Peter Kolchinsky - "IRA's 9 Years Is Too Short"

I'm Duane Scholtess, and on this Vital Health podcast, I'm speaking to Peter Kolchinski, a managing partner at RA Capital Management. Peter is the author of several critically acclaimed books, including the Great American Drug Deal and the Entrepreneur's Guide to a Biotech Startup. Peter is also a healthcare reform advocate and founder of the nonprofit organization no Patient Left behind, where he serves as a member of its advisory board. Peter, great to see you.

Thanks for having me, Dwayne.

Well, it's my pleasure. And you have a lovely facility here in Boston. Thanks for inviting me in. So I guess let's just jump right in. At RA Capital Management, you guys are entrusted with actually doing this for real. Investing in novel technologies, new innovations, trusting entrepreneurs to bring stuff to market. The Inflation Reduction act treats large and small molecules differently. As we've all discussed, successful small molecules now will have prices negotiated at nine years after being in the market. And biologics, large molecules will have their prices negotiated at 13 years. Now, as someone who does this, and you're valuing assets, what does this mean for you and your decisions? What impact is Ira having on your investment decisions?

It's yet one more thing that we have to take into account. When we evaluate any given project, we're always looking at, you know, what's the toxicity profile in animals? What's the mechanism of action? What's the competitive landscape? There's so many questions that go into ultimately figuring out, like, should we invest in this? And functionally, any molecule that isn't going to get an exemption from that nine year price negotiation. So if it's a molecule for disease of aging that is largely dependent on Medicare, and if it's not going to be for a single orphan indication that would get an exemption and it's going to run squarely into that nine year thing, it would be as if a company came to us and said, hey, will you fund my preclinical project? Oh, and by the way, when we launch, we will have only nine years of patent exclusivity left. And of course, I know that for years, if we ever looked at a project and knew we'd have only nine years on the market before going generic, we would say, oh, that's too short. Right? So I already know what my decision is. Nine years is too short. Now, if somebody came to me with a phase three program that's largely de risked and a low enough valuation, then nine years might be fine.

Right?

But if I'm starting from scratch, like at preclinical, and I know that I Don't get to just enjoy the fruits of somebody else's, you know, capital that was risked on all that and, you know, write that off and buy into that at a low valuation. Phase three. Well, I'm not going to start that early project. So I would say that things like the five year data exclusivity that were in the Hatch Waxman Act.

Right.

Those were consolation prizes for like if you developed a drug and basically got to near the finish line with your patents expired and it's like, all right, fine, I'll limp over the line. But nobody starts that race for too short a period on the market. Nine years too short. Thirteen years is close enough to the 14 year average. There's long prevail that I don't, I don't mind. I don't think about the biologic side of the IRA as much.

Yeah, when we looked at our Cohort, we saw 14, 15 years. Same thing you just saw. How much value do you see being lost in that between nine and 15 years? How much is on the table now that may be pulled out?

Yeah. So the average, I would say is think of cutting the NPV roughly in half.

Half. 50%.

Wow. Maybe it's a 40% off or whatever it is. But you know, the, the bottom line is you lose so much more than just the NPV on like the one approved indication. You simply know that to the extent that you were going to do some indication expansion, anything like that, that's off the table.

Right.

You know, it may take you several more years to figure out like what other uses there are for the drug and get those into the label. And you know, if you get a new indication three or four years after launch, well, heck, that leaves you with only five years to enjoy the benefits of that second, third indication that comes in late. So all I know is nine years has never been enough. I have not adapted my brain to think about how to make nine years work. The easiest decision, therefore, is just say no, move on to the next thing.

Exactly. Go for something that gives you more value, more certainty because it's already risky enough.

Right? That's right. You know, but I think what worries me is not that just this one nine year punch in the face, it's the question of why is the public punching the drug industry in the face, like, where is this coming from and is it going to really stop at nine? Well, of course not. There's yet the next act smart act that is five years for all drugs. Right. So when I'm projecting out what, what kind of Environment. Will I be launching any preclinical drug that I'm funding today? What kind of environment is it going to be launching into? Like, I don't know, eight, nine years, ten years from now when it's coming to market? Can I really be so sure that, you know, it won't be worse than this 9 and 13 thing? No. And so you got to fight just to maintain the status quo of merely 9 and 13. And, you know, I'd sure feel better if we can get the public to realize its mistake and demonstrate that it recognizes its mistake and that it didn't intend to punch innovation in the face by fixing 9 and making it 13. That would make me feel better that we've learned from this and that we're going to achieve affordability in a different way, not through price controls, but insurance reform.

Well, as we said at the top, you are one of the founders and brains behind no Patient Left behind this nonprofit, and you've been heavily involved in this debate up on the Hill. And Steve Potts, who's a member, a friend of both of ours, gave testimony, and your team worked with him on that evidence. And what was interesting about that presentation, one of the things that Steve said that I found was really, really important to this point of why you're getting punched in the face. It's really easy to say, yeah, my Insulin now is 35 bucks, and that's great, and we understand that, but it's at what cost? You know, if you're starting to negotiate these things, it looks good on paper, but you're never going to see the cancer drugs that you're not going to have five, ten years from now. How do we get the public to understand that, that it's not what's happening now, it's what's going to happen five, ten years from now when people like you no longer have the liquidity to say, I'm going to invest in this really chancy orphan oncology product.

Yeah. So I think that first it starts by how we address the public. When the public yells out, you know, we can't afford the medicines that we need. Honestly, I don't understand why the out of pocket for insulin is merely $35. How about zero?

I mean, really, at a certain point, yeah.

Who fakes diabetes to joyride insulin injections every day?

Right.

You know, who fakes cancer in order to, like, try to get free chemo? Right. Like, you don't need out of pocket costs for really any drug. I would argue at this point, we have prior authorizations. If you, you don't meet the qualifications for a given drug, insurance can just say, sorry, we don't cover it for you. That's more than saying, oh, yeah, we do cover it, but how much have you got in your, in your pocket? $45. Oh, good, the out of pocket's 50. Like, it's a trick. It's a cruel trick.

Right.

And so the pharma industry is never going to be able to confidently innovate, invest in innovation, and continue making medicines that are only temporarily expensive and then become generic. It will never be able to do this as long as there are out of pocket costs for obviously appropriate treatments. So we've got to fix affordability through insurance reform and really rally the public around this idea that, like, no one's faking cancer to joyride chemo. Like, make that a tagline. There should be, like, ads out there, like, I want to see, like, celebrities, you know, putting out statements where it's like, yeah, nobody's faking this stuff in order to joyride these drugs. Like, it doesn't seem like fun. We should remove the barriers to access. Physicians know if it's appropriate, an insurance plan can confirm if it's appropriate. And then, you know, as far as we're concerned, we all paid for it. Patients already paid for that drug in the form of premiums. You know, there should be a campaign that OOP means out of premium. There's so many ways to direct our direct to consumer advertising talents as an industry. You know, in order to ultimately channel the public's outrage where it belongs. You know, public should be outraged about insurance design in this country. Now, if out of pockets were zero for appropriately prescribed drugs, what that would simply mean is we are all now bearing the costs of all of health care out of our premiums.

Right?

And of course, nobody, you know, wants, wants to be taken for a ride, whether it's for $1,000 out of pocket or for a penny. And so I'm not suggesting that just because now we would be paying out of premiums that drugs shouldn't be worth it or shouldn't be worth it to society. I would argue that Congress kind of understands that the reason we get value from medicines is because they can go generic. They're manufactured goods that are displacing services. They've long gotten that. You can see it in the way that Hatch Waxman made sure that drugs went generic. It created the, and the path, but also made sure that the incentives were adequate to keep them being invented. So added the five years of patent term Restoration to make sure that the average time a drug had on the market before going generic was about 14 years.

Right.

Patents are 20 years long, but you burn a lot of that up in clinical development. And so Congress is like, all right, let's make sure you get up to like 14 years. And that's why the average has been around that point. And then the ACA came along, you know, Medicare Part D came along, those things improved insurance, reduced out of pockets. But at the same time as the ACA, they passed the Biosimilars act to try to get biologics to abide by the intent of Hatch Waxman. That didn't quite work out because biologics aren't interchangeable. And some things like gene therapies, you can't even develop a biosimilar of that. And so along comes the IRA and it sets an out of pocket cap for seniors. That's good. $2,000 is welcome. Smoothing out out of pockets, that's welcome. You shouldn't get hit with the whole deductible all smooth that out over the year to help solve for affordability. And you know, the 13 year price control on biologics, I get it. I would have preferred that it be like 14 or 15, but whatever. That's making sure that these drugs that kind of don't really fall off a generic cliff the way small molecules do, that they too become public goods. I get it. So for the most part, if you think about all the kind of policy we've gotten over the years, it has abided by what, what I've called and now other people call the biotech social contract.

Right.

Insurance for affordability. And then making sure drugs go essentially generic, become inexpensive to make sure that we all as a society get value for our money. That's what I think it really takes in order to keep driving innovation forward. Now how do you get the public to get it? Well, I would argue that the public doesn't have to get anything at the moment other than how outrageous out of pocket costs are. Like first get that off their mind, then later when they're not worried about getting hit with an out of pocket, when they're sick and vulnerable. Then we can find out what would it take to get the public to be inspired by how they're. A little bit of the money that they pay every month towards premiums is going towards driving all of this innovation. I would love to see the farm industry really bring some of its most creative people together and really think about how do we engage with our true customer. I Mean, I think most people in our industry don't even really think about who our true customer is. They're like, oh, it's patients. Well, no, patients don't pay nearly enough to drive everything that you see. It's like, oh, is it. It's doctors? No, doctors definitely don't pay for pharmaceuticals. Oh, it must be payers then. Oh, payers are a pass through entity. It's not really their money. So wait, who is it? That's exactly it. It's like, that's right. People can't even name who it is because they're so invisible to us. It's the mostly healthy people who pay more into health care than they get out. We never seem to address them. The closest you come is like government talking about it, like, oh, it's taxpayers that paid for this. It's all Americans have been paying through either taxes or premiums to drive all of this whole ecosystem, right? And a lot of their dollars goes toward just affording, affording for the patients that exist today, whatever care exists. But the 10% of all insurance premiums that everybody pays every month, that goes towards branded drugs. That's the incentive for hundreds of thousands of scientists and millions of other people to be working on all of these quests. We could be inspiring the American people with stories about how that little portion of their insurance premiums every month is funding thousands of quests to roll back disease after disease after disease. We don't tell them about the battles that we're fighting to push back against disease. You know, it's almost as if we're secretly playing these baseball games, you know, in some secret room somewhere. And then we tell people, oh, the score was 7 3, and we expect them to care.

And this is the guy who won right here.

This is the guy who won. And they're like, yeah, okay, I guess. But that's not how Major League Baseball makes its money. Like, they bring people into the game, watch the game, the score's almost an afterthought. Oh, you know, you know, Yankees lost to the Red Sox, of course, you know, and I'm in Boston here and. And of course, people that are like, tell me about the next quest, the next game, the next matchup. And in pharma, we play our games in the dark, you know, nobody gets to see them. And then when we have a success, we tout the success. We do DTC advertising of the successfully developed drugs, and we don't even market it to the American people who made that possible through that 10% of their insurance premium. No, we direct it to patients.

And the problem is that success. The reason why you don't talk about the other things is because they fail 92, 93% of the time.

