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Venrock partners predict another Theranos in 2018

In 2018, venture investors can expect to see at least one healthcare IT unicorn exposed as being overhyped, an uptick in successful IPO and M&A exits in the sector, and Amazon kept at bay from disrupting pharmacy-benefits managers.

That’s according to Venrock Partners Bob Kocher and Bryan Roberts, who discussed their annual predictions for the healthcare venture industry at the StartUp Health Festival on Jan. 8. The health-innovation event took place in San Francisco during the JP Morgan Healthcare Conference.

Among the forecasts: Kocher and Roberts predicted that at least one company will follow in the footsteps of blood-testing company Theranos, which saw its $9 billion valuation evaporate after investigations revealed its technology to be unreliable.

“As a VC, I’m surprised that I get people all the time who say things that aren’t true,” Kocher said. When he follows up on claims made by entrepreneurs, customers, or other investors, he said he discovers their claims to be demonstrably false “an amazing amount of the time.”

A surplus of capital flowing into the healthcare-IT sector is partly responsible for the proliferation of companies built on false promises, Roberts added.

“We’re in year six or seven of way too much capital,” he said. “You’re investing in things that are interesting, but below the tablecloth it doesn’t pan out.”

The investors also predicted an increase in successful healthcare exits, after several years of subdued liquidity activity for IPO and M&A deals.

That isn’t just wishful thinking, but speaks to a level of maturity in the sector after more than $10 billion in venture capital was poured into the sector in the past five years, according to Roberts.

And increased M&A activity is likely since large participants in the sector need to acquire different lines of business to stay competitive.

“Nobody in healthcare, beside the pharma folks, makes enough money to be happy with their business,” Roberts said. “On a good day they break even.”

In 2017, there were 45 venture-backed biopharma IPOs and M&A deals, down from 80 exits in 2014, according to a recent Silicon Valley Bank report. Exits among venture capital-backed medical-device companies is similarly down, with just 17 IPOs and M&A deals in 2017, compared with 28 such deals in 2014.

Despite some expectations to the contrary, Kocher and Roberts don’t expect Amazon to begin disrupting healthcare-industry intermediaries like pharmacy-benefits managers, whose responsibilities include negotiating medication rebates, delivering medications directly to patients, and processing claims from pharmacies and patients.

Instead, Kocher said he expected Amazon to take on distributors first, with Amazon Prime delivering supplies like bandages and sutures instead of medications, which are more highly regulated. “There’s a trillion dollars of other stuff to sell first,” he said.

In addition to their predictions for 2018, Kocher and Roberts shared some of their investment criteria, focusing on an unequivocal return on investment and high-level engagement in early-stage businesses.

“Healthcare is full of distractions, and you need profound engagement,” Kocher said.

Part of identifying a successful team with those characteristics is to find and learn from early customers, he said. “If they will give you the feedback and access, take a chance on [the company] and let it iterate through them.”

Photo of Venrock Partners Bob Kocher and Bryan Roberts interviewed on stage at StartUp Health Festival 2018 courtesy of Josh Edelson/StartUp Health.