What happens when a disease-fighting charity dives into venture capitalism?
In the first case of its kind, the results include one of the planet’s most expensive pills, huge sales projections for a drug company and windfalls for executives who sold stock in the glow of enthusiastic news releases about the drug.
Kalydeco is a breakthrough drug designed from knowledge of the genetic roots of cystic fibrosis, a lung disease that kills most victims before they reach middle age. Developed by Vertex Pharmaceuticals with a $75 million investment from the Cystic Fibrosis Foundation, it is an early example of “venture philanthropy,” where a nonprofit helps finance development of a treatment in return for a cut of sales.
Much of the initial science behind Kalydeco involved nonprofit research universities and hospitals, with funding from the Cystic Fibrosis Foundation and by taxpayers through the National Institutes of Health.
Yet it costs each patient $307,000 a year to take two Kalydeco pills a day – a price borne by taxpayers through Medicaid and other government programs and by the workers and companies who finance employee health insurance plans.
In 2012, with less than a full-year on the market, Vertex sold $172 million worth of Kalydeco and the foundation cashed in by selling future royalties from the drug to an undisclosed firm for $150 million. The foundation is investing that money with Vertex and other companies to develop more new drugs.
Clinical trials have shown Kalydeco is a beneficial drug that advances treatment of the disease. But it helps only 4% of patients with cystic fibrosis, those who carry a rare genetic mutation – about 1,200 people in the United States.
Despite the tiny number being treated, fortunes are being made.
Last month, news about success of the drug sent Vertex stock soaring more than $6 billion in a single day. That surge and a similar one last May allowed top executives and directors of the company to sell stock and options worth more than $100 million.
The Kalydeco story reveals much about how advances in medicine and escalating health care costs often go hand-in-hand. It also raises questions about conflicts of interest and where to draw the line between a charity and a profit-driven, publicly traded drug company.
“The concept of a charitable, not-for-profit taking on the role of a venture capitalist is new and difficult to digest at the moment,” said Paul Quinton, a cystic fibrosis researcher at the University of California, Riverside and the University California, San Diego.
Quinton, who has cystic fibrosis, is one of 28 doctors and scientists who sent a letter to Vertex calling the price of Kalydeco “unconscionable.” A copy of the letter was provided to the Journal Sentinel and MedPage Today. Kalydeco, the doctors wrote, costs 10 times more than what a typical cystic fibrosis patient pays in total drug costs.
“This action could appear to be leveraging pain and suffering into huge financial gain for speculators, some of whom were your top executives who reportedly made millions of dollars in a single day,” the doctors wrote.
Since receiving the letter last July, Vertex has raised the annual price of Kalydeco another $13,000.
Kalydeco sales this year are projected to hit $300 million worldwide. Analysts say the drug eventually will bring in billions annually if it can be combined with other drugs to treat larger numbers of cystic fibrosis patients. Research on those drugs also is being co-funded by the foundation.
Other nonprofits, such as the National Multiple Sclerosis Society, are considering similar venture partnerships with drug companies.
Vertex and its executives have benefited greatly from Kalydeco and foundation funding.
Last May, when Vertex and the foundation reported positive results from a clinical trial involving Kalydeco and whether it could be combined with another drug to treat more patients, the company’s stock jumped more than 70%, from $37.41 to $64.85 a share.
Five executives and two directors sold off more than $35 million in shares, mainly at prices from about $55 to $64 a share. Many of the options were priced between $16 and $40 a share.
Three weeks later, the company said it overstated the effectiveness of the drug in that trial and the stock dropped about $7 a share, ultimately falling back under $40 by December.
Vertex spokeswoman Nikki Levy said in an email the company does not comment on individual stock sales.
She said the executive stock sales either were part of pre-existing 10b5-1 plans or followed the company’s internal stock trading policy. A 10b5-1 plan is an automatic trading tool in which executives specify timing or pricing of sales to avoid questions about inside information the seller had at the time.
