Venture Philanthropy: The New Venture Capital?

Non-profit organizations’ growing support for industry drug development does more than fill a funding gap. It brings disease knowledge, patient access and an understanding of the end market that few traditional VCs can offer.

By Melanie Senior

When stock market guru Warren Buffett donated a large part of his $40 billion fortune to the Bill & Melinda Gates Foundation last summer, he reminded the world, as Gates had done, of the good that business success can bring to charitable causes. But funds are flowing the other way, too, from charities into business—and in particular, into the biopharmaceutical industry.

The high costs and risks inherent in drug development, coupled with continued unmet need, perhaps make it an obvious recipient of philanthropic funding. Indeed, health care in the developing world is a big part of Gates’ mission. But biotechs doing drug discovery and development in rare, un- or under-treated diseases are also, increasingly, hot-bed for the business of philanthropy. The mass exodus of VCs from early-stage investments following the last down-turn has led to a funding gap which governments and university technology transfer have struggled to fill. Growing economic and regulatory hurdles to getting new drugs to market has forced companies to de-prioritize programs with smaller target audiences.

Enter the charities, in particular those with a disease-area focus. Their mission is simple: getting more effective drugs to patients. Recognizing that drugs come out of drug development pipelines and not academic research, more and more of them, inspired by pioneers such as the Cystic Fibrosis Foundation are stepping in to support downstream drug discovery and development. Many provide seed funding for young companies working in their areas, helping bridge to proof-of-concept that can catalyze further VC rounds. Some support specific programs, at any stage, including in well-established (often public) biotechs and even pharma, ensuring that they are prioritized. They may also fund additional studies or data-collection by a particular firm that could benefit the field overall. A few are even co-founding companies of their own.

Besides helping pay for drug development projects that others see as too risky or as having insufficient payback, these groups also bring access to patients, trial centers, specialists and far deeper understanding of the disease, and patient need, than even the most focused VCs. Many provide companies with a commercial perspective, contact with FDA and sometimes a political voice—things that few biotechs would have the resources to build on their own.

Non-profit organizations aren’t just stepping in with free money where VCs fear to tread, though. Granted, they are not bound by VC time-lines or investment return criteria, and they aren’t seeking a profit. They do nevertheless need to make their money work, and share in successes they help create. Typically, demands are modest—for a small royalty, or post-commercialization milestones. So for the most part, VCs love them.

Charities will play an even bigger role in supporting industry R&D in the future. Established non-profits are stepping up their commitments to industry, and entirely new ones like the Melanoma Therapeutics Foundation are being founded with an industry-focused investment mindset from day one. The new venture philanthropists don’t want (and don’t—yet—have the funds) to replace VCs; they seek to work with them. As the non-profits get more business savvy and strike more sophisticated deals, some interactions may be tough. But overwhelmingly, non-profits’ growing role is good news all around: for patients, the charities, researchers, businesses and investors.

CFFT: Lead Catalyst

Cystic Fibrosis Foundation Therapeutics Inc. (CFFT), the non-profit drug discovery and development arm of the Cystic Fibrosis Foundation, is widely acknowledged as the trailblazer in industry R&D investment. It has spent or committed $200 million since its foundation in 2000. (See "The Cystic Fibrosis Foundation," START-UP, April 2001 (Also see "The Cystic Fibrosis Foundation" - Scrip, 1 Apr, 2001.).) The disease itself was particularly ripe for this approach: cystic fibrosis is an orphan indication, affecting fewer than 200,000 patients, and the discovery in 1989 of the gene defect which causes the abnormal mucus formation associated with cystic fibrosis provided a defined starting point for research, much of it focused around gene therapy. Ten years later, "we’d had time to focus on what was going wrong," says Robert Beall, PhD, president and CEO of the CFF and CFFT, "but how were we going to get companies interested in cystic fibrosis?" The Foundation struck its first long-term, multi-million dollar deal in 2000 with then-Aurora Biosciences, to access screening and assay technology. [See Deal] It was a risky move at the time; worth up to $47 million. "We could have screened tens of thousands and not have a single one that worked," notes Beall. But some did. Vertex Pharmaceuticals Inc. (which acquired Aurora in 2001 [See Deal]) is currently planning Phase II trials of oral drug candidate VX-770, and received a further $13.3 million in development support from the CFFT in March 2006. If the compound reaches the market, CFFT will receive royalties and milestones.

