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Bridging Science and Business: A Conversation with Professor Fred Ledley · Making Medicine

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Speaker 1: You're listening to Making Medicine Stories from the Early Stage
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Speaker 1: Life Sciences Ecosystem, a podcast that explores the people and
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Speaker 1: deals that have led to the medicines, devices, and technologies
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Speaker 1: that keep us healthy. Let's get into the show.
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Speaker 2: Welcome to another episode of the Making Medicine podcast and
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Speaker 2: happy holidays. As always, I'm your host, John Stanford, and
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Speaker 2: today we're joined by Professor Fred Ledley, the director at
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Speaker 2: the Center for Integration of Science and Industry at Bentley University. Fred,
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Speaker 2: welcome to the podcast.
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Speaker 3: Good to be here.
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Speaker 2: Give a little context about the birthplace of this episode.
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Speaker 2: This was born out of a dialogue that began on
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Speaker 2: stat a great resource and some earned media that you
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Speaker 2: should check out. Professor Ledley had an excellent piece that
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Speaker 2: Incubate responded to. That conversation continued and played out on
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Speaker 2: LinkedIn as we looked at data sets and ideas and
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Speaker 2: had some agreement and some disagreement, and we thought we're
1:02
Speaker 2: better to take this conversation a better platform than have
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Speaker 2: him on the podcast and hear about some of the
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Speaker 2: research he's been doing. And so Fred, I'm so glad
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Speaker 2: we can join and maybe to start off one of
1:15
Speaker 2: the things listeners love. The most about the show is
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Speaker 2: hearing about how people came to their roles. So can
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Speaker 2: you share a little bit about you about your work
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Speaker 2: at Bentley University and most importantly, how'd you get there?
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Speaker 3: So let me really begin with the fact that I
1:30
Speaker 3: got brainwashed in medical school, and I tell people who
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Speaker 3: know me I work with that I still have an
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Speaker 3: MD brain, even though it's been a long time since
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Speaker 3: I worked in medicine. But I had the good fortune
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Speaker 3: in medical school to work at the NIH to be
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Speaker 3: involved in some very exciting research. I trained in pediatrics
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Speaker 3: at the Boston Children's Hospital and that was the very
1:55
Speaker 3: early days of genetic engineering, and they sent me over
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Speaker 3: to my tea to really learned techniques for genetic engineering,
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Speaker 3: which I used in my first job on a medical
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Speaker 3: school faculty at the Baylor College of Medicine and Texas
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Speaker 3: Children's where we had a very competitive lab looking at
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Speaker 3: inborn errors of metabolism, which are those diseases that every
2:17
Speaker 3: kid gets tested for at birth, which are inherit diseases
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Speaker 3: that could be generally managed to some extent with modern medicine.
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Speaker 3: Our work eventually became focused on the opportunity to perhaps
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Speaker 3: treat these diseases with gene therapy. That led the school
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Speaker 3: to start a by our tech company, which was my
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Speaker 3: first startup, and that one was based on technologies from
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Speaker 3: my lab and those of a number of my colleagues
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Speaker 3: in the department, and that was my business education. We
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Speaker 3: started a company called gene Medicine at Kline Perkins and
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Speaker 3: other really lead vcs as backing it, and we had
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Speaker 3: a rapid rise, as many biotechts do, raise one hundred
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Speaker 3: and eighty million dollars over the first couple of years
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Speaker 3: when public had a good run. I then left the company,
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Speaker 3: largely for personal reasons, to relocate back to the Boston area,
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Speaker 3: where I became CEO of another startup called Varygenics, who
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Speaker 3: was a personalized medicine company. Again, these companies were very
3:22
Speaker 3: very early. This is we're still in the mid nineties here,
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Speaker 3: and that company also had a good run. We were
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Speaker 3: about ready to go public when my venture capitalist backers
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Speaker 3: decided they would rather I take over yet another startup,
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Speaker 3: and that one was a company around the Fremiam Heart Study,
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Speaker 3: which was the most exciting, exhilarating and exhausting thing I
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Speaker 3: ever did, and ultimately we couldn't quite pull it off.
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Speaker 3: We raised a lot of money working with Boston University
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Speaker 3: on that and ultimately couldn't quite get that one off
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Speaker 3: the ground. Part of it was the crash of the
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Speaker 3: dot com boom. And after taking off some time, I
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Speaker 3: joined Bentley University, which is a leading business school. It's
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Speaker 3: a pick your ranking top fifty business school in the country.
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Speaker 3: And I came out of my years in industry with
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Speaker 3: a real belief in the synergies of business and science
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Speaker 3: that if you get those right, there's nothing like it.
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Speaker 3: And you know, gene medicine. We did. We raised a
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Speaker 3: ton of money, We hired great manufacturing quality control people,
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Speaker 3: put products in the clinic, very hard to do. In academics,
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Speaker 3: the challenges the synergies are very hard to achieve, and
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Speaker 3: the idea of teaching and actually I was hired at
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Speaker 3: Bentley to really build a science department in the business school.
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Speaker 3: And as you know, the Massachusetts economy is totally is
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Speaker 3: very focused on life sciences and healthcare, and the idea
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Speaker 3: of trading business executives to effectively use science in their
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Speaker 3: businesses really was very appealing to me. So we built
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Speaker 3: a very different type of science department, turned it over
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Speaker 3: to great young people who we hired and now we've
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Speaker 3: had for ten years now, we've had a research center
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Speaker 3: which is really applying essentially economic and finance research to
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Speaker 3: characterize that boundary, to characterize the interface between science, the
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Speaker 3: public sector and business and try to find where synergies
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Speaker 3: can be established.
