Ep80: Peter Kolchinsky on Pharma's Soul

Welcome to the long run. This is a podcast for biotech adventurers. I'm your host, Luke Timmerman. Today's guest is Peter Kolchinski. Peter is the Managing Partner at RA Capital Management. The Boston based firm invests in public and private life sciences companies with a total of $6.8 billion under management. Peter is a virologist by training from Harvard University. It's obviously a valuable set of skills to have in a year like this, but he's actually been spending a lot more time lately on something even bigger and more broad. If you can believe it, the future viability of the biopharmaceutical ecosystem itself. The industry, as everyone ought to know, is in deep trouble. Public anger over high drug prices has been festering for years with no real solution being offered by either party. In Washington, D.C. peter has seen the good that industry can do with creating new medicines, as well as the misdeeds that have been committed by those in both the insurance industry, PBMs, and in pharmaceuticals that have all contributed to this mounting public anger. In January, he wrote about some proposed solutions in his book the Great American Drug Deal. It's brilliant, unorthodox in its solutions at times, and easy for a layperson to read. Unlike a lot of health policy books, Peter hasn't just been content to say his piece in a book he's now spearheading a non profit called no Patient Left Behind. It seeks to advocate for some of the ideas described in the book, urging biotech executives, leaders of trade groups and members of Congress to get on board. He sometimes seeks to advance these thoughts, as well as an occasional contributing writer for Timmerman Report. You can see links to all those relevant resources in the show summary posted on timmermanreport.com in this conversation, I skipped Peter's backstory. We talked entirely about this existential crisis and the broken profit incentives that have created this mess. He sees an internal battle within the industry between builders who develop innovative new drugs and other products versus the landlords who are more interested in rent seeking behavior to maximize profits of old blockbusters. He calls this a battle for the soul of the industry, perhaps adapting a phrase from a certain candidate's rhetorical framework this election year. One small note before we start. Peter was joined on this call by Chris Morrison, a veteran biotech journalist who's now working as an editor at RA Capital. You'll hear Chris chime in at a couple of points, once to clarify a patent expiration date that I had gotten wrong, and another time to remind Peter of the name of an author he was trying to cite. Peter is brilliant and fiery in this conversation. You'll hear it right away in his voice. Anyone who cares about the future of biotech ought to give this a listen. Now, real quick, before we get started, do you enjoy the Long Run podcast? Maybe you're trying to raise awareness of your company, your organization, or your services with a high powered group of entrepreneurs and venture investors who listen to this show. Tell me about your company and why it could be a good fit as an advertiser. Lukemermanreport.com now please join me and Peter Kolchinski on the long run.

Why start a new organization dedicated to affordable medicines when there's already plenty of organizations out there dedicated to this cause?

Sure. So the book was about some ideas that were familiar to many people. The idea of lowering out of pocket costs, that's not new. But in my book I also made the case that odds are Congress is going to be looking for something from the drug industry, something to balance out the correction of our insurance system by fixing what it saw was wrong with our industry. It somehow sees that drug prices are too high and so it wants to impose price controls. At least, you know, HR3 certainly does. And yet the argument I was making is like, no, what's wrong is not that drug prices are too high, it's that some drug prices are too long. Drugs aren't going generic when they're supposed to. Some of them because of patent gaming and in other cases just because they're too complex to copy.

Right?

As we start launching more and more gene therapies, they're not going to need patents in order to keep them as monopolies. They're natural monopolies because they're uncopyable. And so in order to ultimately offer up a holistic reform proposal that lowers out of pocket costs in exchange for a certain fix on the drug side, I had to, well, frankly, create a new organization that didn't just call for, as some do, price controls on drugs as one of the ways to achieve affordability, but rather that said, no, it's out of pocket cost reduction, extend insurance to everybody, right, who isn't currently insured, and ensure that all drugs go generic without on due delay, introducing the notion of contractual genericization. That was different enough that it did require an independent organization.

I mean, others, you're talking about a middle ground essentially, because you've got people on the left and in the Democratic Party that they want a pound of flesh from the pharmaceutical industry. They think that's where the price gouging has occurred and they want price controls, as you say. But then there's the people on the right who are not really advancing a price control kind of regime. They're not really advancing anything to extend health insurance like as you describe. So you're talking about accountability for both two major players here in what's driving up the cost, the health insurance and also the pharmaceutical industry.

