null Episode 3: Gene Therapy: Cures, Risks and Opportunities
Double Take podcast

Episode 3: Gene Therapy: Cures, Risks and Opportunities

00:47:44
Double Take podcast Audio Thematic Equity
February 2020
Episode 3: Gene Therapy: Cures, Risks and Opportunities

Double Take explores what happens to health care investing and financing now that curative genes can be delivered to patients.

Transcript

Rafe Lewis: Hello and welcome to Double Take, the Mellon podcast. I'm Rafe Lewis, director of investigative research at Mellon, and one of your regular co-hosts.

Jack Encarnacao: And I'm Jack Encarnacao, also an investigative research analyst and cohost here at Double Take. Today we discuss a really exciting, but complicated and little understood corner of the medical economy, gene therapy. To help us discuss the ins and outs of this emerging field, we've invited Mellon's esteemed biotech analyst, Amanda Birdsey-Benson as well as Dan Mytelka, director of simulation and policy research at MIT's foCUS initiative, which studies innovative financing and reimbursement of medical cures in the United States. All right, why don't you give us a little more background here on Amanda?

Rafe: Great. Well, to put it bluntly, I mean, Amanda's kind of a genius here at Mellon. She's a senior research analyst covering biotech across the various market caps. I'm not actually kidding, but it is funny. Amanda has been an equity investor since 2012. She joined Mellon's small and mid cap US equities team back in 2018. She holds a PhD in biochemistry from Dartmouth college and, well, long story short, again, she does make us feel kind of dumb occasionally. Amanda, welcome.

Amanda Birdsey-Benson: Thank you.

Jack: All right, so time for you to make us feel dumb here at an extended version. Let's start with just the brass tax of the discussion. We try to be a little more accessible to folks that might not be as steeped in the terminology of the subject matter we cover, just broadly, umbrella definition, gene therapy, what is it? What difference can it make in how we think about medicine?

Amanda: Yeah, so there are many different ways you could define gene therapy, but we like to take it as broad as possible because at the end of the day we think we'll be using a lot of these techniques together into a single therapy. But if we back up, what exactly is a gene? So every cell of your body has long strands of DNA. That's comprised of segments of genes. And each of these genes is basically a code for a protein. And so the DNA is then converted to what we call mRNA or messenger RNA. And then the messenger RNA is translated into a protein.

Amanda: Proteins are what do everything in your body. They code for ion channels. They code for factor VIII, which makes your body able to clot blood efficiently. So they're really the actors. And so we could control the proteins, which is historically what biotech has done. We could control the mRNA, or we control the DNA. So we have three different levers to pull on here.
Rafe: The point being though is that when some people have a disease state, they actually have a mutated gene that needs some kind of therapy, repair, or replacement?

Amanda: Exactly. And so when a gene is kind of broken, we say it's mutated. And that can be in a few different things. In the case of cancer, it could mean that the cells proliferate when they're not supposed to. Or in monogenic diseases like cystic fibrosis, there's a mutation in there where the ion channel can't work like it should.

Rafe: And the point being, I guess, is that science was never in a place until relatively recently, where we could actually target a gene for pulling out the bad mutated piece and hopefully replacing it with a normal strand.

Amanda: Yeah, I think gene therapy really started in its broadest definition, probably five to seven years ago, where we finally got the ability to turn down the expression of certain genes. Now, if it was cancer, you'd want to do that, and we could do that with small molecules that act on proteins, or we can use a technology called siRNA. So this is a small RNA that binds to your own RNA, but the body sees that as bad, and it wants to destroy it. So it chews up that RNA, so you never actually get the protein that you had. But if it's a bad protein, if it's doing things it shouldn't be doing, that's a good thing.

Amanda: But until recently, we didn't have a way of turning up the genes or to giving you back a gene that's broken. And so now what we're doing is supplying genes. So let's say in the case of SMA, right? So this is a spinal motor atrophy disease, and so what happens is when these kids have a mutation in a gene called SMN1, their motor neurons start to die. And so what we can do is basically hijack a virus and deliver that gene within that virus.

Amanda: And so when you usually think of viruses, you think, oh bad, you don't want a virus. But what viruses are really good at doing is to attach into your cells and delivering the viral DNA, and then that kind of sets off an inflammatory cascade. But what we're doing is we're taking that virus, and we're making a good. We're taking out all the viral DNA, and we're putting in the transgene that you need.

