16 Minutes on the News: Mobile Malware, Drug Pricing

0:00:06 Hi everyone, welcome to the A6NZ podcast. I’m Sonal and this is our second episode of 16 Minutes,
0:00:12 our new news show where we cover recent headlines of the week, the A6NZ way, why they’re in the news,
0:00:16 why they matter from our vantage point in tech, and share our experts’ views on the trends involved
0:00:21 as well. The first episode covered Neuralink and Brain Computer Interfaces, TikTok influencers
0:00:26 and AI, FaceApp and more. You can listen to that as well, it ran last week. But in this episode,
0:00:31 we covered these two topics that came up in the news this week, a new kind of mobile malware
0:00:36 that’s out there in the wild, and a new bipartisan proposal for lowering drug prices for senior
0:00:41 citizens with a short lay of the land on drug pricing in general. Remember, as we mentioned,
0:00:45 specific companies that none of this is investment advice, nor is it a solicitation for investors
0:00:51 in any of our funds. Please be sure to read a6nz.com/disclosures for more important details. Finally,
0:00:54 you should be able to find the show in the current A6NZ podcast feed, which is probably where you
0:01:00 found it, as its own show, 16 Minutes, in your favorite app shortly, and on our website at
0:01:09 a6nz.com/16minutes. So the first news item is on malware, which sounds very scary and malicious,
0:01:13 aka the mal. So let me actually quickly summarize the news and then I’ll introduce the a6nz expert
0:01:18 joining us to talk about this. So here’s the news. This week, a report was released by
0:01:22 Mobile Security Company Lookout, which also happens to be an a6nz portfolio company,
0:01:26 and basically researchers there discovered some of the most advanced mobile surveillance
0:01:31 wear ever seen. And to quote the Ars Technica article, which is one of my favorite news sites,
0:01:37 by the way, for this type of topic, the malware is called monocle. Sounds like a James Bond character.
0:01:43 And it’s been in the wild since at least March 2016, so over three years ago. And let me just
0:01:47 quickly say what it is. It’s an Android-based application that was developed by a Russian
0:01:52 defense contractor that’s apparently been linked to meddling in the 2016 presidential elections.
0:01:55 And I’m an Android user, but iOS folks, you’re not off the hook because
0:02:00 apparently a version of monocle for Apple’s operating system has been very likely developed
0:02:03 as well. And I’ll go into more details about what it can do, but let me introduce our expert
0:02:08 joining us to have this conversation, a6nz general partner, Martin Casado, who is a
0:02:13 serious expert in software-defined networking and actually has a very long and storied history
0:02:17 and security as well. Welcome, Martin. Thank you. So, Martin, can you just quickly help
0:02:22 break down what this category is? This isn’t practical advice. What is mobile malware? Tell
0:02:28 me about that. Sure. So, traditionally, in security, there’ve been two large markets. There’s been
0:02:32 network security, which are things like firewalls, which try and intercept bad things on the network,
0:02:37 and endpoint. So, endpoint is probably the most familiar. This is like protecting
0:02:42 traditionally at desktop. So, have you noticed things like Mac-A-Pee, Norton-Andy virus,
0:02:47 that’s right, Symantec, Trend Micro. So, this is the traditional endpoint security market where
0:02:52 you had a Windows desktop, typically, and you want to protect yourself from viruses. You’d get one
0:02:56 of these. You would download a package, install it, and run it on your machine. Right. Now,
0:02:59 there’s been a few things that have happened over the last, say, 15 years that have disrupted that
0:03:03 market, right? I mean, there’s been the move to cloud, which means there’s just, you know, fewer
0:03:07 desktops in the same way, and those desktops run fewer applications as opposed to like cloud
0:03:12 applications. But there’s also been a proliferation of operating systems. So, Windows used to be the
0:03:16 dominant personal operating system. Now, we see a lot of macOS, we see Android, which are mobile
0:03:20 operating systems. Right. You know, Chrome OS is another one. But also, like the form factor has
0:03:25 changed from something that sits on our desktops to laptops and, you know, like iPads, mobile phones,
0:03:30 tablets, etc. And by the way, just to emphasize, this is not like a static shift in terms of here,
0:03:33 the underlying secular trends, which I love that you just summed up for me. But we’re also talking
0:03:38 about mobile people, mobile workers. These devices enable them to move around. People are working in
0:03:42 coffee shops, you know, connecting, they’re doing their work with new tools that are letting them
0:03:46 do their work in the cloud. So, all of this affects all of that. It’s very important that
0:03:49 you point that out. Also, like there’s just a different life cycle for a mobile phone and different