Vertex’s VP, corporate and business development Kerry Reinertsen, PhD, doesn’t underestimate the impact that the CFFT funding had on the program’s development. "Without the CFFT’s input, we would not have progressed this compound nearly as fast into the clinic," she says. Vertex has another CF compound about a year and a half behind VX-770, and struck another research agreement with CFFT in January 2006.

The CFFT’s support, although significant, hasn’t been make or break for Vertex as a company, though. But the charity was far more critical in catalyzing the survival and success of Altus Pharmaceuticals Inc., spun out of Vertex in 1993. In 2000, the company received $1 million for research into its oral enzyme replacement therapy for pancreatic insufficiency in CF patients. That was followed by a $25 million commitment the following year, the largest in the fund’s history at the time. [See Deal] This allowed the company to get to proof of principle, which was instrumental in attracting the firm’s $50 million VC round several months later, notes Robert Gallotto, VP of strategic planning and alliance management at Altus. [See Deal] Altus eventually floated in 2006, raising almost $100 million [See Deal]. But "they had been down to the point where they were not sure they could make the payroll," recalls Beall.

CFFT knows its model works. One of its earliest collaborations, with Pathogenesis (now part of Novartis AG ) led to a marketed product, tobramycin (Tobi), and several charity-supported candidates have reached Phase III—including antibiotic aztreonam (Cayston), in development for CF-related lung infections at Corus, an early CFFT beneficiary. Corus went on to raise a total of $120 million from VCs and was purchased by Gilead Sciences Inc. last year. [See Deal]

Given that success, other organizations focused on orphan or underserved diseases have followed suit in engaging with industry. (See Exhibit 1.) The Michael J. Fox Foundation for Parkinson’s research in 2005 put about half of its research funding into the for-profit sector, and last year launched its first funding program dedicated to industry. The Therapeutics Development Initiative is aimed at de-risking and accelerating Parkinson’s disease research within companies of any size—part of a recent $4.6 million award went to a Wyeth team seeking drugs to inhibit the LRRK2 gene implicated in PD, another awardee was privately-owned Amicus Therapeutics Inc., where scientists are testing a compound that may be implicated in both Parkinson’s and Gaucher’s disease.

The Juvenile Diabetes Research Foundation , dedicated to finding a cure for Type I diabetes and associated complications, started funding industry programs three years ago. EVP of research Richard Insel, MD, estimates that this support has been worth about $20 million a year. It comes in a variety of forms, including equity: JDRF in August 2006 participated in a $36.5 million financing at TolerRx Inc. to support lead product, TRX4, an anti-CD3 monoclonal antibody that’s about to start Phase III trials in Type 1 diabetes and psoriasis. [See Deal] "We’ll engage in whatever form of funding makes most sense to the company and to JDRF," says Insel.

Thus, in a January 2007 deal to fund a similar Phase II/III program at private MacroGenics Inc., the charity provides up to $2 million in milestone-triggered funds. This was one of the first Phase III trials the JDRF has supported. But it and other charities bring particular value in the earlier stages of development, "keeping things alive and allowing others to come in and sustain the effort," illustrates Insel. "If we don’t address this gap, who will? It’s a role for foundations."

Louis DeGennaro, PhD, SVP, research, and director of the Leukemia & Lymphoma Society (LLS)’s recently-launched Therapy Acceleration Program (TAP), agrees. That’s why he’s re-directing some of the society’s $60-70 million annual research funding downstream into development. TAP is designed to support academic researchers moving into pre-clinical work, address the Phase I bottleneck, and to help resurrect shelved therapies among biotech and pharma. DeGennaro expects the TAP’s funding to grow to $35 million by 2011 (this year it will provide between $4-8 million).

