Peter Kolchinsky - A New Prescription for Innovative and Affordable Medicines

Foreign.

We'Re so excited to share with you Today's episode featuring Dr. Peter Kolchinski, founding partner of RA Capital. If you enjoy this podcast, we encourage you to read Peter's book, the Great American Drug Deal, available on Amazon. Additionally, you can hear more about the topic in today's podcast by applying for the Business of Biotech course run by Peter and the RA Capital team. By visiting racap.com Peter and his team also recently launched a nonprofit called no Patient Left behind whose mission is to make medications affordable to everyone in America. Find out more@nopatientleftbehind.org or check us out in the show notes onto the episode.

Welcome to the Hopkins Biotech Podcast. As academia pushes the boundaries of science and technology, the biotech industry responds by translating those discoveries into drugs, diagnostics, and medical devices to enhance people's lives. In this series called insights, we'll investigate major topics that have shaped the pharmaceutical enterprise as we know it today. I'm Joe and I'm joined by my co hosts.

Hi, I'm Roshan Chickerman.

And I'm Jenna Glatzer.

Today we are very excited to have with us Dr. Peter Kolchinski. Peter was trained as a virologist but is now a biotech investor and founding partner at RA Capital Management. He's also a drug pricing expert and recently wrote a book entitled the Great American Drug Deal, which he calls a new prescription for innovative and affordable medicines. Peter, thank you for coming on.

Thanks for having me.

I thought an interesting way to start with discussing this is to point out some of the catalysts that are really driving efforts to litigate drug pricing in various ways, including why drug pricing is important and how it impacts patients. So I think a good way to illustrate this is to talk about a real world example that sort of illustrates these points. And I think a good example is insulin. So in 2019, there was a study that was conducted by the CDC's National center for Health Statistics, and they found that amongst the adults who were prescribed diabetes medication In a recent 12 month period, more than 13% of those patients ended up skipping out on their doses. They took fewer doses than they need, or they delayed filling a prescription in order to save money. So my question to you is, are these patients concerns about drug affordability warranted? And how do you think that this challenging situation with insulin might serve as a microcosm for some of the concerns that patients have with healthcare affordability in the broader healthcare system?

Yeah, so insulin's a really great microcosm for actually all the things that are wrong with healthcare right now. And I think to try to understand what it is that you would want to change about the system now in order to make it work, it's helpful to ask a very simple question, which is, what is the point of any co payment whatsoever for an insulin for a person with diabetes? A doctor prescribed it to you. Generally, people don't fake diabetes because I really want to inject myself every day with insulin. Modern day insulins are much better than the old kind of. But there's still no walk in the park, right? So what exactly are you nudging a patient to do or to consider when you say you really need a little extra skin in the game, your diabetes is not enough skin in the game, we're gonna need to charge you a copay. And that's the thing. I don't think people pause to ask that question and to really answer it.

And.

I can tell you, as an investor, I mean, I've been an investor now almost 20 years. I spent easily over a decade not really asking that question to me. I was just focused on like, should I invest in this phase one drug or this preclinical program, will it work? And then in my financial model, I just assume like, oh, this drug's going to be so great if it works, you know, at least 80% of people are going to get it. You know, why not 100? I would actually often ask why not 100. People would say, oh, Peter, you got to be realistic. Like, you never get 100% of patients. There's all these reasons. Sometimes patients don't know about a drug or a doctor prescribing it. They don't have insurance or their co payments too high, whatever. And I would just be like, all right, I'll just plug in 80%. 80% of a big number is still a big number. It would be an adequate reward if this succeeded. It makes my investment thesis work. I'll make the investment. And years later, if that program were successful, like, eventually hep C drugs that we invested in were successful. You know, they're generally not in my company's hands anymore. Oftentimes they've been bought by a big pharma. And we just sort of, we, the people who invest in the early stage stuff say, I don't know pharma. They're masters at this complex stuff at reimbursement and all that. Who knows how that works? You know, I never studied. I'm a virologist, for God's sakes. Like, what do I know about rebates? And all that kind of stuff, right? And you would see the public react to that and they, the public would then like turn on our industry and hate us and we'd be like, I don't understand, like we just cured hep C collectively. Like, how do we rank below tobacco?

Right.

And at the root of it is this question that none of us have really delved into. What is the point again of an out of pocket cost of a co payment for a drug that is clearly appropriate and necessary for a patient and that a doctor is saying to that patient, you should get that Even an insurance company oftentimes will give prior authorization agreeing that it's the right drug for the patient. Oh, but by the way, you've got a deductible, so you know, you got to meet that and then you got to pay the co payment. And so I do have an answer. You know, people will say, oh well, you're biased or whatever. Okay, My answer is that our insurance system is terrible and heartless. And the fact that it continues to impose these out of pocket costs to essentially deputize patients into challenging physicians because the insurance company fundamentally is suspicious. I don't know, I just don't trust these doctors to be prescribing appropriately. And rather than use my own electronic medical records to get involved and figure it out and who's overprescribing and talk to them directly. Have my doctors that work for the insurance company talk to the doctor doing the supposed over prescribing. I know I'll just make all patients pay out of pocket for all drugs and let the patients figure out where they're getting prescriptions they don't really need. All these patients that never got any training at understanding their diseases or modern medicine or anything are being deputized by America's insurance system to just double check whether the doctors are really doing their job. And so we are getting exactly what you would expect from a system like that. A bunch of patients freaked out by their own disease, eager to get the appropriate treatment, that the doctors tell them are right, who think they've paid insurance premiums all their lives and now should be able to access appropriate care and somehow are being nudged into second guessing their doctors. And some of them are saying, I guess maybe I don't need as much insulin for my diabetes because I can't afford this co payment. So mission accomplished. Edna or Cigna or Anthem or Blue Cross, well done. I'm going to second guess my doctor and I'm going to pay my heating bill instead. So I do think that there's a real problem with American insurance. And I think that the drug industry, if it was ever, if we were ever really sincere, and I do believe we were sincere about getting better treatments to patients, then we have to go beyond what we've done historically, which is invent the drug and put it on the sidewalk outside the person's home, and then disregard the fact that there's a whole phalanx of insurance people that are doing their damn best to make it almost impossible for some of these patients to get from their own doorstep to the sidewalk to get our drug. We need to be finding a way to clear that path.

