Monday, June 10, 2013

Is the Cystic Fibrosis Foundation a Charity or a Venture Capital Firm?

We have often discussed how health care organizations now seem prone to diversion from their stated missions, often when money is the object.  While the organizations in question are frequently academic, teaching hospitals, academic medical centers, or medical schools in particular, in May, the Milwaukee Journal Sentinel presented an example of a disease specific charity.  This article deserves considerably more attention than it apparently initially received.


The background was,

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.

Remember that while disease specific charities often sponsor basic and clinical research, in this case, the CFF sponsored drug development.  In fact, much of the research on which this development was based was sponsored by charities and the US National Institutes of Health:

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.

The Price to Patients 

Despite, or perhaps because of the funding provided by CFF, Vertex chose a stratospheric price for its new drug.

 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....

To put that in perspective, the yearly cost of Kalydeco is approximately six times the median family income in the US.

Minimizing the Harms

To put it further into perspective, keep in mind that for the moment, the data from the single best published clinical trial on Kalydeco suggests that while the drug seems to help the average patient, it is not without risks, and it is certainly not a cure.

The largest published trial that followed patients for a reasonable amount of time appeared in 2011 in the New England Journal of Medicine.  [Ramsey BW, Davies J, McElvaney G et al.  A CFTR potentiator in patients with cystic fibrosis and the G551D mutation. N Engl J Med 2011; 365: 1663-1672.  Link here.]  The study followed 161 patients for 48 weeks.  The patients treated with Kalydeco on average showed improved lung function (increase of FEV1 [forced expiratory volume in one second] of 10% compared to essentially no change (-0.2 percent) in the placebo group.  Treated patients were less likely to have an exacerbation of their pulmonary disease requiring hospitalization (31% vs 49%).  So the drug certainly seems to have benefits at least in the short term.  The number needed to treat to prevent one exacerbation requiring hospitalization in one year is five, which seems quite respectable.

On the other hand, the drug may have significant harms, even thought the report of the study seems to have attempted to minimize them.  The article stated

there was a lower rate of serious adverse events in the ivacaftor [Kalydeco] group than in the placebo group (24% vs 42%).  

However, this statement depended on a rather peculiar definition of severe adverse events.  In particular, pulmonary exacerbations of cystic fibrosis were included among severe adverse events.  Yet these are, as the term suggests, manifestations of the disease that is being treated.  Reduction of pulmonary adverse events should be and was considered a measure of efficacy.  So placing exacerbations within the definition of adverse events essentially double counts these incidents. 

Furthermore, the presence of these within the category of adverse events swamps out other events which may in fact be adverse results of the study drug.  If one subtracts pulmonary exacerbations and hemoptysis from the counts of serious adverse events, what remains is that patients on Kalydeco were more likely to have a serious adverse event (10%) than those on placebo (4%).  Thus the apparent number needed to harm was 17.  Thus, using this peculiar definition of adverse events appears to be a way to manipulate the analysis to minimize the apparent harmfulness of the drug.

While the study did appear to show that more patient received the benefit of avoiding a hospitalization due to a pulmonary exacerbation of cystic fibrosis than had a serious adverse event, the study did not show that the drug had overwhelming efficacy, or tremendous safety.   The study did not last long enough to show long term advantages, or to rule out rare but severe side effects.

This is the only drug available of this type, and it may well provide benefits that outweigh harms, at least over the short-term, but it is not a wonder drug, and the rationale to charge so much money for it, other than that is what the market will bear, is not obvious.  

A Windfall for Corporate Executives, and a Question of Insider Trading

The drug's approval has lead to a lot of financial success for stock holders, particularly Vertex executives:

 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 executives' lavish windfall occurred in somewhat questionable circumstances:

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.

So at least Senator Grassley raised the question of whether Vertex executives may have taken advantage of their insider knowledge to personally profit even more from this useful but not miraculous drug meant to be used on vulnerable patients.

