Keeping the Biomedical Innovation System Humming: Peter Kolchinsky, Ph.D., Biotech Investor, Scientist & Author

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Good afternoon, this is Aaron Strout, and I am the CMO of Real Chemistry and the host of the Real Chemistry podcast. And today we have a guest who, quite frankly, is pissed off. You'll find out why. His name is Peter Kolchinsky. Peter is the managing partner and at RA Capital Management. He's also the author of a book called the Great American Drug Dealership, and he is the founder of a group called no Patient Left Behind. Today he speaks with Jim Weiss, who's my colleague and frequent guest host, also founder and chairman of Real Chemistry. They cover a lot of ground, but in particular they're focusing on the latest health care reform bill and why the Senate can't sign it as it's currently constituted. The the downside is it will kill a tremendous amount of innovation. It will hurt a lot of small molecule companies and will stop tremendous amount of innovation in important areas like cancer treatment, Alzheimer's treatment, etc. So I implore you to listen in. If Peter has his way, you will also sign the letter. We'll have a link to this in the post, and at the very least, you'll feel Peter's passion about this very, very important topic. So, thank you.

So, hey Peter, welcome to the podcast. We really appreciate your taking time on this. Look, our audience is pharma, scientific types, investor types. You know, what I really want to jump right into is what do you need us to do right away? What is the problem statement and solution you're asking for that we need to help you achieve?

Yeah. So all of us are kind of in the same boat here. To the extent that we care about keeping everything that works about the biomedical innovation ecosystem humming, we know what we're good at. We know what it takes for all of us to do our jobs. The trouble is that over the decades, I think we failed to teach enough of how our ecosystem works to the rest of the world. So that now, when you look at the bill that's in the Senate, at how they are attempting to just make little tweaks to the various incentives they offer ecosystem. It is frightening. It is frightening, a level of misunderstanding of how we make investment decisions. Not just people like me who manage funds and invest in small companies, but my counterparts who are Investors within large companies who are deciding how to redirect, you know, the cash flows from existing drugs into R and D projects or buybacks or dividends or whatever. And the Senate doesn't. Well, all of Congress, media, arguably American public, they don't understand what drives our investment decisions. So in the next couple of weeks, if this Senate bill passes, as it looks, and as seemingly everybody says it's to pass, it's baked. We're not going to reopen it like it's hopeless. Then what you're going to see is that small molecule drugs for diseases of aging, mostly covered by Medicare, are going to be price controlled down to like negligible profit levels after nine years. That's it. Nine years on the market. Any of us in this industry know that nine years is not enough, like there's no company out there going around to investors saying, I've only got nine years, will you give me money? They know it's pointless.

Well, right. So, you know, I was going to ask you, if you identify the wrong problem, you get the wrong policy solution. You know, what is the real problem here? How did they get here? On drug prices?