U.S. Sen. Chuck Grassley (R-Iowa) wrote a letter to the U.S. Securities and Exchange Commission, saying it could appear that Vertex executives took advantage of the situation, knowing the overstated clinical trial results would eventually be made public and cause the stock price to drop.
The letter said the stock sales were troubling for industry investors and the federal government, which pays billions of dollars a year for drugs through Medicaid and Medicare.
Judith Burns, a spokeswoman for the SEC, declined to comment on the Grassley letter.
Last month, the company’s stock shot up more than 60% again, from $52.87 to $85.60, after positive early data from a clinical trial of Kalydeco and another drug it is developing with funding from the foundation. On April 19, the day after the news was released, the company’s market value jumped by more than $6 billion.
That same day, two company executives sold huge chunks of stock options. Executive Vice President and Chief Financial Officer Ian Smith alone sold 745,685 shares worth more than $60 million. Most shares were sold at $81.50, with options purchased from $29 to $39.
More than 50% of children and one-third of adults with cystic fibrosis have their treatments paid for by taxpayer-funded programs, such as Medicaid and Medicare, though Vertex says it believes 75% of the people taking Kalydeco are covered by commercial health plans.
Taxpayers helped fund the science that led to Kalydeco.
In the 1980s, Francis Collins, now director of the National Institutes of Health, was a researcher at the University of Michigan and on his way to becoming a renowned gene hunter.
Collins and a team headed up by Lap-Chee Tsui at the Hospital for Sick Children in Toronto collaborated to identify the gene responsible for cystic fibrosis. That breakthrough involved funding from the NIH, the Cystic Fibrosis Foundation and the Howard Hughes Medical Institute, said Collins.
Another decade of intense basic science followed, much of it funded by NIH.
In the 1990s, Collins said, the federal health research agency tried to encourage reasonable pricing of drugs developed with the help of its funding, but drug companies were not interested.
“We are not holding the levers,” Collins said.
Company officials say while publicly funded research provided early understanding of the cause of cystic fibrosis, it took Vertex scientists 14 years of their own research before the drug won U.S. Food and Drug Administration approval.
Since 1989, Vertex has spent more than $5 billion in research and development, and a significant portion of that involves cystic fibrosis drugs, spokeswoman Levy said.
Specialty drugs that treat “orphan diseases,” conditions that affect fewer than 200,000 people, can run hundreds of thousands of dollars a year per patient.
Drug companies say the prices are necessary because development costs are high and returns must be made on investment even when the pool of people who can use the drug is small.
“You don’t need 10 million patients on your drug to make a return,” said John LaMattina, a former president of global research for Pfizer, who writes about the drug industry as a book author and blogger for Forbes. “As long as the pricing holds up, it’s a pretty attractive area.”
For drug companies, having a nonprofit organization in your corner helps.
LaMattina said patient advocacy groups can spread the word about new treatments and work hand-in-hand with drug companies, helping keep their marketing costs down and profit margins up.
Last month, new treatment guidelines for doctors who handle cystic fibrosis patients strongly recommended use of Kalydeco. The guidelines were funded by the Cystic Fibrosis Foundation.
Three of the 10 authors of the guidelines were employees of the foundation and four others worked for institutions that received grants from the foundation. The chairman, Peter Mogayzel, is a professor of pediatrics at Johns Hopkins University, which foundation tax records show received more than $2 million in grants from 2009 through 2011.
Foundation spokeswoman Laurie Fink noted 110 cystic fibrosis centers around the country receive funding to provide patient care from the foundation. She also said it routinely makes research and training grants to institutions.
“It is definitely a conflict of interest,” said Eric Campbell, an associate professor at Harvard Medical School who has researched conflicts of interest in patient treatment guidelines.
In the past, drug companies have been criticized for funding treatment guidelines that recommend their drugs. It is no different if the guidelines are funded by a foundation that gets royalties from drug sales, Campbell said.
In December, a Journal Sentinel investigation found that treatment guidelines connected with the 25 top-selling drugs in America were heavily influenced by doctors with financial ties to drug companies. In some cases, nonprofit associations issued the guidelines and also had financial ties to the drug companies.