Keep in mind that those huge trading gains were layered on top of already lavish compensation.  The 2013 Vertex proxy statement, the total compensation and stock holdings of its top executives in 2012 was:

Jeffrey M Leiden, CEO                                $5,656,684      441,160 shares
Ian F Smith, CFO                                           $3,109,193      795,434
Stuart A Arbuckle, Chief Commercial Officer   $4,808,697         66,477
Kenneth L Horton, Chief Legal Officer             $2,802,735         41,161
Peter Mueller, Chief Scientific Officer              $3,614,890        997,651
Matthew W Emmens, Former CEO                  $6,896,029    1,486,748
David T Howton Jr, Fomer Chief Legal Officer $3,447,898           3,105

So the top executives of Vertex, while their company got $75 million from an ostensible charity to develop what became an extremely expensive drug, got very rich in the process, although how they got rich may yet attract attention from the SEC.

A Windfall for the Cystic Fibrosis Foundation and its Executives

Furthermore, it appears that the supposedly charitable Cystic Fibrosis Foundation also made quite a bit of money, and its executives, while not getting quite as rich as their associates in Vertex, did not do at all badly.

As the Journal Sentinel noted,

the foundation cashed in by selling future royalties from the drug to an undisclosed firm for $150 million.
Keep in mind that since the CFF was to receive royalties, the money it gave for drug development was not a grant, but an investment.

Furthermore, according to the Foundation's 2011 form 990 (the latest available), its executives received the following total compensation from the foundation and its affiliated organizations:

Robert J Beall, CEO                                                      $1,073,725
C Richard Mattingly, COO                                              $759,799
Preston W Campbell MD, Exec VP of Medical Affairs     $736,031
Vera H Twigg, CFO                                                         $445,183
Ann Palmer, Senior VP                                                     $276,029 
Daniel Klein, Senior VP                                                    $277,300
Gregory August, CIO                                                       $262,698
David McLoughlin, Senior VP                                          $316,122
Glen Goldmark, VP                                                          $253,215
Amy DeMaria, Senior VP                                                 $241,672
Mary Dwight, Senior VP                                                   $246,232

These compensation amounts may be much lower than the gargantuan pay dealt out to for-profit health care corporate executives, but they are very high for those who are managing a supposed charity meant to help vulnerable patients.

A More Complex Web

While profiting from its underwriting of the development of Kalydeco, the CFF also sponsored guidelines about the treatment of cystic fibrosis, with not unexpected results.

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.
These guidelines hardly look like they would be deemed trustworthy according to the Institute of Medicine's standards (look here).  However, they certainly look like they might help sell ivacaftor, and hence help justify higher pay for the executives listed above.

Criticism of Venture Philanthropy

Merriam-Webster online suggests one definition of a charity is an institution funded by a gift for public benevolent purposes.

The Cystic Fibrosis Foundation appears to be such a charity, but now one that functions more as a venture capitalist.  In this case, it did provide venture capital to develop a new drug for its disease of interest.  However, the foundation appeared to have done so not to provide public benevolence, but to generate a  return on its investment.  It is using that return not for public benevolence, but to provide more venture capital to other drug companies, presumably with the goal of getting further returns.  Meanwhile, its executives make generous compensation for people who are supposed to be running a charity.  Finally, the drug has an astronomical price, and its pricing has helped make investors in and executives of the company supported by the CFF very rich.

This has not been lost on some dissidents, per the Journal Sentinel,

'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.

Vertex responded with seeming contempt,

 Since receiving the letter last July, Vertex has raised the annual price of Kalydeco another $13,000.

The funding by the supposedly charitable CFF of guidelines that promote the drug it financed has also drawn criticism,

 '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.


'It is concerning that the organization now stands to profit when patients choose to use the drug,' ... [Prof Lisa Schwartz of Dartmouth Medical School] said. 'Financial entanglement with industry, even with the best of intentions, creates a conflict of interest.'

However, the very well paid CEO of the CFF pooh poohed concerns about conflicts 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.

