Late this summer, Massachusetts-based biotech company Corvidia was acquired for $725 million upfront and $2.1 billion after earn-out.
I had the honor of serving on the Corvidia board and have gotten to thinking about the common themes that have emerged in the M&A journeys that I have witnessed over my 20 years as a VC — the last five of which I’ve served as a partner at Venrock.
Turns out there are a handful of generalizable M&A lessons and company builders might learn from them.
1. It’s far better to be bought than sold
Frequently, entrepreneurs build their company for an acquisition — i.e., “our plan is to be acquired post human proof-of-concept” (biotech) or “after $X M in revenue” (tech).
Don’t! Ironically, if you build your company for M&A, you’ll get far worse deal terms.
Acquirers can sense that you built to flip. They’ll smell your reduced alternatives, and they’ll underbid. Part of the reason that Novartis paid $8.7 billion for AveXis was the substantial AAV manufacturing capability that AveXis had created — a capability AveXis would not have built had the plan been to flip.
2. Great M&A is “cooked” over time
You can’t force the process.
Relationships matter in business deals. No matter how rational the deal is, there is humanity and subjectivity to every company and to every decision to form a combination.
Cultivate those relationships organically over time. M&A usually takes multiple years — even when it takes 30 days.
The two companies meet many times over months and years. Conversation and connection occur at multiple levels in both organizations like when CEOs chat, the scientists or engineers chat, or the BD people chat.
Enthusiasm builds at the acquiror over time and you can’t force it.
Keith Leonard (x-CEO of Kythera) met multiple times with Brent Saunders (c-CEO of Allergan) over multiple years before Allergan’s $2.1 billion bid for Kythera.
3. Understand who the decision makers are
BD and Corporate Development are almost never the ultimate decision maker for M&A.
Usually, the CEO is the decider if the deal is big enough. Other times, the Chief Scientific Officer or someone at the top of commercial decides, depending on the stage of the technology.
You have to woo the decision maker and refrain from alienating the deal team.
4. Empathy matters
Understand the buyer’s needs and address their objections.
Do they need a product to fill a hole in their commercial pipeline? Are they looking to build out a capability? Are they worried about getting egg on their face (i.e., FOMO)? Did their last deal work out, or are they gun shy now? Are they motivated by fear or greed?
5. Communicate using the Goldilocks principle
Hyperbole and over-selling will spook your potential buyer. Use the art of the subtle sale instead.
Be open and honest about your company or product’s limitations — every deal has warts. This builds trust and goes a long way in building relationships as I wrote above.
6. Unbiased thought leaders matter
Cultivate objective and respected advocates who have no financial “skin in the game.”
For instance, at Corvidia, there were KOL clinicians who loved our program, and Novo called them to ask their opinion about our drug. That’s “free” BD!
Similarly, thought leader detractors can turn off potential acquirers.
7. Competition drives price
It goes without saying that you usually need more than two bidders to get a decent price.
Many of my companies have tried to use a pending IPO or even a JV to drive price. They don’t.
Those things can create more bidder urgency (which can have value), but they are not a stalking horse on valuation.
8. A robust M&A ecosystem requires proactive buyers
Most buyers are reactive: they window shop until FOMO or some other impetus gets them to act.
But every healthy M&A market has proactive buyers in it — companies that are aggressive and strategic about M&A. Those proactive acquirers get the reactive buyers to move.
In biopharma, Celgene, Allergan, and Gilead have been recent assertive buyers. Back when Novacardia was acquired, there was a proactive buyer who bid, but Merck ultimately “won” the deal after they were galvanized to action by the other party.
One hint: new CSOs and CEOs in pharma companies usually want to leave their imprimatur on their company by being “bold.” Look to them as potential first movers.
9. Don’t hire a banker until you have a term sheet
Hiring a banker too early means that you are being sold vs. being bought.
Bankers will tell you how good your single lowball valuation is, until you have another bid. Once you do, let your bankers be “bad cop” on driving up price. They’re good at it!
Also, I have not seen a banker bring a totally new bidder to the table. Generally bankers just help galvanize a company that the team has already cultivated.
10. Management almost always wants to sell before the VCs
The stereotype of the VC selling the company out from under the founders and execs is not consistent with my experience. Maybe I’ve just had good co-investors.
Often the teams that had always planned to personally bring a product to market — and to lead the public company for many decades — get their head turned by the offer once its real. Five or 8% of $X billion or even $YYY million can be very distracting.
While I often would prefer to keep going, its not my choice once my leadership team has mentally moved on … game over.