The first private sector recipient is four-year-old Ensemble Discovery Corp. which in November 2006 received funding for proof of concept studies around the creation of a test to detect the BCR-ABL kinase protein that’s central to the development of chronic myelogenous leukemia (CML). Such a test may allow a better understanding of disease remission and resistance mechanisms, and thus more appropriate therapy selection. If early studies go well, the society will provide further funding to help create the product, on which it has a royalty agreement.

"If you listen carefully to our donors and those affiliated with our organization, they want to find cures. It takes more than research to find those cures," DeGennaro says.

Money, and More

It also takes more than money, which is why non-profit organizations’ involvement in drug discovery and development goes well beyond grants and funding. Most importantly, non-profits bring biotechs access to the relevant patients. That, for one thing, motivates company scientists, but also "brings awareness of the disease from different perspective than just the clinical side," explains the SVP, corporate development at one company, currently in a quiet period, which has received money from a variety of charities. The foundations’ direct line of sight to the market also allows charities to play an increasingly hands-on--role in trial recruitment, execution and design, and in the regulatory and reimbursement processes too.

Once again, CFF has led the way with its Therapeutics Development Network (TDN), set up in 1998 to run and coordinate CF trials. This provides access to most CF patients in the US through links with accredited universities and medical centers; CFFT invested a further $3 million in 45 US sites in February 2007 to expand its research network.

Inspire Pharmaceuticals Inc. found the TDN "really helpful, as we could draw on their expertise while we developed a protocol and recruited for the trial," recalls Mary Bennett, EVP of operations and communications. Inspire received funding from CFFT for a Phase II clinical trial in 2002; "that was the only financial support they gave us, but they’ve given us great amount of non-financial help," says Bennett. And CFF got closer to its goal, too: Inspire’s denufosol, designed to stimulate mucosal hydration and clearance in the lungs, is now in Phase III with fast-track review.

The CFFT takes an active role in clinical work via scientific advisory boards set up across all of its alliances, onto which CFFT and the company each appoint two members. The charity believes it has something to add at all stages of drug development. "The companies may know their drug,"says Beall, "but they don’t know CF."

The Epilepsy Therapy Development Project (ETDP), created in 2002 to find new treatments for epilepsy sufferers, has built an online clinical trials database and recruiting tool. In addition it has helped create the Epilepsy Study Consortium, which assembles leading academic research centers doing clinical trials in an attempt to develop faster, more cost-effective trial methodologies. It and other charities are involved further downstream, too: "We’re working with FDA on the approvals process" for epilepsy drugs, notes Warren Lammert, co-founder and chairman, who is hoping to secure first-line labeling for new therapies.

JDRF doesn’t do trial recruitment, but it has been working with insurance companies to ensure adequate reimbursement for new products for Type I diabetes patients. For instance, the organization paid for clinical trials, designed in conjunction with the insurance industry, of continuous glucose monitors (CGMs) to help patients control their disease. The foundation also sponsors continuous medical education courses for doctors so that they prescribe and use such products. "We can pre-condition the market so that there are no barriers to reimbursement, patient use and acceptance," sums up Lammert. The charity’s next step is to help speed approval and coverage of artificial pancreas technologies which combine CGMs and insulin pumps.

Meanwhile LLS is hoping to improve and accelerate methods for testing the efficacy of lymphoma therapies by persuading FDA to accept positron emission tomography (PET) scans rather than computerized tomography (CT) scans as the standard. (CT scans take a lot longer to products a result since they measure tumor shrinkage rather than cell viability.) The Society funded a workshop during which a clinical trial protocol was agreed with the regulators, with industry funding. LLS also provides funding for clinical centers in return for preference for blood cancer trials, including those from private sector.

The New Tech Transfer?

