Radically Different and Fundamentally Lower
EQRx launches with bold ambitions
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EQRx, A brand new biotech startup, has just launched with a $200MM Series A, and its founders are saying some intriguing things about how they’re going to enter the market. And they want to target drug prices:
[CEO Alexis Borisy] and his co-founders believe there's a growing opportunity for a company committed to inventing and introducing new drugs at "radically different" prices than what brand-name drugmakers typically charge today.
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"Our price is going to be much lower — so much lower that it's not about a rebate or a discount, it is a fundamentally lower price," said Borisy.
I’m intrigued because Borisy is claiming to have found an opportunity to profit from high drug prices, and in the process, bring them down. That’s significant, although the details of how it will work aren’t at all clear. Frankly, I feel a little bit nerd sniped by the media coverage, which offers tantalizing clues on the strategy, but mostly leaves us guessing.
(If you’re interested, this podcast from Stat contains a detailed interview with Borisy. See also this writeup from Forbes, this piece from Timmerman, and this angle from EQRx’s investors at A16Z.)
Here is my synthesis of EQRx as described in those resources, as briefly as possible:
Fast Follow/Equivilar Drugs: EQRx plans to invent and patent its own drugs. These drugs will use the same drug targets as existing FDA-approved therapies, but they’ll be distinct enough to avoid patent problems, according to Borisy. That means it’s not a generic or biosimilar strategy; EQRx instead have been using the terms ‘fast follow’ and ‘equivilar.’
Very Low Prices: Borisy says the drugs will be ‘radically more affordable’ than the incumbent drugs. He sees a big part of EQRx’s opportunity as arising from the extremely high prices on some branded drugs.
Large Portfolio: EQRx expects its first FDA approval in 5 years, with 10 approvals in 10 years, and “dozens and dozens” within 15 years. For those unfamiliar, this is extremely aggressive timing for the industry. The initial focus is expected to be on small molecules, proceeding to biologics and possibly gene therapies in the long run. To start, they’ll target cancer, immuno-inflammatory diseases, and rare diseases.
Focus on Process: Because EQRx is sticking to known drug targets and attempting to get many drugs approved, it needs strong processes for drug discovery, development, trial, approval, and commercialization. The A16Z piece linked above is especially firm on this point.
Partnerships across the value chain: Not many details here. A16Z notes this is to “remove friction.” Forbes says EQRx will “market directly to payers and providers instead of consumers,” although in my own experience marketing drugs, that is a pretty common and traditional approach.
Setting up the puzzle
Here’s the kicker: Borisy says that very low prices are the key. From the Stat interview: “If we jack the price on that equivilar that turned out to be by far the best in class, that would ruin the whole approach of what we’re doing and everything else.”
Borisy has to believe that these very low prices are the best thing for his business and shareholders, even compared to the more common strategy of biosimilars pricing around 20% below the incumbent. On the surface, that doesn’t seem true; there are diminishing returns to lower prices.
The diagram below illustrates what I mean; there just isn’t much to be gained from charging a very low price relative to a more typical entrant price. The gain in share is small while the loss in price is large.
Finally, the Forbes article leads with this quote that hints at a novel business model:
“EQRx wants to do for the pharmaceutical industry what Southwest did for air travel, says its president Melanie Nallicheri. “They didn’t reinvent the airplane,” she says, but “they reassembled the experience, lowered the cost.”
Let me plainly state the question at hand: What is EQRx’s business strategy, such that they are incentivized to charge prices below the revenue-maximizing level?
Assembling the Pieces
From this point, our analysis departs from the facts and enters the realm of speculation. Please treat is as such! I think it’s still valuable to think through the various possibilities and their trade offs.
Let’s start by taking a look at how drug development might work at EQRx. We mentioned above that they’ll be focused on creating equivilars that act on known drug targets, which reduces the uncertainty in the drug development process. Because these drug targets are just as available to competitors as they are to EQRx, it’s imperative that EQRx develop the best possible set of tools and processes for finding these molecules.
Remember, their competitive set includes big pharma companies that already have expertise in these drug targets (having identified them in the first place). As I understand it, big pharma doesn’t necessarily have research processes in place for quickly optimizing a drug WITHIN the space of a known drug target, though.