Being a healthcare VC feels purposeful. It’s an honor to contribute behind the scenes to iconic companies that bring multiple therapies to sick patients. But let’s be realistic too: M&A is also a vital part of the start-up ecosystem and start-ups exits, and, given that, let’s learn from past mistakes — and perhaps a few successes.
Camille Samuels is an investor at Venrock where she invests in biotech, medical devices and consumer health.
Much has changed during the past six months, but our search for great talent hasn’t stopped. We are excited to welcome two Vice Presidents to the firm, continuing our effort to help build great companies across healthcare and technology.
Mariana joins the healthcare team with experience across the entire drug development life cycle. Prior to Venrock, she was Executive Director at Celgene, where she led a broad range of preclinical and clinical stage drug programs through early human studies. She graduated from Harvard with an MBA and Ph.D. in biochemistry after earning her bachelor’s at Brown University. Her focus will be on early stage biotech companies and she was instrumental in Venrock’s recent investment in a stealth oncology antibody drug conjugate company.
Julie joins our technology team and will focus on investments in consumer, commerce enablement, and SMB tools & services. Most recently, she was an executive at Facebook, where she helped SMBs grow as Director of the global long tail ads business. Previously, she was on the founding product and sales teams at Pinterest. Before moving to the west coast, Julie was a Vice President at Goldman Sachs, where she worked closely with consumer and retail companies. Julie has dual degrees from Stanford, with a Master of Science from the School of Engineering.
Both Mariana and Julie will be based in our Palo Alto office upon reopening.
This article is co-authored with David Beier and Avik Roy.
The 1918 influenza pandemic—the world’s worst viral pandemic of the twentieth century—called into bold relief the deep interconnections among the health of all individuals regardless of race, gender, ethnicity, or income. Despite that fact, the 1918 flu led to few meaningful health care reforms.
The most notable changes flowing directly from dealing with COVID-19 include greater need for mental health services; expanded telehealth services; and the need to manage severe stresses arising around supply-chain management of personal protective equipment (PPE), essential medicines, and diagnostic and serologic testing. Staff shortages and mismatches between health care needs and type of health staff available have also arisen.
As we face months more of dealing with the COVID-19 pandemic, we ponder what changes should be made now and to make the US health care system better when things return to a new normal, and, God forbid, in the event of future pandemics. Here are 10 actions that will lead to better post-pandemic health care in the United States.
Adding Public Health To The Curriculum
Medical schools do not sufficiently emphasize instruction on how infectious diseases emerge and spread. COVID-19 must be used to help the next generation of doctors better understand the role of biostatistics, epidemiology, data science, disease surveillance, viral genomics, non-pharmaceutical interventions, and contact tracing of various public health issues.
Some schools are already changing their curriculums for their incoming class of medical students. It is important that we learn from what worked and what didn’t work. For example, policy responses designed to combat influenza pandemics may not be as effective in addressing coronavirus pandemics, and vice versa, and students will need to learn to apply scientific thinking to novel pathogens that do not fit established patterns.
Getting Serious About Evidence-Based Care
The urgency to figure out how to treat COVID-19 and its high mortality has led to a stunning increase in interest in pre-prints of articles regarding treatments and potential vaccines for the disease, enrolling patients in clinical trials, and adopting new treatments as well as stopping ineffective ones. We believe that this will lead to the creation of global data sets and integration of artificial intelligence and machine learning in key specialties, including radiology and diagnostic medicine. Prior to COVID-19, it took 17 years for breakthroughs to become implemented widely in clinical practice. That is far too long of a lag given the tools we now have at our disposal.
Using “Real-World Evidence”
The Food and Drug Administration (FDA) has dramatically changed its approach to evaluating new diagnostic tests and treatments to enable new entrants to bring tests to market. Between February 2 and May 28, the FDA issued emergency use authorization for 114 (polymerise chain reaction) PCR tests. The FDA was similarly permissive about letting new antibody tests enter the market, but after negative data emerged about test performance the FDA took action to increase oversight of these tests.
Allowing patients to access tests rapidly and only increasing regulation when a real-world need emerged is antithetical to pre-COVID-19 FDA approaches. A continuation of this approach when a technology or diagnostic offers large potential benefit, with real-time monitoring of clinical data, would be a more productive approach than the FDA’s pre-COVID stance. Since the agency’s new approach is less costly for developers of new technologies, continuing it would prompt more innovations to enter the market. This also could lead to more adaptive clinical trial designs—which allow modifications to ongoing trials in response to emerging evidence—as seen with Genentech’s Actemra trial.
