Too Lucky To Be Just “Lucky”

Jan 13, 2017

This essay appears in today’s edition of the Fortune Brainstorm Health Daily. Get it delivered straight to your inbox.

Here are a few things I learned at the J.P. Morgan Health Conference this week: (1) Vice-presidential motorcades tie up as much traffic as presidential ones; (2) San Francisco hotels have no compunction about charging pharma-sphere prices, especially when the city is overrun by pharma executives; (3) no one will ever know if you brought more than one blue blazer to a four-day meeting; and (4) in my next life I want to come back as Bryan Roberts.

Allow me to dwell on No. 4 for a minute.

If you’re going to be a venture capitalist, you ought to have some fun doing it—and nobody in Silicon Valley looks like they’re having as much damn fun as Roberts, the Venrock partner who may well be the most successful health-startup investor around. A slew of biotechs the VC has backed have been gobbled up for big bucks by the likes of Roche, Merck, Allergan, Celgene, and Mallinckrodt. Other early seeds include the hot diabetes-drug company Intarcia Therapeutics (which I wrote about in November) and the Jonathan Bush-helmed athenahealth (now worth nearly $5 billion), which has become a prominent force in the age of the cloud-based doctor’s office and hospital. And as Roberts tells me a story about his first investment—in genetic sequencing company Illumina—the guy in the black tee and blue jeans in a Marriott full of suits is either in mid-grin, or in mid-guffaw, or both somehow, the entire time.

It was probably about nine months after the company’s founding in 1998, Roberts recalls, and he was talking strategy with John Stuelpnagel—Illumina’s original CEO and cofounder. Even before the company’s novel gene-profiling tool was market-ready, even before they knew how to outflank a long-established competitor (Affymetrix), Stuelpnagel was looking far into the future. Says Roberts: “He quickly figured out that if Illumina was successful, it would need more than the world’s supply of oligonucleotides”—the short snippets of nucleic acid that are designed to pair up with specific genetic sequences, and which are critical for DNA or RNA analysis.

So what did Stuelpnagel do? “He went out and he found somebody who was, at a very early stage, working on novel oligonucleotide synthesis technology, and bought it. He brought it into Illumina, got it working, licensed it out to the oligo manufacturers, brought the price of oligos down by like 90% and dramatically increased supply”—which enabled the now–$24 billion-in-market cap Illumina to succeed. “Imagine,” says Roberts, “if you woke up one day and said, ‘Oh, this Illumina thing is awesome. It totally works. And we can only sell twelve of them a year because there’s not enough oligos in the world.’”

The way Roberts talks about Stuelpnagel, interestingly, is the way lots of people talk about Roberts. He has a way of zooming in on the one or two issues that will actually matter to a young company’s viability, says one of his investees, Serge Saxonov, co-founder and CEO of 10x Genomics.

But what matters most, says Roberts, who came to Venrock in 1997, just after earning a Ph.D. in chemistry and chemical-biology from Harvard, isn’t that “brilliant idea” that launched the company—but rather the brilliant person who’s leading it. “Most of the people I invest in are first-time CEOs and most of them make it,” he says. “Some not-immaterial proportion of the companies that I invest in that are successful are successful in something other than what I invested in. And then we find our way to success—not necessarily with the thing we were doing.”

That said, the VC does have a natural feel for what he calls “themes”—the broad directions where healthcare is heading. And his internal compass now points to a world that many entrenched health system players will find uncomfortable, if unavoidable: The asset foundations that made them solid businesses for generations are now keeping them immobile—essentially paralyzing them.

“For many decades, capital assets—whether that be stores, MRI machines, you pick it—have been a strategic advantage for companies across sectors,” he says. “Those high-value assets were a competitive advantage in a marketplace. I feel like we are entering a time, because of the liquidity of data and analytics and software, when that’s flipping on its head—such that all of those capital assets (that used to be these huge strategic advantages) are now actually really constraining. Obviously, they cost a lot of money and depress margins. But I think they could also dramatically constrain business models, too.”

(Notably, Sue Siegel, the uncannily insightful CEO of GE Ventures, told me exactly the same thing yesterday at a meeting at Stanford. “Everything is going from ‘CapEx’ to ‘OpEx,” she says—from capital expenditures to operating expenditures.)

Take hospitals, says Roberts. “They are essentially big capital assets trying to stuff people through them.” Just a bunch of pricey beds and CT scanners and other giant machines—a heaping pile of fixed costs—looking for customers. And if I’m a doctor or patient in a metropolitan area with five major hospitals, I’m looking at essentially five commodity items with all the same stuff.

“Yes, there will be some small percentage of cases where I need the pediatric interventional neuroendocrinological radiologist person—there’s three of them in the universe,” he says. “For that, I know where I gotta’ go. For the other 99% of stuff, why wouldn’t I call up five hospitals and ask, ‘What’s your bed rate for the day?’”

Good question.

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