0:03:54 behavior behind it. And a lot of detection of malware is behavioral. This is how a desktop
0:03:58 should act. Now, of course, a mobile phone will just be quite different. And so, mobile malware
0:04:04 is focused on that segment. Okay. So, given this recent news, tie it back to Monocle. I mean,
0:04:08 should we be freaking out or what? Actually, we’ve known that there’s, you know, like,
0:04:13 pretty serious malware out there for a long time. Here’s what’s so significant about this to me,
0:04:21 which is, for whatever reason, we’ve decided to use phones as a security device more than we have,
0:04:25 for example, desktops traditionally, right? So, they’ll give you an example of that. Often,
0:04:29 in order to secure an account, we do what’s called two-factor authentication. And the second factor
0:04:33 is an SMS. By the way, two factors, something you have, something you know. That’s right. So,
0:04:37 for example, like, for me to get into my email account, well, I’ll have a password, which is
0:04:42 something I know. But often, if they don’t know that it’s me or they want a second factor, they’ll
0:04:46 send me an SMS text to my phone. So, that’s the second factor, maybe that’s something I have,
0:04:50 which is the device. So, often, we say, well, the mobile phone is something you have. And we’ve
0:04:55 been treating it like a security device. So, like, if this is a bank account, if this is your email,
0:04:59 if this is your Coinbase account, whatever it is, actually, it turns out, like, phones aren’t
0:05:04 that secure even though we’ve been relying on it. And you can see there’s been a huge spate recently
0:05:10 of attacks against phones in order to get access to accounts. And so, this just further proves
0:05:13 that phones are very much a weak link into personal security.
0:05:16 In fact, this would be very specific about what monocle in particular can do, what we are talking
0:05:20 about the broader category. So, here’s some of the things according to the report. It can retrieve
0:05:25 calendar information, including the name of the event, when and where that event is taking place,
0:05:29 and a description of it. It can collect account information and retrieve messages from WhatsApp,
0:05:34 Instagram, Skype, et cetera. It can send text messages to an attacker-specified number.
0:05:38 It can reset a user’s PIN code. And it can download attacker-specified files,
0:05:42 reboot the device, and uninstall itself, and remove all traces from an infected phone.
0:05:44 It’s like it has a life and personality of its own.
0:05:47 Yeah, yeah, yeah, yeah. That’s the attacks I was talking about. Let’s imagine, for example,
0:05:54 like, your bank account was protected via SMS to your phone. If you have malware there that can
0:05:57 intercept that and send that to the bad person, they can reset your password on your bank account.
0:06:01 So, these things are actually very serious. In fact, how many of us authenticate using
0:06:05 SMS as our second factor? It’s very common. The first thing I do when I sign up to a new
0:06:08 thing is I turn off two-factor SMS for exactly this reason.
0:06:12 So, bottom line it for me. How should we think about security in a post-parameter world, which,
0:06:17 by the way, is what Lookout’s tagline is? And you and I talked about that topic in 2016 when you
0:06:22 first joined A6 and Z, and we did a podcast about networking as sexy. Yeah. How does Monocle and
0:06:26 Malware fit into the overall landscape of how security is changing just in the big picture?
0:06:30 I do think that there is a macro trend, which attacks are just becoming more personal and
0:06:34 dealing more with social engineering, right? So, there’s just less about, like, “Oh, I’m going to
0:06:38 have some bad bug that, like, does something malicious,” and more, “I’m going to have something
0:06:42 that’s closer to the human being, so I can trick them into doing something I can pretend to be them,”
0:06:47 because it really is these social aspects that we’re seeing become really predominant when it
0:06:51 comes to these attacks. I think the phone is about as close and personal as the devices we have.
0:06:53 It’s like a body part for many people.
0:06:56 It really is. I mean, it’s an extension. It’s like the coprocessor to our brain.
0:06:59 Yeah. I mean, I just think that the first thing is to realize that attacks are becoming incredibly
0:07:04 personal and they’re focused on us, right, especially if you’re anywhere near, like,
0:07:09 you know, a large company with a lot of assets. And so, I think it’s very important for listeners
0:07:13 to understand best practices for protecting themselves. For example, getting a password
0:07:18 manager is a big deal using hardware tokens where you can, turning off two-factor authentication,
0:07:25 not relying on SMS. I mean, just knowing that there are these targets that are focused on us
0:07:30 as people and understanding, you know, best practices to defend against that will go a long way.
0:07:31 That’s fantastic. Well, thank you for joining, Martine.
0:07:32 That’s a pleasure.
