March 2, 2026
Welcome to Perspectives, a signature podcast series from The Leerink Center for Pharmacoeconomics. Hosted by Dr. Mel Whittington, a health economist and Head of the Center for Pharmacoeconomics, we will be hearing from individuals across the industry to better understand and appreciate the societal impact of healthcare innovations.
Mel Whittington: You know, it’s easy to think that prescription drugs are overpriced and that the existence of patents make it so that the manufacturer has a monopoly over the product and therefore they can charge whatever they want. But our guest will talk about why the high prices of prescription drugs are worth it and market forces still exist even with patents. because I can’t help myself, I’ll also be asking if he considers the value to patients and the health system in his investment decisions. Our guest today needs no introduction to this audience. It’s Dr. Peter Kolchinsky, founder and managing partner of RA Capital Management. Hi, Peter.
Peter Kolchinsky, PhD: Thanks for having me, Mel.
Mel Whittington: I’m excited. Let’s get into it. you talk a lot about the importance of market-based pricing for drugs over this patent-intended period of time. I mean, you literally wrote a book about this. But the US prescription drug market is not a perfect market. Maybe most notably, there are patents which restrict entry and competition. But you know, there are other things too, high barriers to entry, lack of transparent pricing, consumers don’t pay the full price, information asymmetry. I could go on. Can you argue for market-based pricing when there isn’t a perfect market?
Peter Kolchinsky, PhD: So, I think what economists consider the perfect market is one where anyone can compete without any restrictions at all. It’s only perfect for something that actually exists. And I think that if someone were dying of, let’s say, hepatitis C and there was no cure, they would say the market is far from perfect. For anyone who wants there to be better medicines than we already have patents are what turn a really imperfect market into a much better one. We all get the innovation that you see today because of those patents. So that addresses at the very least the role of patents
Mel Whittington: So, you’re suggesting patents actually give us things to have on the market?
Peter Kolchinsky, PhD: Yes, like, if you start from the premise of what is a perfect market for things that already exist, and then you say like, but we have all these people who are really creative, and they aren’t creating what’s holding them back? You would think about first principles and be like, I think we have to give them an incentive, a reason to believe that if they spend a lot of time inventing something for going other ways of making a living, that they won’t just have their work copied by lots of other people, you know, and end up making nothing from all their effort. And so, when anyone can copy your invention, as soon as you come up with it, there’s just no incentive to innovate. I mean, it would be as if anyone could move into your house as soon as you built it. No one put in the time and money to build a house since it would immediately be claimed by a mob. That’s why we have property rights. Today, you can use contracts and courts to enforce them. But in the past, we used weapons. That’s what property rights were, your ability to protect your property. You build it, you own it. And it’s the same with a novel medicine. Whoever came up with the patent system basically said, if you build it, you should own it. And it’s just that, unlike property rights for your house, where if you build it, you own it forever, when it comes to these ideas, intellectual property patents only protect you for 20 years. Right? After that, anyone can copy it. And if you think about it, that’s a pretty rough deal compared to owning your own home. Right? So, people that, you know, build homes, in order to live in them, they don’t, you know, have to worry about being kicked out of them by a mob. That’s like, no, it’s been 20 years. We get to move in. But somehow, inventors are spurred to innovate for merely 20 years. And then all of society gets to enjoy the brilliance of their invention for little more than the cost of making that. Like then it becomes a perfect market. Then you get generics coming in and the price of the thing collapses down to a little more than the cost of just making that extra pill or that extra syringe. Right? That’s a pretty remarkable deal. I think Lipitor dropped by what, like 99%? Hardly any profit left in making it anymore, right? But if it’s valuable enough, then the inventor can make a lot of money in those first 20 years. And they don’t even get 20 years because you get the patent, then you have to like do the trials and everything. And so, you’re left with a certain amount of time. And historically, that’s been about 13 or 14 years, right? And so, people came up with this modification to what otherwise was just an overly perfect market in order to make it an innovative market.
Mel Whittington: So, the patent gives you the incentive to innovate, gives you a product to enter in the market, and then after that expires, 20 years, but you know, maybe 14 years of the drug section in the market, then we start getting more of these perfect market principles. But we would never have that.