One wonders when patients would ever have the opportunity to voice any "concerns" to Mr Beall, who also disdained any restraints on the price of the drug,

.Beall said the foundation did not ask Vertex to price the drug more affordably.

'That would have been a deal-breaker,' he said.
That seems to put making money ahead of patients' needs.  Was this venture philanthropy, or vulture philanthropy? 


We have discussed numerous cases in which non-profit health care organizations seem to put short term revenue ahead of their missions to further patients' and the public's health.  In this case, a disease specific charity seems to have foregone its mission to directly support patient care, teaching, or research to provide venture capital, an action which lead to a profit for the organization, huge profits for a drug company, large rewards for the charity's executives, and even greater wealth for the drug company's executives.  It did also lead to the marketing of a beneficial drug, but at a breathtaking price that no middle-class patient without exceedingly good insurance could afford.  

Where is the public benevolence here?  Where is the charity?  How much is about patients and how much is about  making insider executives wealthy? 

As we have said until blue in the face, true health care reform would ensure health care organizational leadership that upholds the health care mission, not their personal finances.  


Steve Lucas said...

This link may be of interest:

“Breast cancer charity Susan G. Komen…said on Tuesday it was canceling fundraising walks next year in seven cities where money goals have not been met.”

“A Komen spokeswoman said in an email that participation in the three-day walks declined by 37 percent in the past four years, without specifying whether that was the number of participants or dollars raised. The group decided to remove the cities from next year's schedule that have not been meeting fundraising goals, the spokeswoman said.

It was unclear what the group's fundraising targets were for the walks. Each participant is required to raise a minimum of $2,300 and walks about 60 miles (96 km) over the three days.”

“The group says the events involve more than 1.7 million participants each year.”

So, here we have a group that has been involved in controversy finding that money is the driver in its events, not the goal of raising awareness and providing support for those who have suffered the ravages of cancer.

Steve Lucas

Anonymous said...

Interesting article, but the focus is skewed.

Kalydeco works for the 4% of the CF population who have one copy of the G551D mutation. (And a recent expansion for other gating mutations means the drug reaches a few hundred more people worldwide.)

Kalydeco, on its own, does not significantly help the largest CF populations, namely those homozygous or heterozygous for F508del. If a high-functioning drug can be found for the F508del population, then you'll start to see >50% of the CF population helped.

Vertex now has vx-809 and vx-661 in trials in combination with Kalydeco for F508del. But their cash burn-rate while getting there has been extraordinary. Look at investor discussions on pages such as and you'll find plenty of people who feel Vertex is a very risky stock pick - far from being the crock of executive gold you portray. If their F508del drugs fail, the company will be in big trouble. And then those shares will dive...

Kalydeco has usefully funded some (but not all) of the cost of developing the next phase of drugs. The CFF is rightly putting its profits straight back into funding new research - and not just with Vertex. Several small-molecule companies are in partnership with the CFF now. They intend to keep the cycle of investment/re-investment going until CF has been effectively cured.

You know all this, of course. High risk, high reward - it's the classic biotech investment model. But without the CFF taking on some of those risks in the first place, do you think that CF would have attracted billion-dollar research efforts? With only 30,000 CF patients in the US the market is so much smaller than that for statins or anti-depressants.

The plain facts are that Kalydeco is a step forward, and a solid one, but still just a step in a long race. But unless the whole race is funded, it will fail - so each small step must be paid for.

Anonymous said...

This article is interesting on its face, but so clearly not written by someone with a true understanding of what this drug does in the face of cystic fibrosis.

CF is fatal, period. Even with significant advances in research and medications targeting the symptoms of this disease, our average life expectancy pre-Kalydeco stood in the mid 30s. And while CF is a full body disease, the most deadly portion is far and away pulmonary infections leading to progressive scarring and, eventually, lung failure. For patients in this position, the ONLY option is a double-lung transplant, which itself costs upward of 1 million dollars (often borne primarily by Medicare or Medicaid) followed by a lifetime of anti-rejection meds. This after years and years of expensive CF therapies and hospitalizations.

