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EQRX Redux

In 2020, EQRX launched with an innovative and potentially disruptive business model. To provide low-cost, patented medicines in the high priced oncology and specialty immunology market. The business model was founded around three fundamental hypotheses:

  1. They would develop 10 drugs in 10 years investing about $200M per molecule (development to launch), thus creating a critical volume over which to amortize costs of operations;

  2. They would lower SG&A costs by partnering with payers to pull their medicines through the system preferentially, and;

  3. This combination of scale, volume and, lower SG&A costs would result in margins similar to the traditional biopharma business model.

Last week EQRx announced that their innovative business model was derailed at the jump with FDA feedback that approval of their PD-1 inhibitor for Stage IV NSCLC would require a 2nd Phase III trial with a head-to-head comparison against an approved PD(L)1 agent showing non-inferiority on OS. Ouch! That is long, expensive, difficult to execute, and blows up the $200M budget assumption. Management concluded that there is no viable commercial path in the US for this indication and that they would pursue a traditional pricing model in the US for their other pipeline products which have best in class potential.


When I wrote about EQRX’s model last year, I talked about Eroom’s law and the high cost of drug development. I stated that EQRX was taking on lower development risk, but higher commercial risk since they were going after known targets. I was thinking that if the target was validated, then the risk of getting good efficacy data in the clinic was much improved. But, I missed something very important—the type of clinical trial a follower needs to do to satisfy regulators could look very different than the trial the incumbent needed to do. Whilst early market entrants in a class may have the luxury of a placebo-controlled trial and even single-agent trials in some indications, once you have established efficacy the goal posts move. Ethically it is difficult to deny patients known effective treatments, so you end up with a head-to-head non-inferiority trial with OS as your endpoint which cost a helluva lot more than $200M and takes a wicked long time to enroll and complete (IF you can recruit the patients you need in the 1st place).


The FDA may seem like a spoiler to what was a good plan, but let’s remember the FDA’s mandate is protecting the public health, not lowering drug prices. And the FDA’s position shouldn’t come as too much of a surprise. They signaled their perspective on the bar for new PD(L)-1 therapies loud and clear with the Lilly/Innovent PD-1 decision and feedback to Novartis on tisle monotherapy in NSCLC. And its not like there are limited choices for patients. Its just that in this market “competition” in oncology medicines doesn’t result in lower prices since oncology medicines are a “protected class” and insurers have limited ability to restrict usage to a preferred agent (thus blowing up hypothesis #2).


On the other hand, as Peter Kolchinsky points out, there is a lot right in a market that makes this level of innovation investment viable. On Biotech Hangout last week, Sam Fazeli brought up an excellent point—no one knew ahead of time that the PD(L)-1 market was going to be as big as it is. In fact, its is a great example of the strategic advantage of continued investment in a medicine after initial approvals (and brings into stark relief the potentially devastating chill IRA may have on such follow-on investments). Incumbents have invested heavily in their PD(L)-1 therapies to broaden their reach into multiple patient populations and maximize revenues, thus setting a higher bar for fast-followers and solidifying their market share. Merck alone has conducted more than 25 trials of their PD-1 inhibitor and invested multiples of the $200M proposed in the EQRx hypothesis.


What’s next then for EQRX? Every start-up is founded on a hypothesis, and often that hypothesis is proven false. EQRX is doing what all successful start-ups do. They are pivoting. In this case to a traditional biopharma business model in the US. This is smart—with $1.5B in cash, runway until 2028, and two potential best in class products in their pipeline, their future is bright. Congrats to the founders for pursuing a bold vision and running the experiment. This is a tough business. Those who take innovative risk should be congratulated even if it doesn’t work out. Its clear that we need new business models that better balance incentives for innovation with access to medicines for patients. Let’s keep innovating. Perhaps a new business model for insurance coverage of medicines that aligns incentives for insurers, patients, and innovators? Naw, that’s a crazy idea!


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