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Speaker 2: Well, I think that's that experience that you have seen
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Speaker 2: scaling up. I think some of the time when we
5:37
Speaker 2: think of academics, we may not realize exactly how much
5:42
Speaker 2: very practical business experience. I mean, you can't ask for
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Speaker 2: someone who has seen more, especially in such an interesting
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Speaker 2: time of the nineties and early two thousands in the
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Speaker 2: genetic space. Recently been doing a lot of work and
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Speaker 2: a lot of heavy thinking around the impact of policy
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Speaker 2: on the pharmaceutical industry and taking a look at what
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Speaker 2: is a big and an our view, critical debate. And
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Speaker 2: that's why it's important that this happens in the public
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Speaker 2: square of what the impact of certain policies has been
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Speaker 2: and if you can maybe one of the biggest questions
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Speaker 2: we're trying to answer at Incubate and maybe industry more
6:23
Speaker 2: broadly is how the recent Inflation Reduction Act and this
6:26
Speaker 2: price negotiation, price control, pick your verbiage mechanism will impact
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Speaker 2: the industry and by consequence, impact development of new medicines
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Speaker 2: and at the end of the day, impact patients. Can
6:40
Speaker 2: you sort of share some of your top find views
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Speaker 2: on how you think the Inflation Reduction Act could or
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Speaker 2: could not impact the development of new medicines.
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Speaker 3: Sure. The short answer is that we have a lot
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Speaker 3: of confidence in the leadership of the pharmaceutical industry and
6:59
Speaker 3: we think that they have the tools and the capability
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Speaker 3: to successfully manage this and achieve those Again, the word
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Speaker 3: synergies comes up a lot in our thinking. Our work
7:12
Speaker 3: on the IRA really began some years ago with when
7:17
Speaker 3: we undertook a very detailed study of the finances of
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Speaker 3: every public biotack listed on public exchanges over the last
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Speaker 3: twenty years, and you identify them by a code for
7:29
Speaker 3: pharmaceutical industry, and we looked at about fourteen hundred public companies,
7:35
Speaker 3: and our primary focus originally was on the very largest
7:39
Speaker 3: pharmaceutical companies and the way the industry works. I'm sure
7:44
Speaker 3: you've talked about an other podcasts is there's a limited
7:48
Speaker 3: number of very large companies. Maybe pick your number, somewhere
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Speaker 3: between thirty five and fifty depend on how you define it,
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Speaker 3: which are responsible for ninety percent of product sales revenues,
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Speaker 3: R and D spending. And these companies are the ones
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Speaker 3: we know. These are the names we know. And we
8:11
Speaker 3: had a paper in Journal with the American Medical Association
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Speaker 3: in twenty twenty looking at the profitability of these companies.
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Speaker 3: And these are very successful businesses. They're very profitable. They're
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Speaker 3: significantly more profitable than other companies in the S and
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Speaker 3: P five hundred of similar size. And when we did this,
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Speaker 3: one of the things we had to work through is
8:33
Speaker 3: there were thirteen hundred other companies in this data set
8:38
Speaker 3: who didn't look at all like that. They typically had
8:42
Speaker 3: almost note revenue, they typically had negative earnings, they chronically
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Speaker 3: lost money, They did a fair amount of R and D,
8:53
Speaker 3: and in fact, the R and D frequently was more
8:55
Speaker 3: than their product revenue. And these companies also were selling
9:00
Speaker 3: generating capital through the sale of stock, through the sale
9:03
Speaker 3: of equity. And around this time QVA published a paper
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Speaker 3: pointing out that about sixty percent of the clinical trials
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Speaker 3: were being done by what they call the merging biotech companies.
9:16
Speaker 3: That's an even smaller subset than ours, and that about
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Speaker 3: sixty percent of drug approvals are coming from those companies also,
9:25
Speaker 3: So when we dug down into this large number of
9:30
Speaker 3: essentially fledgling biotech companies, what we realized is that these
9:36
Speaker 3: companies were doing most of the early innovation. They were
9:41
Speaker 3: substantially funding this not only from revenues, and they had
9:45
Speaker 3: no product revenues. Any revenues they had likely came through
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Speaker 3: pharmaceutical partnerships, but a substantial amount of the innovation capital
9:54
Speaker 3: was in fact coming from the venture community, and very
9:57
Speaker 3: much confirms the view of the apolists that they are
10:01
Speaker 3: risk investors, that they are investing early in this process.
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Speaker 3: And it was around this time that the IRA hit
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Speaker 3: and we start to model, now, what happens if you
10:12
Speaker 3: take this economic this financial system that we described. So
10:18
Speaker 3: we take all the variables we had on all these
10:20
Speaker 3: companies and look back over twenty years and say, just empirically,
10:25
Speaker 3: what happens if the revenues go down, what happens if
10:30
Speaker 3: the revenues go up? What happens to their R and
10:33
Speaker 3: D spending? Right? And what we found was in those
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Speaker 3: very large companies, there's a very close association between revenues
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Speaker 3: and R and D. They have more capital to spend,
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Speaker 3: they spend more on R and D they have less.
10:49
Speaker 3: R and D is much easier to cut than core
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Speaker 3: operating structures, and there's about there's a ratio that for
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Speaker 3: every dollar of revenue change, on average, R and D
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Speaker 3: will go up or down about eighty cents. So you know,
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Speaker 3: this is a long standing pattern. We see no reason
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Speaker 3: if you predict that that will continue, and of course
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Speaker 3: that's always a prediction to predict the future from the past,
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Speaker 3: but that's all we have right in the little companies,
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Speaker 3: there was absolutely no relationship between their reported revenue and
11:22
Speaker 3: there are and D spending, but there was with the
11:25
Speaker 3: capital they raised through sales of equity. So we then
11:30
Speaker 3: went and asked what happens to investment, which is the
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Speaker 3: purchase of equity. So what happens to investment when there
11:39
Speaker 3: are changes? It was hard to know. At the benchmark here.