Right?

And my book was an attempt to contribute to that effort to, to explain what the problem is, that the reason drugs cost a lot to patients is because insurance plans want them to cost a lot to patients. And then also recognizing that I'm going to have no credibility coming from the drug industry unless I turn that lens, that analytical lens on our own industry and ask the question, well, what is it that we owe society in exchange for having all of our products be made available to patients? And what I have long appreciated about the value of drugs is that unlike anything else in healthcare, they go generic. And the funny thing is, even though we had a blurb on our website for a long time, I don't think we have it now anywhere on our website. But we used to say what we're looking for are actually small molecule drugs that can solve problems that are normally solvable with biologics. And people would even sometimes ask, why? Why do you care about that as long as it's problem solved? It's like, well, because in the big picture, small molecules go generic and therefore they offer society a tremendous amount of value, whereas biologics, we kind of know, they don't really go generic. And so they're just going to stack up like infinite rents, right? And eventually society will get really pissed off about how drugs don't control their own cost. And it feels like just you're trading hospital rents for drug rents. And so, you know, whenever we can see complement disorders solved with a small molecule factor D inhibitor instead of an antibody against C5, that was a totally nerdy thing I said. But I love that many of you guys understand that that's a win. Society doesn't even realize what a win that is because that small molecule will displace the biologic. And then that small molecule, after a period of being compensated well, like a series of mortgage payments, gets paid off and society owns it as a Generic. And so I kind of took it for granted that we were actually creating a ton of value for society because our stuff actually goes generic, which means society can take ownership of it. It's like paying off a home. You can take ownership of it and you get out from under, paying rent forever living in some crummy apartment, by which I mean a hospital. So my book, it opens with a sort of notion like we're spending a ton of money on hip replacements, right? $40,000 per hip replacement, not even counting the cost of rehabilitation. And times 400,000 hip replacements a year in the US it's $16 billion. The number of hip replacements is only going up as our population grows and ages. And the cost of hip replacements is only going up because it's tied to the cost of labor and the cost of land, right? Those have to be done in a hospital. And so we're spending 16 billion a year now. Do you like, if there were a drug that cost us 16 billion a year now, it would be the most successful drug ever in the US Markets. It would be better selling than Humira. Does anybody talk about the price gouging of hip replacements? America's being taken for a ride by these price gougers, these hip replacement surgeons, orthopedic surgeons that are, you know, making all this money. Well, no. Why is it because that cost is spread out, right? You don't. There's no one logo. There's no Gilead or Abbie or whatever to point to. It's just the whole system. And it's insidious, right? Because that cost is spread out, but it's no less real, right? It weighs on us, right? It contributes to our insurance premiums and it contributes to surprise bills for patients. I mean, the insurance system is heartless across the board board, not just drugs. In fact, I kind of give the insurance system in America credit how it actually pays for vaccines. You can get free flu vaccines. So when people freak out, like, are we going to be able to afford the COVID vaccines? It's like, as long as they're treated like flu vaccines and a lot of other vaccines, we're actually good there. Like, America's insurance system's either smart enough or been regulated well enough to at least not push back on obviously awesome products like vaccines. But everything else, our insurance system is pretty harmless. And yet if we do nothing about hip replacements, 16 billion this year is going to turn into $50 billion in 40 years, right? So 50 billion a year, that means times 20 years, that's a trillion dollars. You'll spend over a couple decades eventually on hip replacements. That is in our futures. I look at you guys, you're young. I think I'll even be around in about 20, 30, 40 years, you know, assuming medicines are good and all. And we're going to be eating those costs. Unless. Unless. And this is what I get into in the opening pages of the book. Unless, of course, somebody invents a drug that strengthens bones, protects joints, you know, generally prevents the need for hip replacements. And that drug, if you were to say, wow, well done, we will make you, whatever company succeed with that. We'll make you more successful in Humier. We'll let you charge 16 billion a year. You've cut our hip replacement rates in half, which means we're spending 8 billion on hip replacements, but we're spending 16 billion on your drugs. So you think, oh, no, that's costing the system more. True. But let's say after 10 to 15 years, that drug goes generic. And now you're still, you know, you still have half the rate of hip replacement that you would have otherwise. You know, when you're looking in the year 2050, you're not spending 50 billion on hip replacements, you're spending 25. That's a lot of rent saved. And is anyone even going to be talking about the cost of that drug after it's gone generic? No. Just like nobody talks about the cost of statins today. And yet Lipitor was a reviled drug in its day. Oh, it's so expensive. Right. And so what you realize is that America's insurance system, everybody who talks about costs, you know, they fundamentally do not understand the difference between paying rent and paying a mortgage. Yet all of you do. You know, or if you don't, you definitely should. Because someday you're going to hear about someone saying, oh, I pay 2,000amonth for my home. And someone else Sundays, I'm paying 3,000amonth for your home. And if you fail to ask which one of them is paying rent and which one's paying a mortgage, you might do the wrong math and conclude, oh, I'd rather pay 2,000amonth in rent forever than to make the wise investment in a mortgage that will eventually end, leaving you with a house that you fully own, you can pass on to your kids and your grandkids. It's a real asset. That's what generic drugs are. They're a gift from our parents and our grandparents. They paid off those drugs. And if we keep spending on branded drugs, then as long as they go generic we are contributing to a permanent upgrade, continued progress, improving our standard of care, avoiding hospitalizations, avoiding and averting rent costs for ourselves, for our kids. That's how we get out from paying a ton of money down the road. But if you fail to look at the fact that today's drugs are different from the ones that were expensive 15 years ago, if to you it's just, I don't know, I just see that we're spending $350 billion on drugs and we were spending about that much last year and the year before and it just seems like too much. Well, whose fault is it that you're not doing the right math, that you don't know the difference between mortgage and rent? I'd be tempted to say it's your fault, except the price controls are on us. And so it's like we got to wake up and teach. We got to explain our value proposition. And maybe if we're going to take credit for how awesome our generics are, maybe as an industry we shouldn't be constantly fighting the generic companies and saying they are other. And when they make crappy generics and you read books like Bottle of Lies from Kathryn Evans and you realize, oh, look, nobody can trust Indian made Lipitor. You shouldn't welcome the patients back with open arms and say, come back, take branded Lipitor. By the way, I'm going to still charge you branded prices because, you know, you're basically taking advantage of the fact that you don't have a reliable genericization process, right? You're relishing the opportunity to charge these extended rents, you know, and I believe that our industry should take pride in the fact that our products go generic. If you see that your generic competitors are struggling to make the drug reliably, then you should be like, I don't know, this is maybe a silly analogy, but art and music, it all goes off copyright after the artist is dead. But imagine if it didn't. Imagine if it went off copyright 15 years after somebody wrote their song and somebody takes your free reproduction and mangles it, right? Your Beyonce and somebody is singing your songs terribly. You could basically be like, well, that's what you get for cheap off copyright recordings. It's terrible quality. Or you could say, that's no good. How can I help you with a proper recording? Because I want fans for the rest of all time to enjoy my music in the quality that it was meant to be. I got paid. I made a lot of money off that song, which, forgive me, artists, I know most of you don't, but Imagine you did. Imagine you got plenty of money for those first 15 years and now what you owe America is a reliable resource for the rest of time. You would partner with those generic companies, or you would just say, I will sell my product at a generic like price. And that's essentially the reform that I propose. Drugs that aren't going generic reliably, whether they're small molecule drugs or biologic biologics or whatever, at the end of their natural patent life, the initial reasonable period, typically 10, 15 years, I believe that every original manufacturer needs to be under an obligation to America to simulate genericization. Go ahead and keep making that drug at a price that is, and sell it at a price that it's still profitable for you. But profitable like a generic drug is profitable, which is to say not very profitable, right? And America will feel like, all right, we, we paid off the mortgage on this, but we're still dependent on you, the original builder of our home, to continue to maintain our home. It falls apart. We can't find plumbers or electricians to maintain it without you. And at the end of the mortgage period, you don't just keep charging us the same amount as you've been charging us for a mortgage all this time, just because we need you to maintain it, you drop your rate.