Besides providing money and market access, non-profits are also doing tech transfer. They’re matchmaking academic research programs with companies, as for example the ETDP did for the Hebrew University of Jerusalem and Jazz Pharmaceuticals Inc. The academic researchers had found compounds—analogues of valproic acid--that may prove to be more potent and less toxic anti-epileptics than those currently available, and needed a commercial partner. "Instead of giving another research grant, we went out among emerging pharmaceutical firms and sought a collaborator," explains Lammert. Jazz agreed to match the ETDP’s $150,000. If the project works, the partners will commit to another $1 million to take it to the clinic; if it gets beyond that, ETDP will receive twice its initial investment. The charity also matches young companies with VCs, as it did for Marinus Pharmaceuticals Inc., one of its first for-profit investments, in 2004. ETDP co-sponsored a conference where Marinus was introduced to VC firm Sofinnova Ventures, which eventually co-led a $30 million round. [See Deal]

LLS aims to provide academic researchers with access to the services and expertise necessary to advance their work into development. "I’ve listened to presentations by academic groups who have spent far too long trying to address [pharmacokinetic] problems that those with a development mindset would have solved in a fraction of the time," notes DeGennaro. He’s trying to create a network of CROs that blood cancer researchers can tap into, coordinated by the LLS with the economies of scale that may bring.

Not content with their role in getting research into the clinic, charities are seeding new companies too, usually around research they have funded. Like many of its counterparts, the Alzheimer’s Drug Discovery Foundation (ADDF) has begun to invest in biotech discovery and development, "but we also saw the need for technology transfer," notes executive director Howard Fillit, MD. The Institute for Study of Aging (of which ADDF is the affiliated public charity) provided seed money for two start-ups in 2002, Allon Therapeutics Inc. and Zapaq, which merged with Athenagen (renamed CoMentis Inc. in February 2007) last year and went on to raise a $50 million B round [See Deal], [See Deal], and is working on two more. Given many of these organizations’ role as gatekeepers for research in area of interest, most are ideally placed to identify and bring together important research assets into a company—especially given their growing downstream expertise. JDRF hasn’t seeded any companies yet, but is considering it. "Technology transfer isn’t as efficient as it should be," concurs Insel.

In the UK, laws granting charities the rights to research they fund mean that organizations such as Cancer Research UK have long played a more active role in technology transfer than many of the country’s universities—and than many US charities. (See Sidebar: Tech Transfer, US v UK) Cancer Research Technology, the charity’s tech transfer arm, has focused on licensing deals rather than spin-outs. (See "Cancer Research Technology Ltd.", In Vivo Europe Rx, June 2003 (Also see "Cancer Research Technology Ltd." - In Vivo, 1 Jun, 2003.).) But it is now expanding its in-house development laboratory, which, according to Keith Blundy, COO, "will soon be larger than our technology transfer activities."

US charities don’t automatically get rights to research that they support in other institutions. But a handful have in-house activities and are incubating companies, or envision licensing deals based on those. ALS Therapy Development Foundation, which is seeking cures for amyotrophic lateral sclerosis, or Lou Gehrig’s disease, spun off Alsgen LLC in 2004 around some particularly promising compounds that inhibit the SOD1 protein implicated in ALS. The company has raised $2 million in angel money and will seek a VC round to support clinical trials. In January 2007 the foundation announced a $36 million, three-year research program, in conjunction with the Muscular Dystrophy Association, with the aim of licensing drug-lead IP to biopharma firms.

Meanwhile the Blanchette Rockefeller Neurosciences Institute, which researches Alzheimer’s and other memory disorders, spun off some of its work around the use of bryostatin as a therapeutic into NRV (Neuroscience Research Ventures) II LLC, a Delaware corporation, in July 2006. "We rolled up some IP into a for-profit company, licensed that company the technology, raised equity and are spending that on eliminating risk," explains Mark Cochran, PhD, CEO and executive director. NRVII has secured $1 million in angel finance with which the company hopes to start Phase I trials this year.

Cochran knows a thing or two about VC finance since he was previously a managing director at NeuroVentures Capital. His move from VC across to non-profits mirrors the shift in the source of funding in discovery and innovation. "Most VCs are more willing to fund drugs that already exist, than they are to fund innovation. But the pharmaceutical industry wants innovation." That, opines Cochran, will increasingly come from foundations. "They’re stepping up to the plate where normally they did not."