Creating Spare Capacity
As the severity of COVID-19 become clear, states scrambled to create surge capacity. While fairgrounds and convention centers were transformed into field hospitals by the National Guard, the big question was how we would staff these facilities with clinicians. While states rapidly created reciprocity to accept out-of-state licenses, there were few excess clinicians in other states since the pandemic was impacting everyone, everywhere.
California addressed this labor shortage by creating a State Health Corps of retired and in-training clinicians. We think this could become a national model, since we need to draw upon new and unused pools of labor in times of crisis. Once we get through this acute phase of our crisis, we hope that these clinicians undergo structured training modeled on the National Guard so that they are well prepared to mobilize and work productively when called upon for future crises. One important addition would be the creation of a new emergency use electronic health record that is easily connectable to all existing systems and able to access critical data to improve patient care, safety, and coordination. As an incentive, student debt could be forgiven in exchange for service.
Investing In Safer Housing
The highest mortality outbreaks of COVID-19 have been in skilled nursing facilities, prisons, and homeless encampments. Forty-five percent of all US deaths from COVID-19 have occurred in nursing homes and assisted living facilities, places that house only 0.6 percent of the US population. COVID-19 has laid bare the health consequences for vulnerable populations living in nursing homes, congregate living, jails/prisons, detention centers, and areas of acute poverty. Efforts to improve the safety of these living situations will make communities safer by lowering local infection rates. Programs to provide more home-based care; hygienic congregate housing; workers who are both safely protected with PPE from becoming infected and also non-infection carrying based upon negative PCR tests; and PCR screening of high-risk populations can deliver very tangible benefits to society. We hope that these move from a progressive dream to funded initiatives.
Ensuring Providers Stay In Business
COVID-19 is crippling the balance sheets of the health care system we are depending on to treat us. This is happening precisely at the time when we most want our health care system to invest in PPE, additional workers to meet the surge of demand, and testing capacity. We predict that far more health care providers will opt into arrangements that pay them a per-patient-per month fee or shared savings so they are protected from sudden drops in demand and revenue. Even better, we think hospitals could be offered additional incentives to invest in buffer capacity that can be brought online when needed.
Adopting Telehealth For Real
Prior to COVID-19, telehealth was a niche business among commercial health plans for patients needing low-acuity urgent care. As a result of COVID-19, nearly all patients and providers have been forced to use telemedicine services, out of fear that going to the doctor may be dangerous. We think that payers will continue to reimburse telehealth, and we hope that Medicare continues to allow seniors to access telemedicine.
Pandemics are stressful and can exacerbate mental health conditions. As a direct consequence of the pandemic, it is widely expected that the suicide rate and mental health treatment need will dramatically increase. Sadly, access to metal health care services is uneven and sometimes unethically limited.
California Governor Gavin Newsom launched a state COVID-19 Testing Task Force co-led by Blue Shield of California, the largest health plan in the state, and the California Department of Public Health. This partnership was able to ramp up testing in California from 2,000 tests per day to more than 110,000 tests per day in 12 weeks, a faster increase than any other state. By bringing in outside talent and leverage, the state was able to respond faster and better.
We hope that this type of inclusive approach is used more often by governments to solve problems. Public and private sector may be useful for tackling challenges such as excess mortality among African Americans and Hispanics and to speed the development of new vaccines and treatments.
Insisting On Better Information
Myths, falsehoods, faulty assumptions, poor modeling, and poor information undermined the US response to the pandemic. Public health authorities found themselves without strong enough tools to collect basic data such as infection rates, hospitalization rates, and mortality rates, let alone data stratified by age, health status, residential status, and other risk factors.
Despite the extraordinary concentration of morbidity and mortality in long-term care facilities, not until late May were all states reporting long-term care fatalities to the public or to the federal government. An improved nationwide system of public health reporting in long-term care facilities would aid greatly in addressing infectious disease deaths.
There has been no uniform standard for counting COVID-19 fatalities. For example, patients who die of non-COVID-19-related causes, but carry a positive test result, are often counted as COVID-19 fatalities; it is also likely that a significant number of individuals have died of COVID-19-related causes where the virus went undetected.
We hope that the experience with COVID-19 leads to a global disease surveillance system of data sharing and monitoring. This would allow us to simultaneously learn about emerging diseases and understand what actions would be useful to reduce spread and improve care.
While a pandemic is never the incentive one would want to spur innovation, these 10 actions could provide a modest silver lining and lead to a better health system. We hope policy makers seize upon the emergence of many of these ideas today and take action to ensure that they persist. This can be done by simply continuing funding for services such as telemedicine, which should actually be cost saving, and adding items such as loan repayment for national service or data interoperability to subsequent stimulus packages.
