EQRX: Hope or Hype?

So this is a different kind of post for me and I feel the need for some disclaimers—opinions are my own and do not reflect those of my employer. The following should not be construed as legal or investment advice, etc. And while I have no financial conflicts of interest (other than being employed by an incumbent in the industry EQRx seeks to disrupt), I do have plenty of intellectual conflicts of interest, which is the real reason I’m writing this post. More on that later. And if you’re used to my pithy, concise leadership posts—strap in. This is a long one!

EQRx is a venture-backed, soon to be public, biotech company founded in January 2020 with a mission to increase patient access to high cost medicines in oncology and immunology. The business concept is a “fast-follower” approach to drug development, paired with a “pull-through” go-to-market model executed through partnerships with payors who are members of the EQRx “Global Buyers Club.” Not to be confused with the “Dallas Buyers Club,” but, hmmmm . . . maybe that’s why Alexis Borisy is wearing that hat?

Their focus is on high-cost drugs in oncology and immunology where there is a known, clear and causal mechanism of action with sufficient patent runway in the class. Their hypothesis is that there is a decreasing cost and increasing efficiency of drug discovery through computation and high throughput tools. And in this new era of bioengineering, they can quickly scale and bring to market a robust portfolio of new medicines in established classes of high cost drugs that are different enough to be patentable, thus filling a niche that cannot be met by low-cost generics. Since they are going after well-understood pathways and targets, they expect less development failure and lower R&D costs. They also hypothesise that their “pull-through” Buyers’ Club business model will eliminate most marketing and sales expense. The combination of efficiencies, scale, and cost reductions will subsequently allow them to charge 50-70% less for their medicines whilst maintaining similar margins to incumbent Pharma companies. It is a creative, audacious and bold vision. All the things I love about entrepreneurship.

A company like this could make a huge impact in our industry and in the world. Global drug spending is expected to be $1.6T by 2025. EQRx has proposed to take a big bite out of that with a current portfolio of assets that could challenge more than $200B of spend and an ambition to take on $650B in global sales over the next decade. By my calculations, this would represent somewhere between 15-30% of global drug spending at scale. If they garner just 10% market share with their near term portfolio (a very reasonable assumption one would think), they could remove $10-15B from the ecosystem, while earning substantial profits themselves—again, not investment advice. While sustainability of the business (through profits) is of course necessary, let’s not lose sight of the fact that this is a mission-driven company at its core. They exist to remove access barriers for patients suffering from very serious illnesses like cancer. We can all get behind that, yea capitalism!

So it seems like the EQRx team is on to something really big if it works. But, can it work? Some investors surely think so. Their Series A was backed by an impressive group of A-listers, and they announced Friday a staggering new raise of $1.8B through a SPAC+PIPE (which leaves them with $2B on the balance sheet; you can disrupt quite a bit with that kind of cash!) The management team and the board are world class, and they have many advisors who are likewise some of the most accomplished folks in our industry. This is no Theranos. This team is “super-legit” as the kids would say (they still say that, right?)

Enter my intellectual conflicts of interest, aka biases. Be honest, while you were reading about this did you have an emotional reaction? Did your breathing change? Did you get fidgety or hot? If so, that was your amygdala reacting to a belief challenge. Our brains crave certainty. So when something challenges what we thought to be true, the part of the brain responsible for the fear response is activated and we set to work finding all the confirmatory information we can of why it is not true. We reject facts that support the challenge and put disproportionate weight on facts that dispute it. That is called motivated reasoning, and the smarter you are, the better you are at it.

My motivated reasoning was activated big time when EQRx launched in early 2020. I just couldn’t believe there was anything that could fix the US drug payment system which seemed entrenched and broken beyond repair. And I’m still skeptical, but I have been paying close attention to decision-making and thinking models lately, and thought I’d apply what I’d been learning from Annie Duke’s Thinking in Bets and other stuff. That is why I’m writing this post. To examine my biases in the cold light of day. To get curious. With me? Lets dig in.

Every business is founded on a hypothesis, which is really just a belief. EQRx has three fundamental hypotheses I want to explore with you:

1. We can produce 10 drugs in 10 years at about $200M development investment to launch per molecule.

2. Payors are incentivized by lower prices and can drive prescribing in their networks, so we don't need an expensive sales force.