Yeah. Let people see that.

Well, it'd be great if, if we could. One other thing I'd like to touch on, and this is the point of the premiums. The premiums are particularly perverse in this equation. You've just laid out this scenario because not only is it the sick people who are getting the drugs, it's also the sick people through and out of pocket who are then paying for the subsidy for the healthy people who are paying the premiums as well.

Yeah, that can certainly happen with generic drugs, right?

Absolutely.

When what you pay for the list price is out of pocket ends up being more than the drug actually costs. And who makes the difference? Well, the PB takes a sliver, then kicks it up to the payer. And the payer is like, oh, look, I got this additional, like revenue stream from the sick people, you know, that I can use to offset premiums. So it's reverse insurance. And you know, everybody seems to think payers are like Aetna Blue Cross or whatever. But the reality is that when you talk to the folks that work at these plans, they're like, you understand that most of the people in this country are actually covered by large employers.

Yes.

And so it's like, huh. So if you don't like your insurance, the bad guy is some household names out there, you know, like some large employers. And I wonder, do the employers know that they are basically milking their sick employees for money that these people can like ill afford in order to subsidize the insurance premiums that they really are a form of employee, you know, hiring people and retaining people. So basically you're milking your sick employees in order to pay for insurance, part of a compensation package to attract healthy employees that will probably take the sick guy's job. It's like, that's cruel, man. If you get some investigative journalists to like probe into this and figure out who are the employers that do this and then contrast them with, frankly, a lot of good employers, especially if they have unionized workforces. Unions do a really good job of negotiating for really good healthcare. You know, they have low out of pockets. You know, you don't see these kinds of predatory tactics as often when you have unions. So I would argue that there's a, you know, a real contrast between the great employers out there and the not so great ones. And the question is, do you think the CEOs of these companies that have terrible insurance designs, do you think they know it? And I think probably not.

I think my guess, Peter, would be that they're really just concerned about the premiums. Oh, we're getting a great deal on the premiums here.

I don't even. Yes, I agree with you, but I don't. I don't even think that this really comes up much in a C suite. I think that they kick it to the hr, of course, and the HR groups like, look, we did the usual thing. We talked to some brokers, some brokers showed us some usual plans. This is market standard where maybe a little below the average, but, you know, these high deductible plans are normal. And so the CEOs like, okay, yeah.

We got a great deal.

Yeah, we're not doing anything outlandish. And essentially what they're, I believe, hoping for is that whatever they're doing saves them a few bucks. But it's not so bad that they're going to draw attention heat for it, Right? So imagine what would happen if suddenly they're in the press as having a predatory insurance plan.

Right.

And there are some case studies of their employees being railroaded by their company's plan. And they're being contrasted with a company that's maybe across town that has a great insurance plan. I mean, you can see how customers might be appalled at how a company might be treating its employees. Certainly workers are going to be like, gee, is that the company that I would want to join? And so suddenly the CEO is going to be like, why are we getting this bad press? And the HR department is like, well, I mean, I guess we went with this plan and it's got all these deductibles and all that kind of stuff. It's like, what would it cost us to not be the biggest jerks in town? That's going to cost us like, I don't know, 10 basis points or something, like a little bit of extra. And it's like, yeah, I think I'd like you to pay that because it is not worth the terrible publicity. We're going to lose a lot more revenues and we're going to lose a lot more workers. And ultimately we're going to pay the price for being cruel in other ways. And so it's that awareness of these outrageous, unconscionable practices that gives the public a chance to make its feelings known. So I think we need to shine a light. And if America's like, no, I think it's all perfectly Conscionable to treat people that way, well, then I've misjudged the value of new medicines to society. If people aren't going to mind that patients with diabetes get denied insulin, if they're not going to mind that patients with cancer get denied treatments, then my job is done. Because my investment decisions are predicated on the idea that society will absolutely mind when a really great drug is denied. They will consider it unconscionable.

If you look at, say, okay, we've got an out of pocket cap now and we both agree that's great. Okay, fantastic. But we're also. Now there's PBM reform that just came out of the House of Representatives yesterday. So now we're going to be putting transparency on rebates. And for those folks who are listening who don't know what a rebate is, very few people do. It's very difficult. But the point is that's money that the company pays back to the pharmaceutical benefit manager who. It used to be called Payola in the 50s in the radio industry, but it's legal in the context of, in the insurance formularies that we have now. So that's revenue that gets back for placement. So they get a percentage of that revenue. The PBMs get it to list that as part of their formulary on the, on the insurance.

It's like a retroactive discount.

Yeah, exactly. And so that. But we're cramming those down now and that just leaves the premiums out there. Now we're talking about freezing premiums or putting into law the inability to raise premiums. Now, A +B +C has to equal D here. And the problem is, if we're putting all these constraints in, the only thing you've got then is what they do in Europe, which is access management and restrictions on access. Are you concerned that that's where this is going to start to end up?

What we are seeing here written large is a conflict between the idea of investing and managing a budget.

Yeah.

So what we spend on hospitals generally does not drive innovation. If you just spend, you know, on hospitals to keep treating people, unless they've got new drugs or new diagnostics or new medical devices, a hospital keep doing the same thing that it's doing and its costs will over time only go up, generally speaking, because land and labor only goes up.

Right.

And you know, as the population ages and you've got inverted demographic trends, it's going to be only more expensive to staff hospitals. So we're just paying this rent to hospitals. The only thing that could possibly allow us to spend less on Alzheimer's, for example, than we're doomed to spend, you know, on nursing homes and hospitals and all that is if we innovate our way into preventing the progression of Alzheimer's to allow people to keep their mental faculties about them, to be able to take care of themselves, and therefore remain at least productive if not doing kind of work. I mean, oftentimes people are retired by that point, but at least do the work of looking after yourself.