Right?

And so we just have to pre negotiate that we need to make it clear to companies you're going to charge, you know, people 50,000 a year for 15 years, then just specify that like 45,000 is the mortgage, 5,000 is the maintenance contract, and after 15 years, the 45,000 goes away. And their $50,000 mortgage payment with maintenance baked in now just becomes a simple maintenance contract where people continue to live in this home that they've paid off. And yet they also know that, complex as it is, and you can't find just any old plumber to fix it, the original builder is there to make sure that it keeps running, keeps serving your family well. And that contract extends to your kids and your grandkids. That's how I look at our industry's duty to America. And so it's what we call the biotech social contract, right? Society, the drug industry's job is to make drugs that will go generic without undue delay. And society owes it to patients to make all appropriate treatments affordable for them with proper insurance, which means low out of pocket costs. And in that way, patients can afford what they need. And America still gets value for what it spends on branded drugs. And by spend, I mean invests, right? Because as long as Those drugs are going generic. It's an investment, not an expense. It's a mortgage, not rent.

Getting into this topic of genericization, one of the things I thought was very interesting in your book that you point out was that there's not a lot of publicly available information about when drugs go generic. And you could argue, of course, a company with a branded drug doesn't want to reveal when suddenly it can bring in competitors. Of course.

Yeah.

I was wondering if you could elaborate on that and why it's so difficult to find information about this as is.

