Stephanie Sirota: Innovation is moving at an extraordinary pace from GLP-1s to AI-enabled drug discovery, but new therapies and tech are not enough if patients can't access the innovation. Welcome to the RTW Podcast, where we aim to keep our listeners healthy, wealthy, and wise.
I'm your host, Stephanie Sirota. Today, we're joined by my partner, RTW's founder, CIO, and managing partner, and now author, Rod Wong, to discuss his new book, Innovation Is the Best Medicine: A Policy Roadmap for Biotechnology, published through the RTW Institute, an independent nonprofit think tank within the RTW ecosystem.
Rod has had a front row seat to the last two decades of American medical innovation, and sometimes compares today to the best of times and the worst of times. How did we get here? Hardly anyone is better positioned to explain. Thanks for being here, Rod.
Rod Wong: Happy to be here. It's been a few months, I feel like, since we did one of these, so looking forward to it.
Stephanie Sirota: You chose to write this book at a moment where capital seems to be flowing back into the space, yet policy pressure and affordability concerns are intensifying.
Rod Wong: It really goes back to this kind of fundamental belief that we have, which is innovation is really the key, or one of the keys, certainly, that people's lives are going to be better over time, certainly healthier, right?
But that can't be separated, to your point, from the fact that we have this affordability crisis. And so getting the diagnosis right on the affordability crisis is critical if you're going to have any chance of getting the policy solutions right across health care, including drugs.
Stephanie Sirota: At the center of your book is the concept of the drug innovation treadmill. It's great imagery. What is that, and how does that define the American model of innovation, entrepreneurship, and the capital that keeps this sector afloat?
The Drug Innovation Treadmill
Rod Wong: Yeah, I really like this image of a treadmill, because I think the drug industry is basically on a treadmill. I want people to understand that. This industry is unique and different from every other industry because you have forced generic substitution after patent expires.
So what that means is that these drug companies are always trying to solve the biggest health care problems by innovating, but they have to replace basically their entire businesses on average every 15 years or so, as their existing sources of revenue basically disappear. And because of that very unique dynamic at a societal level, it's really an incredible bargain.
Stephanie Sirota: I want to double click on that, the concept of this being a bargain, because you're right, people, when they get hit in their pocketbooks and they have to pay for certain things, or can't afford certain medications or therapies, then it feels like things are out of reach.
But by bargain, I want to emphasize what you mean, which is that there's going to be one generation, or one decade, or 15-year period where people are paying top dollar for a drug, and then that is free.
Rod Wong: That's right. Another way I like to paint the picture for people is the way it nets out for each American is that you pay about $100 a month. And what that $100 a month gets you is basically a Netflix-like subscription to every medication, branded and generic.
Now the generics are, at any given time, 90% of all the medications that are available, and then 10% are branded. And that 10% changes as new drugs are developed and then eventually they go generic and are replaced by the most innovative new drug.
Stephanie Sirota: Now, when the innovation treadmill functions as it's intended, what value does it create for patients, investors, and society more broadly?
Rod Wong: Yeah. For patients and society, I think it is a no-brainer. Over time, health improves significantly, especially after you address most of the major public health concerns. It really is innovation that's going to drive the improvement in our lives, our health overall, over time.
Already over the last couple dozen years, we've seen cardiovascular mortality get cut by about half, cancer by about a third, and that's really what you get. And then, of course, for investors, it is one of the few very innovative industries that can create value, and thus it gives investors an opportunity to participate in that value.
Stephanie Sirota: You also argue about the fragility of this system and that it's highly sensitive to policy shifts. So a couple parts of this question. First, where do you see signs of strain today? And then, is there anything different about what the Trump administration has done to tackle affordability without penalizing the drug companies?
The Economics of Innovation
Rod Wong: Yeah. When you think about the business of discovering and developing innovative new drugs, I think everybody's heard the numbers, right? They are scary, right? It's over a billion dollars to develop the typical drug. It comes with a single-digit success rate. It takes over a decade to get to the finish line.