0:07:37 Okay. So, the next item is on drug pricing. So, here’s the news. Just this week,
0:07:41 the Senate Finance Committee released a bipartisan drug pricing proposal that would cap
0:07:47 senior citizens out-of-pocket costs for drugs, as well as, this is really interesting,
0:07:51 limit price increases in Medicare. And according to the Congressional Budget Office,
0:07:56 as reported by the Washington Post, the proposal is projected to save the government about $100
0:08:01 billion over 10 years, save senior citizens about $27 billion in out-of-pocket costs over that same
0:08:07 time period, save $5 billion from lower premiums. And just to be clear, this is one of many proposals
0:08:11 in a couple of months. The House of Representatives is also expected to release a different drug
0:08:16 pricing proposal than this Grassley-Widen one, which would actually allow Medicare to negotiate
0:08:20 the prices of some drugs, and that’s currently prohibited by law. And there’s two other proposals
0:08:25 on the horizon as well. Clearly, it’s a very political, tough topic with many proposals
0:08:30 and many players involved because drugs, the argument goes, should not be so expensive.
0:08:35 They’re life-saving. They’re meant to keep us healthy. It’s insane that drugs can be so expensive.
0:08:39 And I also just want to mention that this is playing out against other recent news, which we’ve
0:08:43 talked about on A6 and Z quite a bit already, which is that in the past month, for the first
0:08:49 time ever, we’ve seen the approval of not one but two gene therapies with approximately $2 million
0:08:55 price tags each. So I’m going to welcome A6 and Z Biogeneral Partner Jorge Conde and A6 and Z
0:09:00 Biomarket Dev Partner Jay Ragani. This is a really meaty topic and something I can’t believe
0:09:07 or even trying to attack as a part of a 16-minute segment. I would just love to start with just
0:09:12 quickly the lay of the land. Why is drug pricing so damn hard? So one of the things that often comes
0:09:17 up, and it’s currently in the headlines right now, is why are drug prices in the United States so
0:09:22 much more expensive than other countries? Why can’t the government and specifically Medicare
0:09:26 use its purchasing power to negotiate against pharmaceutical companies? As you mentioned,
0:09:30 it’s illegal, but the history is interesting. So the Medicare Modernization Act of 2003,
0:09:35 the one that actually established Part D in the first place. What is Part D? Part D is the drug
0:09:40 benefit for Medicare to cover prescription drugs. And what’s interesting in that is
0:09:46 it established the Part D benefit, but it included a provision known as the non-interference clause,
0:09:50 which effectively prevents the HHS from interfering. Department of Health and Human
0:09:53 Services, the government agency that developed here. Exactly. So the Health and Human Services
0:09:58 Secretary from interfering with any negotiations between the drug manufacturer and any of the
0:10:03 other stakeholders in the value chain. Fifteen plus years later today, we have some bipartisan
0:10:09 momentum to give Medicare the ability to negotiate. And I think it’s very important to note that when
0:10:14 we talk about drug pricing, in general, you run the risk of conflating things. What’s being conflated
0:10:19 here? Well, it’s one thing that the price of insulin continues to rise at the rate at which
0:10:24 it’s risen. It’s one thing where sort of things that have been off-patent or have been generic
0:10:29 for a long time all of a sudden get these very, very large price hikes. That’s different than
0:10:33 saying a new therapy like a gene therapy that has the potential to be a cure, you mentioned,
0:10:38 a $2 million price tag. Those therapies are A, expensive to discover. B, they’re very,
0:10:42 very expensive to make. And C, they have real benefit. In this case, they’re potentially
0:10:46 cures. And so you’re not giving someone a dose of a medicine. To be clear, you’re basically saying
0:10:51 that it’s a one-time treatment and cure versus having to see a doctor with chronic therapy over
0:10:55 and over and over again. For example, in the case of Zolgensma, it’s a gene therapy that was approved
0:10:59 to treat children with spinal muscular atrophy, which is one of the leading genetic causes of
0:11:02 infant mortality. Exactly. In that case, you’re not only giving these children health, you’re
0:11:06 giving them life. And so these are two very different things. It’s talking about how we control
0:11:10 rising costs of drugs that may not be on the cutting, still necessary, but not on the cutting
0:11:14 edge of innovation versus the new… And that can get lost in the dialogue because these are
0:11:18 obviously very complex debates. And for the latter, people can listen to your episode. Jorge
0:11:24 did an episode with famous MIT economist Andrew Lowe, who has a really interesting proposal for
0:11:26 thinking about how to fund these. So you can listen to that for more of a deep discussion.
0:11:31 So now let’s go back to the big picture, lay of the land. So let’s remove the deep special
0:11:36 new therapies off this particular discussion and talk about why are drugs so goddamn expensive?