Right?

And so you keep somebody out of the hospital, you keep them out of a nursing home. And it may be that the incentives that you need to offer in order to elicit that kind of innovation are higher than what you are currently spending on Alzheimer's. This isn't unique to Alzheimer's. When people talk about we need new antibiotics. Well, in fact, we don't need them right now, we just need them in the future in case some crazy drug resistant bugs emerge.

Right.

And so what is Congress doing? It's debating passing the Pasteur act to create billions of dollars of near term incentives for companies who create new antibiotics. Because we need to just stick them on a shelf and have them just in case in the future. So this is an example of the government taking a long range view and saying it is worth stressing our budget a little bit to create something that will pay itself off and save us tremendous expense in the future. So it is justifiable to borrow. To the extent that the government goes into debt, it is borrowing against its future self and will realize the savings later when whether it's averting needing to build thousands of more nursing homes, or averting some sort of pandemic from a drug resistant bug, we will ultimately save ourselves a lot of money because we invested in the preventative measures. Now that's the kind of thinking we need to preserve. And our government is capable of taking that long range view like for climate change. I met with economist. Turns out the spouse of one of my colleagues here is an economist with an EPA and she told me that I asked her, how far out do your models go? Take a guess. Take a guess how far their models go.

50 years?

300.

300 years.

300 years.

That's a big model.

I know, I mean, you know, Excel or Google, I guess can handle it. And they use a discount rate of about 2%. And so when you build a 300 year model and you discount at only 2%, like you see that, like, wow, there's a lot of cost and suffering that could come from whatever's going to happen with the climate based on the predictions. And yeah, it's worth coming up with some incentives in the near term to prime the pump on all kinds of technologies to try to bend the climate change curve. Well, how's Alzheimer's any different? Go ahead, build a 300 year model of Alzheimer's. You know what, I'll take a hundred year model of Alzheimer's. Right. Anybody who plugs in their life expectancy today if they have basically features like if you don't have any kind of, you know, genetic disorder, if you don't have like cardio condition, if you exercise, if your weight is reasonable, if you handle stress reasonably well at this point. All these life expectancy calculators spit out numbers in the 90s. Yeah, for people, right. Like so don't engage in gun violence, you know, and you get up into the 90s, that means that these models are not like abstract academic models. These are the models that govern what our children are going to actually experience. I've got a 4 year old son and 10 year old daughter. Like this is their reality and I do care about them in their old age. I'd like to see a model that tries to avert Alzheimer's instead of just saying, well we're not going to spend that money and who knows what's going to happen to costs way out there. It's like, oh, I know, you know, it's either you are going to spend a ton of money building nursing homes or if you insist on not spending any more on health care than you spend now, then you're going to be turning away people with Alzheimer's. You're going to be saying no, you're.

Going to be restricting access, that's your only option.

And they will what? They will rot in their own homes. I mean they'll outlive their children and they will die alone like in their own homes. Like this is horrific. My wife is an emt. She gets called out on all kinds of assignments. Like people call in like they've fallen out of bed or whatever. Like you can see how people age, right. And it's, it can be lonely, it's distressing and you know, people badly want to stay in their own homes and you know, they know that if they can't they will go to a nursing home.

Right?

Like that's where they will end up. What happens when you're not going to a nursing home? What's the alternative? Well, they call 911 really often. Sometimes there are people who like can't get into their bed. So they call 911 just so somebody helps them into their bed. That's crazy. Like, so imagine when we're not spending money on the EMTs anymore, when there's not enough, so now nobody shows up. This is our future. So when you say no to innovation to try to allow people to keep their health, keep preserve their health span and take care of themselves as much as possible, then you're gonna pay the cost. The question is in what form? Will it be a lot more money building nursing homes, or will it be in suffering and like the moral decay of our society as we let our aging population just suffer?

And what's really pernicious about this, Peter, if you look at where innovation has been going the last three years, we're actually starting to see therapies that aren't just masking symptoms that are actually working at preventing the onset of Alzheimer's. We're actually starting to get there. And what's nice now, if you were at ctad, the big Alzheimer's conference that happens annually, you saw that. Okay. Now that we have this drug, we see actually non responders and responders related to insulin receptors in the brain. So there you go. There's another channel we can go after for medication. These are probably gonna have to be both combo treatments and probably small molecules to get past, eventually small molecules to.

Be across the brain. It's a lot easier to get small molecules in the brain.

And we've just disincentified.

Yes, we did.

We just disincentivized that with Ira.

And look, when I talk with people in Congress, I get the impression that there are some people who know that this is a flawed policy. For example, Scott Peters, he's a congressman from San Diego, and he was instrumental in fending off HR3. And he proposed the Scott Peters bill, which actually would have been a really smart policy that would have been, you know, given drugs their initial patent length and then impose Medicare negotiations. So ballpark, 15 years or so, that would have been great.

Does anybody not want that deal right now?

You know what? That deal was instrumental in frankly averaging HR3. Right? You take the average of the Scott peters bill with HR3, and unfortunately, what we got was not 13 years for all drugs, but this strange compromise where it's 13 for biologics and 9 for small molecules. And Scott Peters, at a recent testimony, in fact, I think where Steve Potts testified, he said not all bills, you know, no bill like this is ever going to be perfect. You pass it. You know, you approximate the kind of policy that you want and then over time you fix what needs fixing. Right now you won't get a lot of Democrats who are going to say that publicly, but the fact that you get any Democrats that say that publicly ultimately gives me hope. And there have been other Democrats who have said that off record, you know, to me, I remember one exchange that I had with a fairly senior Democrat who said, hey, don't, don't worry, like this will get fixed. This is obviously not what was intended. And I said, well, it's really important for me to know when you know, because I got to tell you, like I'm already not funding these programs and I've defunded some programs and we've told our companies that have platforms that could do any number of things, stay away from any diseases of aging where you're going to be heavily dependent on Medicare. And the trouble is that if I say, oh, you know what, let's just go at risk, let's go pursue those programs because I just trust that the government will fix this, then everybody watching will say, see, it didn't do anything to innovation and therefore the impetus, the evidence that you're looking for that this nine year penalty is harmful. Like you won't actually see it because we all will keep investing, trusting that you'll fix it. So we have to take it seriously and act like you won't fix it in order for you to have the evidence that you seem to need and want and ask for, for why it should be fixed. And it's perverse, right?