And so if you put all that together and crunch the numbers, as a business, what it looks like is a business with a low single-digit return on invested capital, ROIC. And those kinds of returns, especially when you consider the volatility and the uncertainties involved, it's really, really hard to compete with very attractive industries like tech that can easily return into the 20s. And look, money goes where there are attractive returns. And so that's why I really want to make that point to people, is that we're not entitled to innovation in our space.
It has to be attractive to investors for that innovation to happen. And so any business that at baseline is already at a relatively low level of ROIC, if you change incentives a little bit, obviously you can get major swings in terms of how much of that innovation you get, and we'd be most worried about it going to the negative. The most recent well-known example is with the passage of the IRA, for at least the initial period after it, there's a 30% drop in small molecule oncology projects. And obviously the last thing any of us want as a society is less cancer innovation. So the stakes are high, and it's just important for people to really know what's at stake.
Stephanie Sirota: I think that's a really important point, and there are observable points that we can compare, the robust capital markets ecosystem in the U.S. versus what we see in Europe, where it's hard, because there certainly isn't enough risk capital in the system to drive a lot of these programs forward. And you need to have investors there to keep pushing the most innovative things and make it across the finish line for some outsize gain.
Rod Wong: You're exactly right. I mean, it is so special and unique that really the U.S., until very recently, with the emergence of China, was really the only place where you had all the ingredients come together to support a healthy drug innovation ecosystem.
Stephanie Sirota: Now, in your book, let's talk about gene therapy, because you've been an early backer of gene therapy. You started a company in the space over a decade ago. You know the space quite well. You suggested gene therapy is today at a crossroads. Do you see it that way, particularly in light of recent FDA initiatives and commitments and challenges?
Gene Therapy at a Crossroads
Rod Wong: Yeah, I think that's right. I think gene therapy is the poster child today of a technology that has incredible promise. When it first hit the scene, the promise to cure a long list of really severe genetic, rare diseases is what got people really, really excited.
Stephanie Sirota: And let's just tell our listeners, there are 5,000 known monogenic diseases that in theory could be targeted, and have those faulty genes repaired, and halt that disease in its tracks, or get it early enough so that it never even can present.
Rod Wong: That's exactly right. And the issue that has emerged is that gene therapy is just an immature modality, and we're going to have to innovate to make it so that it is less costly. Right now it's extraordinarily expensive, can be hundreds of thousands of dollars per patient to make, and we need to improve what we call the product profiles.
The state-of-the-art don't have perfectly clean safety profiles, but because of those challenges, it is right now on a knife's edge. The market value, the number of companies in the space, has plummeted.
And so if we don't get the right incentives in place, and here I think the ones that are important are things that in large part are under the mandate of the FDA, granting regulatory flexibility, both on the expectations of the amount of clinical data, the standards that data is held to, as well as on the manufacturing side, having regulation be an appropriate match for the maturity of the technology itself and not just cutting and pasting the regs that we've used for very mature technologies like antibodies, because they've been around for 30 or 40 years.
If we don't get that right and are mindful about it, then gene therapy will never deliver its potential.
Stephanie Sirota: I think it's really important for you to say this, so that Americans get out of that belief that the drug developers are the bad guys. How should listeners think about the biggest drivers of health care spending?
Fixing Healthcare's Incentive Problem
Rod Wong: Honestly, the system is just structured completely wrong. There's no price transparency in services. When have you ever seen how much something costs when you go to the hospital, until you get your bill two weeks, four weeks later, after you've gotten the service? Everybody knows there's no price transparency in the system.
As a result, there's actually no competition. There's no mechanism to impose efficiency or discipline because of that. Now, if we don't do something about it, it's going to increase forever. And unlike drugs, which, even if you mess everything up, at the end of the day there's a safety valve, which is this forced generic substitution. Let's say a drug is egregiously priced, it will eventually go generic. There is no generic substitution in services. So if you don't fix the incentive system, it can literally go on forever.
Stephanie Sirota: Now, the subtitle of this book calls it a Policy Roadmap. If you could prioritize a handful of reforms that would strengthen both innovation and access, where would you begin?
