Drug Prices: Revisiting the Social Contract

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While the US public and law makers push for price controls, pharma’s venture capitalists have other ideas for balancing innovation and affordability.

As prices for key therapies continue to increase, the pharmaceutical industry faces a public opinion crisis in the United States, with few prospects for improvement (1). According to IQVIA, high costs prevent 70% of the patients who need medicines from filling, or refilling prescriptions (2). People are demanding that the industry define its mission. Is it helping patients or generating profits?  CEOs might argue that they are doing both, but the public and legislators aren’t buying it. 

US legislators and public interest groups are focusing on price caps and the use of a global index to rein in drug prices, but this approach “has never led to a system that simultaneously incents innovation and promotes widespread affordability,” writes Wayne Winegarden, senior fellow at the Pacific Research Institute in a recent analysis of drug pricing (3). 

Industry groups such as the Pharmaceutical Research and Manufacturers of America (PhRMA) and BIO have taken a mainly defensive posture, arguing that price controls will kill innovation, without outlining any clear alternatives for reducing prices. 

Venture capitalists have stepped into the breach, starting off the new year by advancing solutions to the pricing dilemma that consider the industry’s obligation to individual patients, as well as the need to support innovation. January 13, 2020 saw the public introduction of EQRx, an innovator company based in Cambridge, MA. The company was established in late 2019 by investor Alexis Borisey, formerly managing director of Third Rock Ventures, who has led 15 different biopharma companies, five of which have gone public, and biopharma executive Melanie Nallicheri, who was most recently the chief business officer of Foundation Medicine (now part of Roche), and is now EQRx’s president and chief operating officer. 

EQRx aims to leverage best practices and new targeted approaches and to focus on known biologies to establish an “innovation engine” that will allow successful development to be replicated, faster and more cost effectively, between different classes of drugs (e.g., from oncology to neurological treatments), Nallicheri says. Using this approach would reduce development failure from the industry’s current 90% level to 40–50%, she says, and would allow the company to offer the therapies at drastically reduced prices. 

Plans call for EQRx to introduce its first product to patients and healthcare providers within the next five years, Nallicheri says, with 10 additional therapies to follow over the next 10 years. The primary focus is most likely to be on oncology treatments, she says, but would broaden over time. “We’re trying to democratize biopharmaceutical innovation, disrupt the status quo and break the mold,” she says.

On a more theoretical front, January 20, 2020 saw the publication of The Great American Drug Deal: A New Prescription for Innovation and Affordable Medicines, written by PhD virologist Peter Kolchinsky, founding partner and portfolio manager at RA Capital. Addressing issues that affect all stakeholders (i.e., healthcare systems, providers, patients, payers, and developers), the book outlines approaches that could make drugs more accessible while rewarding innovators for persevering with the cost and challenges of drug development. 

Both Borisey and Kolchinsky have built their careers on evaluating the degree of innovation, and potential impact, of new companies and therapies. Kolchinsky sees the current state of antibiotic and antimicrobial therapies as a warning to industry and the public of what can happen when the incentive to innovate is lost. 


EQRx, equivalars and targeted therapies

Although headquartered in Cambridge, EQRx will be a global company operating from more than one site, and is currently pursuing partnerships with contract development and manufacturing organizations and technology vendors, says Nallicheri. Rather than launching biosimilars or generics, its products will be “equivalars,” therapies that target the same disease and systemic problems as existing drugs, but without violating any intellectual property (IP). EQRx's equivilars represent an intermediate route of “pseudo-genericizing” novel drug classes, says Kolchinsky.  Myovant and Obseva are developing fast-followers to Neurocrine’s gonadotropin-releasing hormone (GDRH) antagonists for treating endometriosis, and multiple companies have developed their own versions of CGRP (calcitonin gene-related peptide) inhibitors for migraine and CAR (chimeric antibody receptor) T cell therapies for cancer, he says. 

“Prices for hepatitis C virus treatments came down precisely because Abbvie launched a second drug and offered payers a discount.  And even in cases where the list prices in a category are going up, the net prices may be going down due to competition among what the public and Congress often dismiss as me-toos,” he says. Kolchinsky points to IQVIA data showing that net prices in general aren't growing even though list prices are increasing, with pharmacy benefit managers (PBMs) just taking a great and greater cut of the difference.  "Whether they are called equivilars, me-too drugs, or fast-followers, having similar drugs compete on price is a proven model that saves society money, although, in the end, nothing will beat the value of all those drugs just going generic," he says.

There won’t be any patent violation problems, says Nallicheri.  “IP restrictions are narrower than one might think, and there are ways to avoid running afoul of other patents, either with new products or those created via licensing,” she says. 

Leveraging best practices and new technologies 

EQRx will combine novel approaches that its management team members have worked with, including precision medicine methods that would allow the company to target the patients most likely to benefit from a specific medicine, to match them up to potential therapies and optimize clinical trial results. Additional technologies center around novel ways to use data, she says, as well as approaches to simplifying the overall supply chain. “These approaches have never before been combined with the goal of improving efficiency and establishing a lower unit cost for each individual medicine,” she says. 

It would be difficult to apply this approach in an established biopharmaceutical company, she says, given the need to mitigate risks at each step in the value chain.  Having a new company and business model will allow EQRx to take a different mindset going into development, she says, although the risks remain significant.