Peter Kolchinsky, PhD: Exactly. It’s not even a guarantee that you’re going to profit. The patent is no guarantee at all. There are plenty of drugs that get on the market and are duds. You still got to figure out whether the thing you invented is worth anything to society. So, a company invents a drug and then they go and they got to do the hard work of negotiating with plans and see like, I want to charge X, I want to charge $1,000 a month per script. Will you pay? And a plan may say yes, may say no, and time is ticking down. Your patent is being eroded. Your company’s burning money. They’re manufacturing, they’ve got a sales force, they’ve got all these people. And if in the end, you can’t convince people that your drug is any good, maybe it’s got too many side effects or whatever it is, it doesn’t sell well. And it’s a dud and you got to write off all of that money that you spent on inventing it.
Mel Whittington: So, you’re saying that even if you have a patent, this doesn’t necessarily mean that the inventor, the manufacturer can price it at whatever they want. But if they have a patent, of be devil’s advocate here. So, I agree. You’ve convinced me that patents are essential as an incentive for innovation. And then although not a perfect market during that patent protected period, it gives us a product to have. But if there’s a patent, no one can copy them. The manufacturer gets to set their price, and competition is limited. Do we still get some competition over that patent protection period of time, or are we just kind of stuck?
Peter Kolchinsky, PhD: Most drug classes have more than one drug in them. So, what you realize is the promise that if I build something really great, if I come up with a drug that really solves this problem, payers are going to have a hard time saying no, as long as I charge prices where I can see they’re already saying yes. So, I look at drugs like Trikafta that are $300,000 a year for patients with cystic fibrosis. It’s a really great drug. It transforms people’s lives. And so, I might look at another disease like ADPKD or DMD or something else and just say, if I could come up with a drug that is as transformative as Trikafta, given that adjusting for population size, right? Because if you’re treating a population’s 10 times larger, there’s no precedent for charging you know, 300,000, but still Vertex is probably making what like $8 billion per year from the US for I don’t want to say curing CF, but good Lord, it’s such a miracle drug. It’s practically transformative treatment, right?
Mel Whittington: Transformative, for sure.
Peter Kolchinsky, PhD: So, like you have this signal that like America is willing to pay that much and there’s no competition for Trikafta. Plans could say no. I mean, there’s nothing forcing these plants to say yes, they could just say no, but somehow they choose not to. They choose to increase their per patient per month premiums by a couple bucks per person in order to be able to say yes for the 30,000 or so people with cystic fibrosis in the United States. That is America’s value judgment. And of course, if anyone else could come to market, and we do have a company that hopes to rival Vertex, it sends a signal that like, we ought to be able to get a piece of that, right? Like, are we going to come in and, if our drug is merely comparable to Trikafta, just charge $300,000, like, why would anybody buy our drug? It’s a newer drug, it’s less proven, right? So, you’re going to have to compete on price, right? If our drug is superior, well, then you know that you could charge 300,000 and arguably everyone should shift because it’s same cost, but yours is better. Could you charge a little bit more and they’ll still shift? Maybe you’d have to feel it out, right? So, you try it, you might charge 350 and if plans are like, no, then you’re like, okay, maybe I’ll come down on price. But it really is a question of like, will the plans have the courage, the chutzpah to say no, given how awesome your drug is compared to the alternatives. And so, when you have several drugs that make it like in the case of Hep C, Gilead launched its drug, priced at 90,000 and then soon after, AbbVie launched its drug and the only real difference between them was AbbVie’s was twice a day and there was raging price competition between them. Merck entered the market and the price dropped over several years from like $90,000 per treatment course, which is essentially a cure down to like under 30. I mean, competition really works, but you never know whether a problem is gonna be so hard like cystic fibrosis where only one might solve it, like we as a society would be lucky to have even one, or whether in retrospect you look back and say, like four or five made it. And so, the thing that’s kind of cool about the market and competition is that after you, you know, people tackle the problem, hoping that they might be the only ones to solve it and that they might get like, the most reward that they could possibly get. If it turns out that it was easier to solve than they thought, competition at post-hoc corrects the reward. The second player comes in, the third one, and what society actually pays ends up being less than what it signaled it was willing to pay if it was a really hard problem and only one solves it.
Mel Whittington: But doesn’t that upset you as an investor or a company builder or the CEO of a company that you’ve invested billions of dollars developing something and then something comes in and eats up all your market share, and then doesn’t that turn you off from investing here?
Peter Kolchinsky, PhD: No, because fundamentally that’s the beauty of competition. You know that the market was willing to pay you a Trikafta level of reward, if indeed you were the only one, right.
Mel Whittington: Because it’s a harder problem to solve.