11:43
Speaker 3: You could look at total pharmaceutical sales. That's a pretty
11:46
Speaker 3: blunt measure, but there are two government indexes of drunk prices.
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Speaker 3: The government publishes each month of consumer price index for
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Speaker 3: pharmaceutical products, which is what are consumers actually paying, And
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Speaker 3: they publish a producer price index, which is what are
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Speaker 3: the producers, namely these large companies actually getting and what
12:09
Speaker 3: we found there accounting for the usual things that affect
12:12
Speaker 3: markets is market conditions, many ways to define sort of
12:17
Speaker 3: equity market conditions that matters. We all know when there's
12:21
Speaker 3: a lot of capital out there and there's a lot
12:23
Speaker 3: of investment going on, biotech stocks do great. When the
12:27
Speaker 3: market drops, biotech has an exaggerated drop, it is considered,
12:33
Speaker 3: for various reasons, considered a risky investment. But we found
12:38
Speaker 3: that when you look at those indices versus investment in
12:42
Speaker 3: companies over a long period of time, we did not
12:45
Speaker 3: see any relationship with drug prices, and you can't prove negatives,
12:50
Speaker 3: but there was no evidence of relationship between changes and
12:54
Speaker 3: drug prices and changes in investment activity. So our conclusion,
12:59
Speaker 3: just to you know, bring this together, is that we
13:02
Speaker 3: do believe the large companies are going to cut their
13:05
Speaker 3: R and D spending. And we then went in and
13:08
Speaker 3: model smart management practices. Smart management practices, and these companies
13:13
Speaker 3: have spent decades putting in agile, lean, pick your favorite adjective.
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Speaker 2: Sigma all the way, yeah, and this.
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Speaker 3: Is smart business. Right. To be able to reallocate your
13:27
Speaker 3: capital resources quickly is very important to large companies, and
13:32
Speaker 3: we built a model where if these large companies continue
13:35
Speaker 3: to focus on gaining products to late stage products to
13:38
Speaker 3: market the phase two, particularly phase three studies. It's very
13:42
Speaker 3: important to these companies whenever they can to control those
13:45
Speaker 3: phase three studies because that's what's going to determine your
13:49
Speaker 3: market size. But if they increase their reliance on these
13:53
Speaker 3: small companies, which they're already getting sixty percent of their
13:57
Speaker 3: pipeline there, and if that continue or increases within the
14:01
Speaker 3: bounds where we know there are products being abandoned because
14:05
Speaker 3: no one wants them, so called commercial failures, or that
14:10
Speaker 3: you could protect your earnings by cutting your R and
14:12
Speaker 3: D in these large companies, and they'll do that. Earnings
14:15
Speaker 3: pennies on the dollar are really important. The earnings per
14:19
Speaker 3: share is a critically important measure. But if they would
14:23
Speaker 3: increase their dependence on the small companies where you have
14:27
Speaker 3: excess innovation happening, we actually believe they could protect both
14:32
Speaker 3: of both their earnings and also their pipelines and come
14:36
Speaker 3: through this relatively unscathed.
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Speaker 2: I would really help one. I think it's fascinating research
14:45
Speaker 2: that you've undertaken. I want to see if you can
14:49
Speaker 2: sort of help me square a couple circles here you
14:52
Speaker 2: point to eighty cents on the dollar. I think the
14:57
Speaker 2: answer you gave. And when we look back about the
14:59
Speaker 2: media around the announcement of the actual prices set in
15:05
Speaker 2: the first round, you know, a lot of the media
15:07
Speaker 2: covered the pharmaceutical ceo is saying we can manage this.
15:13
Speaker 2: But I if you actually look at sort of what
15:15
Speaker 2: the CEOs have said in the earnings calls, they're managing
15:19
Speaker 2: this sort of product by product, not portfolio wide, and
15:24
Speaker 2: their point is for this first round of price controls,
15:29
Speaker 2: it can be managed and the stock price shouldn't take
15:33
Speaker 2: too much of a hit, if any at all. But
15:37
Speaker 2: do you feel like a lot of your answer, I
15:39
Speaker 2: feel like was focused on the financial well being of
15:43
Speaker 2: the large pharmaceutical companies and maybe stock price is is
15:48
Speaker 2: a proxy for that, But what about the actual products
15:52
Speaker 2: to patients and you know, the glory word of innovation.
15:56
Speaker 2: Do you feel do you think the conclusion is the same.
15:59
Speaker 2: Do you think can really have two hundred or three
16:02
Speaker 2: hundred billion pulled out of this industry and still bring
16:06
Speaker 2: the same number of products? Cause that's kind of our
16:08
Speaker 2: beef with the Congressional Budget Office. Is we just can't
16:13
Speaker 2: square that math. But I'm curious you spoke about it
16:16
Speaker 2: on the stock or sort of the financial health side.
16:19
Speaker 2: What about sort of products for patients. Do you think
16:21
Speaker 2: we're going to lose ground there?
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Speaker 3: No, we don't think you'll lose ground. We think, in fact,
16:27
Speaker 3: this is more likely to stimulate the biotech industry to
16:31
Speaker 3: meet large pharma's need. You know, this is all based
16:35
Speaker 3: on as you've pointed out and others have pointed out,
16:39
Speaker 3: that a lot of the projection is not about cash today,
16:43
Speaker 3: it's about future profits. Right. There is this somewhat simplistic
16:49
Speaker 3: theory that you know what companies invest in and is
16:53
Speaker 3: all based on adding up how much money they're going
16:56
Speaker 3: to make in the future and discounting it back and
17:00
Speaker 3: calculating sort of a projected return on investment. That's much
17:05
Speaker 3: more severe in theory than what happens day to day.
