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Venture philanthropy deal-making: How and why foundations fund biopharma

03/12/2015

The Cystic Fibrosis Foundation’s recent return on investment in Kalydeco has placed a magnifying glass on the venture philanthropy model and its business-minded approach to funding for-profit biotech and pharma companies. Driven by the urgency to find treatments and cures for their own diseases, these patient-powered foundations are often the players with the greatest incentive to make strategic, early-stage investments that accelerate solutions, and an increasing number are applying the principles of venture philanthropy to help push promising science through the pipeline. As the focus on venture philanthropy increases, new questions are arising about the structure and impact of these deals.

Tune in Thursday, March 12, at 1 p.m. Eastern to hear answers from legal experts, foundations, and companies about what the details of these deals look like, what results are being achieved, and what interested foundations might need to know before going down this path.

Speakers include:

  • Anthony Coyle, Senior Vice President and Chief Scientific Officer, Centers for Therapeutic Innovation, Pfizer Inc.
  • Lou DeGennaro, President and CEO, Leukemia & Lymphoma Society
  • Ken Schaner, Partner, Schaner & Lubitz, PLLC
  • Moderator: Margaret Anderson, Executive Director, FasterCures

Summary

Hundreds of listeners from nonprofit foundations, industry, and academia tuned in March 12 to learn about the growing trend of venture philanthropy in medical research from legal experts, foundations, and companies. “This [venture philanthropy] is not at all a new phenomenon, but the Cystic Fibrosis Foundation’s recent return on investment for Kalydeco has placed a magnifying glass on this model and raised new questions about the structure and impact of these deals,” Moderator Margaret Anderson, executive director of FasterCures, pointed out in her introduction. “We created today’s discussion to provide a practical, ground-level view of what these deals look like, the impact they’re having, and what the potential partners in deals like these need to know."

Defining characteristics of a venture philanthropy deal

While FasterCures subscribes to a more expansive definition of venture philanthropy that encompasses a variety of strategic approaches, for the purposes of this Webinar we focused in on the strict definition: nonprofits funding for-profit companies. Even within that strict definition there is debate about its meaning; speaker Kenneth Schaner of Schaner & Lubitz, the lawyer who has worked for more than a decade with the Cystic Fibrosis Foundation (CFF) on its successful venture philanthropy deals, noted that even he and his partner have differing definitions. Schaner identified the main element of a venture philanthropy deal as being return on investment, which can take several forms, including capital gains on an equity stake, interest on a loan, and (most commonly) royalties upon achievement of milestones of success.

Schaner briefly reviewed the history of venture philanthropy in medical research, which began with CFF’s initial investment in Aurora Biosciences in 1998 (Aurora was later acquired by Vertex Pharmaceuticals). He emphasized the fact that it took 15 years for that investment to produce a product (Kalydeco, a breakthrough for CF patients) and a return, underscoring that venture philanthropy is a long-term proposition for foundations, and the risk of failure is high.

 Offering some practical insights into structuring these deals, Schaner noted:

  • Deal sizes are typically between $200,000 and $150 million.
  • Royalties are usually capped; for smaller awards (under $6 million), they are most often a multiple of the funding provided (four to six times), with additional royalties if sales are higher than anticipated.
  • An interruption license should be considered to ensure an asset can continue to be developed even if shelved by the company or if the company goes bankrupt.
  • Foundations should pay close attention to the definition of “the field” in the contract.

For more information, visit Schaner’s comprehensive “deal checklist” on FasterCures’ TRAIN Central Station Web site.

Investing for greatest impact: A patient perspective

Louis DeGennaro, president and CEO of the Leukemia & Lymphoma Society (LLS), spoke from the foundation perspective about the value that venture philanthropy has brought to its mission and the patients it serves. While LLS has had great success in supporting basic discovery in the blood cancers that have eventually resulted in transformative therapies, about a decade ago it realized that a significant portion of projects moving out of its discovery portfolio and into development were floundering for lack of expertise and funding. In response, LLS created the Therapy Acceleration Program (TAP) to support university-based projects into and through product development. It then expanded TAP to include support for biotech and pharma companies, and now 10-15 percent of the foundation’s research funding goes into projects in partnership with biopharma to de-risk projects and help them overcome hurdles in the development process.

