This Medical Charity Made $3.3 Billion From a Single Pill

How the Cystic Fibrosis Foundation amassed a fortune—and upended medical research at the same time

Source: Vertex Pharmaceuticals

Kalydeco, approved by the FDA in 2012, can treat cystic fibrosis in about 2,000 patients in the U.S. A year's supply costs more than $300,000.

Last December, a few dozen scientists gathered at the modest headquarters of the Cystic Fibrosis Foundation in Bethesda, Md. Researchers from academic labs and startups convened in the foundation’s fourth-floor conference rooms to discuss new ways to target the fatal lung disease, which affects 30,000 Americans. The foundation’s goal was to get the rare disease on the top of scientists’ agenda for novel treatments such as gene editing or stem cell therapies. “We want to be on their pipeline in 2015,” says Robert Beall, who has led the foundation since 1994, “rather than waiting until 2000-and-whenever.”

The scientists had good reason to pay attention to Beall's pitch: His foundation has money, and lots of it, thanks to its pioneering approach to searching for new treatments. In 2012, a pill called Kalydeco became the first drug approved to treat the underlying cause of cystic fibrosis (CF) in a small subset of patients. The CF Foundation had since the late 1990s given drugmaker Vertex, which developed Kalydeco, around $150 million in exchange for something unusual—a share of the royalties for any treatment Vertex’s research yielded. Two weeks before the foundation’s December meeting, it sold its royalty rights to an investment company. For $3.3 billion.

Suddenly, the CF Foundation was the largest disease-focused charity in the country as measured by net assets. Most medical charities don’t get any money from the research they fund, and none had ever gotten a windfall so big. The CF Foundation now has more to spend on future research than the American Cancer Society, the American Heart Association, and the American Diabetes Association combined. The approach yielded more medical advances as well. Orkambi, another Vertex drug that will treat the most common genetic mutation behind CF, was approved by the FDA last week.

 

The headquarters of the Cystic Fibrosis Foundation
The headquarters of the Cystic Fibrosis Foundation
Photographer: Robb Scharetg/Bloomberg Business

The CF Foundation’s exclusive goal used to be the search for a cure. But now that it has helped fund two promising drugs, the group needs to make sure patients can actually access them—which is tougher than it sounds. Both medications are accompanied by staggering price tags: Kalydeco’s list price, before the discounts insurers negotiate, is about $300,000 a year. Orkambi will cost $259,000 a year. “The worst thing we could ever do is throw these patients a great lifeline out there, and have it be frayed by the issue of access,” Beall said.

The medicines’ high cost means some health plans may hesitate to pay for them or may require patients to jump through elaborate hoops. Arkansas’s state Medicaid program initially resisted covering Kalydeco but backed down after a lawsuit. And some health systems abroad delayed approving the medicine because of the price tag. Although Vertex offers assistance to uninsured patients, few would be able to pay the full price on their own.

President Obama celebrated Kalydeco in his State of the Union this year when he announced a “precision medicine” initiative that will allocate hundred of millions to research for treatments tailored to patients’ genetic profiles. Other patient groups, from the Michael J. Fox Foundation to the Leukemia & Lymphoma Society, are trying to replicate the CF Foundation’s methods. “The case study comes up constantly,” says Margaret Anderson, executive director of FasterCures, a nonprofit trying to accelerate medical research. “One of the takeaways from the CF story for the community was this real sense of, ‘Wow, we can do this.’”

Meanwhile, the drug industry is increasingly looking for profitable therapies for rare diseases, as companies have exhausted treatments for more common ailments that yield blockbuster drugs. But experience says new orphan drugs are sure to be costly. The CF Foundation’s model may show the way to develop new therapies, but it hasn’t yet figured out how to ensure that cost won’t stand in the way of patients getting them. “We’re the first out of the gate,” Beall says. “What’s going to happen when you get 20 orphan diseases, or 30 orphan diseases, that have these new therapies?"

 

Cystic fibrosis is caused by genetic mutations that affect the movement of water and salt through cell membranes. Sufferers develop unusually thick mucus in the lungs, pancreas, and other organs, which can cause abdominal pain and difficulty gaining weight. The mucus also makes it hard for patients to breath and makes them susceptible to potentially fatal lung infections.

When the Cystic Fibrosis Foundation was created in 1955, most patients didn’t survive to elementary school. Today, many live into their 40s—and the foundation deserves much of the credit for that progress. In the 1960s, the group established a patient registry to collect data and tissue samples to understand better the disease and its genetic roots. It also created a handful of clinics to deliver specialized treatment and help patients manage the disease, which has expanded to more than 110 sites nationwide.

Even before Kalydeco, CF treatments were getting better. Patients can take supplemental enzymes to aid digestion and other medications to boost lung function. New ways to deliver antibiotics to the lungs help combat infections. These advances have lengthened lives, but none has addressed the underlying cause of CF. That seemed poised to change in 1989, when researchers at the University of Michigan identified the gene responsible for the disease. 

When Beall became chief executive of the foundation in 1994, he was impatient for progress. So he persuaded the board to take a big gamble: The foundation would fund for-profit companies to research the disease rather than scatter grants among academic labs. The approach became known in the medical research world as venture philanthropy. Beall wanted to apply the methods of venture capital—funding high-risk, high-reward, early-stage treatments—to the singular goal of a cure for CF.

“It really grew out of total frustration,” Beall says. Academic labs worked slowly, testing a handful of compounds at a time for efficacy. Beall instead wanted to work with companies using a new technology called ultra-high throughput screening to sift molecules lightning fast. He started cold-calling companies in 1998. The only one to return his call was Aurora Biosciences in San Diego, a predecessor of Vertex that happened to have a scientist on staff who had studied CF.