Right. So America's been crying out about affordability for quite some time. And for one reason or another, people have misdiagnosed the root of the problem as drugs. Drug companies are charging too much. It didn't help that you had companies like Turing and Valiant price jacking old drugs. But the reality is that most of the drugs that are out there that are hard to afford for patients, you could price control them down by 80% and they'd still be unaffordable without proper insurance. So the answer to why can't patients afford the medicines that they need is their insurance plans don't want them to. So is America being taken for a ride by some drug companies? Yeah, I think it's wrong that Humira is still expensive after all this time, that it still has managed to evade competition. That wasn't the intent of Hatch Waxman. So I think that as you see, biologics turn into sources of rent for the drug industry. As you see, pharmas take joy in how they no longer suffer patent clips as long as they load up on enough biologics and they're really happy about gene therapies, that'll be great. Cell therapies. Nobody can copy them. That's wrong. We're losing our soul as builders who are rewarded with finite mortgages to basically this ethos of rent seeking. We're becoming landlords. Insurance reform is the answer for affordability, period. And then once we pay for drugs collectively out of our insurance premiums, it's not any one patient that finds Humira unaffordable because it hasn't gone generic yet. That's neither here nor there. They can afford it because their insurance covers it. The question becomes, are we as a people being taken for a ride and paying too much for things that should be public goods? So when I wrote my book, I basically proposed that in exchange for insurance reform, which would solve affordability, our industry needs to acknowledge that we need to give up rent seeking. We need to acknowledge that all drugs have to go generic without undue delay. Now, my version of it is a lot more nuanced than what you see now in the, in the Senate. But essentially it's not that far off from the idea of after, you know, 13, 14 years, fine, price control the drug, you know, down to two times the cost of production, basically simulating genericization. That would be fine. Close enough. The bill says small molecules after 9, biologics after 13. I would settle for all drugs after 13. It's so desperate right now that forget the average of 14, I'll take 13 for everything. But how do you get Congress to listen? So in the last couple weeks, what I've gotten to experience is all of the reasons that people who claim they're concerned come up with not to fight. I've had people say, oh, I can't join that call, or I can't help you prepare this analysis because I got to jump on an earnings call. It's like we just talked about this. You just saw an analysis of the bill. We just agreed that this would defund like a quarter of the R and D in our industry and plausibly shut down 450 companies. And you got to jump on an earnings call. Do we understand how little time we have to do something impactful? And so if this bill comes to pass, I will look back on the last several weeks and I will have this really intimate, disheartening memory of how bad things come to pass. You know that saying that all it takes for bad things to happen is for good people to do nothing. I'm witnessing thousands, tens of thousands of good people doing nothing. Why? It's fascinating. It's a really fascinating question. Why aren't they doing a lot of them? Because they don't know. It's just noise to them. They read stuff, sure, I read something in Biocentric, but they just assume somebody else handles this stuff. Crazy things like Congress completely meddling with the market based system we have that drives innovation for a sector that's the jewel of the US that would be so absurd. That'll never happen. It's just more noise from people like to get attention about I had to stop this thing in Congress. I'm so important. I know senators. The trouble is sometimes it is that bad and people like me go from living my life and doing my job happily in oblivion, assuming somebody else has it handled, bio, pharma, whatever to huh. Maybe I ought to get involved. I wonder if I can help. You write a book, you launch a nonprofit, you donate to a few politicians, you start to talk to them, you become one of those people who could talk to senators. And all of a sudden the scales from all three of your eyes, you've taken the red pill. I hate that analogy now. And you're like, oh my God, this is how the sausage is made. We are in so much trouble. And now you're on the other side of it and you're talking to your peers and a lot of them just can't be moved now. God bless the dozens who I work with closely, who have been moved, who rally, but it's just dozens. And thankfully we have hundreds of people that will sign a letter. So within several weeks, as this bill progresses, you will start to see presumably more investors start talking about it, sell side analysts covering it. And it will be kind of like for people who never imagined that Trump would win and as it dawns on them, oh my God, he's winning. So for a lot of people that happened that election night and others were ringing the bell earlier being like, no, no, no, it's happening. I can see it throughout the heartland, et cetera. Over the coming weeks, it will dawn on more and more people this is true. They will examine their portfolios, they will see which companies have a ton of exposure to these price controls. Small molecule companies, mostly oncology. And they will realize that they probably better sell those stocks. If they're stocks they might want to rethink whether they're going to put more money into their small companies. If they're private and need more funding, to the extent that they're on these boards and they can influence the companies to pivot away from these programs. If the boards can reclaim the money somehow and if they're bold enough to ask for it, they will. My guess is that there'll be some VCs that are too polite to basically say, yeah, we can't, like we're dead. These price controls, we're never going to be able to raise more money, but they won't want to be the bad guy asking the small companies to give the money back. And so you're going to see these small companies live in this protected little bubble for a bit. These drugs will advance a bit, and then they won't get any money, so they'll die. So what do these small companies have? Maybe a year of cash at best. So somewhere between weeks from now to about a year from now, you will see the defunding or non funding of hundreds of small molecule programs for diseases of aging, which is mostly oncology at this point.

Do you believe. People don't believe this canary in the coal mine moment that you're sounding the alarm? So you're saying, now you're overstating it or it's all about.

That's the trouble with it. Like I, I am, I am delivering a message that is so absurdly extreme that the human brain isn't wired to accept it. Human brain is wired to accept things that are about like a standard deviation, you know, around normal. Right? As soon as you try to tell somebody that something is three standard deviations, because it happen, you know, it's like that movie, don't look up. It's like, no, that can't happen. Really frustrating.

So, you know, you're at one of the most prolific successful VC firms. You know, what are you an RA looking for in a company asking for investment? I mean, are you going to just bypass every small molecule company or.

We're going to likely bypass every small molecule company working on diseases of aging where their net present value is driven primarily by expectations of Medicare reimbursement. It's just a math. You can't make sound investment decisions. You can be a nonprofit. Anybody who wants to engage in oncology drug development as a nonprofit, you're welcome to it because there will not be enough profits to do it any other way.

Who are the senators we have to convince in terms of all 50 of them?

This is such an interesting question, Jim. Everybody says this. I do not understand why nobody is saying Hickenlooper in Colorado. When did that person become so unreasonable? When did that senator become so unreasonable? People are like, well, surely there's no point in talking to Senator Hickenlooper. I mean, I mean, sure, the guy's got, like, business and industry experience, and he comes across as a very reasonable person, but no, it's Senator Sinema or nobody. Why any one of those senators can do the right thing when this, if this bill passes, every single senator should be held accountable. Right? And I do not understand this thinking that like, well, let's identify the right senators. They're all wrong if they vote for this. And every member of the House that votes for this is wrong too.

Okay, so we've got letters, we've got writing, you know, I mean, I'm trying to think, you know, is it, do you have to take a delegation up there? You know, what have we been doing? Have there been things done at all to affect this?

So individuals, you know, I don't know, single digit numbers of individuals, maybe a few dozen at most, have been calling, writing letters to senators, congresspeople, making this argument. Our letters now out has over 800 signatures from various stakeholders, patient advocates, academics, innovators, investors. It lays it out clearly enough. I'm now working on a white paper that's a lot more extensive this point. 1012 pages explanation of each of the provisions and why it's not going to work that I hope will attract the signatures of lots of investors. Um, honestly, I'm not sure about that.