A Policy Roadmap for Reform
Rod Wong: Sure. So first, on the innovation side, it's really about how you speed up the different steps of the drug development process. In preclinical and clinical, the bottom line here is the list of requirements has become too long and too rigid, and we've lost sight of the science. What do you actually need to make a good decision, as opposed to having a really long checklist? And the result is we've become too slow relative to other countries. The UK and Australia are also faster when it comes to translational, early-stage development.
To those that say, "Hey, but we don't want to do things that are less safe, we really place a high value on American lives," I would just point out that in the UK and Australia, the evidence would suggest they are no less safe. So you're getting bureaucracy with no discernible benefit, not even on safety, from being more conservative.
And then with clinical development overall, that's the longest chunk of the life cycle, the time it takes to develop a drug, and paperwork is 20% of that time. So the typical drug, you're spending a couple of years just on paperwork. That is low-hanging fruit, and it's perfectly suited to the new tools that we have, like AI. We just have to apply these new tools and start making things go faster.
Now, I'll make a special call-out for new modalities. I mentioned it with gene therapy, but you can't just use the frameworks for regulation for technologies that have had 20, 30, or 40 years to mature. If we want these new modalities, including gene therapy or cell therapy, to have the chance to innovate their way to maturity and success, we're going to have to tailor our regulations for the stage of that technology, and I think we can get that balance better.
On the affordability front, we've already touched on a lot of the things that we need to do. Tackling inflation starts with having better and more information, so you need pricing transparency, we don't have it. We need to reintroduce competition. We have to reverse these trends we're talking about with consolidation.
Similarly, technology gives us an opportunity to improve the operational inefficiencies that have been allowed to develop because you don't have the right framework for incentives. Now, on the question of incentives, even when you make progress on all these things, it's a little bit harder to realign incentives for efficiency. I don't think there's just one way to do things. People point to examples like Kaiser, originally out of California, which has this capitated model. Mayo Clinic is kind of the total opposite, they just have this performance-driven culture, and it seems like it works. But we do need to change the system. We need to try new things to reintroduce discipline and competition.
Stephanie Sirota: There are many competing perspectives in the drug pricing debate. Patients, investors, policymakers, hospitals, manufacturers, in a system with finite resources, how should we think about balancing those interests while keeping patients at the center?
Rebalancing the System
Rod Wong: There is so much opportunity to do better, that the bar is so low. There's been no reform. There's been no attempt. Big picture, I kind of think, first principles, when you have insurance, it should behave like insurance. It should cover what you need it to.
Related to that, I don't think denying or delaying access to care should be such a big business. It doesn't make sense. I think, obviously, we believe innovators should be incentivized to tackle health care challenges and to cure disease, because it's a hard job, it has low odds. We should make sure that deal is fair. Generic substitution, for example, shouldn't be unreasonably delayed, that's a deal that the industry has struck, but it also shouldn't come too soon. You shouldn't do things like the pill penalty that makes it uneconomic to innovate.
Very simple, basic first principle: non-innovators shouldn't enrich themselves for providing a supportive service, whether it's middleman rebates or hospital 340B. If you have half of the revenue from innovation, it shouldn't be going to the supporting actors in the ecosystem.
And then, we don't have to go into it again, but of course I would include services in that: you really need to bring competition back. You need to put the ingredients in place so that competition can function again, which currently it does not.
Stephanie Sirota: Rod, I wish you a lot of luck. I hope this think tank really develops. I hope the RTW Institute does what its mission is, that it's able to actually shape and reshape durable, positive policy around innovation and access. Thanks so much for joining us today.
Rod Wong: Thanks for having me.
Credits:
The RTW Podcast was produced by Katerina Rosen and edited by Matt Colbourne. Executive Editorial Advisor was our Partner, Chief Business Officer Stephanie Sirota. Editorial Advisor as Jim Heins. Theme music was “Goofy” by Danny Shields and “Mague” by Jozeque.
This interview was given by Roderick Wong, MD, Founder, Managing Partner and Chief Investment Officer, and moderated by Partner and Chief Business Officer Stephanie Sirota at RTW Investments. Statements reflect RTW's views and opinions as of the date hereof and not as of any future date. All expressions of opinion are subject to change without notice and are not intended to be a forecast of future events or results. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent.