This leads to an opportunity for EQRx to design such processes from scratch, and hence they’ll emphasize engineering competence, rather than basic science. A16Z briefly mentioned machine learning algorithms, which might be especially useful for discovering equivilars if properly applied. The highly pedigreed founding team can hopefully bring their experience to bear on getting this right.
The result of a successful effort in building this process is a scalable, low-risk way of identifying drugs, getting them approved, and bringing them to market. That means an initially capital-intensive business spending money on process design, but a relatively capital-light business in the long run.
The next key lies in how EQRx develops partnerships “across the value chain.” Who could EQRx reasonably partner with, and how might those partnerships affect their business? Because there’s little information available right now, we stand on shaky ground, but let’s look at a few possibilities.
Payers: Insurance companies have a great deal at stake in lowering drug prices, so should be willing to engage with EQRx. One of the key hurdles for many drug launches is getting access to insurance plans’ formularies, especially when the drugs are expensive. But EQRx will have an easier time, as insurance companies will be eager to replace expensive drugs with cheaper ones.
That also means insurance companies may be willing to help EQRx along. Help might include advising on which drugs to develop according to market need, or even putting up some capital to fund development (as BCBS has recently done elsewhere).
One thing I do not expect to happen is for EQRx to engage payers in any value-based contracts like the ones that have recently come into vogue. These contracts can align incentives for drugs that are very expensive (either as a one-time cure, or over a long horizon for chronic conditions). And value-based contracts create a lot of friction, because they require two sides to agree on precise measurements for both the effectiveness of a drug (hard to prove without counterfactual) and the resulting economic benefits (highly entangled with other factors). However, since EQRx is taking the low-price approach, none of that is necessary.
If EQRx does opt to contract with insurers, it may instead take the form of a long-term purchase agreement that enables insurers to lock in access to the low prices, and infuses EQRx with funding sooner that they can roll into their business.
Crucially, all of this payer collaboration is predicated on the payer being attracted to low-cost drugs. The more that EQRx stands to benefit from collaborating with payers, the greater incentive they have to keep prices low, and the more their success relies on being able to both develop and produce drugs at low cost. When and if we learn the details of EQRx’s collaborations with any payers, it may turn out to answer the pricing mystery that I stated above.
Pharmacy Benefit Managers: PBMs negotiate drug prices with pharma companies and retail pharmacies on behalf of payers. The recent wave of Payer-PBM mergers (CVS/Aetna, Express Scripts/Cigna, Optum/United) gives payers more insight into PBM negotiations, and has possibly shifted some of the incentives in those negotiations (which by the way are totally broken).
In any case, EQRx will need to convince PBMs that the low prices they’re charging are in the best interests of the PBMs, and it’s important to note that those interests often do NOT align with the PBMs’ clients, the payers.
In the extreme case, I do wonder if it’s possible for EQRx to simply bypass the PBMs and engage with payers directly, who may then exercise some power over the PBMs. This is potentially easiest to do with the payers that own their own PBMs, or have close partnerships in place (as BCBS has with Prime).
Doctors: To drive prescription volume, EQRx will need to reassure doctors that their equivilars are as effective as the incumbents. Those incumbents employ sales forces with long-established doctor relationships, and will aggressively defend as best they can. For example, a simple copay card from an incumbent sales rep can reduce the patient’s out of pocket cost on an expensive drug to zero, even as the payer bears the burden of the high overall cost.
So EQRx has a couple of options: the first is to respond in kind with an expensive sales force (drug reps, especially in a specialty space like oncology, are very well paid). With a large enough drug portfolio (as EQRx expects to create), it’s possible to spread the costs of these reps fairly efficiently. On the other hand, low prices don’t leave much gross margin to devote toward sales costs.
The second option is to leverage their payer relationships (as described above) to control formulary access, such that even doctors who want to prescribe the more expensive incumbent are forced to go with the equivilar.