In the meantime, we will keep physical distancing and rooting for the world’s most rapid development of a very safe and effective vaccine.
As we all entered January 2020, many years into a historic bull run along (too?) many dimensions, few of us (well, maybe Stephon Marbury) had any idea what the next 4 months would bring. We have all had to adapt, finding resiliency and grace in the face of uncertainty and adversity. We have had to throw out the old playbook.
That includes our annual survey on the biggest news, trends and challenges facing the healthcare industry. We issued our survey on February 24, 2020, and over the course of the 2 week response period, the world began internalizing that COVID-19 would become a global pandemic, forever changing our everyday lives and dramatically altering the economy.
A bunch of the survey responses were “same old, same old”: Haven would not do much (who knew how right that would be); there would be more talk than action on drug prices; people are enamored of Farzad’s bow tie and epidemiology prowess… There was, however, a dramatic change in sentiment regarding COVID-19 and the economy over the course of the survey. As a result, we broke with tradition and issued two follow-up surveys in late March and April in order to track the rapidly changing sentiment elicited by COVID-19. These include timelines for a vaccine and drug treatment, stark economic predictions and questions about the virus’s impact on the upcoming presidential election and returning to work.
Our commentary on the most interesting findings can be found here, including the full results from all three surveys. Many thanks to the hundreds of people who took the time to share their views and opinions.
Discovery biology, pre-genomics, followed a linear path: develop a hypothesis, design an experiment and carefully control variables, one at a time, to prove or disprove the hypothesis.
The challenge with this “classical” approach is not only the “one step after another” pace, but the fact that the formation of a hypothesis is limited by our current knowledge and imagination. Not only do we not know what we don’t know, we cannot even put boundaries on how vast that negative knowledge space is—a thimble or an ocean’s worth of possibility?
When it comes to biology, our knowledge remains very limited, even after decades of eye-opening discoveries. Even for the most well-researched, monogenic diseases, such as cystic fibrosis, there are vast gaps in our knowledge. It was only in 2018 that scientists, using single cell genomics, discovered the actual cell type in the human airway that expresses the CFTR mutation causing cystic fibrosis.
While the following quote accurately describes the field of genomics, it entirely misses the dramatic impact that genomics platforms have had on scientific experimentation:
“Genomics: a branch of biotechnology concerned with applying the techniques of genetics and molecular biology to the genetic mapping and DNA sequencing of sets of genes or the complete genomes of selected organisms”
Over the last 20 years, new experimentation platforms like arrays, next-generation sequencing and single cell analysis have dramatically increased experimental throughput while decreasing experimental cost, thereby enabling genome-wide analysis within a single experiment.
These exponential improvements (10^6+) have unleashed a multitude of non-hypothesis driven approaches that have catapulted the genomics field forward; scientists have moved from developing and testing a hypothesis regarding a single gene (…then rinse and repeat) and instead now study many, many genes simultaneously.
While these non-hypothesis driven, hugely multiplexed experiments have turbo-charged the field of biology, it has largely been a revolution of observation.
For instance, in genome-wide association studies (GWAS), scientists commonly compare, across the genome, a diseased population versus a control population -seeking variations that are statistically different. These studies have yielded putative disease-causing variants and, by inference, putative disease-causing genes.
That is terrific; however, there have been two limiting factors:
One has had to rely on low throughput, high cost experiments to validate these findings. Additionally, the identified variants often display no connection to our current functional understanding of the disease, showing up in “junk” DNA – primarily referred to as junk because we do not understand its functional importance… yet.
Perhaps more importantly, studies have been limited to interrogating naturally occurring biology. We are only testing what is available in nature, yet evolution is incomplete. The ability to test non-natural variation would eliminate the “looking for your keys under the lamp-post” conundrum and dramatically expand the exploration space, very likely resulting in many, heretofore unimaginable, biological insights and potential commercial opportunities.
Advances in synthetic biology, such as CRISPR, and the initial merging of genomics with synthetic biology is beginning to allow genomics to explore more than the naturally occurring genetic space, moving the field from an “observation of nature” science to an interventional endeavor.
While next-generation sequencing has revealed millions of naturally occurring variants, the ability to intervene in a cell to create a new variation and then observe, test and measure the results at scale will dramatically expand our biological knowledge.
An early approach is Perturb-seq, which enables researchers to turn off single genes in single cells, thousands at a time, and then observe the results through RNA sequencing.
Perturb-seq provides genomic scale and resolution, allowing both multiplexed intervention in a genome as well as analysis of non-natural configurations for the first time.
