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