Yeah, so there's actually plenty of information. The trouble is that the answers are hiding in a whole stack of like possible answers. Right. So a needle hiding a stack of needles. You know, you've got information on when all the different patents are going to expire. The trouble is that there end up being so many patents that companies file even after they launch the drug that you don't know which patent is the one that's going to be the, you know, the last to dictate when the drug truly is now copyable by others. And contractual genericization, as I propose in the book, kind of is a, is a price assurance mechanism that sits over the patent system. Companies are still welcome to file their patents. You know, maybe they invented a new technique for manufacturing the drug that's applicable to many drugs and they want to, you know, protect that for themselves and benefit from it. By all means, that's fine. But that doesn't change the fact that you submitted the, you know, NDA for this drug and a contractual generic date was set. Like let's say somebody filed for approval today and their date was set July 1, 2033. That's when your current patents should expire. Let's agree. On that day you will drop your price down to two times the cost of production and we won't tell you what to charge between now and then collect your reward. Good luck. Go teach the world about the merits of your drug. The company then continues to invest in the drug and files for more patents. For example, maybe the drug is a twice daily drug and they figure out how to make it a once daily drug and they have a new patent for it. What I think you could do is say, oh, that is a really great upgrade. It is much better to have once daily versions of of pills than twice daily versions. That improves adherence to the drug. That's better for patients. I would much rather have the once daily version of like Lyrica, which is called Lyrica CR on the generic drug mountain than to have only the twice daily. But what is that increment of innovation worth? Like, how much do you have to pay for that?

Right?

And in truth, society shouldn't really be paying any more to incentivize innovation than is necessary to incentivize innovation. And inventing that drug from scratch the first time around, that is an act of true risk taking and it's uncertain what it takes to create it. So, fine, name your prize and if others succeed, you'll compete with them on price. But upgrading a drug from a twice daily drug to a once daily drug, that's pretty straightforward. For almost all drugs, that's pretty straightforward. So can we agree that since your drug, like, look, you're doing so well selling a billion a year, how about we'll extend your contractual genericization date by six months? You know, that's $500 million more of revenues, you know, for you because of that tweak, you know, is that worth it now? You might say no. My drug is incredibly complicated, requires exceptionally sophisticated technology to get it to a once daily drug. I won't invest in making that upgrade unless you give me more. And you know, you could imagine saying, fine, we'll give you a year. It's like, okay, fine, that's enough. So it's a bit of a negotiation that you could imagine having, but ultimately you get your increment of reward. And the thing is, it's a valuable increment of reward because you collect revenues on your entire drug franchise, the twice daily version as well as the once daily version. And then the once daily version, well, both go generic. But what society cares about is the once daily version now is generic. And so society gets that once daily version as a generic sooner. And in exchange, the company gets to collect a whole year's worth of extra revenues on the whole franchise sooner.

Right?

And so if you look back at some of the great case studies in the drug industry of this kind of evergreening, of this switching up to upgraded drugs, you get cases like Humira launching. And at first the formulation really stung. It was too acidic and they figured out how to change the formulation so it was less acidic and it made it less painful. Well, that is a much better version of the drug to eventually get in our generic armamentarium. I would like that. Could you have incentivized that upgrade with six more months of Humira? Yeah, that would have been at 15 billion a year, that's $7.5 billion. That's plenty of reward. And so I think that you could preserve a whole lot of These incremental upgrades of our already launched drugs with just exclusivity extensions. It's actually what the FDA does now to incentivize companies to teach us about how to use their drugs to treat kids.

Right?

You got a drug like Lyrica, and thankfully most kids don't need, you know, a drug like that. They don't suffer from neuropathic pain, but some do. And yet Lyrica wasn't studying kids until, you know, Pfizer actually focused on doing a study in kids and figure out how much lower should the dose be? Is there something about kids that makes them particularly sensitive or whatever. And with those data in hand, we now have a better understanding of how to use this resource. Right, and the FDA incentivizes that by giving a company like Pfizer six more months of market exclusivity. So we use these mechanisms for doing things that are pretty standard. I mean, it would be kind of ridiculous for Pfizer to say, well, we did a study in kids and we learned this stuff and we patented the knowledge, so we're entitled to 20 more years on that. It's like, really? Like, how about if the NIH maybe had just done that study and paid for it, then could we have gotten that knowledge and still gotten your generic sooner? Right, because we didn't really need your cleverness for the pediatric study. Right? So some things just don't require that much ingenuity. And for that stuff, let's use exclusivity extensions for the stuff that really requires ingenuity, let that have a patent period. Let them dictate what price they want to charge. And as long as it goes generic, if you think they're overcharging, well, it's a self limiting problem. And just realize a lot of people are like, well, that's wrong because companies will charge whatever they want. Well, technically they charge whatever they want. Now isn't that what pisses people off? And yet, despite charging whatever they want now take a guess. Maybe you've heard me before, so you already know the answer. But what would you guess is the industry's collective profit margin? If you just mashed all the companies together, what do you think their collective profit margin is? Individual companies that have profit margins of like 25% and that's what people like to point to. It's like 25% profit margin. It's one of the most profitable industries. Well, I mean, software is a bit higher, but whatever. It's like, yeah, but across the board, when you don't just look at the Winners. When you don't just judge how well compensated all artists are by looking at Beyonce. Beyonce figures prominently in a lot of my talks, by the way. But if you don't just judge everybody by Beyonce, but you look at the reality of being an artist, the reality is it's not that lucrative being an artist. Well, most biotech companies aren't even generating any revenue. They're just spending it. They're investing it on new drugs. So when you add it all up together, the whole industry's got profit margins of about 10%. Which means if you just shave 10% off the price of all drugs around the world. Just. That's it. 10% haircut. That's it. The industry's a nonprofit. That's all it takes to render this industry a nonprofit. Generally, people think that nonprofits are do gooders. They're altruistic. So that's it. A 10% price cut is the difference between the drug industry being the most hated industry, worse than tobacco, or being a bunch of altruistic saints? Come on, it can't be 10%, right? People might say, well, I mean, the prices in other countries are already lower than the U.S. i just want a price cut in the U.S. fine. Then, like a 25% price cut in the U.S. would wipe out the industry's profits entirely. And executive compensation. We've gotten rid of everything that a lot of people have been led to hate. And yet you still have taken, what, a $20,000 drug that a person with a $5,000 deductible can't afford, and you've knocked down its price to $15,000, and the patient is still paying that $5,000 deductible. Heck, you know what? Let's go further. Let's chop the price of that drug in half. 20,000 becomes 10,000. Does the patient save money? Nope. Still has a $5,000 deductible. So you know the answer does not lie. You know the answer of why can't patients afford drugs? Does not lie in the price that companies charge. It lies in what insurance makes those drugs cost to the patient.