Amanda: And so in the case of SMA, we've done this with a virus called AAV9, we've put in the SMN gene that they need, and we've delivered it to patients. And so usually these kids would have died by the age of two. They never would have walked. They never would have been able to sit up by themselves. And now with a single gene replacement therapy... This is like a two hour infusion, right? These patients are sitting. They're living. They're walking around. They're doing things that would never be possible without this kind of therapy.

Rafe: And it's interesting there, you talked about that one time administration. That would seem to have the most consequences in terms of market potential here, right? And some of the more disruptive ways of thinking about these treatments compared to traditional medicine and that we may very well be on the cusp of a range of treatments that only need to be delivered once in a lifetime. And how do we think about that from a market opportunity standpoint when the cash flows aren't coming over 40 years of a patient's life, but in fact are administered maybe once when you're three and that's it? So how do you think about that?

Amanda: Yeah, I mean, you have to... So these therapies so far have been extraordinarily expensive. The one for SMA is over $2 million per patient.

Rafe: Wow.

Amanda: But if you think about what have you saved? Well, the kid's life. You've saved hospital costs, intubation costs. And you can justify the huge price point based on other parameters. For example, if you think about hemophilia, usually you'd go and get infusions of factor VIII through years, decades of life. These can cost hundreds of thousands of dollars each year. But if we had a gene therapy that was $2 million and a single treatment, you could justify that, as long as the benefit lasts for at least a few years.

Jack: And what happens if that first treatment doesn't work? Do you only get one bite at the apple here?

Amanda: So right now we don't have a huge amount of companies that are doing this. And so for the case of like hemophilia, there's only one competitor that will be on the market soon. And if it doesn't work in a particular patient, you're kind of out of luck at the moment.

Amanda: Now the reasons why it doesn't work, it could be that you already have antibodies to that virus. Those antibodies will kind of bind to the virus and prevent it from docking onto your cells and delivering the transgene. So we'd have to monitor patients to make sure that they're not already exposed to that virus.

Amanda: But we can get around that later on when we go into making new viruses and different... Maybe you've been exposed to AAV5, but not 9, or maybe we do some, it's called capsid shuffling, and generate entirely new viruses that nobody's seen before.

Jack: And that's, I guess, a great segue to what I'm wondering about, which is where is the innovation going on here? Is it going on in the development of viruses that none of us even have antibodies for because we've never been exposed to them because they were created in a lab? Or is it the development of these transgenes that can go in and kind of like an organ transplant and give you the healthy strands that you're looking for?

Amanda: There's different levels of innovation here. You could make a better transgene, you could make one that is less immunogenic. You could make one that's kind of a supercharged transgene. You could add a different promoter to it, so it gets expressed better. You can make a better capsid that delivers it more effectively. You could even not use a capsid and use something called the lipid nanoparticle where that would get you around anybody being seropositive for these.

Rafe: One of the things that I hadn't thought about that you pointed out in one of your writings internally on this, and for folks that are listening, a lot of Amanda's white papers on the subject are available now at mellon.com if you want to read more of her thoughts on this, one of the things you pointed out is just how much capacity it takes to actually produce the viruses that might save these folks' lives, that might actually be implantable and change everything, and how much just, I don't know, square footage it takes to produce that kind of thing.

Rafe: You pointed out in your paper many biotechnology companies simply do not have the footprint or the manpower to produce sufficient quantities of high quality virus for clinical studies, nevermind in the commercial market. And in fact, they've outsourced that capability to players, select few players, who also feel overwhelmed. And this is just very early days for this technology and treatment. So how are we to think about where all of this capacity is going to come from to produce the viruses?

Amanda: Yeah, these viruses are not easy to make. So they're made in usually mammalian cell lines or insect cell lines. And so those cell lines, they need to be fed, they need to be incubated, they need to be free from contamination, they need to be at a certain temperature. All these parameters require a lot of manpower and a huge amount of space. And so we have these enormous incubators that can make these cells, and then they need to be purified.

Rafe: Define enormous. What are we talking about here?

Amanda: I think it's 500 square meters of exposure for the cells to kind of lie inside of these. And so there's been two recent takeouts of the biggest companies that were making supply for all the biotech companies to run these trials. There's actually over 200 INDs right now filed with the FDA to run clinical trials with cell and gene therapy. That's a huge amount of virus that needs to be…

Jack: Quickly, Amanda, for our listeners, IND?

Amanda: That's an investigational new drug. It's an application that you file with the FDA, so that the FDA is like, "Okay, this is safe enough to try in humans," and then you kind of have to sign off with all the clinical trial sites that they agree to it.