Yes. So there's an ask here that in some ways goes beyond what the left asks for in health care reform. We would argue, really? Instead of talking about out of pocket costs, like how much can we lower them? As if there's a presumption that they serve a useful purpose. Look at it the other way around. Why do we have out of pocket costs at all? If a patient is prescribed something by a physician, whether it's a test or a procedure or a drug, what is the point of the out of pocket costs? If it's to get the patient to shop around, that's debatable. But okay, I get it, right? If there's maybe two different facilities to get your MRI at and one of them is less expensive, I understand that the system would like to shunt patients to the less expensive one. But when there is a uniquely effective treatment or a drug class that a patient needs, why is it that insurance currently offers you a moderate CO pay for the preferred drug and a high copay for the non preferred drug? Like there's still a copay and for some patients they can't afford it, so they go without.

Right.

This is where the outrage is coming from. How about we basically say anything that is appropriate for the patient when there's no alternative, there should be zero copay for it.

Right?

And when there is an alternative, there should still be zero copay for the thing you prefer and maybe a high copay or heck, don't even cover the thing that you don't want the patient to take. So if they need an insulin analog, then if Lilly offers the biggest rebate on Humalog, fine. That's the one that has the zero copay. And Novolog can be not covered or have a high copay. So start from the standpoint of out of pocket costs are corrosive because they deter appropriate utilization and then convince me why I'm wrong.

I think a lot of people would say that deterring of utilization is part of the point.

A lot of them would say that deterring inappropriate utilization is the point. It's hard to find people who say I actually want to deter appropriate treatment that Takes a certain level of heartlessness that you just like, you don't really find very much of. Sure, it's out there, but we can rally together to counteract that. So I'm going further on out of pocket costs, certainly I'm throwing in there extend insurance to people who aren't insured. That goes beyond what some are calling for. But intellectually it's honest. And then on the drug side, heck yeah. You know, not all is right with our industry. We know that. Like when you see the kind of patent gaming going on for like Revlimid, you know, Celgene and Bristol are like, well, we gotta keep all of our scientists employed. So it's important that we extract several more years of high prices from Revlimid. It's like, no, I mean, somebody who's thinking about, should I fund the next Revlimid who's in year negative 5 funding the phase 1 trial of such a drug. The idea that someday in year 20, 21, 22 of their drug society will pay an extra few billion dollars. Like, no, that doesn't amount to very much incentive when you discount that back to year negative five. Okay, I would rather know society will pay higher prices for new drugs in their first 10 to 15 years. That drives innovation. That's an incentive. But companies should not be allowed to make money off of old drugs anymore.

And this is really where you part ways and I think an interesting way with a lot of people in the leadership of the industry, there's been a whole lot of finger pointing and blame shifting on their part toward the insurance companies that I'm sure you agree with a lot of what they've said. But they also, they're not willing to couple it with their own responsibility. Or maybe they'll point fingers at, you know, let's say small fry, like a Martin Shkreli. Like, if you're looking at like the whole scope of the problem, you know, people finding, you know, monopolies that they can exploit in rare disease populations. I mean, that's just not the core. Like, not where a lot of the people are really suffering. I mean, not to excuse it, I mean, but. But things like what you're talking about with these forever monopol like Humira and Enbrel and Revlimid and insulin, it's really hard to explain, like, why should that be allowed to continue?

There's no economic sense. And that's the thing. The fact that drugs aren't going generic the way that Hatch Waxman envisioned them to, you know, the spirit of what Hatch Waxman Forged. It's what I call the biotech social contract.

Right.

Hatch Waxman didn't really speak to insurance, but essentially insurance makes all appropriate care affordable to patients and industry. Make drugs that will go generic without undue delay.

Right.

That right there, like those two tenets, explain everything that is good about America's health care system and the rest of the world benefits from it. But it did not contemplate. I mean, this was 1984 when they passed it, and it was in the 70s and early 80s that they were debating it. Biologics didn't really exist. Insulins were just like a notion. They were just starting to come out, recombinant insulins. And so nobody was thinking ahead to would they be able to go generic? And the answer is no. But the ACA basically recognized the problem. And the ACA on the one hand, expanded insurance for people. It tried to fix insurance to some extent. And on the other side of the biotech social contract, it tried to bring biologics in line with the spirit of Hatch Waxman, but it failed because we did not achieve sort of confident interchangeability of biosimilars with the original.

Right.

We're still not comfortable that a biosimilar is identical enough that any pharmacist can just switch it out. Nor did the biosimilar act really speak to really complex biologics, like true blas, like what gene therapies and cell therapies are. And so basically what we have here is a market failure where we cannot get biologics to go off a patent cliff. Even though for decades we have been innovating very successfully, very ambitiously and with a lot of fervor and gusto. We've been successfully innovating despite the fact that Hatch Waxman has actually worked and drug after drug has gone off patent clubs. Arguably, big companies have been hustling extra hard to replace lost revenues, like that's the norm. Why would we want to change that? Well, the patent gaming has started to change it. The natural monopoly status of complex drugs has started to change it. And we are rediscovering our roots as landlords, as rent extractors. That's what our industry was before Hatch Waxman. We're going back to the past, right?