Yeah. And the problem as well, Peter, is eventually we're not paying the price now. Okay, it's not today yet because the maximum fair price is not in. But you and I, we've done the math. We know that, you know, in a few years and where that goes, you know, it depends if it's a rebate or if it's on the premiums. We don't know exactly yet, depending on the drug and the negotiation. But there's going to be four or five billion dollars of Eliquis that disappears. Whoosh, gone. Yeah, Puff, it's gone. Okay, well where it's not going is to pay you guys off to make you whole for your investments.

Well, look, it is not the actual $5 billion that Eliquis won't earn that is gonna therefore like reduce the industry's ability to do R and D. Because technically speaking, there's lots of cases, for example, in a disease where there's no money being made by any drug, where we come up with the Funding because we believe there will be enough money.

Okay.

And so it's by watching how Congress treats Eliquis today that we infer how any of our drugs that we're funding today will be treated.

So you're picking up the signals. Exactly.

So imagine this as a hypothetical. Imagine that God came down, all right? And I can't think of anybody with more integrity that we would believe more than God, you know, and I say this as somebody who is agnostic. Fair enough.

So you're already surrendering the belief that yes, he does exist. Congratulations.

For the purposes of this discussion, let's say that God exists.

We just tabled and accepted.

He, she, they, you know, I've been reading Percy Jackson books with my daughter, so maybe it's the Greek gods, but in any case, the bottom line is God comes down and says, all right, we're going to do a one time thing. We're going to price control all drugs that currently exist. All of them, like if they were launched a year ago, two years ago, you know, 15 years ago, 20 years ago, they're all being nationalized. But I promise you, in exchange for that, we're going to lower out of pocket costs and never again will this ever happen. So you can go ahead and use all your inferences about market based pricing for all the projects that you are funding and for the rest of time, this will never happen again. Would there still be R and D? And the answer is yes, because it's the confidence that, oh, that'll never happen again. And out of pocket costs are lower. Like, yeah, let's invest. It means that society will come up with more funding through venture capital.

Right.

In order to fund these projects.

Right.

There won't be a pharma, you know, there won't be pharma companies. It'll be tedious to rebuild sales and marketing teams and whatever, but the bottom line is you don't actually need the drugs that are on the market today to fund the R and D that is going on today. It's convenient, it is absolutely convenient that the companies that are really good at doing this continue to exist. There's a continuity of expertise that comes from that.

It's not called economies of scale, it's called economies of scope, technically. And these companies, because they have these infrastructures there, they can very efficiently pivot to certain assets at a very, very hard to beat cost. That's really what that boils down to.

That's right. Now, of course, the reason why this little thought experiment doesn't work is that nobody can make that promise.

Not even God.

I mean, I'll believe it when I meet God, when he or she shows up.

Yes.

Well, I'll see. All right. There'll be a lot of doubt about the wisdom of a God that came down and said, this is the policy. I see everything going wrong in the world, but this, this is the thing I'm gonna do, right? So anybody who thinks that that's a good idea, that's the solution for how to achieve affordability and balance the country's budget. When branded drugs make up like a little over 1% of GDP to pick on that, it's like, no, this, this God's coming back, right? Like I don't believe him, that they'll never do it again.

That is the end of the old, the New Testament. It does say that Peter.

That's right. That's right. The resurrection of the anti pharma God. And so I worry about anybody who says, oh, it's just a one time thing. It's like, it's not the way you treat Aliquis, the way you're going to treat Eyebrance, the way you're going to treat all these drugs is the way you will treat my drugs someday, if not worse. After all, I do see the smart act. And then the other acts that suggest extending this to commercials.

Look at last week, you know, we released just out of dumb luck, a study looking at, well, we kind of figured it was coming, this Department of Commerce multi stakeholder report on marching rights and applying marching rights for patent patents for negotiation. You know, we did this big study saying, hey look, really you've only got five drugs. And we released that two weeks ago. Wham. Six days ago. The Biden administration releases their new policy on marches. So now they're going after patents.

You know, a friend of mine with some experience in Washington, you know, said, you know, he's quite bipartisan, probably more left leaning, say, but he's like, when you see a party proposing this, let's just waive patents, you know, they're out of ideas. Yeah. At this point they are just pandering to the voters in the worst possible way.

Right.

Like they're basically saying, watch this, I'm going to cut off a nose. And it's somebody else's face, but it's their face. And what a terrible trick. And so I can only hope that more and more people within government, particularly the Democratic Party, are kind of a little grossed out by how far Democrats now are willing to go to try to show off just how anti pharma they are. But. But I do wonder, how is it that as an industry, we have failed to inspire the public with what it is that we can do for everybody? We can do a better job of addressing our true customers. We can take a lesson from what NASA did back during the Apollo program, when the US Taxpayer was being taxed quite a bit to pay for the Apollo program. It was linked to our competitiveness with the Soviet Union. And we have to be the first to get to the moon. We were not the first to get a man into space. You know, we lost that to the Soviets. Let's be the first to put people on the moon. And every rocket launch was televised. You know, the story of the astronauts was told. And the American public went along on this quest, and you know, what that meant was that any senator that proposed cutting NASA's budget in order to reduce taxes did not really win votes. People were like, oh, that's unpatriotic. That's un American. So NASA got the budget that it needed to put Americans on the moon. That's amazing, right? And in that moment where Americans saw fellow Americans stepping on the surface of the moon, that was a moment of intense, just pride. And then, as I understand it, NASA's budget went, you know, down because there was not quite another quest like it, you know, afterwards. People are in it for the quest, not the success. And so what do we do? We work quietly on trying to solve these diseases. We mostly fail. Our rockets basically are blowing up left and right, but nobody's watching, you know. And later, when we successfully develop a drug, people assume that the stuff grows on trees because, you know, they didn't see the struggle, right? They don't believe you that you have a high failure rate. They only see how profitable you are. Well, that's like looking at Taylor Swift and Beyonce and be like, oh, it's easy to be an artist.