However, Perturb-seq addresses only one type of mutational change, that of stopping a single gene’s transcription. Additional tools would allow us to experimentally analyze other types of genetic variation—single nucleotide polymorphisms, multi-base variations, structural changes, promoter swaps—at genomic scale.
Beyond increasing biological potential, scientists will want to explore such variation in combinations of variants. For diseases caused by a single, highly penetrant mutation, we have learned a lot.
In fact, this knowledge has fueled a growth industry in discoveries to treat rare diseases by pharma and biotech companies. We know a lot about monogenic diseases because they are easy to study with our current tools. However, most diseases plaguing our society, like heart disease and cancer, result from the interactions between multiple genes and their environment. To unravel this complexity, we need genomic scale tools that create multiple mutations in cell lines and then challenge them with different conditions, all in large multiplex and for reasonable experimental cost.
These capabilities are on the horizon. For instance, a recently launched tool from Inscripta created over 200,000 massively parallelized, precisely defined variants distributed throughout the E. coli genome.
There were several remarkable effects: (1) the discovery of over 100 variants that increase lysine production, most of which were outside of known genes; and (2) the discovery of three variants which each increased production only several fold individually, but over 14,000-fold when combined. These results further underscore our limited understanding of biology even in one of the most studied pathways in one of the most studied organisms.
Although recent advances have unveiled tremendous knowledge and revived interest and excitement among scientists and entrepreneurs, the more we learn the more we realize we still have to learn.
Distributed genomic tools that allow for cost-effective, highly multiplexed, recursive genetic editing combined with current genetic analysis platforms like single cell and next-generation sequencing will enable a closed loop of intervention and analysis that allows us to explore the full potential of nature’s variations.
We can hardly imagine, much less prognosticate, how this will impact our understanding of biology, or the new products that will arise to treat disease, produce better crops, and create novel materials.
John Stuelpnagel is a co-founder of both Illumina and Ariosa Diagnostics. Additionally, he currently serves as Chairman of the Board of Directors of Inscripta. Bryan Roberts is a partner at Venrock. Venrock is an investor in Inscripta.
Todd Graham Joins with Focus on Cybersecurity and Infrastructure
For over 40 years, Venrock has been committed to diversified, early stage investing – supporting entrepreneurs who will run through walls to create new products and services, surmounting obstacles that most think impossible. The Venrock team consists of individuals with diverse backgrounds and passions, but all share a collaborative approach to investing and supporting companies with a performance driven, long-term view. Ethan Batraski, who invests in frontier tech and enterprise software, and Racquel Bracken, who invests in biotechnology and creates new companies on behalf of Venrock, reflect the firm’s unique approach. We are thrilled to announce that they have both been promoted to Partner.
Ethan joined Venrock’s technology team in 2017, after 15 years as
a product executive, founder, and angel investor, with leadership positions at
Facebook, Box, and Yahoo!. Since joining Venrock, Ethan has led our investments
across space, autonomy, and frontier technologies, including Skyryse, an
autonomy company focused on VTOL aircraft, Atom Computing, a neutral atoms
based quantum computing company, as well as three additional companies that
have not been publicly announced. He also holds 16 patents. Ethan is a
passionate early adopter, space geek, and competitive athlete.
Racquel has been a member of Venrock’s healthcare investment team
since 2016. She led the Series B round for Cyteir, an oncology start-up focused
on DNA damage repair, as well as the formation and seed funding of Federation
Bio, a microbial cell therapy company for intractable disease. Since its
founding, she has also served as the CEO of Federation Bio in addition to her
Venrock investment activities. Prior to Venrock, Racquel was one of the first employees
at Clovis Oncology and helped the company from inception through approval of its
first product, with responsibilities in business development and
commercialization over 7 years. Racquel is an avid outdoorswoman, backcountry
skier, mountain biker, and board game lover.
We are also happy to welcome Todd Graham to the technology team as a Vice President in Palo Alto. Building on Venrock’s history in the security and infrastructure space – including CloudFlare, Shape Security and CheckPoint Software –Todd is excited about the future of digital transformation, human-based cyber-threats, disruptive go-to-market, and the consumerization of the enterprise experience. Todd joins Venrock from Cisco, where he led corporate strategy for the security and collaboration businesses. Todd was also an early employee at Tablus, a Data Loss Prevention company that was acquired by EMC’s security division, RSA.
We are honored to recognize Racquel, Ethan
and Todd’s accomplishments and look forward to their continued partnership and
future successes, joining forces with early stage leaders to build substantial,
durable businesses that improve lives across the globe.
As we near the end of 2019, it is time for us to look ahead and share what we believe 2020 has in store for the health care ecosystem. But first, let’s look back and assess how we did with our 2019 predictions.