17:11
Speaker 3: But first of all, nobody knows those numbers, right. You
17:15
Speaker 3: really can't project the market for a product in pre
17:19
Speaker 3: clinical or phase one because you have no idea what
17:22
Speaker 3: it's going to be useful for, who's going to be
17:24
Speaker 3: indicated for an industry is a dismal track record of
17:28
Speaker 3: predicting what's going to be a blockbuster early. There's been
17:32
Speaker 3: a bit of a flurry about the fact that Pfizer
17:35
Speaker 3: turned down a GLP drug that Jeff Fleier, the former
17:40
Speaker 3: Dean of Harvard, was developing in the early nineties with
17:44
Speaker 3: a partner company because they didn't see a market for
17:47
Speaker 3: an injectable GLP drug. Humeror was nearly killed by basf
17:53
Speaker 3: in the years before was approved, true to languished forever
17:57
Speaker 3: at mark with no real champions. So it's a very
18:01
Speaker 3: complicated equation as to what when a drug is recognized
18:06
Speaker 3: to be a potential blockbuster. And you know, the drugs
18:09
Speaker 3: I was listed are the biggest drugs ever, and you
18:13
Speaker 3: know the little ones is even more complicated. So there
18:17
Speaker 3: were really two things the CEO said. The first is
18:20
Speaker 3: we can manage this year. The second was with one exception,
18:26
Speaker 3: which is Bristol Myers, which has had a tough couple
18:28
Speaker 3: of years. They also reaffirmed their earnings projections, their long
18:33
Speaker 3: term earnings projections, And to me, that's the critical thing.
18:38
Speaker 2: They said, you mentioned t true and I just think it.
18:42
Speaker 4: How then do you sort of square the se the
18:47
Speaker 4: CEO saying, or Lily CEO saying, we're going to miss
18:51
Speaker 4: the next key, Truda, and.
18:54
Speaker 2: Why does he believe that? If you feel like that
18:58
Speaker 2: innovation is going to continue.
19:01
Speaker 3: So let me separate two things. When they're making when
19:05
Speaker 3: they're talking to their investors at accord to report, they
19:08
Speaker 3: have lawyers sitting there listening to everything they say and
19:12
Speaker 3: tapping them in the back that they don't like it. Right,
19:15
Speaker 3: And you know industries there are real restrictions on what
19:19
Speaker 3: you can write in a report, what you can tell
19:21
Speaker 3: your investors. I give that way. I mean, I you know,
19:24
Speaker 3: we use accounting statements for our analysis because their laws
19:29
Speaker 3: governing everyone knows what word R and D means and
19:32
Speaker 3: what revenue means and what it doesn't mean. Right, it's
19:35
Speaker 3: fairly defined. There's a lot of stuff going on. There's
19:40
Speaker 3: a lot of there's litigation they're trying to support, which
19:44
Speaker 3: has very little to do with anything we're discussing today,
19:47
Speaker 3: as with has to do with whether they think negotiations
19:52
Speaker 3: are fair or not, and whether negotiating with your biggest
19:56
Speaker 3: customers coercive or not. I think one has to be
19:59
Speaker 3: careful full to try to separate what's affecting financial markets
20:04
Speaker 3: and what's affecting the political realm, they're different set of standards,
20:10
Speaker 3: and I'm going with what they're telling in legally binding statements,
20:15
Speaker 3: which is they're reaffirming their projections.
20:18
Speaker 2: So let's dig in a little deeper into some specific
20:21
Speaker 2: IRA provisions. Then, because I'm with you, and in fact
20:25
Speaker 2: Incubate has piloted, we wanted to get away from the
20:29
Speaker 2: narrative of sky is falling, innovation is ending. I think
20:33
Speaker 2: to make our case on both sides of the aisle
20:35
Speaker 2: about issues we see with the Inflation Reduction Act. We
20:39
Speaker 2: knew we have to bring data, bring the receipts, as
20:43
Speaker 2: the kids say, I suppose, and so we set up
20:46
Speaker 2: with the Life Sciences Investment Tracker, and all we do
20:50
Speaker 2: is sit and look at those earnings reports and look
20:53
Speaker 2: at the SEC filings, and we use that as our barometer.
20:57
Speaker 2: And we've got forty discontinued programs, twenty two specific products.
21:04
Speaker 2: But I want a caveat because I want to have
21:07
Speaker 2: a level set debate. Not all of them say we
21:11
Speaker 2: were going to do this, but because of the small
21:14
Speaker 2: molecule penalty, we're not. But we do have a dozen
21:17
Speaker 2: plus on legally binding calls, like you said, saying we
21:22
Speaker 2: are backing away from this product because of the small
21:24
Speaker 2: molecule penalty, we are backing away from this secondary indication trial.
21:29
Speaker 2: I mean your point about phase three. We had al
21:32
Speaker 2: nilam stop a phase three trial explicitly for reasons related
21:38
Speaker 2: to the IRA. So in the cases of the small
21:40
Speaker 2: molecule penalty or secondary indication and sort of orphan issues,
21:45
Speaker 2: do you see disincentive there for particular product types.