Everyone makes money in pockets.

Everybody makes money. And it's like, no, there's the story of the starving artist, right? There's always these documentaries about how hard they worked, right? And how almost improbable their success was. And so you kind of cheer for them. It's like they won the lottery, right? Like, good for you. You imagine maybe that could be me, right? And so you go along on that ride with them, like, wow, you did it. But not with pharma, not with scientists. Even though we're fighting incredible demons, diabetes and cancer and Alzheimer's, like, how is it that the public is not rooting for the underdog of a Scientist, you know, chipping away at this. Every once in a while they'll see a movie or something that shows that the public's capable of it. Nih, for example, has that. It's like, oh, they're at the leading edge of disease. But industry knows somehow we fail to tell our own story. And the price for it, of course, is when Congress tells these mostly healthy people, how'd you like to pay less? Don't worry, you won't get any less innovation. Look, we asked the Congressional Budget Office, they ran some models and they promised us, you won't get any less innovation.

Only 1%.

Yeah.

Then the American public's like, sounds good, I like it. I like Medicare negotiation. Turns out when you reframe those questions about Medicare negotiations and say, would you like the government to give Medicare the power to, quote unquote, negotiate these drug prices? But it's going to cost us innovation. Support for that goes way down. Why is it that the anti pharma folks ran polls designed to not frame it that way? So they show that it's. Most Americans supported Medicare negotiation. In our industry, with all of its DTC capabilities, all of its ability to do R and D to get to the root of something we failed to do. The basic of our R and D of how do you lay out a basic poll that shows that in fact most Americans would not be supportive of solving affordability through price controls if they understood the consequences. So no. Patient Left behind is essentially a research laboratory for how to figure out what would it take to get the American public to be proud of the fact that it is supporting more than any other country in the world, more than any other citizenry in the world, it is supporting the quest to cost effectively improve human health span to fight back disease. We're gradually chipping away, we're gradually identifying the various misunderstandings. You know, I kind of think of it as bringing each person down this long corridor where you tell them by the end of this quarter you will walk through a door where you will see that the solution to affordable innovation is lowering out of pocket costs for all appropriately prescribed drugs and making sure that all medicines go generic without undue delay. There's a few other little fixes, ASP6 not such a good idea or whatever, but basically those are the solutions. So whatever you think today, however much you hate pharma or whatever, trust me, by the time you get down this corridor, you will agree that that is the right solution. And as they walk down the corridor, they try to get, get out of there by Walking through all these. But what about side doors? And you got to study every single side door. But what about Europe? They pay less. You got to have a pithy answer that gets that person to say, okay, all right, so this is not the door that will get me out of this corridor. All right, I'll close it and I'll walk down a few more steps. Oh, but what about pharma profits? Well, if you integrate the entire P and all the industry, you'll see that pharma is reinvesting the vast majority of its profits into new drug development. It's not that profitable in industry.

Pharma last year was slightly less profitable than the coal mining sector.

Or they say, what about price increases? Well, actually, net drug prices are at this point deflating. And if you take a look at them over 20 years, you'll wonder, wait, what happened to Lipitor? How come its price hasn't, like, continued to grow? It's like, it's gone. It doesn't cost anything.

Essentially free.

Right, Right. That's right. It's like a. It's like a mortgage. You've paid it off. Like deflating.

I'd like to pick up on something you were talking about, about the CBO assessment. Now, you and I were on a panel last month in the House Budget Committee.

Yeah.

And we were with cbo. And what was really interesting in the course of that meeting, in the questioning that you and I were sort of putting forward, sort of a bizarre tag team.

Yeah, yeah, the bear conversation.

Yes, exactly. We finally had CBO admit on the record in this meeting that they hadn't considered indications at all in their assessment. And, yeah, we would see switching out of, you know, some drug classes. And when that, when push came to shove, we. We got them to admit that, yeah, they're probably switching out of the Medicare age population. Now, there were several Congress people in that meeting whose mouths at that point basically hit the floor when the ramifications of that came about. How do we get the general public to realize what's happening? You know, CBO saying, oh, yeah, you're only going to lose 1% on aggregate, but in fact, you're seeing huge switches away from the over 65 population in.

Drug discovery ever since the CBO scored the ira. And really, there's sort of the primary scoring they do just like, what will the impact be in the next 10 years? And frankly, not much.

Right.

Because when I stop planting seeds, it'll take you most of that 10 years to realize, like, oh, where's the food? Where's all the food.

Right.

Like when it takes that long to grow. So in a 10 year timeframe, defunding innovation, removing incentives for innovation, like, you won't see that impact. Congress can ask the CBO to look out further. And so this is more of a secondary analysis. And so they asked them to look out like 30 years. And indeed, you ought to see what happens when I've stopped planting all kinds of seeds, like small molecules for heart failure. Done. No way.

Right.