Right.

And so the drug industry, you know, needs a certain amount of money just to keep all these people employed. And yes, you do need a profit margin to motivate investors who could be investing in anything. Fast food, Fortnite 7, whatever. They can invest in anything. But if you want them to invest in developing new drugs so that we don't someday grow old and are condemned to hip replacement surgery, you gotta offer them some profit, right? And no, I Don't think you can look at 10% across the board for the industry and be like, ooh, that's too high. That's on the low end for a lot of industries. Real estate does better than that. And so I just think that it's important that what we pay the drug industry is as much as possible, rewards for relatively recently launched drugs. Which means those rewards are condensed to the first 10 to 15 years after they launch.

Right.

And if we are spending any amount of the money that we are today on branded drugs, on drugs that were invented more than 15 years ago, then just realize that the promise, like if someone said to me, hey, Peter, you are investing in a drug that might get approved in five years. And I want you to know that 16 years after that, after it gets approved and launched, don't worry, you'll be able to still make a billion dollars off of it. It's like, really? Because I would rather know that I could make that extra billion dollars earlier because when you promised me that reward in year 16, and here I am in year negative five, and I discount back that billion by 8% or 10% a year for what are we talking about, 21 years? It's barely worth anything this year to me. Now it has no power to incentivize my decision making to take risks on new drugs. Those aren't incentive payments. That rent extraction model that some companies have figured out, like Abbie and Lilly.

Right.

We talked about insulins. The insulins are long in the tooth. They should have gone off a patent cliff, but because of the complexity, they can't. They are now in the rent phase.

Right.

And the fact that they're making a bunch of money does not incentivize me anymore to, you know, to want to invest in whatever the new insulin will be, the new drug that could treat diabetes. It doesn't motivate me any more than I was already motivated by the fact that insulins were well rewarded for the first 10 to 15 years on the market.

So, Peter, I think you point out something that's very interesting, which is that the process of genericization is actually a very powerful drug pricing dynamic that already exists in the industry. Because during the patent lifetime, that 10 to 15 years of market exclusivity, drug companies actually can recuperate costs. And then when the drugs go off patent, there's a whole bunch of generics that come onto the market. There's healthy price competition. Lipitor is something. It works. Lipitor is one example you cited.

That's right. For Lipitor, that's how it was envisioned. And that was brought about by an act of Congress because it wasn't always that way. That's the thing, right? Like, this industry was born as a bunch of landlords who extracted rent from drugs that they invented that never went generic. So if somebody invented some sort of, like, let's say whoever invented aspirin, somebody else would have to invent an aspirin with a different brand name and compete on their brands. But a pharmacy could not simply switch you to whatever the cheapest version of that drug was. That only came about because Congress saw the wisdom of what we now take for granted as, like, oh, drugs just go generic, and there's a patent cliff. That was 1984, not a very good year to be introducing a really remarkable act of legislation that really instilled hustle and vigor into the innovative biomedical sector. But that's when the industry that I have grown up in and loved was born. And any of you guys who might be thinking about going to the drug industry, you are entering an industry that I would argue has created the hustle of. It was created in 1984. And the trouble is, because we're switching to biologics, we're reverting to what this industry was before 1984, a bunch of landlords. And I use this landlord builder analogy. And actually, when I speak with members of Congress, I tell them, I bet you think that our industry is split into biotech versus pharma. And they're like, well, aren't you? It's like, no, that's old school. Like, at this point, AbbVie is a biotech company. Eli Lilly is a biotech company. These are biotech products, right? So it's not biotech versus pharma anymore. It's builder versus landlord.

Right?

And it's not that a company is either a builder or. Or a landlord. There are companies like Biogen, for example, that are on the cusp of possibly launching a new Alzheimer's drug that they're very excited about, right? But at the same time, they've got drugs that are pretty long in the tooth for multiple sclerosis. And some of them are not the types to readily go generic, so they may start entering their rent phase. And so that company is exactly like. It's a poster child for the dilemma that companies will find themselves in increasingly, where, on the one hand, they want to be known for their innovation, on the other hand, there are the easy rents of drugs that are already profitable. And if you just play some patent games, you can fend off the generics and you can keep milking the old drugs.

Right.