Hospitals and Health Systems: Can be an excellent source of patients for EQRx’s clinical trials. Clinical trials will be a critical process for EQRx, since they’re necessary to bring drugs to market. Sourcing the right patients is an important part of that, especially for drugs in the rare disease space (where patients are, uh, rare).
Hospitals can also control access to some drugs (i.e. drugs given in the hospital, as opposed to drugs dispensed by a retail pharmacy like CVS). In this case, it’s similar to building a doctor relationship, but clinical decisions are more centralized, usually incorporating a panel of pharmacy directors, medical directors, and highly tenured doctors.
Big Pharma: can contribute R&D resources, capital, manufacturing and commercialization expertise, and industry relationships throughout the value chain. EQRx CEO Alexis Borisy has previously sold a company to Roche; it wouldn’t be surprising to hear of a partnership with Roche, or another big pharma company whose portfolio isn’t at risk from equivilar competition.
Narrative Synthesis
If EQRx is successful, what does that look like? Here is one possible vision, again highly speculative:
EQRx develops its first drugs quickly, learns from the experience, and settles on an effective process for doing it over and over again. Those processes include proprietary algorithms and software tooling that make researchers more effective than they would be elsewhere.
The regulatory regime accepts the notion of equivilars, and speedily approves them, especially given strong political demands to reduce drug prices. In fact, EQRx’s low pricing strategy insulates them from regulatory risk far more than the rest of the industry.
During the 5 years of development on the first drug, EQRx will have engaged a range of insurance companies for help in determining market needs for cheaper drugs. Those insurance companies, intrigued by the need for cheaper drugs, cooperate and even contribute resources to these development efforts. Upon approval, the insurers make sure their formularies prioritize the equivilars, regardless of the PBMs’ wishes. While doctors aren’t necessarily sold, the payers have put so many hurdles in place that they give up on prescribing incumbents’ products.
Following the first approval in ~2025, competitors begin to take note of the successes, and consider copying the strategy. But by then, EQRx has had a 5 year head start and sits high atop the experience curve. After several big capital raises in their early years, EQRx’s funding needs are now much lower, and it is able to continue discovering new drugs at much lower capital intensity. So, it can move even faster, and charge lower prices, than any potential entrants.
Some large pharma companies may also try to copy EQRx’s model, leveraging their own highly distinguished research departments and impeccable commercialization engines. But much like Continental Lite failed to compete with Southwest, big pharma incumbents lose money on the new strategy because their own processes and relationships all slant toward different objectives. They eventually exit, unable to commit to an effort that’s ultimately low-margin compared to their core businesses.
Drug prices fall, at least for some highly-priced cash cows. On the other hand, research into new drug targets also falls, since those discoveries are less valuable now that fast followers collect more of the benefits. Research efforts shift subtly toward exploiting known targets instead.
Meanwhile, the list of biggest risks that could disrupt that success story might include:
Execution risk can’t be over-stated: developing a process for fast drug approvals is hard. It can be managed, but not easily, or else it would have surely been done by now. Clinical trial outcomes are hard to predict, even given known drug targets, and the same holds for the FDA, who are gatekeepers that can (and indeed, often should, for safety’s sake!) hold up a fast-mover strategy.
Regulation: I’m not a lawyer, but it’s possible that the equivilar strategy runs into patent trouble. Legal challenges, even if they’re won, can direct cash away from more productive uses.
Competition: it’s possible that the process development and relationships aren’t actually difficult to, and that competitors flood in at the first sign of success, making the fast-follow strategy a slog in the long run. EQRx still sits at the top of the experience curve, but returns diminish. Note though, that in this case, it’s likely that EQRx has proven some success in order to attract competition, probably enough success to have justified the substantial venture funding.
Relationships: Value chain participants, namely insurers and PBMs, aren’t interested in low-priced drugs because of incentive problems, clinical concerns, or something else, and market access isn’t achieved.
EQRx’s success is far from guaranteed, but there does seem to be at least a plausible path to success. Notably, success is defined differently than for a more traditional biotech startup, which aims to develop a drug and monetize it as best it can. EQRx is successful if it develops a process that allows it to develop drugs repeatedly. And if that process results in low prices for patients and insurers to bear, the company is well worth watching.
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