I mean a lot of the, you know, I don't think people know the difference between a biologic and a small molecule and, and what drugs drive that. I think if they understood it better. Yeah, you'd have a lot more people lining up behind it.

Yeah. So you've got thousands of listeners to this, every single one of them. I would hope somehow you'll provide them a link to that letter and I hope that they sign. Not just that. Here's the thing. A lot of people think, well, I signed the letter, I did enough. Right? How many people do you know? Do you work at a company? Will you do the uncomfortable thing of asking every one of your employees to sign and if they don't, reach out to them and ask, why not? Do you not understand what this is about? Can I please inform you? Can I change your mind? It's that level of activism of converting people into activists who will convert other people. That's how you affect change. And so as long as people think they've done enough just by signing for themselves, they don't really understand the magnitude of the problem. And they're not acting like they understand the magnitude of the problem.

We're trying to change that through this effort and one to the next to the next. I mean, what other threats do you see right now? And what are the opportunities? Is it all bad news for the drug investment industry and biotech again, A lot of doom and gloom out there.

Yeah. So I think that. Imagine that these price controls don't pass. Imagine that Congress does the right thing and changes nine years to 13 then actually, I think that the drug industry is in a really great position to come back from what has been really a terrible downturn. And hopefully we'll learn how to be more efficient, careful with our resources. I see a lot of companies that are being more prudent. A lot of conversations between small companies about how to search for synergies. We've been encouraging that, and it's been really heartening to see how many people have acted on it. And so you're looking at all these small companies that have been beaten up. The valuations are lower. Funds like mine, A lot of my peers, we've taken our lumps. We're down, but it kind of feels like we're at a base and we can rebuild. The science, I think, is working. I realize that a lot of people look at the failures and what they see is, well, they have a confirmation bias, they're feeling bad. And so they see strings and strings of failures. But you see strings and strings of failures during good markets. The point is, we're all driven forward, we're all driven upward by the successes. You don't undo a breakthrough. You get a drug like trikafta. That's it. That's the beginning of new era of correctors. It's amazing. Yeah.

And we need to highlight that more. There is a lot of success within the current environment that would encourage you. We are seeing some uptick, as we've seen. But, you know, I. I don't think we're looking at, you know, an 010815 phenomenon. I think this is a long slog. I think we'll both agree on that. And we all have to get engaged, which is the message here. Get engaged and educate the. The people who may not understand it as much and are looking for blunt instruments to fix a problem that's been around for a long time.

Yeah, I don't know that we can compare it to past downturns. We're already in a longer downturn than we've been in, but we've got a bigger industry than we've ever had. We've got more innovative companies doing things that are worth funding than we did back in, you know, 2001. Right. We've got our own drugs. Back then, it was picks and shovels. Now we've actually got our own drug. Programs like those are more inspiring to keep nurturing, you know, try to hold on to ownership. 2008, we were still in the midst of, you know, a decade of Repurposing, relocating, repricing, reformulating, but not that much. You know, really cool, innovative stuff. Now we're chock full of innovative stuff. So we frankly raised a lot of money with the expectations of pursuing a lot of programs in parallel. And now we're realizing, oh, wait, we're not going to be able to raise a lot more money. So as long as we concentrate what was previously three drugs worth of cash down to our best program, we can get through this. And companies are. At least a lot of the companies that I see, they are being prudent and they are focusing their cash. You're seeing some mergers. People are getting creative and looking for synergies. I think that we will get through this as an industry, having learned a lot about our degrees of freedom, and maybe we'll hold onto those degrees of freedom when our cost of capital goes down and things aren't feeling as dire. Maybe.

All right, well, that's a little bit more optimistic and a reason to sign on because there is a future to all this. And I think that's what we're trying to get people to understand. You know, it's not futile by getting engaged to help, you know, change this legislation for the better that'll help the whole industry and ultimately patients.

As long as nobody plans on getting cancer like this bill's not that big a deal. Cancer and Alzheimer's try to avoid those. And it's not that big a deal. But if you think maybe cancer and Alzheimer's is going to continue to be in our future, I think we ought to be acting with a certain level of panic that we're not yet the quarter of R and D that this bill is going to gut is worth fighting for.

Got it. And that message is heard loud and clear. Thanks, Peter. It was great to catch up with you. We'll make sure we share the letter, the book, the white paper. Hopefully we can get some of that material out there quickly with and for you. You know, we can work with your team.

I will trade you this. Nobody needs to read the book because there's a whole nonprofit organization called no Patient left behind. So nopatientleftbehind.org that is basically the nonprofit embodiment of the book. Go there, you'll find animations, videos, explainers that are a lot more digestible than the book, more fun, you know, and that's an organization I would encourage everybody to support. You know, it's doing a lot of the teaching. You know, it's the organization that helped to convert HR3 to this current bill so that, you know, instead of losing all R and D, we're now just fighting to preserve a quarter of R and D. And hopefully from that platform we can continue to improve policy in this country so that we don't have to sacrifice any R and D in order to achieve affordability.

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Sam.