One way EQRX will reduce these risks is by starting with disease targets that can be readily identified and are reasonably well understood. Target-based drug development was made possible by results from the Human Genome Project, as well as sophisticated modeling of target structures, says Kevin Noonan, partner at McDonnell Boehnen Hulbert & Berghoff LLP and chair of the firm’s Biotechnology & Pharmaceuticals Practice Group. “Modeling provided an in-silicoanalogue to traditional methods such as wet chemistry binding assays and high-throughput screening,” he says. 


But EQRx’s products will undergo the same regulatory scrutiny and have the same relatively short exclusivity periods that conventional drugs have. “Unless there are additional strategies in play, it is hard to see how the proposed competing drugs will be economically viable,” Noonan says.

Nallicheri anticipates a great deal of competition. “We’re not naïve about the degree of difficulty involved. Making things simpler is very different from saying something is easy,” she says. Risk will still be there, particularly idiosyncratic risk. 

However, the company sees major opportunities. Despite the number of therapies available, the industry has not even come close to exhausting the possibilities for addressing potential targets for new treatments, says Nallicheri.  “More than 90% of the medicines available today are not curative, and most new therapies only provide marginal survival benefits over existing treatments,” she says, offering huge potential for developing curative products at a much lower price.

Questions remain about how readily insurance companies might work with a drug developer that has a novel business model.  At this point, Nallicheri is optimistic. “Payers are looking for solutions, and disruptive solutions that are market-based and that create tighter alignment between supply and demand have a much better chance of succeeding than crude, mandated solutions,” she says. “Besides, as an industry, do we really want that kind of approach?” she asks.


Contractual genericization

Also arguing for market-based approaches is Peter Kolchinsky, whose new book aims to clarify misunderstandings about innovation and to start discussion and debate about the role that insurance companies and other payers, patients, healthcare systems, and drug developers and manufacturers should play in reducing drug prices.  Kolchinsy believes that innovation should be clearly separated from mere patent extension and that industry funding be limited to the first 10-15 years after a new drug is developed.  “If we don’t sacrifice the excessively long revenue tails some companies have figured out how to append to old drugs, society will simply squash all revenues down with indiscriminate price controls,” he says.

The patent system was designed to give finite rewards, like a mortgage, for innovation, he says. “If companies exploit the patent system to achieve infinite monopolies, it might be legal, but it’s at odds with the spirit of competitive, free-market economics (i.e., capitalism) and laws can be changed to block such exploitation of the patent system,” he says.  Kolchinsky proposes a mechanism called “contractual genericization” 

Working with a central agency

With contractual genericization, all companies that develop a new drug would have to enter into a contract with a government agency (structured along the lines of the US Biomedical Advanced Research and Development Authority [BARDA]) when they file for approval of their drug. This would ensure that the drug becomes inexpensive once the initial patent period has expired. Using this approach, Kolchinsky says, if the company made a legitimate, useful upgrade to the drug after it launched, it could receive a six-month deferral of the contractual genericization date, just as FDA awards companies six more months of patent exclusivity in exchange for running pediatric trials. 

“An invention is meant to become inexpensive in the long run. That’s why patents expire. Contractual genericization is just a fall-back for those cases when things don’t play out the way they were meant to because of the complexities of drug development, regulation, and the patent system,” says Kolchinsky. 

“When I’m funding the development of a new drug, I don’t count on revenues 20 years after approval. I have to discount anything that’s that far away and, because my discount rate is high (i.e., 8–12%), factors that are more than 10-15 years away are essentially irrelevant to my decision. So if you tell me ‘my company’s drug will become very inexpensive after 15 years on the market’, that won’t prevent me from investing in its development. I wasn’t counting on those revenues anyway,” he says. 

“It’s now time to guide Congress to reaffirm the pro-innovation price control we’ve long had: drugs going generic. That keeps big companies hunting for new drugs to launch to replace their aging ones, which keeps them engaged with small companies, partnering and acquiring them. If big companies are allowed to just kick back and harvest extended revenues from old drugs, they may lose their eagerness to fund innovation, and that’s no good for patients,” he says. 

Taking a larger view of healthcare costs
Kolchinsky is critical of insurance companies and the role that they have played in creating the drug pricing and access problem. “The drugs that cost hundreds of thousands of dollars are needed by fewer patients than those that cost less. So we should not focus on one drug’s cost and assume that drugs are unaffordable to insurance companies,” he says. “Curing a patient of Hepatitis C for $80,000 is way cheaper than treating patients in hospitals with surgeries and transplants as they gradually die from their infection. So we mustn’t look at the price of any one drug in isolation from all the costs they avert. We spend tens of billions on vaccines each year that spare us much more pain and cost,” Kolchinsky says.  

Having drugs go generic is in society’s best interests, he says. “If we don’t ensure that high drug costs are a finite mortgage instead of an infinite rent, then Congress will be right to regulate those rents down,” he says.


1. A. Shanley, “Public Opinion: Can Pharma Chart a New Course?”, January 2020, 

2. IQVIA Case Study, 2018.

3. W. Winegarden, “Improving Market Efficiencies Will Promote Greater Drug Affordability,” Pacific Research Institute, January 2020.