0:11:40 I’ll give you the thrust of some of the more common arguments. The first one is,
0:11:45 they’re expensive because R&D is expensive. Developing a drug is time consuming. It’s risky
0:11:50 and it costs a lot of money. And because there are a lot of failures along the way,
0:11:55 the ones that are approved have to be priced as such to not only make money for that drug,
0:11:59 but also to pay for all of the things that have failed. As Jay mentioned, it’s very clear that
0:12:04 the United States, we pay a far higher price for most drugs than we do in the rest of the world.
0:12:08 For a lot of the reasons that he mentioned, the counterargument from industry would be,
0:12:12 well, for better or for worse, the United States is subsidizing R&D for the world.
0:12:13 Right, the research and development.
0:12:19 So that’s one issue. Another issue is that we do have this question of who has market power and
0:12:24 it is illegal in the United States at the moment for the government to negotiate drug prices that
0:12:27 would be considered price controls here in this country, even though that’s not the case
0:12:32 in many parts of the rest of the world. Number three, we have a very complex industry structure.
0:12:34 Tell me more about that, like the players that are involved here.
0:12:39 Sure. So there are manufacturers who, generally speaking, discover and develop the drugs in
0:12:42 the first place and commercialize them. And probably want to make money off of it.
0:12:46 Then you have distributors and the distributors get paid to move drugs through the channel and make
0:12:50 sure that the drugs get to where they need to go and can be in a hospital, a pharmacy, whatever it is.
0:12:53 There’s a middle layer here. Yeah, there’s a middle layer here, the pharmacy benefit
0:12:58 manager that helps actually the PVMs that helps manage who gets access to the medicines,
0:13:00 who’s eligible versus who’s not.
0:13:03 They sort of consolidate some of the information too, right? They sort of summarize the formularies
0:13:07 for what are the drugs, for which condition, et cetera, et cetera, and that helps influence
0:13:12 what gets prescribed. Yeah, so the B in pharmacy benefit manager, the idea was this sort of layer
0:13:18 of the industry arises to help the insurers, the payers, control who gets access to the drug to
0:13:21 make sure the right people get the drug and the wrong people don’t, and to help manage
0:13:25 the benefits spent, which that’s the idea to the benefit of the insurer. But then, of course,
0:13:29 that layer takes a cut of the economics, and it’s a very complex thing in form of rebates
0:13:33 and otherwise. And then you have the insurers and the payers. The payers obviously want to
0:13:37 minimize costs. They’re, in fact, just tying it back to the news. As I understand it, they’re in
0:13:42 support of this current bill. Because it controls the increase of the cost of the drugs, but there’s
0:13:46 always a risk for an insurer. If you’re reducing your drug spend, is there a potential that you’re
0:13:51 going to have more expensive interventions? As you go through the system, there are various
0:13:56 stakeholders that all get piece of economics, but there’s been studies that have been done that
0:14:02 show that for every dollar of drug spend, the manufacturer gets a percentage that is surprisingly
0:14:05 low. I would never have assumed that, because right now the narrative is like they’re extracting
0:14:09 all the value. Yeah, and the reality is that there’s value taken along the way. So that’s an
0:14:13 amazing breakdown of who the players are and their incentives and motives and just sort of how
0:14:16 they’re thinking about it, because obviously we’re not going to answer and fix this in one
0:14:21 episode. Now, let’s bring it back to the current news. So how does this sort of tie back into what’s
0:14:26 on the table right now? The proposal here is to cap the amount of spend or the amount of cost
0:14:30 that Medicare patients pay out of pocket in any given year and dropping it pretty significantly.
0:14:35 I think it was in the $8,000 range, and now they’re talking about the $3,100 range. Oh,
0:14:39 wow. Big difference. So that’s one big piece. The other one, at least as I understand the original
0:14:44 proposal, is to cap how much you can increase the prices and tie it either to inflation or
0:14:49 other mechanism by which annual price increases can occur over time. Now, the risk, of course, is
0:14:53 having drugs be introduced at even higher prices, because if I’m capped at how much I can grow,
0:14:57 right, I’ll start at a higher price. That’s right. Using maybe a terribly stretch analogy of rent
0:15:02 control and the San Francisco apartment, the rent is going to start off thousands of dollars higher
0:15:05 because you know you can barely incrementally increase it after that if you’re going back on
0:15:09 the market. Yeah, I think the other element to add there is walking through the chain of
0:15:15 stakeholders from the manufacturer to when a medicine ultimately gets in the hands of a patient.
0:15:20 There is also a lot of narrative externally on the list price to net price differential.
0:15:26 Oftentimes, a manufacturer will set a list price for a medicine, but that’s actually not the price
0:15:32 that is paid for by the payer or by the patient. That rebate that is given back by the pharmacy
0:15:37 benefit manager very rarely makes it to the patient or to the payer. So a lot of inflation
0:15:42 without any felt tangible benefits whatsoever. Exactly. And so that’s why I think some criticize
0:15:50 that some of the complexity in the chain and the lack of transparency creates unfair pricing policies.
0:15:54 We can obviously dive into all the solutions, but just at a quick take in the 16 minutes episode,
0:16:00 what are some of the things that technology can do? If you’re an entrepreneur looking at this space,
0:16:05 the opportunity for technology to drive transparency across various different steps in this process,
0:16:11 at least hopefully, and we’re optimists here, can drive down a lot of the waste that happens in
0:16:15 the system. One of the things that people really are challenging, one of the things that we’re
0:16:21 excited about is value-based care contracts or outcomes-based pricing. Yes. For some of these
0:16:26 novel one-time cure therapeutics that have entered the market, you mentioned Novartis Zolgensma,
0:16:31 Bluebirds and Tenglo. What’s challenging there and where there’s a real technology problem
0:16:38 is how do you get the data to actually facilitate that contract? Basically, because if it’s saying
0:16:42 value-based, how do you know it actually is being paid on value versus just some theory that it’s
0:16:46 going to work? It actually works and therefore you pay based on that. Exactly. Manufacturers are
0:16:52 proposing a money-back guarantee, but the data, the infrastructure, the plumbing does not exist
0:16:56 today to effectively arbitrate those contracts at scale. That’s where technology can help.
0:17:01 It’s a critical point because the chain is not only complex, it’s also not transparent,
0:17:05 and so the potential for technology to have an impact there is pretty significant,
0:17:12 but it also requires some help from policy to essentially make transparency, if not an obligation,
0:17:17 at least to write. If you have that, then you can help to drive out some of the inefficiencies,
0:17:20 drive out some of the frictions that exist in the system that ultimately lead to a higher cost.
0:17:24 Well, quite frankly, the argument that I would make here as a believer in free markets is that
0:17:27 they only work if there is transparency of information or symmetry of information and
0:17:31 that that’s the thing that people always forget when these debates become all about free market
0:17:36 economics versus price controls versus X versus Y. That is the key ingredient. The irony is that’s
0:17:39 a very thing you need, yet it’s a very thing that’s being obscured. Okay, so bottom line it for me.
0:17:43 What’s on the horizon here? Look, it’s clear that we as a country need to have a debate on how to
0:17:48 deal with rising cost of health care generally and specifically rising cost of drug spend,
0:17:53 and so I think it’s important that proposals are being made. This is obviously the first step of
0:17:57 what’s going to be a broader and ultimately very complicated conversation because we’re talking
0:18:02 about drugs that can cost tens or hundreds of thousands of dollars a year for chronic therapies.
0:18:06 We need to find a solution to contain those costs and to make sure that the patients are
0:18:09 getting the right therapies and that the system becomes accessible to everybody. Yeah, that access
0:18:14 is taken care of and that the system can support it. But what’s coming down the pipe is that we have
0:18:20 new modalities, new therapies like gene therapies, engineered cells that are really changing the
0:18:25 definition of what a medicine can be. I think it’s a very important thing because the outcomes,
0:18:30 and Jay was just describing value-based contracts and all that, the outcomes of what these therapies
0:18:34 can do are very different than what we’ve seen. Cures are a very rare thing in medicine,
0:18:38 but some of these things start to approach things that look like cures, but they’re very expensive
0:18:44 to make. You mentioned Zolgensma. SMA is a disease where you otherwise did not have an option,
0:18:50 and that can be a 10-year treatment horizon that now can be potentially addressed by one cure,
0:18:55 and the cost that that pulls out in the system from an administration standpoint
0:18:59 is also part of the value of that medicine. So the Center for Medicare and Medicaid Services
0:19:04 Administrator Seema Verma earlier this year highlighted the fact that the current system is
0:19:11 not set up to execute and support these kinds of new medicines. And less than until we have a system,
0:19:16 and this includes policy, this includes technology layers and pipes to have the data of feeds that
0:19:22 we need to understand what’s working and what’s not, and a way to address the cost that is entirely
0:19:26 up front and mismatch with the benefit, which is over a very long period of time. We will find
0:19:30 ourselves, I think, in the very challenging position where we have a healthcare system that is not
0:19:34 able to support innovation, and I think that’d be the worst thing for society. Thank you, Jorge
0:19:38 and Jay, for joining this segment. Thank you. Thanks for having us.