Rafe: So kind of exponential type growth in terms of the exploration here. But what is the market opportunity? I mean how many diseases, let's say in the next 10 years, can we realistically target for gene therapy?

Amanda: So the FDA has said that by 2025 they expect that we'll be approving 20 to 30 cell or gene therapies each year. Let's put that into perspective. Last year they approved about 58 drugs total. So if we're talking 20 to 30% of our drugs being approved each year starting in 2025 to be these types of molecules, it's huge.

Amanda: I mean, right now we're starting with these rare orphan diseases because that's where the biggest unmet need is. They typically don't have good therapies. There's actually nothing that you can use other than this gene therapy for SMA. And so we're focusing there now. But eventually as the technology improves and our virus production capabilities get bigger, we can go after the larger diseases.

Rafe: So this is disruptive because presumably there are drugs and therapies out there right now for managing these diseases, but not curing them, and not managing them well, or doing it in one shot?

Amanda: Yeah, I mean, if you think about recently there's been a lot of data coming out on Alzheimer's and a potential new Alzheimer's drug that appears to show some efficacy in clinical trials. Now, that is a monoclonal antibody. You have to infuse it through an IV about once a month. Now, we can take this gene therapy technology, package up the actual kind of gene that would encode for that monoclonal antibody and a virus, and then deliver that, and it would be just once. I mean, we're talking 6 million people in the United States with Alzheimer's.

Amanda: If you think about diabetes, we don't have a good genetic understanding of what's going on there, but eventually I think we'll come up with different ways of going about it. So not only can you just supply a gene, but you could supply what we talked about before siRNA and shut down other genes. You could package that up. We could use kind of a multidisciplinary approach to kind of going after these polygenetic disorders.

Jack: One of the things Rafe and I were talking about as far as maybe something we've seen before where the side effects of an injection or whatever, an implementation, become apparent is Botox. And Botox first hit the market, there were news stories talking about the notion of injecting botulinum I think it is, botulinum into people's faces. It's a toxin. And sure enough, several dozen people out of the millions injected over the years have come down with botulism from the bacteria pumped into their bodies. But as far as we can tell, it's pretty much a non-issue today. So how should we think about the risks of using viruses as a literal vector to deliver gene therapy?

Amanda: So the good thing about Botox is that it eventually goes away, right? It lasts maybe three months. Once you've delivered a virus with a gene in it, it doesn't go away. It's there with you forever. So you have to be very careful with this. And so side effects so far that we've seen have been a little bit of liver enzyme elevations. We can manage that with steroids. But it's been pretty safe so far. Where you start to get a little worried is when we're talking about gene editing because that means you're permanently introducing this edit into your own DNA, and it's not going away.

Jack: And editing a gene is going to be a very difficult area to explore as far as you can't get it wrong. I mean, there's no ethical human trial you can do to figure out what happens when you edit a gene.

Amanda: No. And so we're kind of baby stepping our way in here. What we're doing right now with gene editing is taking out your stem cells, editing those, and then checking to make sure that it's all correct before they give them back to the patient. We've also tried it in the eye, which is a fairly restricted space. We don't have to worry about massive systemic side effects there. But the goal is eventually to kind of bring this into the entire systemic administration. We're just not there yet. I don't believe that the FDA is quite ready to accept that either.

Rafe: In the consumer economy, I remember when genetically modified foods, GMOs, were starting to come into the food supply. There were plenty of protests and a lot written about how we're kind of creating Frankenfood and there were ethical questions raised. And I guess what I wonder with this is-

Jack: Yummy.

Rafe: What I wonder is do we have a sense of the long-term efficacy or safety here? And I mean, I'm talking decades, I guess. What's the data trail?

Amanda: Yeah, it's a good question. We actually have no idea how long these virus-based therapies are going to last. We know that in dogs, it's lasted the lifetime of the dog. We know that in some of the hemophilia patients the effect can be seen out five years. But we haven't had them on the market long enough to know the true durability. And a lot of talk in the field is, "Okay, well, if it does wane, you know, what can we do? Can we re-dose?" Currently that's not an option. But we could come up with a different virus and re-dose with a new virus, or we could do something called plasmapheresis and take out all the antibodies that have accumulated in your body and then re-dose you.

Rafe: So this is a complicated multi-step process if we can even get to the point where we can re-dose?

Amanda: Yes.

Rafe: Okay.