Unless it's an orphan heart failure. I was surprised when they said, like, oh, it would barely move the needle. I see a bigger oversight there than even a couple things that you said. Indeed. Like, maybe there's a drug that previously would have been approved for, you know, colorectal cancer and lung cancer. And these are large indications. So they would have. There's no orphan exemption. Maybe they would instead be approved for a subset of colorectal cancer that would still be orphan. Well, in terms of number of drugs, yeah, that's one. So you didn't lose that drug. But there's a big difference between getting a drug approved that is indicated for the treatment of many cancers that can help hundreds of thousands of patients every year and a drug that will end up being used for an orphan indication.

Right.

And so that's what they pointed out, like, oh, well, indeed, we did not really consider the utility of the drugs that would squeak by via the orphan exemption.

Right.

But there's something else that they really didn't consider. I can't really blame them entirely because, you know, this is a group of nonpartisan economists that are trying to get the math right. And they're going off of academic literature, academics, they study investors. Like, we're this strange species, right? I mean, this is in a cage, lab animals, you know, well, more like in the wild. I'm not, I'm not. I'm not in anybody's. I'm not in anybody's cage. Not, not yet, but metaphorically, no. They study us, you know, like, you know, like, I'm a bear, right? This is the bear analogy that I use with the congressman. And, you know, it's like, what will the bear do next? And like, where does the bear sleep? Like, what does a bear eat? What will get the bear to make these medic? How many will the bear make? And I'm like, well, I'm a bear. You could just ask me. I'll tell you, like, what I do and why I do it and how. I think what the CBO basically said is like, well, the government tends to cut like, what is it, like $50 billion per year off of the drug industry's revenues, right? Without regard for how Profitable is the 50 billion, you know, when in the time of launching, after launching the drug, are you cutting it?

Right?

And so I said, like, look, if you're going to cut a bunch of, you know, pounds, 100 pound of food out of a bear's diet, it doesn't matter much if you cut like 100 pounds of grasses and berries, you know, in the summertime or whatever from a bear's diet, you know, it's not a lot of calories and it's well before the bear hibernates. But if you're going to cut 100 pounds of American fatty salmon from the bear's diet, you know, as the bear fattens up, you know, for hibernation, like, that bear may not make it through the winter. And so all you did was just said 100 pounds is 100 pounds, except it's not. And $50 billion cut from seemingly 1.5 trillion of global drug revenue was like, well, wait a second, I don't think any of us are incentivized by the revenues generated by some like Spanish topical steroid cream company that sells steroid creams in Spain. Like, those are irrelevant. When you strip away a ton of this irrelevant revenue, you get down to about like 7,800 billion dollars or so of revenues. Then you do the whole gross to net adjustment in the US that shaves another 200 billion off. And so at the end of the day, you're left with something on the order of like $650 billion of global revenue, you know, for branded drugs, of which probably something like, you know, 250 or 300 billion is ex us which ex us is a very big region. It's like the whole world minus just the US which is 5%, right? So imagine that you're generating about like $350 billion in the US and you're generating about 300 billion in the whole rest of the world. That is a lot of sales and marketing and manufacturing and everything like that. So those ex US revenues are really low margin. And so if you cut 50 billion off that, I wouldn't care. You know, it already barely contributes to our profits. So we showed them a model. We built out this slide deck step by step. We stripped away the irrelevant revenues. Then we basically show that all ex US revenues add up to only about 18% or so of the net present value of a newly approved drug. You know, and then we pointed out that the US is 82% of that NPV. And if you were to cut 50 billion off of just old drugs, if you were to whack any drug that was more than like 14 years, fine, more than 13 years on the market, that's so far off in my NPV curve, it doesn't really move my npv, you know, all that much when I'm making a phase one investment. But if you're going to take that 50 billion off of years nine through 14 or so like in that zone, that's pretty impactful to my net present value. So all these academics that had studied what's called the elasticity of innovation, the amount of innovation you get relative to how much society pays, all they did was correlate revenues and number of drugs, but they never bothered to quantify the dimension of profitability, nor add in the time discount component in order to get to npv. Soon as you do that, you realize that there's a huge difference in how you extract $50 billion from the marketplace. And the way that the IRA did it is the most toxic way that.

You can because it's the drugs that are driving the most outsized profitability for the sector.

It's the market that is contributing the most profit. You're taking it out of the early years that the patent system has intended to be the incentive for innovation. You can take it off the old drugs, you can take it off hard off the old drugs. Like the IRA only has a mandatory 35% discount 13 years after biologics launch. I'm like, well, yeah, but there's no floor to it. So I'm already gonna assume that the government's gonna take the maximal discount, of course. So why don't you just. In your scoring, which, by the way, the CBO does not assume that the price is gonna go lower than 35. They just assume like, well, if the mandatory discount is, industry will magically have some sort of leverage to keep it at the minimum. And it's like, no, they won't. There's no leverage. They're going to get all their profits taken. So if it helps you with your scoring, go ahead and change 9 to 13 for small molecules. But after 13 years, change the mandatory discount from 35% to 42%. That's it. That's all it would take to basically make the score neutral. And you can even go deeper than that, go ahead and knock it down by an extra like 40% if you'll just lower out of pocket costs for patients even further. So that is such a great Trade for us.

Right.

To give up these distant, you know, profits that barely matter to us when we're making these investments in R and D in exchange for smoothing, greasing the front end of the NPV curve that you know, would also like reduce people's outrage over not being able to afford medicines that they badly want.

The problem is when you start, particularly on the Congress, when you start putting benchmarks for price revenue percentages, that's a dial that they're very happy to keep twisting, unfortunately.