I'll tell you a little funny little story, Peter. You know, when I first started covering this industry, Enbrel was the first drug that I wrote about. And this would have been like 2,000. And I remember Amgen bought Immunex, and they did all the investment banking projections and they said, well, if we can get $3 billion a year out of this product by 2005, this all pencils out, and it's great for us. Dear shareholders, you ought to vote for this thing. But baked into that assumption was patent expiration 2012. They weren't really projecting anything in the lifecycle beyond that. Well, by about 2011, some new patent came through on some piece of the process, and now we can extend this baby all the way out 2028, and we're making like 6, 7, $8 billion a year now. I mean, this is my entire career. They've been milking this cash cow. And as far as I can see, for the next eight years and probably beyond, I mean, it just.

Have a.

Patent that takes it out to 2037. 2037.

There you go.

I mean, so if society pays that route, then by paying that, anytime that society grants a profit stream to somebody, it is sending a signal to entrepreneurs and investors saying, I like this, I'd like more of it. So what is it that society sending a signal to us to do more of when it rewards Enbrel and gives it another 15 years? It certainly is not keep inventing more Enbrels. Rather, it's keep pulling this trick like, figure out how to do this to more drugs, and you will be rewarded. Because the way to incentivize more Enbrels is in fact to pay, heck, twice as much for Enbrel during its first 10 to 15 years. Like, you want to incentivize even more than you have been. Fine, pay more during the first 10 to 15 years. But when you pay a ton of money, an entire Enbrel's worth of reward, but in years 16 through 1330, and then you discount that in a net present value calculation, 2 year negative 5, negative 10. When we're tinkering with stuff, trying to come up with another embryo, like something even better, then those rewards are discounted to very little because they're so far into the future. So they represent simply rent. They represent a high cost of society that is not incentivizing innovation. And I believe that every dollar that society spends above the functionally generic price of a drug, right? So every high margin dollar that society spends for branded drugs should be relatively early in the life of that drug in its first 10 to 15 years, so as to actually mean something to those of us in years negative 1, negative 5, negative 10, negative 15 that are planting the seeds for future drugs.

Okay, Peter, so we're talking about concepts here, and this is important to understand your. But do you have, like, if you're going to have influence in Washington D.C. in the debate, do you have an actual policy program attached to this? Like, hey, we're just going to cut you off after 20 years and that's that?

It's not quite that, but yes. So I laid out in my book the Great American Drug Deal, especially towards the end of chapter 13. I lay out in some detail how that policy would work. And one of the projects that no Patient Left behind is currently nurturing is writing a bill version of contractual genericization. How would it actually work? How do you get a company to lower its price to slightly more than the cost of production after some initial mortgage period, if you will? And if there is a legit upgrade of that marketed drug, how do you incentivize it?

Right.

You're basically saying that no, you're not going to allow them to get another 15 more years. So are we going to get legit upgrades? I mean, think about Humira when ABBVIE launched that it stung. It had a more acidic formulation and that's what they had to do. I mean, I'm sure they would have made it so that it was less painful if they could have when they were initially developing it. But they didn't figure out how to formulate it, so it didn't sting until later. And that's one of the upgrades that ended up getting a patent. And that helps keep Humier biosimilars at bay.

Right.

It's a pretty minor upgrade though, because the real innovation was when they brought down the pain and severity of symptoms with ra.

Yes. And I did at one point write an article where I basically said, like, a quantum of incentive for a quantum of innovation.

Right?

Like let the incentive match the innovation. And the point is, society has to offer enough incentive in order to get innovation. But no one ever said it should offer more incentive than it needs to. And so I would argue that for something like that, which is a worthy upgrade of Humira, I would much rather that biosimilar Humira is in the future, not sting if you can avoid it.

Right.

For the rest of all time to have a essentially generic Humira that doesn't sting is good for us. But how about like six more months of exclusivity? We grant pediatric extensions to companies to get them to study how their drugs should be used in kids.

Right.

Whether they work or not. Like, you get that upgrade if you do that. You get that extension if you do that upgrade of our label. Well, let's do more of that. Because humira collects like $15 billion a year from the US six more months is seven and a half billion dollars more for that. And I'm pretty sure that would have been enough to get Abby to be like, yep, we'll upgrade humeier for that.