3. These two things will come together to form Voltron and lower drug costs for patients.

Drug development is still plagued by Eroom’s law. Although there has been some reversal of that as we increasingly understand how to intervene in monogenic rare disease, the cost of getting one drug to market still exceeds $2B on average (which includes the cost of failure). So how can EQRx do it for $200M? They speak to the future of computational tools and bioengineering and no doubt that will be helpful as they build their future pipeline. But near as I can tell, in the near-term their secret sauce is the business model, not some AI discovery platform (although they recently disclosed a collaboration with Exscientia). Their R&D costs are low because their R&D risks are low. Instead, they are taking on higher than average commercial risk as they can't guarantee their drugs will be differentiated from what is already on the market. They are betting they will win because of their business model innovation, not their scientific innovation.

However, their bet on 10 drugs in 10 years is not entirely without scientific risk. The prolific, wise, and desperately funny Derek Lowe, weighed in on this in his excellent blog. His post reflects his skepticism, in hilarious fashion (and do read the comments, comedy gold there!). In fact, Dr. Lowe went so far as to bet $500 on LongBets.com that EQRx would not produce 10 drugs in 10 years (all proceeds going to charity). Would you take that bet? How would Vegas calculate the odds?

For clarity purposes, let's define a “drug” as a molecule that has at least one regulatory approval for use in a human disease. And “produce” means that EQRx is the sponsor of the registration-enabling clinical trials for this drug. Using this definition, although EQRx has not produced any drugs in just under 2 years of existence, they are getting close. Two molecules, aumolertinib (a 3rd gen EGRF inhibitor for NSCLC) and sugemalimab (a PD-L1 for Stage III&IV NSCLC), are disclosed to be “pre-registrational,” differentiating them from three other clinical stage assets in the pipeline. Both of these agents were in-licensed from Chinese biotech companies, well known for being superb fast-followers. EQRx has also disclosed clinical programs for a CDK4/6 inhibitor (lerociclib, in-licensed from G1 Therapeutics), a PD-1 inhibitor, and a JAK1 inhibitor. So could EQRx “produce” 10 drugs in 10 years by in-licensing later stage assets from the prolific Chinese fast-follower companies and other biotechs? According to their investor presentation, there are dozens to tens of dozens of issued patents for chemical matter on other major targets like GLP1, BTK, IL23, and KRAS. So that’s 9 right there (assuming they all work in the clinic, again, not a trivial risk).

As Derek rightly points out , the further you stray from the originator compound, “the greater your chances of surprises – PK surprises, selectivity surprises, toxicology surprises.” And sometimes these surprises don’t show up until you start testing in patients. In-licensing after decent Phase II data can help, but is no guarantee of success. I don’t know of a good source for probability of success data for fast-follower molecules, but solid tumour NCE’s have the lowest PoS of the major drug classes. But, the focus on well established targets and pathways greatly de-risks the portfolio, so let’s call their PoS 80% (which is pretty damn high). Even with that generous allowance, 2 out of 10 tries will fail. Now, I’m sure no one at EQRx will be complaining TOO much if they produce 8 drugs in 10 years—that would be a phenomenal success. But, would you take Dr. Lowe's bet? I probably still won’t, but as an homage to Annie Duke, I do acknowledge that the probability of winning this bet is north of zero. I'd take it if it were $20 bucks say, but at $500 I'd want a bit better odds.

Another thing I'm left wondering about, is the breadth of development for each molecule. That $200M investment to launch may not be enough to substantially reduce your commercial risk. Let’s take sugemalimab for example—a PD-L1 being studied in Stage III and Stage IV NSCLC. It presumably will compete with Roche’s atezolizumab (Tencentriq) and AZ’s durvalumab (Imfinzi), both of which have a much broader indication profile. Oncologists are evidence-based practitioners. I don’t think they would be comfortable extrapolating a class effect across multiple tumour types. EQRx will need a competitive data package to unseat these incumbents across a healthcare system.

So how will EQRx handle this? Perhaps EQRx could generate data for these follow-on indications in an efficient way using real world evidence methods, synthetic controls, digital assessments and data collection, adaptive trial designs, etc. There are many ways to innovate on the clinical trial front and I do hope EQRx pushes the envelope here. They have two people on their board who are best in the world when it comes to these issues—Amy Abernathy and Clive Meanwell. So while I’m not sure they can be successful (as some of this is not entirely in their control), I look forward to learning from their efforts.

Which brings me to assumption #2 and the "secret sauce", the Global Buyers’ Club. Here, you have to believe that payors are, a) incentivized by price; and b) can control what drugs are prescribed in their networks. Let’s break it down.