Jack: Well, when we think about how these companies are likely to proceed, companies that want to lead in gene therapy, I mean, is it really going to be a case of capture the proprietary medicine it takes to solve condition X and nobody else ever plays for that business because you solved everybody's problem with your company's solution and it's onto the next one? Or do you see a world where multiple players can somehow be vying for the same gene therapy business, even though I can't imagine a differentiation if it's really a one and done administration?

Amanda: Yeah. If you think about for something like a Duchenne's muscular dystrophy, there may be 10,000 patients in the United States with that. Now, the first player to the market will be able to grab that initial pool of 10,000 patients. But after that, you're talking about the few patients that are born each year that need to be treated.

Jack: Right.

Amanda: And so after you get through that bolus, it's a problem for two different angles here. What if you're a company that developed the first one for DMD, and you've treated all these patients and you have massive amounts of revenue from that, but then it dries up? So what these companies really need to do is innovate so that they can kind of plug and play into a new indication every few years and keep that revenue stream up.

Rafe: Is there something that the regulators can do to help foment this kind of investment to get more therapies going to help the drug companies deliver on this great promise of gene therapy?

Amanda: Yeah, so the FDA has shown some interest in creating what we refer to as master banks. And so these could be master banks of viruses, for example. Because if you have a virus in your lab and you think it's AAV9, I might have one in my lab that's AAV9 as well, but they might be a little different. And so if the FDA could kind of create master banks, and then you plug and play your transgene into them, we could get through the whole safety parameters that need to be monitored and get these into the clinic faster.

Rafe: That's brilliant. So that's a little like, if I apply the tech world to the biotech world, this is a bit like having open source code out there.

Amanda: Exactly.

Rafe: And then you're putting your proprietary twist on it and coming out with your software.

Amanda: Yeah. And the other thing that we really need to work on is a way to actually measure the dose. What is the titer of the virus that is in one company versus another? It's completely not standardized at this time. And so the FDA has shown an interest in coming up with different ways to standardize these assays. We just don't have them yet. The technology is so new that your dose, be it 2E to the 14, is totally different from my dose of 2E to the 14.

Rafe: Because I think a lot of investors think about the regulators as an obstacle often to innovation. But it sounds like you're saying there's a possibility they could play a role in actually helping jumpstart this a little faster.

Amanda: Absolutely. And the FDA has added another 50 reviewers just to handle all the new applications, of IND applications, that are coming through each year.

Rafe: Got it. That's very interesting. And I guess my last question would just be, and you touched on this a little bit before, but right now they're targeting simpler, "monogenic" diseases that only occur on one gene, the mutation, and not multiple. What are the obstacles here? How tough is it going to be to go after these polygenic disease?

Amanda: It's going to be difficult. And I don't think we have the technology right now. So if you think about something like diabetes. And you think about, okay, well, maybe we could supply insulin, but you need to have control over that insulin. What we need is the technology that could enable you to shut off that kind of whatever you've delivered, be it something to code for insulin or GLP1 or something like that. We need to have the control where you could turn things on and off, and we just don't have that yet

Rafe: And what what's going to be necessary to have that?

Amanda: I'm not sure at this point, I haven't seen it in academia just yet. It could be a different generation of viruses that we haven't seen yet.

Rafe: So just we're really kind of super early innings here when it comes to gene therapy.

Amanda: Yes, we are.

Jack: A lot of new frontiers to come. Amanda Birdsey-Benson, thanks so much for getting us started here in our gene therapy discussion on Double Take. It was a pleasure to have you.

Amanda: Thank you.

Rafe: Welcome back to Double Take. Next up, our outside expert on gene therapy, Daniel Mytelka. Jack, be a good chap and give our listeners a rundown of Daniel's bonafides.

Jack: Will do, will do. Dr. Daniel Mytelka is a director of simulation and policy research at Focus, a project at MIT Center for Biomedical Innovation that focuses on finding novel methods of financing and reimbursing cures in the United States. Prior to this role, Dan spent 18 years at drug maker Eli Lilly where his roles included leading modeling efforts in the company's corporate finance and investment banking group. He also led discovery research for antibacterials. He holds a PhD in genetics from the university of California, Berkeley, an MBA from university of Chicago's Booth School and he's also a chartered financial analyst.

Rafe: Dan, I don't know. We like to have guests who have like eight doctorates, a hundred years of experience. We're going to make an exception this time. Hopefully it works out. Welcome.

Daniel Mytelka: Thank you very much for having me here today.

Jack: Speaking of your background, I'm curious, can you talk to us just quickly about how you arrived at this specialty? What brings one to have the expertise you do?

Daniel: I guess I've always been curious about things that really straddle the border between science and the business world and I've gone back and forth across that border a number of times over the course of my career. So perhaps the thing that aligns all of the areas that I've worked in, in the past is really understanding and expectation and hope and belief in value of medicines and trying to say, where is the value coming from at a molecule level, at a portfolio level, at a system level, and how can you really make sure that everything that's being done within the industry is targeted towards getting valued to patients, to providers, to all the different stakeholders in the system.

Rafe: That is a fantastic segue to what we're talking about here today, which is gene therapy. Because that, as you know, is pushing the envelope of innovation when it comes to delivering healthcare these days. But also happens to be a tremendously costly therapy. And so I guess, this brings us really to the core question, why we have you here today as our outside expert, which is to just understand, can you explain how gene therapies pose unique challenges to the US healthcare system?

Daniel: So if you think about traditional therapies, they're dosed on a fairly regular basis. So maybe it's daily, maybe it's weekly, maybe it's monthly. You give a patient the treatment and they make some sort of a payment or whoever is their insurer or other payer makes a payment on their behalf. And then after a period of time, if they continue to see benefit from the therapy and they continue to receive the therapy and there's additional payments made.

Daniel: Here we're talking about a relatively unique and novel sort of an idea, which is you have a treatment that's given for a very short period of time and it has a benefit that lasts for a very long period of time. And hopefully for many of these genetic therapies, it actually lasts for a lifetime. And so as a consequence of that, you have to think about making a very large payment up front that takes into account the value that's being produced by the treatment. And that's different from everything that's occurred for traditional medicines. And it creates a number of very unique challenges for the system to try to manage.

Rafe: You know, it's funny when I hear you describe this though, in a certain sense it sounds vastly simpler. Instead of multiple treatments over multiple years and different billing and invoicing moments, here we effectively have one treatment, one payment, maybe, it should be on its face a lot simpler. Is it just merely the size of the cost that's the issue here? Or is it also in the fact that the cadence is simply one and done?

Daniel: So there are a number of issues that result from it. One is the size of the payment, which can be a challenge for particularly a smaller payer. So maybe a smaller payer has responsibility for a hundred patients or something like that.

Rafe: So payer being, just to clarify for our audience, so an insurance company for example, or Medicare or the government.

Daniel: The ones that could potentially be challenged by this might also be things like a self insured employer. So they may have a relatively small number of patients, as opposed to talking about United Healthcare or someone like that who have millions and millions of individuals within their healthcare plan and for whom even a very large number can be averaged out across a large portfolio of individuals. But when you pull this large amount upfront, first you have this risk that's created by ... From a temporal perspective, you're pulling a lot up front, which could be a significant amount for a small payer.

Daniel: Second, you have patients that actually don't stay for their lifetime on the same health plan. And so maybe you're in a situation where traditionally you'd have a patient who, if they were receiving the chronic therapy they were talking about before, the first three years are covered by one employer, the second three years they're covered by another one and then they go to Medicare or something like that. And now you're talking about having the person who is responsible up front, pay for the entire series of payments that cover the lifetime of treatment.

Daniel: The other thing that's important about these treatments is that they really have fantastic benefits, but that the testing that occurs during clinical trials is not, we're going to test it and see how well it performs for the lifetime for the patient. We're testing it for whatever a traditional clinical trial period is. Maybe it's two years or three years or something like that. Maybe it's in a relatively small number of patients and there's a lot of uncertainty about what the true benefits are.

Daniel: So you might hope that it's going to have benefit that lasts a lifetime. But what happens if the benefit only last five years and how do you know whether to pay for two years, five years or a lifetime of benefits when you're trying to set a price for this sort of a therapy upfront. That's why a lot of people think that some sort of a performance based payment system is a way to try to manage some of the risk that's involved in this. But that then runs back into the problem that I mentioned before of, how do you manage a longer term performance based contract, when you have a patient who might move from one payer to another payer during the course of the contract.

Jack: Performance-based, that's interesting. I was going to ask you what has stood out to you amidst this suite of challenges, is the solution that comes closest to spreading the burden out across, let's say that it's multiple employers so that the burden isn't carried front load by who you happen to be working for when you develop the condition. There's this challenge around a lifetime of treatment when a trial only last two years. So could you talk to us about the performance based notion? Performance, how so? And does that strike you as the best way of attacking all of these challenges we just outlined?