DeGennaro discussed LLS’s due diligence criteria for TAP projects, which include:

  • addressing unmet medical need,
  • the potential to change quality of care,
  • the quality of the science,
  • competency of the partner,
  • the value of LLS as a partner, and
  • the strategic fit with LLS’s research agenda.

Measures of success within TAP include having a direct impact for patients, achieving the expected endpoint, and determining whether an asset was partnered or received follow-on investment to leverage LLS’s contribution.

DeGennaro then shared lessons learned from TAP that may be relevant for other organizations seeking to pursue a similar course, including:

  • the importance of a dedicated team (staff or volunteer) to review and oversee projects,
  • a high level of comfort with calculated risk,
  • addressing potential conflicts of interest up front, and
  • the need to continually re-evaluate the foundation’s role over time.

Asked what foundations need to consider before committing to venture philanthropy, DeGennaro emphasized: “The science has to be there. Every foundation has to ask itself, on the spectrum of needing to solve a science problem to needing to find drugs, where is their disease? Your funding needs to be thoughtfully and strategically placed to solve the problem. Not every disease is well positioned to begin drug discovery and drug development through partnerships like this.”

When asked about donors’ reaction to this approach, DeGennaro commented, “We don’t see it as gambling… There’s significant risk no matter where you place your money. It’s in the best interests of patients and donors to be looking across both fields [academic and industry]. Private-sector partnerships are closer to impact for patients, they resonate with donors. There are timelines with milestones and deliverables, so they see it as very well controlled.”

Beyond the dollars: How foundation partnerships benefit companies

Anthony Coyle, senior vice president and chief scientific officer of Pfizer’s Centers for Therapeutic Innovation (CTI), explained how Pfizer is partnering with patient foundations to co-fund promising academic science within CTI’s network of 25 academic medical centers, highlighting the unique non-financial assets that foundations bring to the partnership.

Coyle called partnerships with foundations “key to the success of the CTI model.” Starting with the Alliance for Lupus Research – which, he noted, was a collaboration borne out of FasterCures’ Partnering for Cures meeting – they now have agreements with six foundations in which they jointly identify and fund collaborative models within the academic community. Foundations are critical, he said, in helping identify the right people and the programs with the best likelihood of success. They have a deep understanding of the complexity and heterogeneity of their disease and what’s really impactful for their patients; can provide access to patient data and samples; and in the clinical stage can help identify the right clinical sites and the best endpoints that are impactful for patients, and can help recruit individuals to participate in studies.

Coyle was emphatic that while co-funding is important, and the possibility of return on investment for foundations exists, given the reality of the need for collaboration in the current R&D environment this is really “about the whole notion of partnership … What drove our interest was working in a different way that will result in different outcomes.”

Size doesn’t matter

Schaner summed things up by saying the CFF experience has been a wonderful thing for the foundation and the patients it serves, as well as for other foundations by demonstrating the important new roles they are playing. But he actually doesn’t like to use it as an example, since there are relatively few foundations that can afford to invest at the level of CFF. “When I do a transaction that’s $200,000 it has the same potential for helping a project get past the Valley of Death [as a $150 million investment]. Don’t be discouraged that you can’t invest this kind of money. You can invest less and still get great results for your patients.”

Given the high level of interest in this topic, registrants submitted nearly 100 questions before the Webinar. As we were unable to address even a fraction of them in the hour available, FasterCures will be producing a series of blog posts to respond to more of the issues raised by the audience. And please be sure to visit the new and improved TRAIN Central Station for many more resources on venture philanthropy in medical research!

Related resources

During the Webinar, we received nearly 100 questions from participants. Though the panelists were unable to address them all during the one-hour discussion, we heard you loud and clear and recognize the appetite for more information on this topic. View the blog posts below for the panelists' answers to additional questions: