$3.3B Patent Royalty Deal, the Largest Ever, is Windfall for Charity

The rights to an expensive drug treatment owned by the Cystic Fibrosis Foundation has helped it to reap a financial windfall but is not without controversy.

Critics believe that non-profits should stick to funding research and not investing in drug development. Profiting directly from the high cost of an essential medication through what has been called venture philanthropy could be seen as a conflict.

Concern that a lucrative patent licensing deal for a breakthrough drug will keep it out of the reach of many who require it has caused some critics to question the impact of a record-setting $3.3 billion IP rights securitization.

Kalydeco, which costs more than $300,000 a year, helps cystic fibrosis patients with a rare genetic mutation, according to Robert Beall, president of the Cystic Fibrosis Foundation (CFF). It works not by addressing symptoms but by attacking the root causes of the life-threatening, genetic disease that primarily affects the lungs and digestive system. 30,000 Americans have CF.

52280_RP-PMS288While the drug’s high price may have boosted the royalties the foundation receives, “We would give up our royalties in a second to drive down the prices,” Beall told Bloomberg News. “We were not at the pricing table.”

Not-for-Profit Motive 

“There is some concern that a profit motive could divert [non-profit] organizations from their primary mission — helping patients — and create a conflict of interest,” wrote The New York Times in a page-one story last week, Deal by Cystic Fibrosis Foundation Raises Cash and Some Concern. “Critics say that perhaps because a higher price means higher royalty payments, the foundation did not do enough to bring the cost down.

‘I would like to see them do more to get the price of this drug down to something that is going to be sustainable,’ said Paul M. Quinton, a cystic fibrosis researcher at the University of California campuses in Riverside and San Diego, who has the disease himself. ‘And I have some concern about the possible kalydeco-resized-600appearance of a conflict.’”

“Robert J. Beall, the chief executive of the Cystic Fibrosis Foundation, said the organization had expressed concern over the cost of the drug to the manufacturer, Vertex Pharmaceuticals, but had no power to set the price. He said the foundation’s mission had always been to get treatments to patients, and that financial returns would only help.”

A 20-Fold Return

The Royalty Pharma-led licensing deal created a unique opportunity for CFF. Independent funding of  life-threatening  diseases is controversial, as major donors and their families put pressure on boot-strapped foundations to invest aggressively to generate solutions faster, and establish capital for research breakthroughs. In CFF’s case this strategy, based on an $150M investment, paid off handsomely. Other charities may not be so lucky.

Families of loved ones faced with medical and financial dead-ends should be encouraged to see CFF/Royalty Pharma’s financial modeling experiment pay off. It has provided a win-win by bringing patients closer to a cure, quicker, and providing funds for continued aggressive research and patient support. The securitization means that CFF gets its future licensing income upfront, when it really needs it, while Royalty Pharma gambles on the pricing model and whether a better drug leads to Kalydeco’s premature obsolescence (not something investors in Royalty Pharma’s deal are likely to be rooting for).

If the price of Kalydeco, is slightly higher than it might otherwise have been had the securitization not taken place, the benefits from most perspectives clearly outweigh the negatives. Programs that mitigate the 2815536cCMYK_Package_Logo_3_enhigh cost of expensive-to-develop drugs should involve the health insurers and government agencies. Investors or financial factors should not be penalized for making wise choices.

The early HIV drugs like Zerit (whose royalties were the object of an unprofitable 2000 securitization by Royalty Pharma) were expensive when they were first brought to market. The price came down when better alternatives were identified and when health insurers were forced to pay the costs for patients to obtain them.

Financial Modeling Experiment 

Let’s not be naive. The profit motive got Kalydeco developed and marketed (as it has many other drugs), and the ROI is being used by CFF to provide for more patients than if a pharma company had done the investing. This may still not seem entirely fair or necessary, but venture philanthropy enables families of patients to participate actively in solutions.

The record-setting Royalty Pharma patent licensing deal also highlights the incredibly diverse opportunities for reliable, revenue generating patents that read on inventions that solve serious problems or address people’s needs. Right now the Royalty Pharma deal is looking like a big win for everyone, especially those who need it most. It remains to be seen whether bondholders will agree.

*****

On January 6 The New York Times ran a provocative op-ed, “Stop Subsidizing Big Pharma,” where the author, journalist Llewellyn Hinkes-Jones argues, wrongly it would seem, against the privatization of medical research, because of its morally ambiguous priorities and failure to serve the broadest medical demographic. (Tell that to the family of a patient dying of a rare blood disease.)

“But while Big Pharma might be faulted for funneling billions of dollars into erectile-dysfunction drugs and off-label drug marketing, researching extremely rare diseases may also represent a misuse of public and private funds,” writes Hinkes-Jones. “Efforts to cure, rather than treat or prevent, obscure diseases can be expensive, diverting investment from more common afflictions. The high costs of focusing on rare diseases are then eventually pushed onto the health care system by way of egregiously high drug prices. Such a choice involves an incredibly complex moral calculus, one that is best processed by democratic public institutions.

“To make medical advancements truly philanthropic, the profit motive needs to be removed from the equation. If the intent is to cure rare diseases, then we should be increasing the budget for the National Institutes of Health and other research initiatives. Instead of gala balls and donor drives, higher taxes on the same rich benefactors could be used to fund the research that isn’t already being supported. Biotech patents developed through venture philanthropy should not have exclusive rights attached to them.”

Image source: cfservicespharmacy.com; 5amsolutions.com; breatheholpe.tamu.edu 

About Bruce Berman

Independent IP observer, adviser and author.

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