21:49
Speaker 3: It looks to me like this as as usual. Look,
21:52
Speaker 3: we know that groups like Joe Domassey's group at TOUGHS
21:57
Speaker 3: and many others have pointed out that somewhere between ten
22:01
Speaker 3: and thirty percent of all drugs that go into clinical
22:04
Speaker 3: trials fail for what various they call commercial or business reasons,
22:10
Speaker 3: and that is no negative evidence on safety, no negative
22:14
Speaker 3: evidence on efficacy. They are abandoned because the company doesn't
22:20
Speaker 3: see commercial incentives to develop it. And again that's good business, right,
22:25
Speaker 3: And it could be many things. It could be. I mean,
22:29
Speaker 3: it's all about the market. But the market's dictated, always
22:33
Speaker 3: dictated by the price you can get, what the competitors are,
22:37
Speaker 3: how strong you're paying position is. And I haven't seen anybody,
22:42
Speaker 3: nor can you. I'm not even sure anyone can actually
22:45
Speaker 3: do this systematically argue that there are more failures going
22:51
Speaker 3: on than they're historically. The same with layoffs, right, people
22:54
Speaker 3: make a big deal the less year or so every
22:56
Speaker 3: time there's a layoff, the rate of and the biopharmaceutical
23:01
Speaker 3: industry is always huge. That's part of why Cambridge is
23:05
Speaker 3: such an effective cluster. There's almost a workforce for the
23:09
Speaker 3: Cambridge by Tech cluster more than there is any one company. Now,
23:13
Speaker 3: I don't want to be a Pollyanna here. Business is tough.
23:16
Speaker 3: Good business is tough. And part of our model also
23:20
Speaker 3: showed they could really mess this up right, So you know,
23:24
Speaker 3: there were also avenues in our model where things do
23:27
Speaker 3: go south and there are going to be big mets made.
23:32
Speaker 3: And what we said is we do think this can
23:36
Speaker 3: be managed, and I think you't have to be a
23:39
Speaker 3: little careful here. Not just you, but in general, the
23:43
Speaker 3: verbiage is a little out of control. There's no small
23:46
Speaker 3: molecule penalty the you know, remember biologicals do get a
23:52
Speaker 3: longer period of exclusivity, but that was based on industry's
23:58
Speaker 3: position that it's more expensive to develop a biological That's
24:02
Speaker 3: why that difference exists because it was a response to
24:06
Speaker 3: Congress that if you wanted to see biologicals developed, they
24:11
Speaker 3: would require more exclusivity, and the IRA mirrors the historical pattern.
24:18
Speaker 3: There's also, you know, price controls and negotiation is the
24:23
Speaker 3: norm in government. I mean, you did some internships in government.
24:27
Speaker 3: I saw going through your resume. People forget that. There's
24:31
Speaker 3: a long code of how government should purchase things, the
24:36
Speaker 3: Federal Acquisition Regulation. The FAR code governs all most federal procurement,
24:43
Speaker 3: and it's all about negotiation. That you do your diligence.
24:47
Speaker 3: You figure out all the factors, and one is you
24:51
Speaker 3: have to pay attention to the profit the profits of
24:55
Speaker 3: the supplier. That does matter. But the norm is negotiation
25:00
Speaker 3: in federal procurement for anything. We have a situation in
25:05
Speaker 3: medicare part where this was kind of thrown in as
25:08
Speaker 3: a poison pill when the actress passed that they and
25:12
Speaker 3: the language is really interesting, they can't interfere in the market.
25:15
Speaker 2: Let's pull a few things there, maybe I'll take them
25:18
Speaker 2: in reverse order. On the negotiation. Would you at least
25:22
Speaker 2: grant that the concept that no price adjustment in the
25:28
Speaker 2: part D marketplace. I take your point about verbage. There
25:31
Speaker 2: are people saying in the lead up to the IRA
25:35
Speaker 2: that Part D is just at the whims of the
25:38
Speaker 2: pharmaceutical companies, and that's wrong. There was deep discounts. They
25:43
Speaker 2: were just negotiated in the marketplace, as opposed to the
25:47
Speaker 2: government being the one at the table. The government instead
25:50
Speaker 2: sort of outsourced that to Part D plan. So can
25:54
Speaker 2: we at least agree that there was discounting. It's not
25:59
Speaker 2: like was saying we're going to charge Xon. You're going
26:02
Speaker 2: to pay it because you have to because it's covered
26:04
Speaker 2: in Part D. There were intermediary securing a great deal
26:09
Speaker 2: of discounts, which is why the net price for these
26:11
Speaker 2: medicines goes down every year, even though we only talk
26:14
Speaker 2: about liss price.
26:16
Speaker 3: So that's not how negotiation works. Right. The government's the
26:19
Speaker 3: largest purchaser and therefore negotiations with sort of fairly minor
26:25
Speaker 3: players is different. Right, government has a lot of clout,
26:30
Speaker 3: I get it. But high stakes negotiations is not new
26:34
Speaker 3: to business. Right. Negotiations that are very very difficult, if
26:39
Speaker 3: not impossible, to walk away from are not new to
26:43
Speaker 3: the business world. Oh, it's a high stakes negotiation. But
26:46
Speaker 3: the notion that industry should be protected from having to
26:52
Speaker 3: enter a high stakes negotiation kind of misses the point
26:55
Speaker 3: of capitalism.
26:57
Speaker 2: I feel like we're going to have to have you
26:58
Speaker 2: back for about eight episodes. I'll challenge something there because
27:03
Speaker 2: part of your core thesis is, Okay, this can be
27:06
Speaker 2: well managed. And yet earlier you pointed to the layoffs.
27:11
Speaker 2: You pointed to these as the normal operations of business.
27:15
Speaker 2: And I guess my fundamental reaction to your stat piece
27:17
Speaker 2: and why we wrote our own, was if they could
27:21
Speaker 2: be more efficient? Isn't the marketplace designed to maximize efficiency already?
27:26
Speaker 2: And so the concept that the industry could be three
27:30
Speaker 2: hundred billion dollars more profitable just by better managing, wouldn't
27:34
Speaker 2: they be doing that already to ensure the most returned
27:38
Speaker 2: to shareholders?