Daniel: Good question. It's not a perfect answer because you're never going to really pay exactly for what the benefit the patient receives are because from a practical standpoint, a performance based agreement is going to be based on a specific milestone rather than whatever potentially a whole set of benefits. So it's very difficult.

Jack: Yeah, these things you can now do with your life that you wouldn't otherwise be able to do if you had this condition. How do we account for that?

Daniel: Exactly. So it's very hard to understand what the full value that a product is bringing you and how to put it into a contract and how to follow all of these and ensure that the patient is receiving the benefits that you're expecting. So there's a lot of monitoring type things that you can make it as complex as you want, but then you're just adding to the burden of actually administering this sort of a contract.

Rafe: So as your group at MIT looks at novel ways of solving these challenges, is it your expectation that we're going to need new regulations, new legislation, or is this the kind of thing that can really be worked out by the market?

Daniel: So a little of both. So there are definitely challenges. In our group, we call ourselves a think and do tank, which means that we don't just try to come up with ideas. We try to see whether we can pilot them and put them into practice. Because if you don't try to do the piloting, you don't find out what the issues are in the real world. So you say, oh, we're going to put in place a performance based agreement and that's it.

Daniel: But in the real world, when you start to do that, you start to find out that there's a challenge here, there's a challenge there and so on. And so we have a list of some of the challenges that we've come up with as potential challenges and some of them have really become actual challenges. So one of them that we were just talking about a moment ago was the concept of how do you actually measure what the benefit the patient is receiving is and ensure that true value is being received? So there's a whole set of issues with regard to that. And that falls within the category of the market eventually should be able to work it out.

Rafe: Sure. The payers are already doing that to a certain extent with any number of therapies. Right?

Daniel: Exactly. So the market should be able to do it. When you start talking about something that has a very large price tag, you start being able to actually think about one off type solutions to monitoring. So if you have a drug that costs $1,000, you're probably not going to have a nurse practitioner or some other individual calling up the patient and trying to figure out whether they're continuing to receive benefit from it. But if you have a million dollar therapy, some of those solutions become more practical.

Daniel: But then when you start to think about the other side of, are there issues within the system that make it challenging for these sorts of things to go cross? Unfortunately the answer is yes. And one of the biggest challenges we've run into is the Medicaid drug rebate program.

Rafe: Medicaid, the program for the indigent and low income.

Daniel: Exactly. And the main challenge, I don't want to go into detail because this is a hour long topic by itself. But the biggest challenge is that the Medicaid drug rebate program sets a rebate for any product that is sold within the United States and that's going to be sold within the United States, and that's going to be sold to Medicaid patients, such that Medicaid is, and I'm gliding over some of the details here, but Medicaid has essentially insured a price that's comparable or better than what's received by commercial payers. And the way the regulations are currently interpreted, when you have a performance based agreements such that some patients essentially have a higher price because they did well on the therapy and some patients have a lower price because they did poorly on the therapy, the price for the patient who did poorly is the one that Medicaid uses when they're choosing to set their rebate. And as a consequence, everybody on Medicaid is going to get a low price even if there's only a very small number of patients who have poor outcomes.

Jack: Perhaps being way too low a ticket price to afford the drug.

Daniel: Correct.

Jack: In terms of what the market decides it's worth.

Daniel: Correct.

Jack: That is an interesting one. You mentioned pilots earlier, putting into practice these notions to work out the kinks. Can you put a little more meat on the bone for us there? What does a pilot look like? Do you work with a drug? You don't have to name names, but do you work with a drug maker, an insurer? What does a pilot mean in this context?

Daniel: So we try to include all of the stakeholders that are relevant with regard to any of the pilots that we're trying to put in place. And the pilot that we tried to design was actually in the eastern Massachusetts area, and we had a number of the largest payers in the area, insurers who were interested in trying to manage both, can you do a performance based agreement and can you monitor as a patient moves from one plan to another plan, and potentially try to do some creative things as far as sharing of payments in a way that allows performance-based agreements to be carried out, that straddle the transfer of a patient from one plan to another plan.

Daniel: And we also involved a product called Zolgensma that was approved early last year, around May of last year for a disease called spinal muscular atrophy, which involves loss of innervation for muscles for patients, and in the most severe cases can lead to loss of mobility and ultimately deaths typically by about the age of two.

