewer and fewer hands, and that has a profound effect on the nature of that private market. So the more players – if you have a lot of players bidding on assets and whatnot, you tend to have a more efficient market in terms of pricing and competitive market and whatnot.

As you have fewer groups, as you approach one single investor, the market characteristics really change from a competitive market to a club. The dynamics of a club are considerably different than an open market. An open market is competitive. A club is cooperative. “You do my deal, I’ll do your deals. If we’re all in the deal at the outset, then we’re not subject to competitive pricing. Later when we come back to market, we will have with a lot of money around the table – and biotech is very capital intensive; we will have substantially reduced the financing risk.”

A lot of the companies that have been lost in the past, and some even in our portfolio, were lost for want of capital. You know, technology worked well, but you just weren’t able to raise the funds. So if you can take financial risk off the table, that’s a significant advantage. It doesn’t eliminate pharmaceutical risk, which is still very high, but at least you’re better off in that situation. So you tend to see much more of a club mentality here, and what that creates is that if you’re in the club, if your portfolio company is in the club, it has tremendous access to resources, capital people, support and whatnot.

If you’re not in the club, you have much less access. You have a have-and-have-not kind of situation. So in that sense, I can understand what the venture guys are doing, because those mainstream venture-funded companies have a substantial advantage in the private markets. You have better access to the public markets, pharmaceutical industry, and all of these things. The experience and the franchise that these guys have tend to keep the industry narrow and keep people out. But, I think that looking to see how opportunities are vetted and perceived in the venture community is probably a critical element for other groups – the foundations, high net worth individuals, and whatnot – in evaluating the crowdfunding opportunities. Generally, even the foundations, may be technically sophisticated about how to treat a disease or the nature of disease, but they’re certainly not experienced in any commercial development aspects.

The venture business really requires a very broad base of experience. We talked about experience and the breadth of experience really required to run a venture fund. There is the same or greater breadth of experience at portfolio companies. That’s why team building is important. You have clinical, you have legal, you have operations, and it just goes on and on and on. All that expertise needs to be integrated and coordinated in a team-oriented fashion. So the venture guys really bring an extraordinary resource to the table. It’s going to be very interesting to see if and when the Fed [Federal Reserve] does turn off the spigot or take away the punch bowl, as the expression goes, and capital becomes less available, whether a lot of these companies that are started outside the venture mainstream – by foundations, family money, or whatever, bootstrapping, entrepreneurial bootstrapping – whether you’re going to see a major washout in that area, which would then discourage this kind of entrepreneurial participation and really restrict the focus to the mainstream venture guys, which would seriously limit the availability and supply of companies and products to the pharmaceutical industry.

CARUSO: I don’t have any other questions. Are there other things that you’d like to discuss?

FLEMING: No, just to sort of sum up, bio-venture, life sciences venture has always been interesting, and is more interesting and exciting today than it has ever been in the past. It is still in evolution. It is a substantially smaller, but better funded industry today than it was ten years ago. It continues its quest to find sustainable business models. It remains to be seen [where it will lead.]

We have groups like Third Rock in Boston that are doing these large scale platform deals. Actually, the head guy there is a guy named Mark Levin. Mark was the CEO of Millennium, and a lot of the stuff that they’re doing at Third Rock is a recapitulation of the Millennium plan. Now I don’t think any other venture groups have been able to sustain that model, make it work, but Mark (a) was very good at it, and (b) he has much more active support from the pharmaceutical industry today than we ever had in the past. So maybe things are going to change in that regard. Again, [the large-platform model is still] unproven; it remains to be seen whether the very limited number of practitioners in that large scale model [can make it work].

At the other end of the spectrum are groups like Atlas, and here in town, Avalon that are doing these completely virtual product-oriented companies. I don’t know if it’s traditional, but it’s a very different business model that they’re testing. Then overall, this is a very heady time in the industry because capital is readily available. If you look back over the times when capital has been available in the venture market, [you see] a couple things; we had windows in, 1990-91, 1995-96 and 1999-2000. Those were times when money was available, and it almost always correlated with the Federal Reserve using monetary policy [to increase the money supply].