Fundamental question—do insurance companies want lower priced drugs? What? That’s a ridiculous question. Of course they do. Are you crazy? Hear me out. In my world, which tilts squarely towards non-oncology to be fair, insurance companies are not interested in lower priced drugs unless they are transformative (e.g. compel prescribing based on the strength of the data). And while EQRx may be on to something big here, they are not bringing transformative medicines to patients, they are bringing me-too products. And lower cost me-too products may not actually benefit the overall economics of a pharmacy benefit manager or insurance company that derives substantial revenue from rebates in a drug class. If we turn to the immunology market as an example, a high priced group of drugs EQRx has stated they want go after, the incentives really are irrational (I hope you’re sitting down).

You gotta ask yourself, why haven’t biosimilars taken off in the US? Is it because docs don’t accept them? Partly, but having enough global experience to know what is happening in Europe, I can tell you that docs there were skeptical at first too. It took mandates from payors to make the switch. And the fact is, most US payors can’t mandate a switch (as we’ll discuss) and aren’t incentivized to do so. What do I mean?

Let’s take a hypothetical immunology medicine, we’ll call it Cashcowmira. The fine folks over at Cashcowmira, Inc have set up some sweet deals with the fine folks over at Gotchacoveredsorta insurance. If Cashcowmira market share in their network stays above its current threshold (say 70% or whatever), then Gotchacoveredsorta gets a 20% rebate off of their purchase of Cashcowmira at the end of the year, which translates into a big fat check. These rebate checks can be several million dollars. BUT, if market share drops below 70%, Gotchacoveredsorta forfeits their rebate. No cash for you! So here comes Fastfollowermira, it is half the cost of Cashcowmira, surely Gotchacoveredsorta will be all over it, right? Wrong. Because they have to make sure they can convert enough of that Cashcowmira business in a relatively short timeframe to cover losing that rebate (unless Fastfollowermira agrees to cover their rebate losses during the conversion, which is an option). The fact of the matter is, most insurance companies simply don’t have enough leverage over prescribers to change behaviour that quickly.

Now the discount/rebate game doesn’t appear to be as prevalent in the oncology space, and EQRx is offering really deep discounts off the bat (probably deeper than most branded contracts, but that’s all secret, so who knows). So for the first several launches, perhaps EQRx won’t have to deal with this crazy issue. EQRx states that several major US payors were part of their Series B, but my googling skills weren’t good enough to find any names. If you have a public source for that info, please put it in the chat. Thanks.

So how can insurance companies drive prescribing and create the needed “pull-through” to save on EQRx sales and marketing expense? You may find this surprising, but most US physicians still have enormous prescribing autonomy. In my experience as a clinical pharmacist and field-based formulary specialist working with large health-care systems, it takes a lot of push to create the pull, with exceptions being some closed systems like Kaiser Permanente or self-funded, self-administered employer systems where incentives can be aligned a bit easier.

So if there is no money from EQRx to do the push, then the payors will need to do the pushing. This is not unprecedented, there is great work going back decades on academic detailing. EQRx can help by having robust data packages and continual evidence generation to show their products are performing as expected in the real world. With these payor partnerships, we can probably assume good access to anonymised data, so the value of the data play they could build to drive behaviour change shouldn’t be discounted.

Other than detailing their own physicians on the merits of a new product, what other levers do insurance companies use to drive prescribing to a preferred agent? Probably the most common tactic is to make things administratively easy for the prescriber (not quite a carrot), or administratively difficult (definitely a stick). Or making it either very affordable for the patient (not quite a carrot) to downright inaccessible (a big ass stick). We know prescribers are sensitive to both of these tactics. And we know the Pharma industry invests heavily in services to help physicians and patients navigate barriers like prior authorisation, co-pay assistance and the like—so if the pain points have been solved through other means, these tactics could be less effective to drive the desired behaviour change.

A more effective incentive is probably a real carrot. Payors could offer financial incentives to prescribers for writing an EQRx product, and hopefully make EQRx products free to patients (e.g. no co-pay or out of pocket, zero, nada—consider this a call to action). This would be a super-charged incentive and perhaps allay concerns of conflict of interest in paying docs to prescribe certain drugs since you’re aligning patient incentives as well. Otherwise I think assumption #3 is dead in the water. There are too many examples out there today of pharmaceutical manufacturers deeply discounting medicines and none of those savings going to the patient. Perhaps this would be fixed by the lower list price, but please EQRx, hold your Buyers’ Club participants accountable!

So, nearly 3000 words in, where does that leave us? There are lots of barriers and risks still to be sorted, but I’m less skeptical than I was before. AndI have to say, being curious is more fun and energising than being skeptical. Put me in the hope camp. I really think they have a shot to make things better for patients. Hey EQRx, don’t throw it away!