But instead they get the 15 years and we as a society end up paying extra billions and billions of dollars. And we're not getting a whole lot of value for that minor innovation.

Let's just put it this way. I think that the amount of value we get for Humira not hurting as much over the span of infinity is a lot. However, we do not need to pay 15 years worth of extra branded spend in order to get that. We are overspending to get modest, I should say, upgrades that while meaningful, actually are not risky and cost only a modest amount in order to pursue. Let me give you an example of Prilsec versus Nexium. This is a classic one. AstraZeneca was selling Prilsec and it was generally like four or five billion dollars a year. And Nexium ended up becoming a blockbuster, really, because it was more effective than Prilesec when given at 40 milligrams.

Right.

But it took three upgrades of Pryosec to get you to Nexium. No one of which was like earth shattering one. Prilosec had to be converted to a pure enantiomer. Right. So experts in our industry, insiders, they'll know what that means. So that's good. The FDA wanted all drugs that were mixtures to be purified to pure enantiomers, just as a matter of course. It's like, it's better for us. We're upgrading ourselves. All future drugs should be pure enantiomers if they can be good. So AstraZeneca did that, got a whole patent on that. And you'd think they're going to get a whole extra 15, 20 years for that. Except it turns out that the difference between those two drugs, the pure enantiomer versus the racemic mixtures, not significant or even detectable. But because of that, you can give just 20 milligrams of Nexium instead of 40 milligrams of Prilosec. Well, what AstraZeneca then did was they doubled the dose of that pure Nexium to get to 40mg and prove that it was even more effective than 40mg of Prilosec. Sure, you'd have to give 80mg of Prilosec to make it not effective. And then they turned Prilosec, which was a twice daily pill into a once daily, which is also nice.

Now most people who listen to this, Peter, are thinking this just sounds like a lot of gamesmanship. This is not the stuff of Nobel prizes.

Fair enough, fair enough. But the fact is the FDA wanted pure enantiomers. It's better to have a once daily pill instead of twice daily if you can get it. And they got more efficacy out of Nexium, which is really what drove its use, you could have incentivized that. I would argue with six months each, 18 months of Prile sex sales that would have been, you know, times four or $5 billion. You would have gotten six to $8 billion more, you know, out of the Prilosec franchise and we would have had generic nexium in like 2003.

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When you talk about this kind of rent seeking behavior on behalf of the pharmaceutical industry, this is not consistent with the industry's conception of itself. It sees itself as the champions of innovation, but yet you're pointing to very real underbelly that everybody in the industry knows about. Are you like pissing off a lot of people? Are you able to keep people with you in this argument and keep them on your side?

If you take a look at the no patientleftbehind.org website, you'll see on there a list of what we call life science builders. We got 150 people that are leaders of the biotech industry, CEOs of companies, major investors, including former, current and future chairs of bio, are there. So Paul Hastings, John Maraginore, Jeremy Levin are on there and many others. Those people in our industry that are in it to innovate, launch a new drug, and basically can acknowledge the sheer economic truth of the fact that getting paid a high price for 10 to 15 years is plenty of Reward if they are successful with bringing their innovation to market. They support this innovation because ultimately lowering out of pocket costs for patients is how we're going to make our medicines accessible and affordable to patients. And giving up long term rent seeking streams way out in the future when we don't even value them today, they're so far out and so heavily discounted, it's actually not much of a sacrifice. So we're just trying to preserve the incentives that have driven innovation since Hatch Waxman. We're just trying to preserve the status quo and keep price controls at bay. Yes, the ones for whom the long term rent seeking part of the model are there presentations Amgen with Enbrel and Abby with Humira. They are the ones who are being asked in our proposal to sacrifice what currently does amount to a fair bit. It is their current, their present value that they are being asked to give up. And here's the thing. Thankfully Abbvie has already reconciled itself with the fact that Humira is probably going to go off a cliff when all those biosimilars it's kept at bay will launch. Assuming that the payers really know how to like drive competition there and get discounts, it ought to go off a cliff. But we have the threat that our industry writ large. Like a lot of companies are going to end up having their builder souls hijacked by long term rents as more gene therapies and cell therapies launch. Merck, a company that's basically succeeded for, I don't know, like a century or more off of small molecule drugs. And that has generated a lot of great small molecule drugs that are now generic. Lisinopril, the most commonly prescribed generic drug, blood pressure lowering drug, that was a Merck drug and it is now generic. It is going to have to face the days at some point when Keytruda nears what we would consider the end of its reasonable mortgage period. And yet I have no doubt that there will be an abundance of little things to patent about Keytruda and there'll be a decision to be made. Do we enforce those patents? And if we're successful, we could maybe get another 10 or 15 years out of Keytruda. But should we? And so there will be that moment when we will find out whether Merck's history as a builder that has contributed, that has launched drug after drug and replaced lost revenues, will end up being swapped out for a new reputation as yet another landlord.

