A biotech VC’s prescription for what ails pharma

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(This was originally published on Forbes.com on January 26, 2020.)

Momentum is building to do something about high drug prices — but what? In Washington, a commonality among proposals from both sides of the aisle is that they’re all likely to hit pharma’s bottom line — and in response, many in pharma have invoked the sacrosanct mantle of “innovation” to combat any attempts to rein in drug spending.

But the claim that high prices are absolutely required for biomedical breakthroughs is coming under closer scrutiny. Alongside “cures” and major advances are many drugs that provide only incremental improvements over current treatments — a few more weeks or months of survival here, slightly better quality of life or convenience there — while commanding prices that collectively strain the budgets of patients, payers, and health care systems. And let’s not forget the highly publicized shenanigans of Martin Shkreli et al., which undercut the argument that high prices sustain “transformative R&D”. Yes, revenues drive many biomedical advances, but even HHS chief Alex Azar, a former drug company executive himself, has grown skeptical of the claim that “if one penny disappears from pharma profit margins, American innovation will grind to a halt.”

That said, critics of high drug prices have largely elided a key fact: there is, in fact, an indisputable tradeoff between affordability and innovation. Virtually all empirical economic evidence says that revenues incentivize drug research and the development of new therapies. And most experts are bullish about the value, in both clinical and health economic terms, of pharma-invented medicines that have radically boosted the quantity and quality of life of patients with cardiovascular disease, HIV, many orphan diseases, and scores of other ailments. We may not know the exact shape of the curve relating drugmakers’ revenues and biomedical progress, but it is flatly wrong to breezily dismiss it as non-existent.

The Great American Drug Deal (Evelexa Press, 2020)

Is there room for compromise between these two extremes? One hopeful voice is biotech investor Peter Kolchinsky, the founder of RA Capital Management. Kolchinsky’s new book, The Great American Drug Deal: A New Prescription for Innovative and Affordable Medicines (Evelexa Press, 2020), makes several sensible suggestions for how to bring affordability and innovation into better balance. Although it’s unlikely to sway the die-hard anti-pharma crowd, his clear, well-reasoned prose is worthwhile reading for anyone who’s open-minded about exploring serious policy solutions in this area.

Kolchinsky’s central premise is what he calls the “biotech social contract,” some parts of which he previously articulated in several blog posts and op-eds. The basic elements are already in evidence in the life cycle of many branded drugs: first, manufacturers invent clinically important treatments, and can charge market-based prices for a fixed period of time. Once the drug’s patents expire, other firms sell knockoffs of these agents for low costs in perpetuity. This system works for so-called “small molecule” chemical agents because under current rules, as long as lab results show that a pill of unbranded atorvastatin contains exactly the same type and amount of active drug as one of Lipitor, FDA will approve the generic, without requiring long and expensive clinical trials. With low R&D costs and no need for marketing (because of automatic substitution at the pharmacy), generic drug firms can charge rock-bottom prices and still make a profit. The net result is a panoply of effective — and now ultra-cheap — medicines for depression, diabetes, high cholesterol, hypertension, infection, and scores of other ailments, with more coming down the pike as more new drugs go through the cycle of invention, patent expiry, and genericization.

In Kolchinsky’s analysis, this is a pretty good balance between innovation and affordability, and it should apply to all therapies, not just small molecule agents. For example, protein-based biologics have historically fallen outside of generics guidelines, because we don’t have the analytic tools to conclusively prove they are absolutely the same as their parents in the lab. However, relatively new rules for “biosimilars” have established equivalency standards that don’t require full-blown clinical studies, and although we’re still in the early days, recent data suggest these competitors are driving down prices, like what we’ve seen for small molecule agents. There’s still room for improvement, including cleaning up patent rules that some firms exploit to fend off biosimilar competitors. Although Kolchinsky doesn’t address the intellectual property issues head-on, overall he supports continued reforms to ease the path of biosimilars to the market, thus enabling the biotech social contract to be fulfilled for biologics.

For more complex agents like cell- and gene-based therapies, where even a biosimilar-like approach may not be feasible, Kolchinsky proposes a more radical solution. Under his plan for “contractual genericization,” manufacturers of these therapies would enjoy a limited period of market exclusivity, after which they’d be forced to enter into a mandatory agreement to continue making them at a much lower price, near the cost of production. It’s virtually unheard of for biopharma insiders to advocate for any form of government price-setting, and Kolchinsky’s suggestion is sure to give heartburn to biopharma executives and investors. But give him points for consistency: if generics are the linchpin of the biotech social contract, then focused price controls like the ones he proposes may be the only way to ensure that Americans will ultimately enjoy low prices in perpetuity for all types of transformative therapies, including those for which generic and biosimilar pathways are unavailable.

Another significant proposal that Kolchinsky puts forward relates to incentives for follow-on drugs. Often derided as “me-toos,” direct competitors in a drug class can introduce significant price competition, as seen in the hepatitis C market. But for companies, the business case for developing cheaper branded knockoffs is pretty weak, because they’re almost as expensive to develop as more novel compounds, and have limited runway before generics of the first-to-market take over — which probably explains why we don’t see them very often. Kolchinsky thinks that by boosting incentives, more competitors will come to market and push down prices. It’s not exactly clear which specific incentives would be most beneficial, or even if any are needed at all (as newco EQRx aims to demonstrate, albeit in the face of some skepticism). But regardless, the question of how we can optimally promote follow-on competition to drive down drug prices deserves more attention from researchers and policy experts than it has received to date, and Kolchinsky deserves kudos for bringing it front and center.

Kolchinsky’s book includes several other ideas that will be familiar to pharma policy aficionados, as well as some that he dubs “beyond conventional thinking”. In the first group are his calls to drastically reduce out-of-pocket expenses and essentially eliminate pharmacy benefit managers from the health care market. He also supports various actions to prevent Shkreli-esque “price jackers” from reaping egregious revenues by exploiting dysfunctions in the current system. On the more far-out end of the spectrum are Kolchinsky’s iconocastic notions on direct-to-consumer marketing and “incremental innovation” (he supports both). In both categories, his positions are passionately argued, well articulated, and thought provoking.

Many partisans may choose not to read Kolchinsky’s book — but that would be a mistake. Yes, of course, his perspective is “biased” by his career as a biotech investor. And no, this isn’t an academic treatise or wonky white paper, sourced with hundreds of references that exhaustively support every point and rebut every possible counter-argument. But whether you agree or disagree with his positions, in whole or in part, there’s value in seriously considering the well-reasoned and generally even-handed perspective of someone who’s “been there, done that” in the drug industry. The Great American Drug Deal deserves a wide audience among policy-makers who are wrestling with how to ensure we get the innovation in prescription medicines that we need and want, at prices that we can afford.

Many thanks to the author for providing me with a gratis review copy of this book.