When enough money comes into the market, some of it eventually finds its way down to the life sciences. We’re kind of the last guys, bio-venture, the last guys in the pipeline. The money [?] has a tremendous effect because biotech is such a capital-intensive industry. Today, the Federal Reserve has pumped money into the system at an utterly unprecedented rate, and money has finally trickled down to the life sciences at an utterly unprecedented rate. So it just seems long-term, that’s going to be unsustainable. It’s never been sustainable in the past. Maybe the Federal Reserve can continue to print money forever, but I think the conservative assumption would be at some point, the money is going to dry up. When that happens, how is the industry going to respond?

I think the mainstream venture guys will do okay. They’re experienced, have good access to capital, and have good support from the pharmaceutical industry. They have good institutional relationships. So I think those guys are going to be okay. They also have a limited supply [of companies] and a virtually unlimited demand, both from pharmaceutical companies for the products that they can’t seem to develop themselves, and from the healthcare market with unmet medical needs.

I think they are in a very good, long-term position, and so it may be sort of a golden age of venture. In that sense, it’s sort of a shame to miss that curve, but some days you make it, some days you don’t. The long-term perspective for the industry is still uncertain. These are unproven business plans. At the end of the day, if the venture guys can’t provide the returns that the institutional guys need, they’re not going to continue to provide them money.

Then the question is the long-term survival of the pharmaceutical industry. You know, they’re facing potential price controls. Large-scale price controls will kill the venture business and severely damage the pharmaceutical industry, and limit innovation. Innovation is what the venture industry has to sell here. The venture industry has never had—as I say—a standard or a proven operating and investment model. The conditions look better today than they have looked in the past. Whether the whole combined venture entrepreneurial and pharmaceutical communities can meet the needs for of the healthcare system and of the patients and can really fully or adequately take advantage of and exploit the scientific breakthroughs that are coming even ever faster every day remains to be seen.

That’s an interesting question. I tell you, it’s been fascinating watching it from our perspective here at Forward and from my own. Stay tuned. It’s very much an industry in flux. Specifically how that affects this community really remains to be seen. The real strength of San Diego is basic research. We don’t really have operating, large-scale pharmaceutical companies here in town. A number of the major pharmaceutical companies have a presence at a research and early development stage here: J&J, Pfizer, Novartis, and Lilly, and so on.

Early stage development has been a challenge for both pharma and venture. If we can’t improve the efficiency of early stage development – getting [more] compounds into late stage development – that’s going to be a real threat to the future of this community. If we can improve the efficiency, the partnership between pharma and venture and entrepreneurial community, San Diego probably has a very bright future because our research community is outstanding. Our ability to generate opportunity, scientific opportunity, is as good as any [region], and better than most, as they say. But pharma and venture together have to figure out a way to be more efficient in that regard, or it’s going to become a real stumbling block. Also, San Diego’s position on the Pacific Rim and our access to Asia and whatnot is another absolutely key element. That’s one I think the SABPA [Sino-American Biotechnology and Pharmaceutical Professionals Association] group would be interesting to speak with. But again, this question of where is China going. You know, if the big guys [China and the US] have a fight in the elevator, the little guys are the first guys to get trod upon. What are we capable of – what can be sustained in terms of Asia? The nature of that opportunity remains to be seen and is sort of evolving.

Innovation is the key to being able to grow first-world economies, advanced economies. An economist was saying it’s between 60 and 80 percent of the growth of an advanced – the first world economy comes from innovation, and innovation is absolutely essential for the future of the pharmaceutical industry because of the patent expirations and the challenges that they need to continually replace these products. [To the extent] that San Diego, and California in general and the bio-venture, biotech community are focused on innovation, I think they’re absolutely at the center of where the industry needs to be and has to go. The fact is that innovation is exploration, invention. There’s a fundamental level of uncertainty that is very difficult to manage in a commercial environment. We need new business models; we need entrepreneurs and whatnot, and how we’re going to get from here to there really remains uncertain. But the fact is that we’re in a great position to run those experiments, to test those opportunities and ideas.

It’s absolutely essential that business, science, healthcare systems figure out these kinds of solutions, but there’s no guarantee they’re going to do it. You could easily come up with some very dark scenarios here based on limited healthcare budgets. I mean look what’s already happening to the academic research community as a result of cutbacks of the federal government. I think it’s highly likely that those are going to continue and are going to increase. The federal government has made it very clear that they are shifting their priorities from basic research to real-time consumption, and there’s only so many dollars out there.

If the federal government, which ultimately is the payer, can’t afford to pay pricing and reimbursement for these new technologies that justify the investment, they’re not going to happen. So there’s some real challenges here. It’ll get quite interesting.