Will they walk the talk? Will they actually put their money where their mouth is and say we are in this to innovate on behalf of patients who were not already helped.

And I do not want to lose Merck as an exemplar of pharmas. If we were to call them an exemplar, certainly better, they've done better than others at having their drugs go generic. I would hate to discover that Merck starts to double talk, starts to sort of justify why no keytruda should be given another five, 10, 15 years. And I believe that if Congress basically were to pass contractual genericization as that concession as a part of holistic healthcare reform, such that no company will even be able to like, they just won't be able to engage in this rent seeking, it will preserve Merck's soul as a builder, right? It will restore the souls of those companies that have, you know, descended into rent seeking, right? It will restore them as builders. And by keeping all of us as builders, by ensuring that Novartis as Zoljanzma gets long in the tooth, does not come to be dependent on those long term revenues, but will instead be focused on innovation, it will preserve the best of us. The fact that we hustle to innovate to replace lost revenues and we are not yet making enough money, I don't believe off of this rent seeking to say that we are truly guilty of being mostly a rent extraction industry. There's a lot to us that the public has misunderstood. They think that me too, drugs are not innovative and that they're bad and whatever. That's not true. Me too. Drugs are just the sort of the consequence of hustling to try to be first or best, but discovering that now you're just similar to the first one, fine, so you compete on price and you get some market share that's good for society. But you know, there is some rent seeking, if I had to guess, maybe 10% of branded drug revenues. So that's like 25 billion. Maybe that can be explained by drugs that are in their rent phase. And so indeed, if we simply lop those off, high margin industry revenues will fall by 25 billion.

That's real money.

That's a lot of money. And I would not even advocate that the industry lose that money because our profit margins as a whole are just 10%. That too, by the way, is news to Congress. And it's yet another project that no patient left behind is incubating. We're doing that with a professor at Harvard and people focus on the profitable companies. And the analogy I use is it's like trying to figure out how profitable is the music Industry. Well, look, Beyonce makes millions, so it's very profitable. But it's like, dude, you gotta integrate all the street performers and the students in music schools and whatever. It's not a lucrative profession.

Right. Okay, Peter, so you mentioned that you've got a bunch of the builders, the people that you and I think of as really dedicated to innovation on behalf of patients who are not already helped. But that's not everybody in the whole industry lining up. It's not. You know, this is not like the official talking points of bio and pharma. They're not going to the map for your proposal just yet when they walk the halls of Congress.

I like what you said just yet. We're going to go with just yet because we are speaking with the folks at Bio and we're attempting to figure out ultimately how might this fit with the bio vision of the future. And I know that these discussions have been happening within bio. They can see the difference between, like, people haven't used this terminology, builder versus landlord. That's something that we're introducing as part of the no Patient Left behind platform. But functionally, they have been having these debates internally and people have been saying, like, look, enough is enough. Like, you're giving us a bad name when you extract more rent from those old drugs. And. And yet those internal discussions within Bio haven't yet really made it to a formal bio platform. Right. So we haven't yet seen where Bio stands on how do you ensure that all drugs go generic. But you have seen members of Bio write independent letters where they try to say like, yes, we believe that innovation should be rewarded and that all drugs should go generic. It's their way of sort of starting to indicate that they agree with the no Patient Left behind platform. These are people that have read my book and my article, so it's percolating, it's getting okay.

So no patient left behind. I mean, you're a biotech investor. This is your day job. I mean, you immerse yourself in the science and these new areas of therapeutic potential. I don't imagine that you want to become like a lobbyist or run a nonprofit that's dedicated to this. So what's your long term goal here? What do you really want to see happen?

Look, I love my job. I love my industry. I love the people that I work with and the fact that we are the most hated industry of all industries, if you count Congress. We sometimes rank below Congress. At the moment we got the COVID bump, so we're technically the most hated. But rank Above Congress. What the hell has happened to us that we're so hated? And yet I love these people and I love our work. And so I do believe that we have to stand up for ourselves, that the leaders in our industry have to stand up on behalf of everybody else. And it does involve education. It does involve an awareness campaign. When I make an investment that I really believe in, which is to say, when I make an investment, I believe in it. And if the CEO says, hey, we want to recruit a chief medical officer, and that chief medical officer kind of wants to talk to some of our board members or investors, like, would you speak to him? I pitch my heart out, I explain, here's why we invested in this company, here's why I think it's great, here's why it's got my support. And if we hit hard times, like, as long as there's a way to make this drug work, like, we'll support the company, and then that person joins the company. What was my role? Was I like a sales rep? Was I a recruiter or whatever? No, I was just like a member of that project.