27:40
Speaker 3: Very reasonable argument, right, And I think that the danger
27:45
Speaker 3: here is most of the economic assumptions assume in equlibrium state. Right,
27:52
Speaker 3: So the notion that companies are maximuently efficient is totally
27:56
Speaker 3: based on an equilibrium model. The place for me to play, professor, Professor,
28:03
Speaker 3: you're not playing. I try to keep that under control.
28:07
Speaker 3: This is a change in the market, right, and the
28:10
Speaker 3: market will have to find a new dynamic equilibrium. And
28:15
Speaker 3: I do think that the venture capital role in the
28:18
Speaker 3: investment community has A is going to have an increasingly
28:21
Speaker 3: important role in this new dynamic equilibrium and that the
28:26
Speaker 3: role of large pharma may prove to be different. Right,
28:29
Speaker 3: we've already said they're going to cut R and D.
28:32
Speaker 3: It oncet surprise me to see cuts in R and D.
28:34
Speaker 3: I got to admit in the first six quarters after
28:37
Speaker 3: the IRA pass there's no drop in R and D yet,
28:40
Speaker 3: which really does surprise me, because again it's the future
28:43
Speaker 3: revenues that should go to their willingness to invest now,
28:48
Speaker 3: but it hasn't dropped. So we're not comparing this change
28:53
Speaker 3: to an equilibrium state. I think this is. You know,
28:55
Speaker 3: we don't do much trig pricing is not our expertise,
29:00
Speaker 3: but one of the things we're kind of enjoying in
29:03
Speaker 3: a paradoxical sense, is how disruptive this is going to
29:06
Speaker 3: be to drug pricing structures. Right, and Neurageshewes in his group,
29:12
Speaker 3: But Schaefer has done a lot on how much of
29:15
Speaker 3: the price of the drug is essentially being is going
29:19
Speaker 3: to non productive intermediaries. He didn't use word non productive.
29:23
Speaker 3: Let me be fair here, who are in the distribution
29:26
Speaker 3: chain but not adding value to the drug itself. Right
29:30
Speaker 3: in classic economics. This is almost a rent. So this
29:34
Speaker 3: is disruptive, this is big. I'm not going to argue
29:38
Speaker 3: this is trivial, but to me, that's the between that
29:44
Speaker 3: and the increasing role of venture capital, which were you know,
29:48
Speaker 3: there's been a big increasing in acquisitions since passage of
29:52
Speaker 3: the IRA, and it all involves phase two products. Right.
29:57
Speaker 3: These are smart business leaders and they have a lot
30:01
Speaker 3: of tools at their disposal, and quite honestly, I don't
30:04
Speaker 3: know what they all are either. And I think these
30:07
Speaker 3: are going to prove it's going to be a new
30:09
Speaker 3: equilibrium in the industry. Will look different if it's less
30:13
Speaker 3: payments to PBMs, if it's a revision of three forty
30:17
Speaker 3: B that's not my field, but we watch these with
30:21
Speaker 3: tremendous interest, and I think there'll be a new structure.
30:26
Speaker 2: Basically, I think you're right, and you point to the
30:31
Speaker 2: growing dynamic role of life science venture capital, and as
30:34
Speaker 2: sort of the voice of life science venture capital, we
30:37
Speaker 2: fundamentally agree. But where we fundamentally disagree is all of
30:42
Speaker 2: my life science investors tell me the small molecule penalty
30:46
Speaker 2: is real and that they are moving money away because
30:50
Speaker 2: of the change in return. And so when you say
30:53
Speaker 2: earlier that it's not real. I can't let that go
30:56
Speaker 2: unchallenged because fifty percent of a drugs revenues come after
31:00
Speaker 2: year nine. There's from the investor perspective, it is now
31:06
Speaker 2: a discounted asset because it just makes no sense to
31:10
Speaker 2: invest in a product that is by definition going to
31:13
Speaker 2: get fifty percent return for the same amount of risk.
31:16
Speaker 2: And again I will caveat because I want this to
31:18
Speaker 2: be an honest conversation. That's not us saying there will
31:22
Speaker 2: be no small molecule products. There will where the patient
31:25
Speaker 2: population is well mapped, where manufacturing is good, where the
31:28
Speaker 2: payers are on board out of the gate, which ironically
31:33
Speaker 2: for Congress is going to lead to more follow on
31:35
Speaker 2: drugs invested in or when it's not a medicare population,
31:38
Speaker 2: we'll still see small molecules developed for middle aged individuals.
31:44
Speaker 2: But help me reconcile. You don't believe the small molecule
31:48
Speaker 2: penalty is real. But money is moving away and the
31:51
Speaker 2: investors tell me we're less interested. So when will it
31:54
Speaker 2: become real?
31:56
Speaker 3: So let's be real about markets. All molecule that can
32:01
Speaker 3: compete with the biological will win ninety plus percent of
32:05
Speaker 3: the market every time, right, So the moment someone comes
32:08
Speaker 3: out with an orally available drug that mimics the impact
32:15
Speaker 3: of ozempic. There's no contest in the marketplace between an
32:19
Speaker 3: oral drug and a and a biological So I think
32:22
Speaker 3: it would be really fool hearty for the industry to
32:25
Speaker 3: move away from small molecules in the long run, and again,
32:29
Speaker 3: it will be a new equilibrium. So I do hear it.
32:33
Speaker 3: I know people are saying that, I know that there
32:37
Speaker 3: is a lot of concern of things being upended, and
32:42
Speaker 3: I would just say that's the nature of disruption. And again,
32:46
Speaker 3: the advantage in the market and the market penetration advantage
32:49
Speaker 3: for anything that's a small molecule is just overwhelming.