There is your test. Can you dangle enough of a reward to a company like Biogen for what they're bringing new to society that they will give up the rents on the old drugs? That's your test, Abbvie. They are so heavily into the rent phase of Humira.

Right.

It's so hard to replace an amazing blockbuster like that, which it makes a ton of money for, Abby, but it's also a truly remarkable drug.

Right.

That if Abbvie had to choose between the rewards for its new drugs versus rents on the old one, I think the decision there is more straightforward, financially speaking. So Congress is going to have to pass some sort of laws, we think should pass some sort of laws that basically prevent companies from being able to even contemplate that someday they might have the easy life of a landlord. And by blocking that off, it actually reclaims their souls. They become builders again because they've got no other choice. Their Humiras are going to have to drop in price as if they went generic due to competition, even if no competition can exist.

Yeah, it's a really interesting point that you make in describing how genericization has really worked for the small molecule drugs, where it's easy for a generic manufacturer to make those, but in the current era of biotechnology, we have these complex biologics like antibodies now selling gene therapies. And it's really not easy for generic manufacturers to make those kinds of things that are comparable to the brand name drugs. And actually, one of the interventions that you propose is this contractual genericization that almost mimics the natural pricing dynamics. Could you maybe explain that a little bit?

Yeah, well, the basic idea is that you file for approval of a drug and based on your initial patents, you set a contractual generic date. And when that date hits, you have to drop the price of your drug to, let's just say, two times the cost of production or some pre specified price level. That is, in theory, where your price would have gone to if it were possible to copy your drug and if a bunch of companies were to come in and compete.

Right.

So how would you figure that out? Well, it's really not all that different from how in the defense sector, the Department of Defense audits the financials of some of their vendors. Because when you've got a contract that says that you will charge cost plus for a given, like lug nut for the B2 bomber or whatever, you know, you actually have to show your records. And so they say, okay, you're allowed to charge this much. Now you might say, isn't that a price control and government getting into your business? It's like, well, yes, but we regulate water companies and railroads and natural monopolies all the time. The Chicago School of Economics and Milton Friedman, they're like red blooded free marketeers. And yet they would tell you that when you have a natural monopoly in a free market system, you need to regulate it. And so these drugs, they are natural monopolies, or in some cases you might call them natural oligopolies. And we need to fix that market failure. Some of my writings have been published in City Journal, which if you look at it, it's got a real libertarian streak. And they would point out that what I'm proposing with contractual genericization is simply a fix for a market failure to preserve the free market. The free market being the right to set your price during that first on patent period. Any suggestion that the government should be able to tell you what to price your newly invented drug at. Now that is a violation of the free market and that truly would stifle innovation. I mean, if I have to sit here and figure out, should I be watering this seedling here now and for the next five or 10 years, but I know that if I'm successful, there'll be a government committee that basically plays Monday morning quarterback and says, doesn't really look so hard. I mean, at every turn you were successful. It's like, are you kidding me? Like, I had to water 50 seedlings. Like 49 of them failed. This is the one that worked. It's like, well, yeah, but when you look at this one, everything went well. So, you know, it's like you paid a dollar for this lottery ticket and you won. So we should just be able to give you $10. I mean, $10 is a lot more than $1. Why aren't you happy? You know, it's like, because I bought, you know, like 50 lottery tickets. Actually, if we're talking, you know, state lottery, I bought 500 million lottery tickets. And so no, I can't win just $10 on the one that actually has the right numbers. So there's a lot of health economists. And here's the funny thing, this is a slight aside. Whenever you take a word and you add health in front of it, it becomes the opposite. Okay, you have insurance, but you call it health insurance. It's not insurance, okay? It's a scam, right? When you take an economist and you put health in front of it, it's not an economist anymore. It's a health economist. It's somebody with an axe to grind. Oftentimes it's not true. There's a few health economists that are truly, sincerely honest and, like, they're rigorous. And generally, they basically say, yeah, innovation doesn't grow on trees. You have to incentivize it. But it is amazing how many health economists have no idea how innovation works. And they would Monday morning quarterback a drug and they put out nonsense like, oh, Remdesivir, the new drug for Covid that's worth less than a bag of saline. I mean, yeah, we did exclude the savings from patients being released from hospital sooner. We completely ignore the fact that it's going to go generic and might be useful for future viral infections. But, yeah, I mean, our math is missing tons of variables, but it happens to reach a conclusion that we like, so we're going to go with it. That's basically what groups like that do. And they bamboozle Congress and lots of impressionable people into thinking that it was rigorous math, but it was nonsense math. It's like dividing by zero. You can perform all kinds of tricks. I can show you two equals three, as long as I get away with dividing by zero. And that's what a lot of these health economists do. And it's maddening to those of us that actually have to live by actual math. If we accidentally invest in a project that only makes sense if you divide by zero, well, then reality will bite us eventually when we lose money on it. Whereas they concoct all kinds of formulas and tell you that 2 times 2 is 10 and 10 is too much.

Right.

And it's like, ugh. I mean, it's not 2 times 2 is 4. If you want to debate whether 4 is too much, we can have that debate. But I don't think I should be debating you about whether 10 is too much when your own math is, like, so deeply flawed.

Right.

So you've got these people that are ultimately making it incredibly difficult to get down to the first principles because they're putting out all these sound bites that make members of Congress feel like, well, you can't trust these drug companies to set their own prices or whatever. They're not looking at the fact that the industry's got 10% profit margins. They're assuming that profits are sky high. But they don't actually look up their own data. They don't look at the facts. Facts are passe. And so the free marketeers are the ones that keep insisting on proper math.

