In January, a new venture investment fund opened in Boston with $42 million in its pocket and a goal of raising $80 million within two years.
The new fund, called the JDRF T1D Fund, quickly invested in three early-stage start-ups. Just like traditional venture capital funds, the T1D Fund plans to work closely with start-ups in its specialized niche. Its corner of the world is type 1 diabetes, or T1D for short, thus the fund’s name.
The difference between the T1D Fund and conventional venture funds is its source of funding and what it does with any returns on investment. The typical venture capital fund wants profits that can be turned into a major return for investors in a relatively short period of time—say, five years or so. The T1D Fund is an example of a relatively new form of funding known as venture philanthropy. Instead of investors, there are donors, and the money they put up is considered a donation for income tax purposes. Instead of profits going to investors, revenues in excess of expenses are supposed to be plowed back into new investments supporting the mission. The T1D Fund has been capitalized by the New York City-based JDRF (formerly the Juvenile Diabetes Research Foundation) and individual donors.
Jonathan Behr, managing director of the T1D Fund, says it is the first investment vehicle of scale devoted to early-stage commercial investing in treatments for type 1 diabetes. “We think it has the opportunity to accelerate outcomes. It’s true venture philanthropy in that all the capital coming into the fund is a donation,” says Behr, who was an executive at Partners Healthcare Innovation in Boston before the T1D Fund.
The T1D Fund seeks to “de-risk” promising opportunities in type 1 diabetes research so they will eventually attract investment from more conventional investors like venture capital funds and drug companies, explains Behr. JDRF, as a major donor, provides Behr and others at the T1D Fund with scientific, drug development, regulatory, and reimbursement expertise. The first investment was in Bigfoot Biomedical, which has developed an automated insulin delivery system that has been compared to an artificial pancreas.
Some new treatments
Philanthropies to support noble causes has its roots in the early 20th Century, when steel tycoon Andrew Carnegie created the Carnegie Foundation to “promote the advancement and diffusion of knowledge and understanding.” Traditional big-dollar secular philanthropy was a matter of well-endowed foundations giving to not-for-profit institutions.
But venture philanthropy and the move toward investment of not-for-profit dollars in for-profit companies started about 10 years ago. Initially, the focus was on education and housing, but now disease-related efforts are becoming popular. Venture philanthropy as a way to fund the development of drugs for rare diseases independent of governments and industry has already led to some new treatments.
But venture philanthropy is not without its problems and critics. Some see it as warping the purpose of charities and patient organizations, so they wind up serving the interest of private drug development. Elizabeth Rosenthal, editor in chief of Kaiser Health News, is critical in her new book, An American Sickness. With venture philanthropy, a new breed of executive took over medical foundations, she writes: “Fundraising rather than curing disease often seemed like the first metric of success.” And so far, venture philanthropy has done nothing to stop—and, in fact, may help fuel—the upward spiral of drug costs.
“Evaluation and measurement are key” to making venture philanthropy work, says Alexandra Graddy-Reed of the Center on Philanthropy & Public Policy.
Alexandra Graddy-Reed, a researcher at the Center on Philanthropy & Public Policy at the University of Southern California, says venture philanthropy isn’t the same as venture capital investment, but there’s overlap. It does aim to make grants more like an investment. Funders have a more involved relationship with the grantees, and milestones need to be met. “Evaluation and measurement are key,” she says.
Venture philanthropy is especially productive for charities that focus on rare diseases that, until fairly recently, didn’t get much attention from pharmaceutical and biotechnology companies and were not a priority of government funders. “Venture philanthropy is a good strategy if you can incentivize companies to do the research that has a lot of potential,” Graddy-Reed says.
JDRF is not a newcomer to venture philanthropy and has invested in several industry partnerships over the past decade. For example, in 2012, it teamed up with KalVista Pharmaceuticals, in Cambridge, Mass., to develop plasma kallikrein inhibitors to treat diabetic macular edema. KalVista subsequently raised $33 million in 2015 in Series B equity financing for its research and clinical development programs on plasma kallikrein inhibitors. “The phase 1 U.S. clinical study, which we co-funded with the company, produced positive results and key proof-of-concept data,” says Michael Batten, director of research business development at the JDRF, which invested $2.2 million in KalVista. The data generated by the co-funded study allowed the company to raise its next round of funding.