Peter Kolchinsky, PhD: And because it’s a hard problem to solve. But you also kind of hope that it’s not that hard to solve, right, you would be, kind of pray that it turns out that it’s an easier problem to solve because you just want a higher probability of success. But you also know if it’s an easier problem to solve, you might end up being like one of two or one of three. But you look at a market that big, it’s like $8 billion per year of revenues for largely solving an orphan disease like that. And you think like, If I could just be one of three players and in the end, I make only like one and a half to two billion, like that’s still pretty good. Right. And so, in the end, it’s maybe not that different from the lottery, right? Where, the, the larger the, the jackpot is, the more people come in bet. But of course, the greater the chance you’re splitting that, that pot, the problem would be is if somebody said, if one company solved it, if somebody said, well, you know, for this other orphan disease, I see that drugs are only selling for $100,000. You know, why should we pay you 300? And it’s like, yeah, but in that other setting, it’s 100,000 because there’s three competitors and they competed down the price. You know, whereas here in this disease, I’m the only one that solved this. You can’t pay me a reward for a problem that’s easy enough that three can solve it if I’m the only one that solved a problem that’s this hard. And so this is the problem with human beings, economists, health economists stepping in and misreading the market signals, feeling like, well, I only want to pay you as if this problem is easy enough that many can solve it, even though, I guess you’re the first and may end up being the only one to have solved it. Right? Like, don’t mess with it.
Mel Whittington: And it shows how in your decision making, risk and reward are interconnected. That if you’re taking a lot of risk, have a really low probability of success, the reward needs to be more handsome than if it wasn’t. But I do want to go back to this Trikafta example, because I absolutely want to incentivize innovation. I want to reward more innovation that provides more value to patients, the health system, and society. I want to reward hard problems like, good job, manufacturer. This is amazing. We want to reward you. I mean, you said it, there’s no other competition at the moment. Could the market be overpaying for it now, given that it is a little bit of a monopoly situation there? How do we know the market’s not overpaying for it?
Peter Kolchinsky, PhD: So that’s a really great question. I know you’ve teed this up because we are now squarely in your arena.
Mel Whittington: I’m setting you up, Peter.
Peter Kolchinsky, PhD: Yeah, I know. So, look, you definitely want to be paying enough to incentivize inventors to solve the really hard problems. You want to pay enough. And understandably, people don’t want to pay more than that. And so how can we figure out what is enough? Truly like investors, innovators, they’re all making up their minds about how hard they think a problem is to solve, they are taking a chance when they’re like, you know what? I think that, you know, for this rare disease, even if we could only charge $200,000, I think let’s make a go of it so they’ll make a go of it but there may be other people that are like no this one’s much harder than cystic fibrosis, I don’t think we could do this you know in the market is smaller so unless I thought we could charge like four hundred thousand I wouldn’t go. if society’s sending off signals with based on how it’s paying for drugs that it’s only gonna pay a lower number, whatever 200,000 or 100,000 or 50,000, there’ll be some people for whom maybe that’s enough and maybe they’re right and they’ll try and develop a drug and it’ll like work and they maybe have spent a billion dollars to invent it, but they make a couple billion dollars per year, you know, less than Trikafta and then they’ll go off boldly and try it again. But on the whole, on the whole, there are thousands of these types of probes of like, let’s try and on the whole, society spends about $300 billion a year on R&D. And on the whole, if the math is wrong and society is actually underpaying relative to what it would need to pay in order for all that money to earn a positive return on investment, society feels that. Investors generally get a sense that the biotech portion of their portfolio is underperforming other sectors. And they start pulling back and you start to see a shrinking of that $300 billion per year. And it’s maybe only $200 billion a year. And what does that mean? It means that you’re not going to get five SGLT twos on the market next time there’s some new target, because there’s not as much money going into it. So, there’ll be maybe only three that make it on the market. And when you have three instead of five, well, you don’t have as much price competition. And so now profits go up a little bit and the market settles out. You cannot expect investors to lose money for a long period of time. They can make a mistake for a few years, you know, but if they see that certain types of investments don’t pay off, they naturally out of consciously or subconsciously, but this is the Adam Smith invisible hand, they will pull back. They’re not stupid. This is our hard-earned savings that they’re looking after. So, people are not going stupidly waste money on things that don’t earn a return. And so, the market feels that, feels that out.
Mel Whittington: Or a return comparable to other options.