Right.

I believed in it, and I therefore lent everything I could to it in order to make it happen. It's not just giving money to a company. You got to give your all. Well, we are part of a single company here, a single entity, a single ecosystem. The innovative drug development ecosystem. It's fueled by the present sales of branded drugs.

True.

A lot of the fuel comes from that. Technically, it's the incentive for investment. And those dollars to invest in a new project could come from anywhere. But if that ecosystem ends up being destroyed, really undermined with price controls, then we will all lose something that we value. You see a lot of leaders working behind the scenes through bio, some cases through pharma, and now through no Patient Left Behind. In order to try to preserve this whole ecosystem, I've gone down to Congress a couple times. I've been joined by people like Sarah Naim at NEA and Alex Carnal from Deerfield. We get out there and we explain what we do. We don't see ourselves as lobbyists any more than I would see myself as an executive recruiter just because I'm talking to a prospective chief medical officer. And strangely, members of Congress, when they meet with investors, I would normally think, like you're meeting with some guy that you might think of as running a hedge fund or whatever. I don't consider recapital to be a hedge fund. But whatever those are distinctions Congress doesn't care about, they Rank us above pharma. I didn't know that. I would have figured we'd be right down there with lawyers and pharma and stuff like that. But apparently as an investor in innovative companies, we've got some caches. So just showing up and saying price controls would prevent us from being able to direct resources to emerging young companies. That seemed to trigger something for some of them. They were like, oh, that's interesting. I didn't realize that they just see our industry as somehow monolithically bad in pharma. But oh, venture capital and young companies, that's good. And it's like, wow, I didn't realize you didn't see this as a single integrated industry. And when you impose price controls on drugs, those are our drugs, those are small companies that are developing drugs fueled by venture capitalists that will someday be some pharma's drug. So you can't say, oh, I will only impose price controls on the big bad pharma. Because that's like saying you're going to impose price controls on all the things that we're working on. You know, in these smaller companies. They don't know that. How could after all these years our elected officials not know that despite bio and pharma collecting tons of money from the industry ostensibly to educate the public media, Congress, I don't know. But we've got to diagnose it, right?

Do they understand like how much importance comes from their role in supporting things like the NIH and the NSF and these scientific agencies as well?

I mean, oh, if you are asking Congress, yes. They think that because they support all that drugs ought to be price controlled. I've created a slide deck to actually try to show the unification of public funding and the private sector when it comes to innovation. My analogy, think of all public funding NIH as elevating us to Everest Base Camp. And it's not just that public funding. How about the funding that goes into smooth roads, public schools, rule of law. All of that elevates us to Everest Base Camp. So do you think. And then there's a promise of a high reward for a successful drug that incentivizes the private sector to then invest in that last leg, that climb from base camp to the top which you can speak to Luke, right? Peter, yours.

I wonder, do you think maybe there's an opening here for you to be kind of a unique messenger? Because if a pharma executive were to come into those congressional offices and say the same thing, it might sound like self serving, like, well, don't price control our products, but you're giving them this bigger picture of here's what the public does and here's what the private industry does, and there's a continuum here. Somebody has to move it to Everest base camp to further your analogy, and then somebody else has to be incentivized to take it all the way to the summit.

Yeah. So I'd rather not be a unique messenger. I wrote my articles, I wrote my book. The slides that I sent you, Luke, those are all meant to sort of convey a unified framework of how insurance and society's willingness to pay for branded drugs are supposed to not just make all current medicines that are appropriate for patients affordable to them, but also preserve innovations so that we get more new medicines which will then also be affordable to patients, and then we'll go generic and free up resources for yet more new medicines.

Right.

Like it's one holistic framework. And I believe that all investors, all executives should be able to explain this to their employees, to students when they give a talk at some school. Like, this should be taught in schools. This is just fundamental to the economics of healthcare. And the CEO of Biogen, Michelle, he wrote a favorable review for my book on Amazon.

Right.