Right.

But they are not against a price Control to fix a market failure, because drugs that are supposed to become commodities after their patents expire don't. That's a distinction. So I found that the real economists out there, they acknowledge we do not see the purpose of a co pay for a drug that's clearly appropriate for a patient. Like the skin in the game, all the data shows that it's counterproductive. Just results in these patients being undertreated and showing up later in the er. It's counterproductive. We should be lowering out of pocket costs to save us money in the long run. And two, we absolutely should have something like contractual genericization to fix the fact that biologics cannot go generic. And it's also not a bad backstop to have, even for small molecule drugs. You guys know the Daraprim story, Martin Shkreli and all that?

Yeah, we were hoping you could talk about that and elaborate.

Yeah. So imagine if GSK had been under contractual generic contract for Daraprin right? Now, it was presumably a drug that was more profitable for GSK way back in the day. But people don't suffer from the kinds of infections that one needs to treat with Daraprim as much anymore. So there's maybe 10,000 patients in the US that need that drug. And so at some point, GSK, which was the only provider of that drug in the us Their sales reached a really low level. Maybe it wasn't even profitable for them to sell it anymore, and they offloaded it to another company, which raised its price, which then sold it to Martin Shkreli, to Turning Pharmaceuticals, who then price jacked it, famously by 55 fold.

Right.

And if that drug had been under a contractual genericization agreement with America, GSK would have still been able to make a profit on that drug. And maybe that means that the price of that drug would have been higher than it was. I can't even remember how much that was. Whatever it was, like maybe $100 a course. And I think 10,000 people needed it. So, yeah, I think GSK was making under a million dollars a year. But maybe GSK's fixed costs for producing that minimum amount of drug that, whether it's 10,000 or 9,000 people a year, need it. Heck, if so much as five people in America need it, the bottom line is someone's got to make it. And so maybe they needed to be making like $3 million a year in order to be covering their costs, which means that GSK should have increased their price threefold. And that would have been fine, because the contract says whatever your Costs are you should be able to charge, let's say, two times that, so that it's still attractive enough for you to keep making it and whatever number of patients happen to need it that year. You divide the 3 million you need by that many people, and I guess that's the price of the drug. At the end of the day, it's really more of a Netflix model, right? Nobody actually cares how many doses are needed. It's just whatever America needs of this generic drug. You just need to make sure someone's supplying it. And so if GSK had been under that contract, they might have been happier with the drug, more likely to say, it's fine, it's modestly profitable, we'll keep making it indefinitely. That's fine. But let's just say that someone came along and said, I'd really like to buy it from you, gsk. I noticed that you're the only manufacturer, and I would love to be able to increase the price. And it's like, well, I mean, we could sell it to you. We could calculate the net present value of all the profits that we'll make on. It's not very much. By design. You can buy it, but the contract comes with a drug. I mean, you can't separate the contract with America from the drug, right? So are you sure you want it? And of course, somebody like Martin Shkley would have been like, well, no, that defeats the whole purpose of it. I was planning on price jacking the drug. And you're saying it's under contract. It's like, yeah, that's kind of how it works. You know, today, if you wanted to, if you basically notice that there's a water utility, that's the only water utility in your city. And you guys are in the Baltimore area, right? So find your water utility in the Baltimore area and then all like, raise a bunch of money and buy it out. Be like, ah, now we've got a monopoly on water. Let's price jack it. You'll discover you can't. You're under contract with the residents in that area through the government, you know, and you are obliged to keep providing water. Reliable water. Not, you know, Flint water. Reliable water, you know, at a price that is still meant to be profitable, right? And just keep on providing reliable water to the extent that occasionally you say, well, the infrastructure is degrading and I need to invest in it. It's possible that you might need to get permission from the government to increase what you charge for water. That's possible. And so it is still possible. To invest in RD and improvement, but it is really more through a contractual process. It's the logical thing to do when you don't really need to innovate on a drug anymore. And Daraprim does not require innovation. We just need someone to keep making it reliably. And that's the thing about most drugs, insulin analogs. No innovation required on insulin analogs. Just keep making them reliably. If you want to come up with a better insulin that's clearly meaningfully better than that, fine. You're not tweaking the insulin analog. You're making a new drug at that point.

Right.

And as long as you're so sure that your new insulin is going to be so much better than the insulin analogs, and you shouldn't mind if Humalog is under a contractual generic contract and now only costs like, I don't know what it is, like 160 bucks a year instead of $1,600 a year net price.

Right.

Because your new insulin is so awesome that it's unconscionable to push somebody onto the old Humalog. And all patients have to be on your new one.

Right.

That's great. You're competing with yourself. That's as it should be. But when you can milk a drug like Humalog indefinitely as if it's been recently invented, then what motivation do you have to come out with some diabetes drug that's even better? Not as much.

So we've talked about how contractual generatization is a form of price control that fixes a problem. But I'd like to open up a discussion about other forms of price control, in particular reference pricing, which is especially relevant now, and extend the discussion into what benefit do the global markets offer to innovation for us pharmaceutical companies?