But Kalydeco changes that not inky by increasing current lug function, but by preventing that inevitable decline in many of the patients it treats. One face you neglect to mention: patients on Kalyddco no longer test positive for CF using sweat-chloride testing, generally considered the gold standard of CF diagnosis. Are they cured? No. But your deliberate attempt to make this drug sound as though it costs exorbitant amounts of cash simply to increase lung function by a small amount with possible other adverse effects is GROSSLY misleading. Yes, it increases lung function, but more importantly it decreases or somtimes eliminates the infections that cause lung function of all in the first place, thus making it significantly more likely patients will continue at that increased level. Yes, it is expensive, but many patients have even come off of other CF therapies (also costly) and have drastically decreased their time in the hospital or need for lung transplant. Furthermore, by increasing health stability, Kalydeco allows many with CF to return to work, actually decreasing the burden on Medicare and Medicaid by a significant margin.

The CFF does lay high salaries, but for good reason. Our execs are the best and most innovative in the business, as evidenced by the fact that Parkinson's, Muscular Dystrophy, ALS and other "orphan diseases" (which are unattractive to big pharma because of small patient populations and the complexity of research required) are now banging on the doors to follow the CFF's lead.

If your aim is education and transparency, as a 33-year-old CF survivor (who, thanks to the CFF's drug development pipeline, has been able to graduate law school and support myself, despite a life expectancy at birth of only 18), I beg of you: give both sides of the story, and remember that without this drug people WILL die. That alone is enough to make our salary output worth it -- esp when coupled with the fact that the CFF remains one of the most efficient charities in business today.

Roy M. Poses MD said...

Anonymous of 9 March, 2015,

I am sorry to hear you have CF, and hope you continue to do well.

Please note that I was not writing about how to make individual treatment decisions for patients with CF. If you are doing well on your current regiment, that's great.

With all due respect, since you have chosen to be anonymous, how are we to evaluate any assertions you made without providing the evidence for them?

You asserted that the drug prevents the "inevitable decline" in function in patients receiving it. The study I cited only followed patients for 48 weeks, and said nothing about what happens after them. Do you have any evidence that it prevents "inevitable decline" after 48 weeks?

I am unable to find any clear data about prevention of infection in the report of the article I cited. Do you have any other data from randomized controlled trials about prevention of infection?

I summarized the questionable evidence provided by the trial report about adverse effects. Do you have any evidence that what I wrote about AEs was "GROSSLY misleading?"

If you look through some of our posts here:

we provide numerous examples of top executives of other organizations and companies said to be brilliant as a way to justify million dollar plus compensation. Do you have any evidence that executives whom you referred to as "our" are "the best and most innovative?"

Your use of "our" suggests that you may work at CFF and hence report to those executives. Were that to be true, it would seem that you have an interest in saying nice things about the people who employ you, wouldn't it?

Note that CFF and Vertex have big public relations and marketing budgets, and hence they hardly lack for public praise from these sources. Given the ready availability of the "other" side of the story, I don't see why I should be required to give it equal time. Have you got a reason I should?

PS - if you really are a patient, and that is the reason you wish to stay anonymous, you can email us here: info at firmfound dot org. If you can show me you are a patient, I will put in another comment to verify that fact.

On the other hand, in the interests of transparency, if you work for the foundation or the company, I suggest you disclose that.

Sam Peterson said...

I really appreciate your efforts to educate the "little people " on the big picture. Having lost my youngest daughter Samantha to CF at the age of 19 I have first-hand experience and knowledge dealing with the disease. I find it totally revolting to see these facts and figures on the general greed by these folks. Maybe if they spent time bedside with those afflicted they would have some compassion for those who are at their mercy. Don't know how they sleep at night. Switch shoes with some parents who give their all and then some to keep their children alive! I hope you keep informing us and can influence politicians or agencies that can curtail the excess profiteering by these greedy individuals and companies.I thank you!