CARUSO: Yes. Scientists at many academic institutions are there only because of government grant.

FLEMING: Absolutely.

CARUSO: The institutions don’t pay the scientists really. It’s the grants that do. So if the grants are gone, there are no more scientists producing science, and also no more individuals training the next generation of scientists.

FLEMING: Absolutely, David. We are the beneficiaries of a tremendous investment that’s been made since the World War II in this space. We [the US] have built a research community, and an intellectual space and momentum that are unparalleled in the world. If we fail, there isn’t anybody who is going to pick up the reins and continue the process. So it’s critical that we find ways to do that, but if the US loses its nerve, if it falters, it will – we will – pay a very high price for that.

You know, when I talk about the federal government providing the conditions that enable people to make the kinds of returns that justify investment in pharmaceutical development and discovery, that investment includes the research at the front-end to create the opportunities. It includes the pricing and reimbursement on the other end to pay off specific investment. You know, this big uproar about Gilead’s compound Sovaldi – the problem isn’t that it’s not fairly priced. It’s $84,000. It’s probably less than the overall cost of treating a patient today. However, it’s paid in one year where the overall cost [without the drug] is realized over a lifetime, albeit a shorter lifetime, with existing technology.

The concern is that bolus, that threshold, of cost that the system has to get over in order to realize the long-term benefits of a cure versus a chronic treatment may exceed the [current] health-care budget. If the US can’t pay for it and they clamp [down] – they set price controls or whatever – “here is all we can pay, this is all we’re going to give you” – you’re going to see the money available for early-stage investment dry up. There’s not a lot of money going into early stage investment today even now. Sure, there are family, friends, foundations, and whatnot, but if you look at the pharmaceutical industry, they’ve cut back tremendously on their early stage R&D. You look at the venture guys. Sure, there’s plenty of money in the venture business but fewer funds, and in those areas, only a small minority of those venture funds do the early-stage work that is needed to take technology from an academic lab into the commercial development stream.

The tragedy of all that from my perspective is that if we really do fall short on our commitment and ability to develop new drugs, no one is going to notice it. It’s going to be opportunity costs. It’s going to be new drugs, medications, and therapies that didn’t happen. The fact that we could have cured cancer, we could have treated Alzheimer’s, it just will be lost in that.

I loved Larry Goldstein’s comment when they were putting CRM into place, you know, the Center for Regenerative Medicine. Early at the outset of that, there were a whole bunch of lawsuits that held up the allocation of those funds. Somebody asked Larry what was the effect of these lawsuits in holding up the thing. Larry said, “Look, it’s going to take us 15 years to develop new therapies, fifteen to 20 years to develop new therapies based on stem cells and whatnot. If you start that today, you get it in 15 years. If you start it five years from now, you get it in 20 years.” That same sort of logic applies here. If we don’t start on these [new therapies], if we don’t have the money to do them, they just aren’t going to happen.

So it’s a very exciting time, capital flowing freely, and opportunities, and excitement. Every day you pick up a newspaper, there’s a pharma merger, there’s a new product, and all the rest of the stuff. At the same time, there are a lot of really basic questions that this industry faces. You know, I’m spending a lot of my time thinking about this and writing about things like that, but so there’s a bit of wishful thinking here. I don’t have an interest in – well, I do – participating in a venture fund, but my real interest in a venture fund going forward is much more at the firm level, and rather than the actual sleeves-rolled-up and hard work of that.

I think that that’s a shame. I miss not having a second generation to [to whom we can] hand-off this [franchise] and the benefit of not only our experience and wisdom, if I may use the word, but the resources and the relationships and whatnot that we’ve built here. But that’s life.

CARUSO: Yes, all right. Anything else?

FLEMING: That’s a dangerous question to ask me, David, but at this point, I’m in good shape. Again, I appreciate your patience and the opportunity to talk with the archive, and I certainly wish you guys in the program well.

CARUSO: Thank you very much.

FLEMING: I think it’s a fascinating time. I think you’re talking here industrial revolution type stuff – maybe the bio-industrial [revolution], and I think people are going to look back, and they’re going to be interested to see [what we did]. Of course, when you look back on these things, it looks like it was obvious. When the venture guys figure out how to do this and pharma [learns] how to really innovate, well duh. But you know, when you look at it from where we are today, it’s not nearly as clear.

CARUSO: No, and that’s why we’re capturing it. So thank you again for participating.