Like, the book lays all this stuff out. Why would that be? I mean, Biogen is currently collecting high revenues for old drugs like Avonex and Tysabri's getting on in the years. Why is that? Why would he support a platform idea that in theory threatens some of these drugs? Well, it's because Biogen wants to be known for innovation. You know, like, let's see how things go with agikamimab. But that could come to redefine Biogen. And if Biogen can collect high revenues for its new drugs, then it's not much of a threat than to ensure through contractual genericization that it's older biologics drop in price. I think that what we may find out is that while bio versus Pharma seems to create some sort of a schism in our industry, even though technically insulins are biotech drugs. And that makes Lilly a biotech company and Hugh Myers a biotech drug. So that makes Abbvie. So really, I can't think of anybody who's not a biotech. But instead of thinking along that framework, you think in terms of builders versus landlords, and then you come to realize that there really aren't any pharmas that aren't both builder if they're landlords at all, if they're currently engaging in any rent extraction at all on Old drugs. There's still also builders. And so my hope is to appeal to the builder part of the soul of every single company and to inspire the boards and the executives at these companies that they should be on board with affirming the biotech social contract. Support Congress in passing the right kind of legislation in the right way to make your old drugs go generic. By the way, not even something that these companies can pledge to do. If, for example, Biden today tried to say, dear America, if the FDA decides that adikamamab should be approved, we hope that you will make it available to all patients, pay the price that we will charge for it. We promise that in 13 and a half years or whatever you end up saying is like the essential brand period, that if aducamab were genericizable, like that's how long it would be branded. We promise after 13 and a half years, we will drop the price of that drug to slightly north of the cost of production as if it went generic.

Right.

You couldn't hold Biogen to that promise. There's no way that they can codify that pledge that I'm aware of, because even if the board and executives swore to it, in the future, activist investors could ultimately take over the company, change up the board, change the rules and keep that drug expensive. Arguably it would be their duty to do so because these companies exist to maximize shareholder value. So if today Biogen wants to ensure that its innovations abide by the biotech social contract, it should actually support the no Patient Left behind platform. You know, in Congress, it has to.

Be a change in the law. There has to be a change in the law, Right?

So that in the future, Biden, whoever it's led by, whatever the board may be, is also gonna be held to that end of the contract by the actual rule of law.

Okay, now Peter, we said you're not a lobbyist, you're also not a political pundit. But it sounds like, I mean, you feel like you're getting somewhere, like people are listening to you in that builder part of the biotech community. Do you, do you think there's some kind of political moment here in which people within this industry are capable of hearing what you're saying and actually maybe getting the industry to a more stable long term place.

So I read a really great book called Generic and it was written by a healthcare historian, normally have his name. What was that?

Isn't it Barry Greene?

No. If you could find it, Chris, you'll save me. I'm so embarrassed that I've slipped my mind but it tells a story of how the drug industry fought against Hatch Waxman for decades and the fight that this one Senator Kefawa for and others around him had to undertake for decades to prevail and bring about what we consider normal. That a pharmacist can just switch out your drug with a cheaper, FDA approved generic and it's fine, and that innovation is preserved. But they fought. And you should see the tactics that they employed, like the misinformation, the claims that it would kill drugs, that they would all go sideways. But it didn't. And so what you're hearing now, when you actually see the industry's reactions now, you realize this isn't the first time we've been through this. If we just develop an intellectually sound framework and we keep advocating for it, we will prevail. The trouble is that we are under the gun because we have avoided proposing a sound framework for so long. Arguably, we should have seen that not all drugs would go generic, even under the bpci. Biosimilars don't apply to all drugs. We should have known even before then. But there were people that should have known soon after BPCI passed that it wasn't going to work without interchangeability, and they should have been able to anticipate that this was coming. I can certainly tell you on RA Capital's website, for over a decade, we removed. A few years ago, we said that one of the themes we like to invest in is small molecules that do the job of biologics, because small molecules go generic and that's better for society, even though technically it doesn't maximize our returns, but it still allows for a sustainable, innovative sector as opposed to one that just maximizes returns in the near term. And people would ask about that and I'd have to explain it, but this was well before Turing, before I wrote anything. It just seemed intuitive to me that that's what's so awesome about our drugs. And so we should have known better and we should have proposed this earlier. Now we're under the gun, and whether Congress knows it or not, they forced those of us that previously were content to just do our jobs, focus on innovation, trust that bio and pharma would keep, like, bad policy at bay. They forced us to take notice and say, huh, this feels awfully hot here. I thought bio and pharma normally shield us from this kind of heat. What's going on? It's like, oh, yeah, this time might be different. They're really angry, right? And so we don't have a lot of time to swap out sound reforms, a sound proposal. I believe that no Patient Left behind proposal is an example of a sound framework. It's a biotech social contract for the blunt price controls that America is now contemplating. So I've been talking to members of Congress, a lot of them.

Do you think the Democrats in particular are open to this line of reasoning?

That's the thing, I've mostly been talking to the Democrats.