Jack: Wow. That's a lot of challenges tackled in one pilot there. Can you focus in and hone in a bit more for us on the challenge of transferring insurers and how to share that cost? Just generally speaking, what strikes you as the skeleton of how to attack that? It sounds like a large challenge. If I am diagnosed with a condition and I happen to be working at employer X, how does that employer not carry the burden of paying for however long my treatment is? Could you spell out a little bit how you're thinking about that?

Daniel: Sure. This is actually a very interesting idea that we've been trying to put forward from the focus group, which is that when you look at two payers, if you assume that there is a relatively equal movement of patients from one to the other and from the other back to the first, they are both motivated to try to manage towards the longer term system optimal value. And if you cover most of the payers within a geographic region, then you're probably going to be in that sort of a circumstance, because most patients who move from one plan to another move within a geographic region rather than moving from one region to another region, although that certainly does occur as well.

Daniel: And so what we're trying to do within what we call our patient mobility effort, is do something such that the downstream payer is going to pick up payments for a performance-based agreement that was signed by the upstream payer. And as long as the first payer is as likely to start making payments for the second payer as they are to transfer payments, both of them feel that it seems to work okay.

Daniel: Now the challenges that start running to on something like this is how do you manage what the actual payment amounts are? And so we have certain things that structure a contract in a way that they're both making the similar sorts of payments. So for example, five level payments over the course of five years based on particular milestones. But then the price itself has to be something that's confidential because that's important proprietary information of the companies, and you start running into antitrust issues if you're sharing information about what the rebates company X gets versus company Y.

Daniel: And so we've essentially structured it so both companies, both payers independently make deals along this sort of a contract structure with whoever the manufacturer is or their representative. And then if it transfers from one payer to the other payer, then they pick up on their terms, whatever the remaining set of payments are.

Rafe: Everything you're saying makes me wonder if there's a market opportunity here for a third party payer type that focuses exclusively on big ticket therapies, and it would almost be a supplemental level of insurance for maybe people who have a genetic risk profile that would potentially make them more likely to need gene therapy, or whatever it might be, so that the burden doesn't fall to the everyday kind of insurance need. And that way it could straddle any number of other plans you might move to from employer to employer to employer.

Daniel: I think you absolutely have the right idea. And there are certainly players within the current system who have some component of that. So you talk about reinsurers who will take on contracts or stop loss type contracts, and they will pick up some of the payments that are too risky for essentially the primary payer to be picking up.

Daniel: We've thought of a concept of something that we call an ORBM, an Orphan Reinsurer Benefit Manager, which has a component of re-insurance and also manages some of the operational issues with regard to some of these, because it's not just what is the finance for these, it's also how do you manage something like a network of providers who are going to potentially treat a patient? And every payer should not necessarily have to set that up if they're very rarely going to see a patient.

Rafe: So gazing into your crystal ball here a little bit, is it your sense then that it might take the intervention of the federal government to kind of create a structure here so that everyone plays nice and the patient gets their therapy, the drug maker, the therapy patent holder gets their check. Everyone's happy here. Or are you bullish that the market can actually work this out based on what you've seen so far?

Daniel: That's a difficult question.

Rafe: That's why they pay me the small bucks.

Daniel: We talked a little bit about the Medicaid drug rebate issue, and so from my perspective, the first thing is the government has to resolve some of the issues where they are creating problems rather than solving problems. And then there are going to be a set of issues that probably can be resolved by the market, and whether there are residual issues at the end that the government has to step in and solve, I could see that as a possibility, because having somebody who essentially mandates something about transition of patients between one payer and another payer and picking it up, makes it a little bit easier to match the benefits received by the patient with the payments that are being made on their behalf.

Rafe: My mind keeps going to what the federal government does with flood insurance. It's something that no one really wants to deal with in the private market, quite necessary, quite expensive, highly sporadic, however, and so they stepped into that void. But I don't know if that's the right model here.

Daniel: So I'm sure there are a lot of people who have perspectives on whether flood insurance is the right model considering the abuses of that system, wherein you essentially have flood insurance and then you have payments to people who were subject to floods but weren't insured. And then you have a lot of questions about whether there's adverse selection for picking up flood insurance and so on. So, government can solve problems, government can create problems.

Jack: Yeah. It sounds like a bee's nest. Every hive you open up here, it sounds like there's a whole lot of crisscross challenges. So finally, what strikes you as the problem that's going to be the hardest to figure out here as these pilots run, as these hurdles get jumped? What do you think is sort of the, if I could ask it to be put in just basic philosophical terms, what's going to be the biggest challenge of making sure people can afford these therapies once they're ubiquitous?