JDRF has negotiated paybacks from its for-profit partners, typically in the form of commercial royalties upon approval of a therapy, which the foundation uses to further support its mission to cure, prevent, and treat type 1 diabetes. The T1D Fund will negotiate terms of its investments on a case-by-case basis and may make equity, royalty, and other types of investments, Behr says.
It’s rare for charities to make equity investments; royalty-bearing grants are more common, says Kristin Schneeman, director of programs at the think tank FasterCures.
JDRF is part of a growing movement among disease-specific charities frustrated by the seemingly glacial pace of academic research. Kristin Schneeman, director of programs at FasterCures, a not-for-profit think tank that is part of the Milken Institute, says her organization runs training programs to encourage charity officials to think about new ways of funding outside organizations. The term “venture philanthropy” is limiting, she says, because many disease-research organizations are taking other kinds of outcomes-oriented approaches that might not involve investing in companies. According to Schneeman, it’s rare for charities to make equity investments. Royalty-bearing grants are more common, with payments made as milestones are met.
“Everybody gets into this business wanting to help patients ultimately, but the various and different incentive systems at play get in the way,” says Schneeman. “Patient groups are bringing the patients’ bottom line into the equation. There is a drive to create new and better treatments as quickly as possible.”
About a decade ago, the Cystic Fibrosis Foundation and a handful of other organizations started to rethink their roles and their funding models. The efforts by disease foundations that fit under the venture philanthropy umbrella include the Leukemia and Lymphoma Society Therapy Accelerator Program, the Dementia Discovery Fund, CureDuchenne, DELSIA (Delivering Scientific Innovation for Autism), the Cure Alzheimer’s Foundation, the National Multiple Sclerosis Society, the Multiple Myeloma Research Foundation, and the Michael J. Fox Foundation.
The Cystic Fibrosis Foundation has been a leading example of venture philanthropy—the success story that others want to emulate. The charity made a $3.3 billion windfall in 2014 from anticipated future royalties for the drugs Kalydeco, Orkambi, and other potential therapies of cystic fibrosis developed by Vertex Pharmaceuticals with foundation support. In 2012, the FDA approved Kalydeco, the first disease-modifying drug for cystic fibrosis, a heritable disease that affects about 30,000 Americans. The jaw-dropping price tag on the treatments: $330,000 per patient per year for Kalydeco and $266,000 per patient per year for Orkambi.
“[Kalydeco] is the most well-known of our investments,” says Preston W. Campbell III, CEO of the Cystic Fibrosis Foundation. “But it is far from our only success. Nearly every CF drug available today was made possible because of the foundation’s investments in drug discovery and development.”
Campbell says current projects include one with Genzyme focused on next-generation modulators and another with Editas Medicine, a Cambridge, Mass., company to explore gene editing. Cystic Fibrosis Foundation Therapeutics Inc. (CFFT), the CF Foundation’s nonprofit drug discovery and development affiliate, announced a $14 million expansion of its research agreement with Genzyme two years ago. Editas and the foundation announced a three-year agreement last year in which CFFT will pay up to $5 million to Editas to support the discovery and development of CRISPR/Cas9-based medicines for the treatment of cystic fibrosis.
The Cystic Fibrosis Foundation pioneered venture philanthropy because the pharmaceutical industry didn’t have enough financial incentives to invest billions of dollars and years of research to develop drugs for diseases such as cystic fibrosis that affect only a relatively small number of people. “The foundation’s venture philanthropy model was born out of this need,” Campbell says. “By providing upfront funding and reducing financial risk for pharmaceutical companies, the CF Foundation has made sure that this rare disease has not been ignored.”
The creation of the Grace Science Foundation offers a different angle on emerging, wide-ranging approaches to venture philanthropy. It’s the story of how a Silicon Valley executive is using his skills to support research on a disease that afflicts his daughter.