Overall, we got about half correct (five or six out of 10 depending on whether you count Blue Cross Blue Shield of North Carolina’s attempt to consolidate with Cambia). What we got right was growth of Accountable Care Organizations, more digital health consolidation, dialysis disrupted, dramatic growth in telemedicine, and breakthroughs in DNA sequencing platforms.
We were wrong about electronic health records (EHRs)—both about any meaningful improvement in the UI and that the government would break the ice on interoperability.
While there has been lots of talk about both of these topics, we do not think much progress was made in 2019. We were equally wrong about pharmacy benefit manager (PBM) disruption, with lots of talk but no action after the Centers for Medicare and Medicaid Services (CMS) withdrew their proposal to eliminate drug rebates.
We do think interoperability and PBM changes will happen but, like most changes in our ecosystem, they will take longer to come to fruition. We were also wrong about insuretech getting tarnished as start-ups, or at least start-up valuations, continue to do very well.
As we look ahead to 2020, here are 10 predictions that are shaping our thinking:
1. Turns Out “Growth at All Costs” Has a Limit
After the debacle of WeWork’s unsuccessful IPO, SoftBank’s subsequent $8.9 billion bailout (Too Big to Fail?) and many formerly high-flying private companies trading below their 2019 IPO prices, growth investors are going to become more discerning regarding eventual, or even near term, financial independence.
To be clear, there will still be way too much money available given the low rates of return in other asset classes, but that sea of cash seeking a home will focus on high growth, high gross margin businesses that could be cash flow positive if necessary. This could push more mature companies to exit (whether M&A or IPO) since the private markets will no longer be so permissive.
2. Cancer Immunotherapy Is Recognized—As Crowded
After multiple years of focus and investment from biotech investors, the market for the next blockbuster immunotherapy runs dry of differentiated ideas and the current batch of immune oncology programs starts to look incremental, therefore not revolutionary enough to command the high prices required for their production. As a result, investors’ cash rotates toward other areas like CNS and autoimmune disorders.
3. Medicare Advantage is Everyone’s Favorite. Uh Oh…
CMS will continue to make Medicare Advantage (MA) a better deal for new Medicare beneficiaries. We think CMS will continue raising rates for MA, thereby allowing plans to lower cost sharing as well as offer more generous drug, dental, and vision benefits.
MA plans will continue to differentiate from traditional Medicare—offering patients better experiences like telemedicine, text-based care interactions, and help with social determinants of health.
The ensuing growth in MA membership will drive even more investment in MA oriented start-ups, most of which will succumb to poor execution compared to the large incumbents that receive most of their net Income from MA (so they really care).
4. Data Privacy Taken Seriously
Hospitals have long viewed their medical records as gold waiting to be mined. For the last few years, a slew of start-ups and Google have come to health systems offering to anonymize, organize, and sell their data to pharma.
The hitch is, it’s very hard to anonymize data and most of the time this was done without patient consent, so a backlash around violating patient privacy is coming. These debates will be intensified by the hunger of AI for large datasets and, we think, the discovery of many examples of patients being re-identified.
5. More Biomedical Philanthropy
Perhaps a by-product of the Warren and Sanders campaigns, the decade long bull market or more likely turning 35 years old with bad knees… more billionaires, especially from the recent generation of tech companies, will follow the lead of Chan-Zuckerberg and Sean Parker and set up biomedical research institutes. Successful entrepreneurs will be entranced by the potential of using new tools and computing power to tackle biology and cure disease.
6. AI Begins to Prove Useful
After several years of pure hype, beyond being able to recognize images, AI will begin to become useful clinically.
While we remain equally excited about non-clinical use cases like more efficient billing, coding, credentialing, and provider directories, we think that AI use cases to support biomedical research and clinical decision support will begin to become useful and practical.
We also think that AI’s insatiable appetite for data will be rate limiting for most clinical use cases since the training data is contaminated with medical errors and bias.
7. More Skeletons Come Out, a la uBiome
As investors pivot towards more rigorous diligence processes, we think it is inevitable that cut corners, made by startups to grow faster, will come back to haunt them—tales of artificial user growth, phantom unit economics, and regulatory disregard will lead to hand wringing and schadenfreude.
8. No Disruption Bogeyman from Big Tech
Despite a steady stream of breathless articles about Amazon and Haven, Google, Facebook, and Apple disrupting health care, we think that they will shift much of that attention to other things in 2020.
Next year big tech is going to deprioritize health care disruption to deal with crises in public trust, privacy, and other consumer technology opportunities. For all the talk about building consumer health products and disrupting PBMs and payers, we think the best we can hope for are continued small experiments and acquihire acquisitions.