Hey, I'm assuming that they're already gonna do it anyway. Knock it down. So I don't care. People are focused on like, well what do you think they'll knock Eliquis down by? And it's like, I don't care, it doesn't matter. Maybe they're like, oh, let's knock it down by just 50%. That way we'll show our reasonableness. I'm like, dude, you're just warming the frog slowly. So like I'm investing in a preclinical drug. You don't think there won't be administration after administration? That's like, oh, we did 50% but we can make our budget look even better with the next drug by making 60, 70% reductions. They'll figure it out. By the time my drug reaches its nine year mark, I have no doubt that CMS will have gotten comfortable with like the full range of its powers and it will be whacking drugs down to roughly two times their cost of goods, making them functionally generic.

Yeah, as the budget works worse, those cuts look better and better to them and they'll just keep dialing.

That's exactly it. It's free money in their budget. They will never take it easy if have to. So I assume the worst. So I may as well encourage the CBO to score it as what I assume it to be, but in trade for what would really matter to patients and to ultimately aligning the interests of our industry and society.

The other thing that CBO said that just absolutely was jaw dropping to me is like, well, we see that launch prices are going to go up and it's like, do you honestly think that they're already not pricing at the price that they.

I was really surprised. You know it is is kind of basic economics that companies that any market participant is already trying to do the best that it can. And so like what power does anybody with an SGLT2 have to just say, oh well, we'll just charge more like no you won't, you'll lose market Share.

And what, and your comment that, okay, that's 50% we're losing in this revenue. So I remember I looked at one of the congressmen and said, do you think your constituents, if it's 50% drop there, that means you would need 100% increase on the front end because I.

Mean, the increase drops straight to your bottom line. So it's not. But the bottom line is, is no, I am not going to assume that I can charge even more. I mean, think of this example, right? Like imagine that everybody out there buys homes with a 15 year mortgage. All right, I realize mortgages are oftentimes 30, but let's just say mortgages to buy a home are 15 years. And Congress wants to show that it is a hero of the people. And you know, it's going to save everybody money. If you are paying a mortgage now, we're going to save you money. We're going to pass a law that says that mortgages cannot be longer than nine years. And you know, anybody with that mortgage is like, that's great. You just lopped off six years off my mortgage. Oh, by the way, like the bank can't like charge you more during those nine years. But now home builders look at that and say, all right, so my costs haven't changed. I got to build a house. It's going to cost what it's going to cost, right? And then when I go to put it up on the market, people are going to be looking at that same price and being like, I got to make that work in only a nine year mortgage. So now the premiums have to be.

Even higher, you know, and your down payment's gonna have to double.

Right? And it's like, that doesn't make the house more affordable. No, the whole point of stretching it out was to be able to make the net present value of an approved drug or a house affordable within our budgets. And so when the government tries to save money in a 10 year budget by lopping off what are essentially, you know, these mortgage payments and making them shorter than then, I, as an innovator, as a home builder need to believe I'm going to charge more for a shorter period of time. But the whole point is all the payers out there are budget sensitive in the extreme. It's like, I know, why don't you just cut it down to one year? That's it. I just got to make all my money in one year. How much do you think I can pay? What would it have taken to incentivize the development of hep C cures. Do you think we could have hit payers with that bill in one year? 2013. Here's your, I don't know, $40 billion bill for Sovaldi or something like that, Right? Like they would have dragged their feet and been like, oh, shucks, we put off curing all these people by one year and now the drug's generic. That's the point. You expect extra friction. So no, the market is pretty efficient, I would argue, in terms of balancing what payers will allow to impact their budget and over what period of time. You gotta ease them into it. You gotta prove to them that people want the drug. And then they're like, all right, fine, enough people want the drug, I'll authorize coverage, but you got to give me a 40% rebate, you know, so that I get my vig. It's a sick dance, but it takes time to work it out and for the most part it's danceable. Like the music is still danceable.

Right?

And so Congress steps in and it's like, oh, well, we're gonna like just speed things up a little. It's like, no, no, no, we don't dance that like, that just breaks. And so instead of focusing like these 10 year budgets, I really wish that Congress and society as a whole would ask what really is broken about this market that needs fixing so badly. And I would argue it's the out of pocket costs.

Right?

And you can price a $100,000 drug down by 80%, you know, completely make it, you know, uninteresting for anybody to invent anything like it again. And a person with a $5,000 deductible is still going to be paying that $5,000.

Right?

So you're not solving affordability at all. You're just arguably saving society money on that investment. But not paying for a mortgage when you live in a crappy apartment with rising rent is no way to save. You don't want to save on smart investments. The question before us is, what is the most cost effective way for us to improve our health span over the long run? And it is absolutely to invent, to incentivize the invention of drugs that will be only temporarily expensive and go generic while keeping us out of hospitals, which never go generic. Eventually Congress will come around to it. The question is, do they need 20 years of disinvestment, you know, so that they end up passing the Pasteur act of all drugs? Right, because we're not inventing antibiotics and we've known that we're not inventing new antibiotics because we don't have enough incentives. We've known it for 20 years. This is how long it's taken for the pestorect to even be proposed. We'll see if it passes. So we could end up with crickets for two decades before a new administration wakes up and says, hey, you know, we just seem to be spending more and more on hospitals and nursing homes. We really should ignite biomedical innovation. I know. Let's pass like a new groundbreaking act that restores the patent system in market based pricing for a patent defined period of time. And you know what? We're going to solve affordability with proper insurance. That's what we had 20 years ago. We just, just destroyed it all. It's like so yeah, let's resurrect it.

Peter Kulchinsky, head of RA Capital Management. Peter, it's been a true pleasure. Hopefully we can do this again sometime.

Sure thing. I don't think this problem is solving itself anytime soon.

Thanks, Peter.

All right, take care.

The executive producer of the Vital Health Podcast is Duane Scholtess. Our editor is Mark Brodin. Our project manager is Gwen o'. Laughlin. The Vital Health Podcast is a production of Vital Transformation LLC. Copyright 2023.