Yeah, so thanks for framing it that way. I can't help but feel like maybe you read a few chapters in the book. Indeed America should. If America wants to be self centered, we really should be asking, do we benefit from Europe paying anything at all for drugs? It's less than what we pay for drugs, but are we better off because of it? And the answer is absolutely. When you're trying to afford a mortgage on a home you look forward to owning and you decide to take in a roommate, even if that roommate's not paying their fair share for that mortgage, anything they pay still offsets the cost of that mortgage. You want that house, you want to live in that house. You decided that it was right for your family. Well, then the roommate, it's sort of no Skin off you. If the roommate takes a room you're not even using, and the analogy breaks down, you could always be like, well, I can stick whatever in that room, like they're taking up space. Yes, but in the case of a drug, it takes nothing from you that Abbvie is making extra doses of Humira.

Right?

It's not like America's paying for that and just giving it to Europe and eating the cost of that. Europe's paying its something, so Abbie is making some profits off Humira. And so in a sense, Europe is subsidizing the rewards that incentivize the drug industry all over the world to invent drugs that America wants. And a simple test for who's the primary tenant, who is the primary client that the industry serves, is imagine if America dropped into the ocean, ceased to exist. Would there be a biotechnology industry? Would there be a biopharmaceutical industry? And the answer is right now, the way we do the math, how little Europe and other countries seem to pay for drugs, the answer is no. I wouldn't be able to make the math work for most drugs. If I had to think, how much would Europe pay for this new drug for this cancer or this new drug for psoriasis? But let's reverse it. Imagine that all the other countries in the world dropped into the ocean. There was only the US Would we still be inventing new drugs? And the answer is yes, because the US Is willing to pay. Now, US would be forced to bear the full cost of the net present value model that justifies my investment right now. I would say, generally speaking, we assume that the US Is going to generate about half the profits for a drug, sometimes maybe 2/3. But that's not all of it. But if you tell me no, Peter, you got to charge the same price in US And Europe, because that's what's fair and that's what reference pricing is. Then I would say, all right, well, then I guess I'm going to charge the US Price in Europe. I'm certainly not going to charge a lower price that the Europeans have negotiated because they're willing to deny me access to their patients. So I'm taking what I can get. I'm not importing that price into the U.S. i'm going to export the U.S. price to Europe. And since they're willing to deny, if they say, heck no, I was willing to be your bad roommate and couch surf and get a break. But if you're going to basically say I have to pay exactly my fair share, like you then, screw it. I'd rather live out in a tent on the sidewalk, and I'll wait for you to pay off the mortgage on the house and then I'll move in. Right, because the Europeans are going to get that drug when it goes generic. So we're going to basically then cause these companies to be forced to make up lost global revenue, the lost profits that they're not making off Europe. How are they going to make it up? Well, they're going to raise that uniform price. And all the new drugs that they launch will now be launched at an even higher price than before. Probably drug companies won't even bother trying to sell them in Europe because they're already going to know it's pointless. Europe just keeps saying no. And so then Americans are going to say, what? Well, we're paying a lot for drugs, seemingly more than before, but at least Europeans aren't getting them at a lower price. What's that do for you? Nothing. It's a beggar thy neighbor strategy. It just makes you feel good. It's in this perverse way, like cutting your nose off despite your face. It's counterproductive, and it's just going to result in Americans paying more. So you kind of wish that all these people that are writing these policies would understand a little bit of game theory and a little bit of economics and understand that differential pricing actually allows the drug industry to harvest whatever profits it can from other countries, which act as a subsidy on incentivizing innovation that Americans want. So you guys are early in your careers and you're asking all the right questions. And I hope many of you are going to go into innovation, either whether it's in basic science and building up that framework that we all need to understand diseases, or you jump into industry and you productize ideas and bring them to patients. But just know that it's not enough for you to do what I did for the first part of my career and just do the good work of creating drugs. If you envision or creating this drug in order to help patients, you got to think about that last 20ft from the sidewalk to the patient's doorstep. And that requires that you understand the role of insurance and doctors and that you get really well acquainted with that. And when you see that it's not working, you've got to solve it the way you have to solve some sort of a mutated kinase. You have to get out there, you have to protest. You've got to make clear what your views are on what kind of insurance system America needs.

Right.

And, you know, I'm waking up to that relatively late in my career. But you guys are starting out on the right path. So thank you.

Thank you, Peter, for joining us today. Where can we find your book and if you want to promote your Twitter and other social media.

Yeah, sure. Just, you know, Eterkolchinski on Twitter and the book's on Amazon. I think everything's on Amazon.

Yeah, we'll include a link in the description of the episode.

Yeah. The Great American Drug Deal. And also, we just launched a nonprofit we're calling no Patient Left behind, which is the nonprofit sort of movement that will promote the reforms that I wrote about in the book. So definitely check out nopatientleftbehind.org and you'll shortly see a growing list of members of the innovation industry that are called the life science builders, as opposed to the landlords, because it's not biotech versus pharma anymore, it's builders versus landlords. All right, so you guys are all hopefully going to be builders someday. All right.

Thank you so much, Peter.

Yeah, that sounds great.

Thank you. All right, take care.

Thank you for tuning in. Don't forget to follow Hopkins Biotech podcast on social media at Facebook, Instagram, LinkedIn or Twitter for updates about upcoming guests. And visit us at hopkinsbiotechpodcast. Com to check out our mission and full catalog of episodes. I'm Joe Varieli.

I'm Roshan Chickerman.

And I'm Jenna Glasser.

Thank you for listening.