Cochran’s ultimate plan isn’t more spin offs, but to have scientists sign deals directly with pharmaceutical partners—rather like the University of California ’s University of California, San Francisco affiliate the J. David Gladstone Institutes did with Merck & Co. Inc. last year, on apolipoprotein-E 4 (apoE4)-focused compounds for neurodegenerative diseases. [See Deal] Gladstone received $3.25 million up front, an annual fee, milestones and sales royalties. "That’s my model, what I want to build this into," says Cochran.

Not-For-Profit, But Still Want Payback

Bypassing VCs altogether isn’t the goal for most non-profits, though, who instead seek to attract, and complement, traditional investors. Non-profits’ singular focus on getting therapies to patients mean they bring a very different mind-set and time-frame than VCs, which most beneficiaries welcome. "The foundations have more patience, and different objectives to VCs. It’s not just about a short-term liquidity event, it’s about getting a product," notes Bob Moen, MD, PhD, president and CEO of Copernicus Therapeutics Inc., which has received long-standing support from CFF.

But although non-profits are, by definition, not purely financially motivated, they still have accountability to stakeholders and aren’t about to throw money away. (That’s part of the reason they’re moving downstream: pure research swallows up more money without much reward.) They expect to participate if value is created—where value usually equals a product on the market, not the next funding round—and to plough the proceeds into further programs.

Milestone-based fixed multiple paybacks and royalty structures are common. Thus if—and only if—its product is approved by the FDA, Inspire Pharmaceuticals will pay CFFT a development milestone calculated as a multiple of the clinical trial cost the charity incurred. Bennett estimates that the milestone will be worth about $12 million, and that the company will owe about another $4 million in sales milestones if the sales reach a certain level, payable over multiple years. "The payback [structure] is great because it’s all post-commercialization," she enthuses. Some charities, including the CFFT, structure deals with pre-approval milestones, too. "It means the companies are incentivized to perform and to prioritize a particular program," notes CFFT’s Beall. "We run these like a business," he continues.

And being business-like is apparently just fine with the charities’ stakeholders and donors, who, far from questioning the charities’ commercial focus, actually appreciate their entrepreneurship. "We’ve been able to attract more dollars—individual gifts of up to $8 million--from those who aren’t even affected by CF but like what we do," notes Beall. "It has had a huge impact on our ability to fund-raise." In fact, some of the JDRF’s stakeholders "are businessmen who have been clamoring for this [approach] for some time," Insel tells START-UP.

Some businessmen are starting up their own charities—with a strong commercial focus from the outset. In conjunction with the University of California, San Francisco, and with backing from a melanoma patient and consulting firm Bain & Company, the Melanoma Therapeutics Foundation aims to move new drugs into the clinic based on discoveries at UCSF. It’s also, specialty pharma-style, seeking drugs that have been shelved by Big Pharma, for which much of the development work has already been done. "We’re in due diligence discussions for three candidates," says executive director Wolf Busse, PhD, also a venture partner at NGN Capital.

The for-profit spin-out which will progress the compounds is already planned, too, and Busse will be CEO. Accelerate Cancer Therapeutics (ACT Biotech) will start up in June 2007, and "since our Foundation will fund some of the work, it will receive shares in the company," explains Busse. The structure is allowed under IRC rules, Busse continues, "and, with this concept, we have received approval as a public charity."

Still, the charities are sensitive to conflict-of-interest issues; for this reason CFFT usually monetizes any royalties as soon as they become payable. The bigger concern for many is follow-on investors. The ADDF, unlike CFF, is happy to use convertible notes for its investments, but never takes royalties at all, since, according to Fillit, "that would be seen as negative by follow-on investors." The idea is to take risk out, not to create a burned that might affect downstream opportunities, notes JDRF’s Insel.