Peter Kolchinsky, PhD: Right, right. But now we still have to get to the question of, yeah, okay, but could it be that the way that the market feels out prices, the way that a plan sort of tries rejecting a price, sees if it gets bad press, and if it gets bad press and people threaten to switch plans or, you know, lot of insurance is employer based if somebody has a child with cystic fibrosis and their employer based plan decides to reject it to save 300,000. The other employees come to the rescue and say, this is terrible. How could you be such a bad employer? They get a bad review. Other employees don’t want to join because they see if you railroad a kid with cystic fibrosis, then what will you do to me and my children when we might need care? And so generally, large employers, Apple, Google, they’ve got excellent healthcare. Ford has excellent healthcare, because the last thing they need is bad publicity from hurting somebody by denying them a really effective medicine. So, could it be that avoiding bad press is resulting in plans overpaying for things? And this is where it helps to do some math, your kind of math, like health economics math, and say, all right, well, let’s take a look at the societal perspective. Now, $300,000 for Trikafta seems like a lot. But let’s consider that medicines are the only thing in all of healthcare that actually go generic. They’re manufactured good. If we didn’t have Trikafta, you would be tending to cystic fibrosis with all of its infections and hospitalizations with all of the effort that a family has to put into tending to a child who has cystic fibrosis, like making sure their lungs are cleared. That’s a caregiver who’s definitely like gonna struggle to hold down a job. Like all that cost and burden forever. Let’s just say that it costs $100,000 a year to look after somebody with cystic fibrosis. That’s a cost on society for 30,000 people. By the way, they die early, decades, decades early. So lost productivity, lost joy. I mean, there’s a value to our joy. Like cystic fibrosis is a weight on our peace of mind. It’s yet another threat. Cystic Fibrosis, Alzheimer’s, cancer. These are all things that weigh on us. Like when people fear mortality, like that’s what they fear. A whole list of diseases and pain and suffering. And so, ultimately, we would be paying that cost of disease forever, right? And hospitals only go up in price. So, I compared to living in like an apartment with rising rent and then along comes vertex or the entire biomedical ecosystem and says, if we think that you will value it highly enough, we can build you a house and you will pay off a mortgage on average over 14 years that will allow you to move out of the cystic fibrosis apartment into this house. And after the mortgage has been paid off, in other words, the patent period, the house goes generic and it remains inexpensive. You live there rent free, not free. You’re still going to have to pay the tiny cost of generic Trikafta, but it’s practically free compared to living in the cystic fibrosis apartment forever. And generally speaking, most people would know that like, if you live in an apartment with rising rent and there’s a house that you could buy, but the mortgage is higher than your rent, that still could be a really good deal because a mortgage is finite and rent is not. So, if you had a financial advisor who came to you and said, well, no, no, no, look, let me talk you out of this because you could see the mortgage is higher than your rent. And you were like, but the mortgage is finite. And they’re like, I don’t know what you’re talking about. Bottom line is mortgage is higher than rent. You shouldn’t buy it. I think you’d be like, I don’t think you understand how time works and discounting and all that. Like, I would like to not have to pay rent forever. And so, you’d expect a financial advisor to look out into the future and, you know, look at changing prices of things, right? And this is where I certainly was disappointed to discover that the health economists that were claiming that Trikafta was overpriced were completely ignoring that it was a drug that could go generic and hospitals do not. And lo and behold, it turns out that you thought so too. You thought that’s a little absurd too.
Mel Whittington: Well, I remember being on vacation, reading your book. I packed my book to read on vacation. It’s a new book by Peter Kolchinsky, I have no idea who you are. Totally an open mind. And then I’m reading it and it was a little bit of a like, I feel a little attacked. But it’s also, this is a good point. Why don’t I think about this? And honestly, then Mark Cuban launched his Mark Cuban Cost Plus Drug Company. The price of generics became very transparent. It was this whole life cycle approach to drug pricing that I had not considered. I’ve been fortunate to work with you and your team and doing some research about that. And so, I’m excited about what we’ve done. But I want to push on the mortgage analogy a little bit. And this is where I’m hoping I can get you. A mortgage, when you get a mortgage for your house, if you’re going to compare drug pricing and patents to mortgages and being paid off and the importance of time, which like 100% there, I agree, you have convinced me. But when you get a mortgage, you still need an appraisal to figure out like if it is worth paying your mortgage payment each month. And so.
Peter Kolchinsky, PhD: Yeah, totally. I mean, there’s such a thing as a mortgage that’s too high, right?
Mel Whittington: Right, right, if your house is not worth that.
Peter Kolchinsky, PhD: Yeah, sometimes it makes better sense to rent. I get it.
Mel Whittington: Is there room for a centralized appraisal committee in the US government that looks at drug pricing? Is that a turnoff? Would that be better?