9. Election Year Policy Paralysis
While disappointing, we do not believe Congress is going to be able to cooperate long enough to solve problems like surprise billing, make any meaningful progress on drug prices, or to improve the Affordable Care Act.
With a presidential election and impeachment overshadowing everything, neither side will want the other to declare any sort of victory. To the extent policy is developed, the action will happen at the State level (which we think is interesting).
10. Primary Care Physicians (PCPs) Break Free from Hospitals
2020 will be the year the PCPs wake up and realize that they can earn more and be happier working independently of health systems.
As a result, payers will try to tempt PCPs to break free by offering them higher reimbursement, start-up capital, and even subsidized office space and technology.
We also think that we will begin to see a reprise of the 1990s with lower margin health systems tiring of losing money on their employed doctors and offer to sell them back their practices for peanuts.
We hope that this gave you a glimpse into our minds and piqued your curiosity. We look forward to seeing what happens. Until then, wishing you all a happy holiday season and 2020.
Bob Kocher and Bryan Roberts are both health care investors and partners at the venture capital firm Venrock.
Over the last seven years, a bunch of variables – some influenced by our effort and attention, while others definitely out of our control – fell into place much more positively than usual. The result being that Cloudflare and 10X Genomics – companies in which Venrock led Series A financings – both went public this week. These are terrific, emergent businesses creating material, differentiated value in their ecosystems… with many more miles to go. Their founder leaders – Ben Hindson and Serge Saxonov at 10X, Michelle Zatlyn and Matthew Prince at Cloudflare – are inspiring learners with extreme focus on driving themselves and their organizations to durably critical positions in their industries. They, and their teams, deserve kudos for their accomplishments thus far, especially given they are sure to remain more focused on the “miles to go” than the kudos.
The VC humble brag is a particularly unattractive motif, so let’s be clear, these returns for Venrock will be great. Our initial investments, while probably at appropriate risk adjusted prices then, now look exceedingly cheap. In addition, each company had operational success in a forgiving capital environment, so our ownership positions were not overly diluted. Whenever we do crystallize these positions, each will return substantially more than the fund’s committed capital. In addition, we hope that Cloudflare and 10X’s success will help us connect, and partner, with one or two additional tenaciously driven company builders.
But none of this is the reason for actually putting pen to paper today. The important nugget, too often buried amidst companies’ successes, is reflected in the opening sentence of this piece. Each of these businesses are mid-journey on the path of 10,000 steps on a knife edge.
To the pundits and prognosticators, startups begin with a person and an idea (maybe a garage) that leads to a breakthrough, after which money falls out of the air. This narrative ignores the ongoing barrage of strategic and executional hurdles, and also the asymmetry of consequences. One wrong move or bad break can erase the gains resulting from many right calls – this is life on the knife edge. This phenomenon of disproportionately large negative repercussions has corollaries in the realm of integrity and respect – it is difficult to gain, but easy to lose. One step off the knife edge is a problem.
Successful start-ups are the result of teams making thousands of – much more often than not – good choices, but as importantly, rapidly fixing the bad choices. This is hard, lonely, and unforgiving work that isn’t for most people, especially at the formative stage. These pioneers invest themselves completely to forever change their industries.
So while – for the first time – two Venrock portfolio companies are ringing the bell at different stock exchanges on the same day, knowing these teams, I am certain that they will quickly return to their journey of asymmetric risk/reward because it is their nature. These IPO’s are one step along that knife edge, in this case to gather capital, provide liquidity and allow for maturation of the shareholder base. Congratulations to the employees of Cloudflare and 10x during this moment of success – thank you.
As an investor, I use three heuristics to evaluate healthcare startups.
Will the product or
Improve dramatically a patient’s experience of care?
Materially reduce the per patient cost of healthcare?
Deliver meaningful health improvements for patients?
This is no secret — the triple aim has been
around for a while. At Venrock, we often see companies that meet one or two of
these aims, but rarely do we see all three meaningfully achieved at the same
Virta Health is one
of those rare companies, and it has been an incredible privilege helping their
team grow and work towards a world where type 2 diabetes (T2D) reversal is a
treatment accessible to everyone living with this chronic disease that may not
have to be chronic anymore. With their two-year results peer-reviewed and
published in Frontiers in Endocrinology, Virta is showing
that even patients who have lived with T2D for years can improve their health
beyond their wildest imagination and safely get off of expensive medications.
Improving the Experience
One of the biggest challenges in treating T2D is that the traditional model of healthcare is at odds with the reality of living with a chronic disease. It is by definition a condition that patients live with day to day, but patients only see their physician once or twice a year.