Right.

Because the Republicans generally have been reliable. I wouldn't say that they will always be reliable, but they've been reliable. Bulwark against anything that sounds overly lefty. But the reality is frankly, to save our country, to save democracy, we need the Democrats to win, right? We need Biden to win. And frankly it would be probably best if they won the Senate and kept the House and passed legislation that started doing something about climate change. I believe in all these things, right. As much as I love health care innovation, it's pointless without the context of everything else about our country and really the world working right? So what's the point of curing a disease if climate change is going to decimate this planet in 50 years? So I need them to win, but at the same time we need them when they win, not to decimate biomedical innovation with price controls. So I've been talking to a ton of Democrats candidates as well as incumbents and what I've been feeling out for myself, I just, this is the thing, like I don't have enough experience to know whether what I'm being told is true or just if I'm being glad handed. But I'm starting to get a sense for the different levels of sincerity among different sort of pockets of the Democratic party. And there are definitely people who, while they all signed on to HR3 if they're incumbents, really saw it as a harmless shot across the bow to show that like yeah, we're serious. Knowing that the Senate would never approve it and knowing that if they ever did have the power, if they controlled the Senate in the House, that they would not support anything like that. They would not support price controls. I just don't know whether those people have enough power in the Democratic Party in the House to keep another HR3 from passing. So we're spreading our analysis, our framework, we are sharing with people very basic insights. Like a lot of them don't know that the industry's collective profit margin is just 10%. Like there just isn't the fat in our system for you to take that kind of a huge chunk out of it. With HR3, they don't know that somebody.

Needs to make the argument to them that HR3 would be throwing out the baby with the bathwater and all of that good stuff that we finance with our tax dollars at NIH and elsewhere.

The thing is, pharma and bio are doing that, as are we.

Right.

We make that case. It's just that what we do is we say, we get it. You need to take a pound of flesh out of our industry and you sense that something's wrong. So you think that taking that pound of flesh is fair and will merely correct a wrong. Well, the trouble is you've got your hand wrapped around our heart. You cannot take that pound. Let me guide your hand. Please. Shift it down here. You see, it's this tumor that's growing within our industry, this gangrenous tumor of rent seeking behavior. It's not good for innovation. It's not good for any of us. It's a bad way to generate revenues to keep all the scientists employed. We should be generating revenues only off of our new drugs. So please, shift your hand from the heart to the tumor. Take the tumor as part of the holistic healthcare reform that patients need, lowering their ad pocket costs. And while you're at it, you're not going far enough on lowering out of pocket costs. We challenge the notion that you should simply set some sort of maximum out of pocket down at like 4,000 or 3,000. How about actually examining why is there an out of pocket at all for insulin for confirmed diabetics? Why don't challenge the notion that when an insurance plan actually grants prior authorization for a drug, it is confirmed that that patient has that disease and that that drug is now appropriate.

Right.

They've jumped through however many step edit hoops, why then is there an out of pocket that some patients can't afford? It's absurd. And it's funny. Apparently they're not pushed. You know, members of Congress are not all pushed to even consider that. Because the moment they even consider it, they're like, huh, yeah, you're right. I kind of don't get why that is. And we're like, right?

There's no good reason.

Hold that thought.

And when HR3 comes up again, we would urge you shift the hand to the tumor and then consider going further and out of pocket costs. And by the way, we are running the analyses, we're working now to hire the kinds of groups that do Congressional Budget Office modeling, CBO scoring to figure out for you when you do write this bill, how's it likely to score? And the answer is in the first 10 years when you basically say, no, we're not advocating for outright price controls, we're advocating for generic price assurance. Yeah, a lot of that's going to kick in later. It may not score that well in the next 10 years. However, it preserves innovation, whereas HR3 miscalculated the impact on innovation. If you got a few minutes, I'll show you.

You're really drawing on elements, though, of thinking from the left and from the right and from lessons of history. By the way, that book I think you mentioned is Generic by Jeremy Green.

Yes, Jeremy Green. I'll put a link to it in the chat.

Luke yeah, so this, you know, we're heading into the election and so, you know, who knows what's going to happen here in the coming weeks. But I would like to think that we will come out of this with people who are are willing to listen to thoughtful proposals about how to make drugs more affordable. Maybe, just maybe, we could come out of this with a leaner, meaner, more productive and better drug industry. You know, for the, for the 2000s. Thank you very much. Peter.

Thanks, Luke.

Thanks for listening to the Long Run. A production of Timmerman Report. Pedro Rosado of Headstepper Media was the sound editor. Music is from Da Wallach. See you next episode.