32:54
Speaker 2: But in your example, use a glip one that's not
32:57
Speaker 2: going to be covered by Medicare anyway. So I agree
33:00
Speaker 2: a small molecule ozempic has a huge return. But in
33:06
Speaker 2: therapeutic areas where there's an existing one, I mean the
33:10
Speaker 2: ware place, I hear it is the oncology community that developing,
33:16
Speaker 2: which is less attractive than something like glip ones. And
33:22
Speaker 2: that's why the American Cancer Society is coming out saying
33:25
Speaker 2: we believe this thing is real. We believe people are
33:28
Speaker 2: less interested in producing small molecule products. And yes there's disruption,
33:34
Speaker 2: but do you agree that maybe the disruption will disproportionately
33:39
Speaker 2: harm certain therapeutic areas well.
33:43
Speaker 3: Generate the data when it's available, yes, you know you
33:46
Speaker 3: can generate. I do value these hypothesis being generated. We
33:52
Speaker 3: do find when we go to the numbers, it's like football,
33:57
Speaker 3: right or baseball. When you actually look at the the
34:00
Speaker 3: New Age baseball stats, it's really different than what the
34:04
Speaker 3: pundits are telling us. And it's important to do both.
34:07
Speaker 3: It's important to listen to people who are on the
34:10
Speaker 3: ground and respect their views, and then to consider those
34:15
Speaker 3: testable hypotheses. And we hope, you know, we we know
34:19
Speaker 3: IQB is going to do it. We know the big
34:22
Speaker 3: consulting firms are going to you know, the big independent
34:25
Speaker 3: consulting firms are going to do it. You can bet
34:28
Speaker 3: Delloitte will be all over it. And then we go
34:33
Speaker 3: on from there, and then the people who really have
34:35
Speaker 3: the data are going to be the CEOs. And you
34:39
Speaker 3: wish there was more transparency. There's a lot of data
34:42
Speaker 3: that we don't have in the public sector, and you know,
34:47
Speaker 3: I think it's going to be important to test what
34:49
Speaker 3: they're saying and then respond to the data. I think
34:54
Speaker 3: it would be a mistake to reverse the twelve versus
34:59
Speaker 3: nine you're for, which was created purposely to create a balance,
35:06
Speaker 3: and we forget that, right. This was created to create
35:09
Speaker 3: a balance stream biologicals and small molecules. I think we're
35:13
Speaker 3: also living in the absolute golden age of monoclonal antibodies
35:19
Speaker 3: and dual target I mean, the stuff that's coming out
35:22
Speaker 3: now is truly extraordinary, and the advance of the immunotherapies
35:28
Speaker 3: is studying and those are all biologics, right, I mean,
35:31
Speaker 3: they're going to be biologics just given the nature of
35:34
Speaker 3: what they're doing with these molecules. I look forward to
35:38
Speaker 3: being part of that analysis.
35:40
Speaker 2: Well, I reserve the right to call you back if
35:43
Speaker 2: and when the ACBA report comes out and has the
35:47
Speaker 2: real data and it says the small molecule I'm going
35:49
Speaker 2: to bet I'm going to have you back on after
35:53
Speaker 2: that report comes out, and hopefully. I mean, I would
35:56
Speaker 2: love for the small molecule penalty to not be real,
35:59
Speaker 2: but every data piece that I get from the investment
36:02
Speaker 2: community is that it is real. It's got bipartisan support
36:06
Speaker 2: to fix it, and I know that's more my universe
36:08
Speaker 2: than yours. But I look forward to that next conversation.
36:12
Speaker 2: I'm gonna I think one other conversation that maybe i'll
36:14
Speaker 2: tease for the next time. You're on a lot of
36:17
Speaker 2: your research, and you talked about it earlier. The innovation
36:22
Speaker 2: engine is the small biotechs, and this may be just
36:25
Speaker 2: another area of fundamental disagreement. There's a lot of talk.
36:29
Speaker 2: I read the small biotech exemption in the bill, and
36:32
Speaker 2: when we would talk to policymakers, they say, well, we're
36:35
Speaker 2: taking care of the small biotechs. In my view, you
36:41
Speaker 2: cannot separate. You can't bash the large pharmas and not
36:46
Speaker 2: have the consequences in the small biotechs because from the
36:50
Speaker 2: investment community, the large pharmas are customer and if the
36:53
Speaker 2: customer is poor, whether that customer is manufacturing the goods
36:57
Speaker 2: or not, if my customer is poor, I can sell
37:00
Speaker 2: them less. And if I can sell less, I can
37:02
Speaker 2: invest less. And I guess that's the one oh one
37:06
Speaker 2: level conclusion why I have concerns about this, But we
37:09
Speaker 2: don't think they can be separated, And sometimes I see
37:13
Speaker 2: commentary that makes it sound like you can separate them.
37:16
Speaker 2: Maybe closing thoughts and for future conversation, can you really
37:20
Speaker 2: beat up big pharma and protect small biotech.
37:24
Speaker 3: So this is any dynamic ecosystem, and nothing I said
37:29
Speaker 3: bash is large pharma. We actually think they're outstanding business leaders.
37:34
Speaker 3: And what drives our model is the work they've done
37:38
Speaker 3: to be efficient, to be agile, to be able to
37:41
Speaker 3: respond to changes. And they spend way too much time,
37:46
Speaker 3: but very important time. Not too much time. They spend
37:49
Speaker 3: a lot of time and are very aware of the
37:51
Speaker 3: disruptive nature not only of technology but new business practices
37:56
Speaker 3: right and they're continuing to push it. You know, I
38:01
Speaker 3: teach about how Lily I've sold their clinical trial facility.