Nine of the 20 guidelines examined were written by panels where more than 80% of doctors had financial ties to drug companies. Kalydeco was not one of the drugs examined.
The three Cystic Fibrosis Foundation employees on the treatment guidelines committee said in disclosures they did not participate in discussions involving Kalydeco.
While the foundation funded the guidelines, they were developed by a separate committee of third-party cystic fibrosis experts, Fink said.
“Each committee member submits conflict of interest statements that are reviewed by the group, and necessary action is taken to prevent conflicts,” she said.
Lisa Schwartz, a professor of medicine at Dartmouth Medical School, applauded the organization’s work in funding development of the drug. Ideally, she said, the royalty money the foundation gets should be used to help cystic fibrosis patients pay for their medications and manage their disease.
“It is concerning that the organization now stands to profit when patients choose to use the drug,” she said. “Financial entanglement with industry, even with the best of intentions, creates a conflict of interest.”
Robert Beall, president of the Cystic Fibrosis Foundation, said that without its financial support, drugs such as Kalydeco would never get to patients. Neither insurance companies nor patients have voiced any concern to him about conflicts of interest, he said.
“They applaud the decision and our business model to the utmost,” Beall said. “The patients are excited.”
He rejected the idea of using the royalty money to help patients pay for the medical care, noting that the foundation needed the money to entice drug companies to get involved in risky cystic fibrosis drug research.
Pfizer will be getting $58 million from the foundation – part of its royalty money from Vertex – to help develop other cystic fibrosis drugs. Another $75 million will be going back to Vertex and about $10 million to Genzyme, which is owned by the global drug giant Sanofi-Aventis.
In the original deal with Vertex, the foundation received a percentage of sales that ranges from single digits to low teens. Beall said the foundation did not ask Vertex to price the drug more affordably.
“That would have been a deal-breaker,” he said.
Beall said he can only express his concern about the price and invest funds with other companies that might develop competing drugs that someday could bring the price down.
For years, disease-fighting nonprofit organizations have funded drug research – usually with no stake in revenue or profits – with the hope that it would lead to innovative new therapies.
When associations invest their money with drug companies, it’s reasonable to expect a financial benefit from taking the risk, said Tim Coetzee, chief research officer with the National Multiple Sclerosis Society, which now is pursuing a similar strategy.
“You should be able to use whatever financial tools are available,” he said.
But David Cornfield, a professor of pulmonary medicine at Stanford University School of Medicine, said the financial arrangement between the Cystic Fibrosis Foundation and Vertex was “fraught with peril.”
Foundation-sponsored treatment guidelines are followed by doctors around the country – boosting the market for Kalydeco, which directly benefits the foundation.
Levy, the Vertex spokeswoman, said the goal of the company always has been to help as many people with cystic fibrosis as possible.
“Our collaboration with the Cystic Fibrosis Foundation is regarded as the first and most successful example of venture philanthropy, and we are excited that we’ve been able to bring a medicine like Kalydeco to patients with CF as a result,” she said.
As more drugs to treat specialty diseases hit the market, more doctors are challenging the astronomical prices.
Last month, a group of more than 100 cancer experts jointly signed an editorial in the medical journal Blood, imploring drug companies to bring down prices for specialty drugs used to treat chronic myeloid leukemia.
They noted that 11 of the 12 new drugs approved last year to treat various cancers cost more than $100,000 per patient per year.
“We believe the unsustainable drug prices in CML (chronic myeloid leukemia) may be causing harm to patients,” the doctors wrote.
Collins, the head of NIH, put it simply: “Drugs that are lifesaving ought to be affordable.”
Kalydeco is a breakthrough, lifesaving life-saving cystic fibrosis drug that costs its users, or their insurance companies:
- $841 a day (for two little pills)
- $25,230 a month
- $307,000 a year for the rest of of their lives.
It was partly developed by a nonprofit non-profit organization that is sharing in the financial rewards.
Source: Milwaukee Journal Sentinel