Peter Kolchinsky, PhD: So, we’ve done this, right? We’ve done some of these generalized cost effectiveness analyses that actually looked at tons of drugs. The reports there on No Patient Left Behind. I know you and I have talked about this, and you are one of the authors of like a user’s guide on how to do generalized cost effectiveness analysis. And when we applied this tool to ask the question, has the US market been paying too much for like any of these drugs? What was remarkable was how the US price, however high people thought it was, was a raging bargain compared to the value that these drugs brought to the US by reducing our reliance on healthcare services and hospitals, by the fact that they have gone or will go generic, restoring people’s productivity. Frankly giving the whole population peace of mind, think about this, standard health economics totally breaks down when you talk about a smallpox countermeasure. There are zero people suffering from smallpox today. There are zero qualities lost according to standard health economists. Yet America spends hundreds of millions of dollars a year on stockpiling smallpox vaccines and antivirals in the event of, why do we do that? Why do we as a society choose to do that? And that’s not even a market. That’s our central planners. That’s the government being like, yeah, we get it. Nobody would invent smallpox antivirals to serve a market that doesn’t exist. Why has America decided to do that? And not just America, but the UK, the UK, which is like maybe the birthplace, I think, maybe the birthplace of cost effectiveness analysis and skimpy math that undervalues drugs. Why do they pay for something where there are zero qualities lost? Because in fact, smallpox does subtract a little bit from our peace of mind. It’s one of those looming threats. So technically speaking, everyone in the world, if they know anything would know, oh, smallpox is a threat. It’s a tiny little impingement on the peace of mind of billions of people. And therefore, having those countermeasures restores that peace of mind. Oh, we’ll be okay. Right? And that was missing from people’s math. There are some health economists, real economists, I would argue, who can quantify these things. They can say, like, no, no, that’s real. Like, it’s the essence of insurance. I mean, why would healthy people buy insurance? It costs like on average, I think, $1,200, $1,300 per person per month in America for the totality of healthcare. You take $5 trillion spent on healthcare, divide by 330 million people and divide by 12 months, that’s what you get. I think it’s like 1260 per month. And there are healthy people that are paying that directly or out of their incomes to their employers. Why? If they’re healthy? Because if you don’t pay that, you’re nervous. Oh gosh, what would happen to me if. In fact, that is where insurance derives its value from restoring peace of mind. So, let’s take a look at all of these medicines that we’ve created to address breast cancer, prostate cancer, multiple sclerosis, all these diseases, Alzheimer’s now. What is the impact on the hundreds of millions of healthy people who don’t need those medicines, but who now know if that were to befall me or one of my loved ones, like that’s there. What is that peace of mind worth? And so, the American market is amazingly astute at recognizing that healthy people actually do value these things and they are willing to pay a bit more. They’re willing to pay $2 more per person per month to know that no child in America will be denied Trikafta if they have cystic fibrosis. And if that’s how well that insurance plan treats that child, then that is a good insurance plan for me. Cause if I need it or my child needs it, then they’ll be there for me. And this is one of the things that I think a lot of people misunderstand about health insurance. They think that somehow health insurance needs to justify paying for a medicine because, what will we make off that person? We got to keep them healthy. Let’s save money or whatever. And then they wonder like, well, why would anybody pay a high price if people are constantly churning? They’re shifting off of different insurance plans. It’s because paying for medicines like paying $300,000 for a medicine is not about the economics of that patient. It is purely a marketing expense to signal to everyone else, all those healthy people, look how reliable I am. If I treat this person that well, despite how expensive that is, then you can count on me to treat you that well. So, buy my insurance plan. Meanwhile, that other insurance plan, look how they just railroaded that kid. Like that’s not the insurance plan you want to buy. Right? And so, I kind of relate this to a restaurant, a steak restaurant. You go to the restaurant, you sit down for the meal, and you plan on ordering the steak. At that point, the restaurants pretty much got your money. I mean, unless they stab you or like serve you poop on a plate or something like you’re going to pay, you know, the bill, right? And so why don’t they serve you a crap piece of meat? Just like some cheap meat. They already got your money. They could save money, right? Like if they just essentially deny you a good steak. They don’t do that precisely because there’s such a thing called social media. Media, we talk, there’s sunlight. You can complain