Cystic Fibrosis Foundation Sells Drug Royalties for $3B

The Cystic Fibrosis Foundation will sell royalties it gets from Vertex Pharmaceuticals Inc. for $3.3 billion to Royalty Pharma, taking a profit from charitable investments made to fight the fatal lung disease.

The Cystic Fibrosis Foundation plans to reinvest the money into new research efforts, said foundation Chief Executive Officer Robert J. Beall.

“These new funds give us a tremendous opportunity to supercharge our efforts to develop lifesaving new therapies” and pursue opportunities to find a permanent cure, he said in a statement announcing the deal.

The purchase by Royalty Pharma, which buys revenue streams from drugs, was financed with cash and a $2.7 billion loan from Bank of America Corp., New York-based Royalty said today in a statement.

The transaction is part of a growing trend in philanthropy called mission investing. In mission investing, instead of giving research grants as charity, philanthropies act more like business partners and expect a share of profits stemming from their gift, according to Aaron Dorfman, executive director of the National Committee for Responsive Philanthropy.

The Cystic Fibrosis Foundation “is a classic, perfect example of how it works when it works well,” Dorfman said by telephone. “There haven’t been huge financial successes like this one.”

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Cystic fibrosis is a genetic disease that affects the lungs, causing a buildup of mucus and making it harder to breathe. It affects about 70,000 people worldwide, and kills most patients by their 40s, according to the foundation.

Dorfman said the trend may have started because more technology entrepreneurs are investing through charities, and because environmentally focused foundations have had some success funding fossil-fuel alternatives.

The strategy doesn’t always pay off, much like any other charitable gift.

“It might not work,” Dorfman said. “You can invest in companies and they don’t, in fact, succeed, and so you’ve not only not gotten a financial return, you haven’t achieved your charitable goals either.”

The Cystic Fibrosis Foundation initially gave Vertex about $150 million to do research and develop new therapies. Vertex now sells one drug, Kalydeco, developed using that investment.

High-Cost Drug

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.

While the drug’s high price may have boosted the royalties the foundation gets, “We would give up our royalties in a second to drive down the prices,” Beall said in a telephone interview. “We were not at the pricing table.”

Royalty Pharma will get royalties from Kalydeco and any other drugs Vertex makes that are tied to the foundation’s investment, including two experimental drugs it’s working on. The first, a combination of Kalydeco and the drug lumacaftor that targets a mutation that occurs in at least 22,000 cystic fibrosis patients, is being reviewed for approval. A second is still in development.

Beall said the foundation doesn’t have plans to subsidize the cost of any of those drugs for patients.

Focused on Cure

“What we’re really excited about is the move to a one-time cure,” he said. The drugs now are “daily therapies and require daily care.”

Royalty Pharma acquires royalty interests in marketed and late-stage pharmaceutical products. It has assets of more than $12 billion and owns shares of royalties in 40 products, according to the company.

“Our goal is to be the premier provider of innovative capital to enable the life sciences industry to accelerate development of important novel therapies,” said CEO Pablo Legorreta, in the statement.

Bank of America acted as financial adviser to Royalty in the transaction, with Goodwin Procter acting as legal adviser. Morgan Stanley acted as structuring agent for the foundation.