Virta is so effective
because their clinicians engage with patients every day. This gives them
massively more data to inform clinical decisions and many feedback loops to
help patients and clinicians figure out what works. Also, Virta’s clinical team
is super specialized, unlike most endocrinologists who treat many different
diseases, and solely focused on providing medical care for T2D based off of the
daily data coming from patients.
As a result, being a
Virta patient is a drastically different experience. Not only does the
treatment result in significantly better outcomes, but the care also teaches
patients about their physiology and how to proactively manage their metabolism.
This gives patients unparalleled peace of mind and confidence.
Reducing Health Care
Costs for Type 2 Diabetes
T2D is expensive. The
long-term complications of heart attacks, kidney failure, and vascular disease
are budget busting for patients and health insurers.
Beyond these increased
health risks, certain classes of diabetes-specific medications are startlingly high
cost as well. The cost of insulin has recently been in the news for its skyrocketing price over the last 15 years. Insulin is not only
expensive, but it also engenders risks for hypoglycemia and weight gain. This
is a point that is often overlooked by providers who are conditioned to cajole
patients at every visit to carefully titrate insulin: prescription medications
often have side effects that alleviate a set of symptoms at the expense of
For example, SGLT2 Inhibitors, a newer class of oral medications for T2D, have a bunch of side effects like kidney failure, hypotension, increased cholesterol levels, and increased risk of developing bladder cancer. It would be far better and more cost effective if we manage T2D without relying on these medications. With Virta, patients lower their glycated hemoglobin (HbA1c) and eliminate medications at the same time.
Amazingly, Virta trial
patients were able to discontinue 67 percent of their starting
diabetes-specific prescriptions at two years. In addition, 91 percent of
patients who began on insulin were able to reduce or eliminate their dosage,
and the average daily dosage of insulin for this group of patients went from
81.9 to 15.5 units per day. The average annual medication costs for this group
of patients on insulin dropped by more than 50 percent between baseline and two
Health Improvements for Patients
When Virta’s 10 week
results published in JMIR Diabetes, I wrote about the
rapid improvements demonstrated by patients who opted into the treatment. Ninety
percent of patients who began the trial taking insulin were able to reduce or
eliminate their dosage and 48 percent of patients met the definition for
conversations with trial patients made us confident that they would be able to
stick with the treatment, it still needed to be proven that Virta could succeed
at demonstrating long-term therapeutic benefit.
With one-year results
published in Diabetes Therapyand now two-year results in Frontiers in Endocrinology, Virta proves that their initial results are lasting. The
vast majority of patients stick with it, and Virta is consistently able to
deliver long-term, clinically significant improvements in health outcomes
related to T2D, avert complications, and save thousands of dollars per patient.
Specifically, of patients who completed two years 55 percent were able to reduce their HbA1c below 6.5 percent (the threshold for T2D diagnosis) without diabetes-specific medications, and 34 percent within that subset of patients were able to achieve partial or complete diabetes remission.
With standard T2D care,
the rate of partial remission
is approximately 2.4 percent, and it is known that patients who have
had T2D longer are less likely to achieve remission. Virta crushes this metric
even with a harder to treat population. At the start of the trial, Virta
patients had lived 8.4 years on average with a T2D diagnosis. Given this
context, the fact that such a substantial percentage of patients were able to
put their disease in remission is remarkable.
In addition to T2D,
Virta patients demonstrated significant improvement in markers of related to
other chronic diseases, including cardiovascular disease risk factors as well
as markers of non-alcoholic fatty liver disease. Virta’s treatment is improving
metabolic health and the benefits of it are being felt by multiple systems in
What Virta has been able
to achieve for patients, payers, and providers is extraordinary. Virta
is giving hope and better health to thousands of patients with T2D. The Virta treatment is
scalable, safe, effective and totally personalized for all types of patients
and lifestyles. Having doctors, diabetes educators, social workers, dieticians and
coaches work with patients daily works much better than the once or twice a
year status quo. Our team could not be more excited to work with Virta, and we
look forward to continuing to help them improve the lives of patients for years
To read more about Virta’s recent two-year results, see remarks from Sami Inkininen, Co-Founder and CEO of Virta, here.
For the third year running, our smart friends from across the healthcare industry helped us take the pulse of the health IT sector. Our respondents have correctly called both the survival of the Affordable Care Act (even without bugging Justice Roberts’ chambers) and the lack of tangible progress in drug pricing. This year, we re-checked on startup health, technology adoption and regulatory issues while also taking a look at new topics including blockchain and diversity.
Our commentary and the most interesting findings can be found here.