and you can make your complaint seen and that will drive all those future customers away from the restaurant. So, when they spend that money on good steak and serve you good steak, that’s a marketing expense, just like insurance, right? And so our ability, when I as an investor look for at a project and I wonder what to fund, I’m asking myself someday if this drug works as well as we think it will, and we are charging a price that is precedented, I’ve seen payers pay this, will a payer in that moment when they’re confronted with like, yeah, but do I want to pay for that new drug or should I save some money? I have to ask myself, will the public care if this patient with this particular disease is denied this drug, given how effective it is? Will it be one of those stories that drives outrage and people condemning the plan? Or will people say, I don’t know what the big deal is, like that doesn’t seem like that big a deal, that drug doesn’t seem that effective, that price seems way too high. And so, I’m making a forecast about how the American public will judge that moment, that act of denial. And I am essentially counting on Americans tapping into the same primal sense of just, I wouldn’t want to be treated that way myself and reaching a similar judgment to what I see them reaching today. It’s something primal. It’s something visceral. It’s something that is connected to how much we love ourselves and our children and our loved ones, right? That is essentially what gives me the confidence to make a judgment call to put money at risk today and trust that whatever we create, if we launch it in like 10 years, that for 14 years thereafter, while my patent is still there, I will get paid these kinds of prices. Can you imagine if I had to count on like a committee in the government to decide what’s being paid? Do you think I could trust based on what the committee does today? What a committee would do in years 10 through 24 in the future. No, if we ever overrode the market-based system we have today that is rooted in the public’s judgment sense of just, what is unconscionable to deny at what price and what isn’t? I don’t know what other system there is that would give investors the assurance they’re looking for over such a long span of time that there’ll be a reward if they succeed in creating a medicine that is anything like the medicines we have today.
Mel Whittington: Yeah, I want to touch back on the part that you were talking about, kind of value and versus price. And I read something in a recent report you and your team put out, and it was related to M&A, which is, I know nothing about M&A. But I saw parallels to drug pricing. And, you know, there was a key insight in there that said something like value is subjective, but price is a function of what someone is willing to pay. And as a health economist, I’m very focused on value. And when I say value, I think of value to the patient or to the health system or to society, not to an investor or to a company, et cetera. And so, I suppose then that it makes sense then that you are looking at past market experience, past market analogs to inform your pricing. I understand why you would do that. But does value to the health system or the patient come in anywhere in your investment decision making? I get the, is this an unconscionable to deny at this price? Will they pay this in a couple years? But are there any explicit or even implicit accounting or assessment of the actual value to the patient or health system?
Peter Kolchinsky, PhD: Yeah. So, it’s interesting you asked that because we recently had a company called Cidara that was working on, is still working on a flu antiviral. And it’s not a vaccine. It’s basically Tamiflu linked to a biologic, an FC domain that gives it a very long half-life. So, you can give a shot at the beginning of flu season and circulates for like six months. And the Tamiflu basically prevents infection like a really high rate of prevention. And it works against all flu strains. I mean, it’s remarkable. When we saw the results, we were like, oh my God, this has forever changed humanity’s relationship to flu. Like we never have to worry about a flu pandemic again. Like flu just cannot be resistant to Tamiflu, to this molecule based on the way that it works. There kind of wasn’t a comparable out there in the market for what this could be priced at or paid for. It felt to me like the kind of drug that would be unconscionable to deny. But I found that when I pitched some people on it, they were like, well, what do flu vaccines go for? It’s like what, like for elderly, the high dose, maybe it’s 50, $60 or whatever. And I was like, well, we definitely have to charge more than that because the cost of goods in that drug are somewhere in that range. So, like, no, we’re going to need to charge like, several hundred dollars. And people’s reaction was like, well, I mean, we don’t spend several hundred dollars on anything related to flu. It’s like, well, I mean, technically speaking, when somebody is in the hospital, like COPD, they get a flu infection, whatever, spending a ton of money on that. It’s like, well, whatever. But for prevention, we don’t spend that. And so, I realized like we have to do a better job of explaining the value of this.
Mel Whittington: And when you say we, you mean the investors and the companies?