Daniel: So at an individual level, I think the treatments that we're talking about in many cases provide tremendous benefit, and the system will have to find a way to ensure that patients who are appropriate for these treatments receive these treatments and get the benefits that occur because of them. There are a lot of changes that we expect to see in the future, because we're just really at the very initial stages of genetic therapy, so if you look at the market so far, you've had just a handful, less than a handful of drugs that have launched, really. Zolgensma, Luxturna, and they are for a relatively small number of patients.

Rafe: Hundreds.

Daniel: Exactly, and if you look to the future, and some of this will require innovation with regard to targeting various cell types and ensuring that you get good expression and so on, but if you look to the future, you're going to have hundreds of these products and they are going to target diseases for which there may be many more patients. So you'll see diseases like hemophilia, you'll see beta thalassemia, you'll see sickle cell anemia, and then there are other ones where who knows exactly what's going to happen, like Alzheimer's. There are people who are looking for cures for that. From a genetic therapy perspective, probably they'll only target, a small subset of individuals who get Alzheimer's, but everybody knows how large that population is for that sort of a disease.

Rafe: Is there a risk, though, that we kind of develop a bifurcated access system here, where the people who have the means or the right insurance are going to be able to access these therapies, and others are going to be left in the lurch?

Daniel: There's always a risk for that, and it depends. It's going to be on a case by case basis. So I think when you look at some of these, that like we were talking about SMA before, and the fact that for the most severe patients, they're likely going to be dead before they're two years old. You're not going to see a bifurcated system there. They will receive the treatment for that, because it's something that's medically necessary for it. It will be covered by Medicaid. It will be covered by all commercial insurers. Where it starts to become more questionable is where you have multiple different treatment options. Maybe some of them are chronic therapies and some of them are this sort of a genetic therapy where it's a one and done type of situation. You might also have situations where the severity of the disease is much less, and there's a question of, "What's the appropriate pricing for that sort of a treatment?" So where you're going to see bifurcation, it's going to be more at those levels than necessarily at the case of the most severe genetic therapies.

Rafe: And lastly, I just wonder, given all these challenges and obstacles that you're pointing out here and just how novel these therapies are, and how to deal with them from a payment perspective, do you see that at all as becoming an inhibitor to innovation itself? Is it possible that some of these companies are not going to pursue this as aggressively as they might if the framework and the infrastructure were in place to know that they're going to get paid the way they want to get paid at the end of this?

Daniel: Ooh, so that's a difficult question. I think that there's a big difference between innovation in genetic therapies and innovation from a traditional small molecule perspective. So for small molecules, you really need to think about identifying typically a protein target and finding a small molecule that really has an exactly perfect set of characteristics to interact appropriately with that target, and inhibit it or enhance it or do something else with it.

Daniel: When you're talking about genetic therapies, assuming that the target is well understood and you're talking about changing a sequence that's a DNA target, if you have good delivery, it may be much easier to actually develop new drugs for a whole series of different treatments. So there's a question of, "What's the cost of developing a drug?" And you know, we've all heard how many billions of dollars it takes to develop a drug, and one of the uncertainties with regard to developing drugs. The story is very different when you start talking about genetic therapies. Not to say that it's easy to do so, but it's just very different, and the cost structure for that is different, and the uncertainties with regard it are different, and I think we have a lot to learn about that as we move forward.

Jack: Daniel, can we see maybe a world where there's a bundling up of patient financing assets that are securitized, almost like a subprime mortgage or something?

Daniel: So interesting example, so first of all you have to think about what the considerations are for a particular payer. So if you're in a situation where a payer is expecting to see a large number of patients, then maybe it helps a little bit at the beginning, but it doesn't help in the long-term, because let's say the first year they have a patient and they start making a payment for that patient, and they only pay one of the payments instead of all five payments up front. You now get to the second year and they've got two patients, because they have a continuing patient payment for the first payment patient, and then you have a new payment for the second patient, and by the time you're at out at four or five years, you're making essentially a payment for all of the five patients and so your costs are no different from if you're paying everything up front.

Daniel: The other consideration from it is, from a financial perspective, this is talking really about how the cash flows. From an income statement perspective, they may still have to book all of the payments for this upfront, and that may be a much more significant consideration for many of these payers than the cashflow implications.

Jack: Dr. Mytelka, thank you so much for sharing your expertise with us. It was wonderful to have you on Double Take.

Daniel: Thank you very much for having me.