How the Kalydeco Deal Will Shape Philanthropy’s Future

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If the mood on Giving Tuesday extends to financing drug development, the example of a cystic fibrosis drug may be the right incentive, though with a few caveats. The move two weeks ago by the Cystic Fibrosis Foundation (CFF), a charity based in Bethesda, Md., to sell its rights in a drug for the rare lung disease for $3.3 billion highlights the lure of windfall gains for investors financing drug development, but it also brings up ethical concerns and questions about the potential for failures.

Charged with finding treatments for cystic fibrosis, a genetic disorder that is often fatal, the foundation had invested $150 million over 15 years in Aurora Biosciences, a biotechnology firm in San Diego, Calif., to develop a drug. Along the way, Aurora was bought by Vertex, which continued the development. The drug, Kalydeco, won regulatory approval in early 2012 and proved effective in treating a select patient population. The buyer of CFF’s rights to Kalydeco is Royalty Pharma, a New York City-based firm that buys intellectual property and other rights to drugs.

Whether you are a foundation or a venture capitalist, this is the kind of payoff that you pray for Twitter ,” said Katherina Rosqueta, founding executive director of The Center for High Impact Philanthropy and an adjunct faculty member of the school of social policy and practice at the University of Pennsylvania.

“It brings other companies to the mix” who will be encouraged by “the proof of concept that something like Kalydeco can work,” adds Denis Hadjiliadis director of the adult cystic fibrosis program and a professor at the Perelman School of Medicine at the University of Pennsylvania. However, those firms must be prepared for disappointments, cautioned Arthur Caplan, director of the division of medical ethics at New York University’s Langone Medical Center. “A lot of them fail; a lot of them don’t work out,” he said of drug development programs. “It’s a gamble for sure.”

“Whether you are a foundation or a venture capitalist, this is the kind of payoff that you pray for.” –Katherina Rosqueta

The three experts discussed the road ahead for foundations investing in disease treatments on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Cystic fibrosis affects an estimated 30,000 children and adults in the U.S. and 70,000 people worldwide. Kalydeco treats a variant of the disease covering only about 1,200 people, or about 4% of those with the disease in the U.S. The opportunity with Kalydeco could get much bigger for Royalty Pharma. A combination drug of Kalydeco with other compounds that could potentially treat another 45% of the patient population is awaiting regulatory approval, said Hadjiliadis. Meanwhile, a next-generation version that combines drugs is in development and promises to cover another 30% or 40% of cystic fibrosis patients, he added.

Caplan predicted a surge of investment appetite building up for such ventures. “You could see all the other foundations saying, ‘Let’s start to invest in our own diseases; let’s pursue relationships with start-up companies,'” he said. However, he warned that it takes “sophisticated people to make the right choices” in the drugs, diseases and start-ups to pursue. “It takes a lot of expertise to understand what the good bets are in a particular disease category and in medical philanthropy,” noted Rosqueta. “That expertise is a lot different from what you would need to understand what some of the good bets are in, say, real estate development if you are an affordable housing organization.”

Rosqueta said investing in for-profit businesses such as biotech start-ups is “a new area for most of the foundations.” It also raises concerns for them about potential conflicts with their fiduciary responsibilities in the use of their funds, she noted.

Ethical Concerns

Caplan identified a few ethical issues for foundations and other investors in similar ventures. Pricing of the drug they help develop is one. “Can the foundation turn around and say [the drug] costs too much?” he asked. “Do they have to subsidize the price or fight with the manufacturer to lower the price, using their leverage as someone who is an investor?”

“You could see all the other foundations saying, ‘Let’s start to invest in our own diseases; let’s pursue relationships with start-up companies.'” –Arthur Caplan

Access to a drug is another issue. In case of a shortage, deciding who gets the drug could be a tricky issue, Caplan said. “Every drug that appears in this kind of relationship doesn’t start with a full supply; it starts up slowly.”

Hadjiliadis noted that when the CFF made its original investment, its goal was to find a cure for the disease, not to make a windfall profit. “Whatever you do, don’t try to make an investment to make a profit, but [to ensure you] are hitting your goal as a foundation to better the lives of patients that you are trying to serve,” he said. “By doing that, if you manage to get a profit, that is a good thing. But if you didn’t get the profit, you would still have a [drug like] Kalydeco.”

Weighty Issues

Caplan wondered how the CFF might have weighed issues like whether to drive down the price of the Kalydeco treatment before selling its rights. The Kalydeco treatment costs each patient about $300,000 annually, according to some reports. “It’s very important that the foundation be transparent here,” he said. “In this model of investing, it isn’t about finding cures; it is about finding cures that are accessible to the people they are trying to help.” Even if insurance covers the costs, he suggested that the government could object to the treatment’s price-tag at some point.

Rosqueta noted that the CFF is much larger and has more resources than most other foundations, which makes it “an outlier in the world of nonprofits.” But she added that the Kalydeco deal raises questions for every foundation, such as: “Do we have the patience to wait 15-20 years for a potential payoff? Can we absorb the risk? Because even if we do have the patience, we may just find out after all this time that the money is not producing a cure,” and instead it could have been put to better use.

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