Peter Kolchinsky, PhD: Well, look, I’m a hands-on kind of investor, right? And my colleague was on the board. So yeah, when I say we, I mean, like all of us, involved who care about this, but the company, we talked to the company management, like we all saw that, that there were lots of people out there that didn’t understand, like didn’t perceive what had just happened, that like, this was remarkable. This is the Trikafta of flu. I may have had a glass of Kool-Aid here, so forgive me. But the bottom line is I was excited, but I could see other people didn’t get it. Well, that happens all the time. There are lots of investments that you make where you’re excited and somebody else says, I don’t know what that is. You know, hep C, I remember a time when I was excited about hep C antivirals. Part of the reason I’m so excited, I’m a virologist. Like I love anything to do with viruses. So, this is totally my jam. And so, in the early days of hep C antivirals, was all over these things. But I remember running into people who would say like, who’s going to pay for this? And as the argument built, those people became convinced or at least quieted down. And generally, there was a growing consensus that there was a bigger and bigger reward for hep C possible if you really had curative drugs. And so more money went into hep C and increase the odds that we would actually like crack that nut. And so, with Cidara, I knew that if we don’t find some way to unlock people’s ability to understand the value of what a drug like this could be, that it would be undervalued. And that means that like the cost of capital is higher for them. It’s a bit harder for them to raise the hundreds of millions of dollars that they need to run the trials. It means if there are acquirers someday, the acquirers will undervalue them. And so, yeah, if I want to generate a really great return, I got to make my value proposition clearer. And so, we actually did some generalized cost effectiveness analysis on just what this drug could do for people over 65. Just in that one case study. And we pointed out how much flu, morbidity, mortality there was, quantified the amount of hospitalizations, the cost of those hospitalizations. And we modeled that out for decades to come. And then we said, now you’ve got Cidara. And if you paid, you could pay up to X for Cidara and as long as it goes generic after the appointed time and since we’re over 65 you’ve got Medicare negotiation you’ve got a guarantee that the government will squash its price after 13 years so when you do the math on paying off the mortgage on Cidara and enjoying the benefits of that drug forever and avert the costs of that much flu then how high can the mortgage be?
Mel Whittington: Yeah, you’re doing an appraisal.
Peter Kolchinsky, PhD: Yeah. And the number was stunning. It was like thousands of dollars per dose. And I was like, wow, I gotta admit, I wasn’t expecting to charge that.
Mel Whittington: You gotta admit, health economic modeling’s pretty cool.
Peter Kolchinsky, PhD: So, when I wrote up this article, I said, look, here’s how big a drug this is if you charge 300 or $500 or whatever in that zone, multiply it by the I can’t remember what it was like, 60, it was a 60 million or something like that. But it was like a gigantic drug. It was like $18 billion or something like that in our models. And it’s like, and that’s just in that low range of like 300 bucks where it’s a raging bargain. And so, we could point to RSV antibodies that were priced in that range and be like, as you can see, there’s some hints of this. Like you could look at HIV pre-exposure prophylaxis. So that is kind of like a Cidara, but for a much smaller fraction of the population that would take it. And so, we used it to help people understand that even at 300 bucks, this is a raging bargain. Do I know that payers will pay $300? No, at the end of the day, like you come with all your best arguments, but payers will pay or not pay whatever they can get away with. Like technically speaking, they probably aren’t that concerned about saving society money 13 years from now when, you know, the drug goes generic. So, they might be like, yeah, but you’re asking me to pay a higher mortgage than the rent I’m paying now. Like, how about I just reject your drug? And so, it’s like, well, you could, but then you will be judged. And so, our argument like Cidara would have prepared all of its arguments to take to large employers, to Ford, to Apple, to Walmart, to everybody, to United, to all these plans, and basically say, this price is a bargain. Here’s what it stands to do for society. Like, here’s what it stands to do for patients today. Your workers, they get sick, and even if their partner gets sick, like, they may have to do some caretaking, like, they may have to drive the kids around or whatever, like here’s all the ways in which it impinges on productivity and peace of mind and everything. And they would make a case that 300 is good. And if they won that, then you as a health economist would look and say, well, I’m glad they got paid that because that drug is definitely worth way more. You as a health economist, in fact, would need to worry. It’s like, if the market doesn’t even pay that, if they won’t even pay like, 100 bucks, if they’re like, no, we’re not valuing this higher than vaccines. What would you do, Mel, if as a health economist, you’re like, this drug is actually worth a ton more to society and the market seems to underestimate its value and has just discouraged this kind of innovation? Do we see any examples of that today? The answer is of course, yes, antibiotics, right? Like we know what happens when the market gets it wrong and undervalues something. And I think that, health economists probably need to spend more time on things that are mistakenly undervalued relative to their value in the grand scheme to society than to worry about things that are overvalued because I have not yet found a drug that when you model all of its value to society and take into account that it goes generic, I’ve not found one that the market has overpriced. They’ve negotiated, the market has negotiated a raging bargain. And so that central committee, if we set one up in the US to do cost effectiveness math to check the market to see if the market’s right, I really think that it would just basically say like, yep, another year where the market’s done a good job. Yep, another year. And that’s good. I mean, I think that there are too many people who doubt the market and they think that Europe does it better, price controlling stuff or whatever. And so, we need our defenders. But I do think that’s what that committee would end up doing if they did their math honestly. They would basically just be saying that the US market has once again negotiated a raging bargain for society or as you would say, negotiated a huge consumer surplus. However, many billions of dollars these innovative companies are making, it’s but a small fraction of the total value they’re creating. So, keep going, guys. Here’s to another good year.