 

Robert Beall, CEO and President of the Cystic Fibrosis Foundaton
Robert Beall, CEO and President of the Cystic Fibrosis Foundaton
Photographer: Robb Scharetg/Bloomberg Business

The CF Foundation cut a deal with Aurora to screen chemicals that might affect the disease’s root cause. In exchange, it would get a portion of the revenue from any drug that might come from the research. The foundation made a small initial grant in 1999. In the coming years, the CF Foundation would commit more than $400 million to dozens of for-profit drug companies, from unknown startups to such giants as Pfizer, Shire, and Genzyme.

"I wouldn’t in my wildest dreams have expected to be where we are right now,” says Bonnie Ramsey, a professor of pediatrics at the University of Washington School of Medicine who used to run the foundation’s clinical trials network. "Going after high-throughput screening, it’s finding a needle in a haystack,” she says. "It was a good move, but there’s luck." 

Aaron Stocks remembers coming back from a run two years ago and not feeling out of breath. The 29-year-old had just joined a placebo-controlled clinical trial for Orkambi. “I stood in my driveway and I cried, because I knew I was getting the real thing,” he says. “It was like, this is how a human being is supposed to feel.”

Since starting the trial, Stocks has gained 10 pounds. His stomach pains have halted, and a measure of his lung function has improved to essentially normal levels. Stocks's improvements are more dramatic than average for people in the trial. "I have no idea how or why and I’m not going to question it,” he says.

Stocks works at the CF Foundation as a senior case manager in the patient assistance department, where he helps patients having trouble accessing care. Sometimes patients’ health plans require prior authorization for treatment or force them to seek special permission to see out-of-network doctors. Sometimes they need help paying for life-extending pills. “Patients come to us, and they have to choose between paying for their medication and paying their electric bill,” Stocks says. “That’s not right."

Aaron Stocks
Aaron Stocks
Photographer: Robb Scharetg/Bloomberg Business

He may soon be taking calls from patients trying to get the same drug that’s changed his life. Vertex’s CF therapies have earned the company both praise for its medical advances and reproach for the price it set. After Kalydeco was approved, a group of cystic fibrosis doctors called the six-figure cost “unconscionable.” A shareholder motion this spring criticized the pricing strategy, although the motion failed.

The company rejects the argument that its prices block access to the drug. “To our knowledge there’s not a single eligible patient in the country who cannot get Kalydeco because they can’t afford it,” Vertex spokesman Zach Barber says. Most insurers cover the drug. Vertex provides it for free or at a discount to people with high out-of-pocket costs, though the company doesn’t say how many people get it that way. After years of investing in research, Barber says the company needs to recoup money to develop future therapies. Kalydeco accounts for almost all of Vertex’s revenue.

The CF Foundation doesn’t endorse the high prices of the drugs it helped create. Beall calls Kalydeco “too expensive” and says he was shocked to learn how much Vertex planned to charge. At the same time, he thinks a profitable drug can attract others to CF research—which is good for the thousands of patients whose particular gene mutation can’t be treated by Kalydeco or Orkambi. "I don’t think the other drug companies would be getting into this field, the Pfizers and the Genzymes, if it were a $10,000-a-year pill,” Beall says.

One thing the CF Foundation won’t do: pay for patient medical costs out of its own budget. Even with the royalty windfall, the foundation determined that "no economic model exists” to cover patients’ costs while continuing to search for cures for more patients. Instead, it established in 2008 a subsidiary funded by donors to help people with CF who have trouble affording treatment. If it never sold royalty rights to another drug, Beall says, “we could run out of money.”

 

The venture philanthropy approach has won admirers, especially since the CF Foundation’s royalty sale. But some question whether the model will fix the fundamental problem for patients with orphan diseases: Progress is far too slow. Just a few hundred of the 6,800 rare diseases have treatments. At most, the FDA approves only a few dozen new drugs each year. At the current pace, thousands of diseases will remain without therapies for generations.

Sharon Terry, president and chief executive officer of a network of 1,200 disease organizations called the Genetic Alliance, says the venture philanthropy model sidesteps systemic problems that impede medical advances. Her children have a rare genetic condition called PXE. “What I would much rather see is for us to work on what is wrong with this system, because there are major things wrong with it overall,” she says.

Breakthroughs require gathering the kind of information that the CF Foundation collected for decades—registries of patients, tissue banks, catalogues of hundreds of genetic mutations. Right now, a lot of that data for different diseases are locked up in the private records of disparate foundations, companies, and academic labs.

That means researchers at one company can spend time and money investigating a compound that a rival's lab has already ruled out as ineffective, for example. And if every advance like Kalydeco or Orkambi requires replicating the effort that the CF Foundation made—hundreds of millions of dollars invested over decades—the prices will be similarly high. “What does that do, when we’re satisfied and we’re charging $300,000 for a drug? Can we sustain that very long?” Terry says. "We need to figure out a better way to scale all this.”

The CF Foundation’s next challenge may be proving that the cost of life-extending treatments doesn’t keep patients from getting them. Orkambi will test how much the price is a barrier. It was approved to treat 8,500 people in the U.S., more than four times as many patients as Kalydeco can. “We’re very concerned about it,” Beall says. “But we also recognize that the manufacturers have to be smart about it too, and they can’t produce a drug that people can’t access.”

Beall says he hopes the foundation can be a productive part of the debate about drug costs, just as it helped pioneer the venture philanthropy strategy. But he doesn’t know the formula that will properly balance access for patients with financial incentives for drug companies. "I can’t give you an answer,” he says. "Our patients are just delighted we have an option.”