The VC Interface

VCs recognize the growing role for charities in the sector—as Busse and Cochran’s moves demonstrate. Robert McNeil, PhD, managing director at Sanderling Ventures, led a $6 million funding round in Zapaq, which was looking at beta-amyloid inhibitors, in 2004. [See Deal] The charity’s earlier seed money, he says, "helped do a complete set of experiments that made a difference in attracting outside investors." It isn’t enough money to go very far, he continues, "but it’s meaningful." It’s also often non-dilutive, and comes with the customer-contact, advice, and often good publicity, too—and return expectations are modest. According to CFFT’s Beall, many VCs see non-profits’ involvement as validating. "VCs call us and ask us what we think," he claims.

Occasionally, VCs may object to a non-profit’s terms and will demand that a deal is re-structured before they invest, but "this has only happened once" to CFFT, according to Beall. One investor in a company that had received seed funding from another charity claims "they were unrealistic in their demands". In some cases, he adds, "they’re trying to be tough [negotiators], but they don’t have the knowledge to carry it off. It’s a learning process," he concludes.

For the many newcomers, perhaps. But less so for established groups like the CFFT, which observers variously describe as "tough" and "savvy". CFFT wouldn’t likely have got to where it is today otherwise. "We have 30 products in our pipeline," says Beall, referring to projects CFF has enabled, "and we want to double that by 2010." The charity has the resources to spread risk across a number of scientific approaches including gene therapy, which has proven particularly difficult. It and others aren’t giving up on research funding, they’re just doing less of it. Beall estimates that 70% of the charity’s funds now go into industry, up from 30% several years ago.

Charities look set to play a far wider, and deeper, role in drug development in the future, particularly in orphan diseases and tricky areas like CNS and gene therapy. "There will absolutely be more such deals to come," says Vertex’s Reinertsen, who is currently considering a few. Other foundations are continuously knocking on Beall’s door to learn from the CFFT’s success; industry conference organizers are starting to run panels on the role of venture philanthropy in biopharma. "It’s amazing and fascinating how it has been taken on," says the ADDF’s Fillit. And not just among disease-focused charities; some universities are raising philanthropic funds to plug the drug discovery gap too, and/or are building their own drug discovery capabilities. (See Sidebar: Universities Plug Discovery Gap.)

"Finding innovative ways to break down the walls between philanthropists and business in the health care sector is critical. It’s a natural, constructive partnership which advances what all of us want," sums up Fillit.

Universities Plug Discovery Gap

In May 2004, the Broad Institute was launched as a collaboration between MIT, Harvard, Harvard hospitals and the Whitehead Institute. With a $100 million founding grant from philanthropists Eli and Edythe Broad, the institute is applying genomic tools to further the understanding and treatment of disease. Harvard University is also said to be raising a multi-million dollar philanthropic fund to support drug discovery efforts.

Meanwhile, Vanderbilt University has built significant early-stage drug discovery infrastructure in-house—including HTS capabilities and small-molecule libraries. The aims of the Vanderbilt Institute for Chemical Biology (VICB)’s Center for Drug Discovery, run by Jeffrey Conn, PhD, include establishing proof-of-concept on specific targets or approaches in drug discovery and encouraging inter-disciplinary collaboration.

Tech Transfer: US vs UK

The US Bayh-Dole Act of 1980 gave US universities the right to take title to IP created with federal dollars. In exchange, those universities had to commit to promoting and attempting to commercialize those inventions (giving preference to US industry and small businesses). That led to the widespread establishment of technology transfer offices within universities. In general, therefore, "universities did tech transfer, not charities or foundations," notes Larry Steranka, PhD, Managing Director of Cancer Research Technology’s US affiliate CRT Inc.

Since there was no equivalent law in the UK, most universities there (and in the rest of Europe) have been much slower to embrace technology transfer—though a host of initiatives have begun to address the commercialization gap (see "The IP Land Grab: New UK Tech Transfer Models," START-UP, November 2006 (Also see "The IP Land Grab: New UK Tech Transfer Models" - Scrip, 1 Nov, 2006.)). Meantime though, charities like Cancer Research UK stepped in, establishing patenting and licensing capabilities themselves. Unlike in the US, in the UK, "the charity has the right to commercialize inventions made with its money," Steranka continues. There are growing exceptions, though, including among US charities with their own research.