Mel Whittington: Two more questions for you. First one, should other investors be doing more of this, more health economics to show the value of their money, the value of their products?
Peter Kolchinsky, PhD: I think maybe it made some difference in the case of Cidara, right? I think that Merck paid the price that it did because it bought into the idea that this was a valuable drug, and they believed that their commercial team would be able to secure a more than fair price for the drug and do well.
Mel Whittington: Another insight from the report I read of yours was about, again, was about M&A. I’m not focused on M&A. But one of your insights was to optimize for M&A. You should assume it won’t happen and plan, hire, finance accordingly. So, market access and commercial strategy as a part of that, should companies be thinking about their health system value proposition, even when they might never plan on commercializing?
Peter Kolchinsky, PhD: If you have a lot of easy comps to point to for pricing, you might be okay. Everybody gets it, any investor, any potential acquirer, whatever, they all get it. But if it’s a new disease or you plan on charging a lot more, for example, this would have been very useful for the first gene therapies because clearly the public did not know what to do about a one-shot price. $2 million just simply sounds like a lot more than three or $400,000 per patient per year. But in fact, $2 million could be a raging bargain compared to paying $400,000 per year forever, right? Or at least until it goes generic. So, when you have to explain yourself, yeah, you might want to reach for a health economist who understands GCEA math, who will probably pull up that user’s guide that you and some other leading health economists created in order to prepare the arguments for why your pricing is not crazy. If you discover that like, it’s weird, the math is actually suggesting that this math doesn’t hold up, you’d better study the math. But that’s no different from like doing an NPV model on your company. And if it’s negative, you gotta like confront like what is going on here and if you can find the flaw it’s like oh, you’re giving us only like 5% market share like we would expect to at least have 30%. Oh, really why? Well, here are arguments and so if the arguments are good then you can plug in 30% market share and now it makes sense like it’s a ragingly positive NPV so it makes sense why people are investing in it. So, the model just shows you your own thinking and if the math comes out and there’s not like raging, it does not look like your price is a raging bargain. Well, you got to improve your arguments or be prepared for a tough fight. Because so far, I’ve not seen a single successful blockbuster drug that wasn’t a raging bargain compared to its societal value.
Mel Whittington: And that’s where I think companies, investors, everybody really should embrace health economic modeling, not as a price setting rule, but more as a tool. Is this justifiable? Could I run into any barriers?
Peter Kolchinsky, PhD: Yeah. Yeah.
Mel Whittington: Will a GCA help you get a better price from payers?
Peter Kolchinsky, PhD: So, I’m actually not sure of that. GCA has been around long enough too, but I know that companies have been making economic arguments as part of trying to negotiate with payers. The bottom line is like, it’s a marketplace where you bring your best arguments and at the end of the day, the payer, if they think they can get away with not paying for something that’s gonna actually cost them more, they very well might try to get away with not paying. All your arguments might end up not mattering. And so, what leverage do you really have? So, if you can turn your GCEA into something that is relatable to the public, if you can learn from it and don’t try to create DTC ads with GCEA arguments, but rather see that GCEA, like a big part of what makes your drug more valuable is that it restores productivity or spares a caregiver. Maybe it changes the way that you present the value of your drug. And if you do a DTC ad, you address the caregivers as well, you know, things like that to understand what is the full value of your medicine. But at the end of the day, like when a company is preparing to go it alone and launch on its own, make your best arguments higher than people that are gonna be as effective as possible at negotiating with those plans. But if a pharma comes along and offers to acquire, there’s a reasonable chance that, at least for some drugs, that a pharma is going to be the better commercializer. They’ve got way more leverage with payers. Maybe for some drugs like Trikafta, they’re just so stunningly transformative and the disease is so small that the developer can justify mustering the courage to commercialize it on their own. And if that’s your base plan, then it offers up really great leverage in a negotiation with a potential acquirer. But even still, maybe you’ll get an offer that you just can’t turn down, right? Like after all, there’s a price for everything.
Thank you for listening to this episode of Perspectives. If you’re interested in participating in future podcasts or would like to learn more about the Leerink Center for Pharmacoeconomics, please email cpe@medacorp.com.