38:06
Speaker 3: What a leap of faith, what a smart, aggressive business move.
38:10
Speaker 3: Things like that are so our view is that we
38:14
Speaker 3: have confidence in them. They're absolutely critical for this, you
38:17
Speaker 3: know it. They're central to the ecosystem. It's not just
38:20
Speaker 3: they're critical, but there's a long tradition of them relying
38:25
Speaker 3: on biotech. There was a IQB report in the last
38:28
Speaker 3: couple of days the sixty percent of drug approvals now
38:33
Speaker 3: not clinical trials, not initiation, are now coming from the
38:37
Speaker 3: smaller companies. Right now, there's still a lot of cash
38:41
Speaker 3: out there from the aftermath of sort of the exuberance
38:45
Speaker 3: of the covid era and the stimuli and all those
38:49
Speaker 3: kinds of stuff, so that may or may not last.
38:51
Speaker 3: It may or may not make sense for small companies to
38:53
Speaker 3: market their own drugs. It's a symbol of how flexible
38:57
Speaker 3: the system really is. And pharma at the very beginning
39:02
Speaker 3: has had this complex relationship with biotech, from the very
39:06
Speaker 3: first partnerships, the acquisition of Hypertech, the very beginning of
39:11
Speaker 3: the industry, Pharma has played a nurturing role. Remember a
39:16
Speaker 3: lot of the venture now is coming from the big companies.
39:18
Speaker 3: Oh yeah, So there to say that there continues to
39:22
Speaker 3: be investment. There is not to deny the dynamics of
39:27
Speaker 3: this sector. This isn't mom and pops making investments in biotechs.
39:32
Speaker 3: And the power of that model is really extraordinary, and
39:35
Speaker 3: it is the biotech model is shockingly efficient and quite honestly,
39:42
Speaker 3: we think it's a little bit less risky than most
39:44
Speaker 3: people think it is. But the power, you know, I
39:47
Speaker 3: put this on LinkedIn one day a little bit to
39:50
Speaker 3: be a counterfactual, but the ultimate example was Peter Kolchewski's
39:56
Speaker 3: investment and triangle. Right, here's a U was ignored by
40:02
Speaker 3: a large pharma. I think I know it is, but
40:04
Speaker 3: I'm not really sure which one walked away from it.
40:08
Speaker 3: An investment was made in a quite small biotech triangle
40:12
Speaker 3: in those days, with no products to bring forward through
40:17
Speaker 3: one more trial after a failed trial. They did one
40:20
Speaker 3: more trial on I'm a Trip to Being, which is
40:24
Speaker 3: now a part of I think eight or ten HIV drugs,
40:29
Speaker 3: and then they got acquired by Gilliad. Think about how
40:33
Speaker 3: hard something that would be in large pharma just to manage, right,
40:37
Speaker 3: you do a failed clinical trial, you don't continue to
40:40
Speaker 3: invest in that product. But the biotech had no choice, right,
40:44
Speaker 3: and they were fortunate enough to have a really smart
40:47
Speaker 3: investor see that.
40:49
Speaker 2: You know what. Years ago we had Robbie Merotra on
40:52
Speaker 2: the show who has sort of this concept of all
40:54
Speaker 2: of small biotech should be categorized as the R and
40:57
Speaker 2: D dollars of the industry. I think the data continues
41:01
Speaker 2: to bear that out. I think there we're going to
41:04
Speaker 2: see attention between just how far investors can stay at
41:09
Speaker 2: companies as they go further and further. But like you said,
41:12
Speaker 2: the AQVA data is really interesting. That are the biotech
41:17
Speaker 2: seem to be taking that relay race. The Johannespruel spent
41:20
Speaker 2: on a lot. He describes it as a relay race.
41:22
Speaker 2: They're holding onto that baton longer than ever before. We
41:26
Speaker 2: have found a lot of efficiencies. You talk about it
41:29
Speaker 2: being flexible. We're from the perspective of we're going to
41:33
Speaker 2: see it bend. We're trying to make sure it doesn't
41:35
Speaker 2: break and doesn't break for specific therapeutic areas. I want
41:40
Speaker 2: to just say thank you so much. I reached out
41:42
Speaker 2: sort of out of the cold. We had some dueling
41:44
Speaker 2: op eds out there. I hope everyone is tuned in.
41:47
Speaker 2: This a little longer than our normal episodes, but every
41:50
Speaker 2: minute of it is the kind of conversation that we
41:52
Speaker 2: hope to be having. So a deep thank you to you.
41:56
Speaker 2: He is Professor Fred Ledley at Bentley Universe. I am
42:01
Speaker 2: really appreciative that we took the conversation from the print
42:04
Speaker 2: media and LinkedIn and put some voices behind it. We
42:07
Speaker 2: will absolutely have you back on when the next data
42:10
Speaker 2: sets come out and see what your take on them.
42:12
Speaker 2: On you can learn more about Incubate at Incubatecoalition dot org.
42:17
Speaker 2: You can find our Life Sciences tracker that tracks some
42:21
Speaker 2: of those consequences at wwwlifesciencetracker dot com. Give us a
42:27
Speaker 2: follow on LinkedIn x you'll see this conversation and many more.
42:30
Speaker 2: A special thanks to Grace Moster and making today's podcast,
42:34
Speaker 2: and a really truly special thanks to you, Fred for
42:37
Speaker 2: willing to come on and share your views. This has
42:39
Speaker 2: been an enlightening conversation.
42:42
Speaker 3: Yeah, my pleasure. These are definitely exciting times.
42:45
Speaker 2: And thanks to our audience for listening and giving feedback
42:48
Speaker 2: and as always, keep innovating.
42:52
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