Grace Wilsey was born seven years ago with a rare genetic disorder, NGLY1 deficiency. Her body produces an insufficient amount of N-glycanase, an enzyme encoded by the NGLY1 gene.
The neurological syndrome is marked by abnormal tear production, a movement disorder (choreoathetosis), and liver disease. Additional features may include developmental delay, hypotonia (weak muscle tone), peripheral neuropathy, EEG abnormalities, and a small head size (microcephaly).
“It’s a terrible disease,” says Matt Wilsey, Grace’s father. “What I tell people often is that the lights are on in the house, but no one is answering the door. She has little moments where I say to myself, ‘Oh, wow, she totally understands something.’ And then the rest of the day I think, ‘I’m not sure she understands anything I’m saying.’ She can’t communicate, which is the worst part about the disease.”
Initially, the Wilseys and their friends started supporting research at a handful of academic institutions to understand the disease and look for potential cures. But Wilsey, who has been involved in three startups, one of which was acquired by Twitter, saw that a lot more needed to be done. He and his wife, Kristen, started the Grace Science Foundation, based on the start-up model used in Silicon Valley. “It’s lean. It’s efficient. It’s very, very flat. There’s no hierarchy. We want to iterate very quickly. We don’t look at failure as a bad thing,” says Wilsey. The foundation has raised $6 million and recruited more than 100 scientists from around the world. Wilsey says patients’ families are heavily involved so researchers know firsthand what patients are experiencing.
The Grace Science Foundation expects researchers to share information with labs that otherwise might be their rivals to accelerate drug development. Molecular biologist Lars Steinmetz, co-director of the Stanford Genome Technology Center and group leader and senior scientist at the European Molecular Biology Laboratory, has worked with the foundation for four years. He believes that rare diseases such as NGYL1 deficiency call for “new paradigms in how science is done and drugs are developed. Large pharmaceutical companies are unlikely to invest in diseases like NGLY1 deficiency because there are only very few patients.” Steinmetz says the requirement to collaborate among multiple labs enables research to proceed much faster than it would with independent groups that do not communicate. Yet eventually, he says, a commercial partner will be needed: “When you come into it from an academic perspective, you have tools that you can launch against the problem, but you cannot replace an industrial setting to bring a drug to market and to do all the controlled experiments and the clinical trials that would be necessary.” Wilsey plans to launch a drug company separate from the foundation to develop medications for NGYL1 deficiency and related diseases.
Yet, the concept and practice of venture philanthropy raises some questions. Eric Campbell, director of research at the Mongan Institute Health Policy Center at Massachusetts General Hospital in Boston, sees venture philanthropy as a contradiction in terms. “The notion of venture philanthropy in some ways is oxymoronic. It’s like being an amateur–pro athlete. You’re either in a venture-related business and the goal of that is to make money or you’re in a philanthropy. But putting those two together doesn’t make much sense,” he says.
Venture philanthropy will likely change the motivations of not-for-profits because they are financially interested in the outcome. “In my opinion, they should be treated no different than a drug company,” he said. Moreover, just like any small pharma biotech company, they are facing long odds, says Campbell: “These organizations need to think very hard about their likelihood of a success, which to be honest is small. Drug companies that develop drugs for a living experience lots of failures in developing drugs. They rarely hit home runs.”
Conflict of interest
Paul Quinton, a researcher at the University of California–San Diego, has a unique perspective as a scientist specializing in cystic fibrosis because he is also a patient. Quinton, formerly a scientific advisor to the CF Foundation, said he was extremely grateful for the work the foundation has done to improve the health and extend the lifespan of patients. At age 72, “I’m twice as old as I’m supposed to be,” he jokes.
But he is troubled by the price tag for Orkambi and Kalydeco. “That’s a lot of people without any disease paying insurance to cover my drug cost. I feel a little guilty about that to tell you the truth. I don’t think I’m worth $300,000 a year to society,” Quinton says. “So why should everybody else be burdened with making sure that the CEOs, the CFOs, and executive officers are making tens of millions of dollars a year in personal compensation from the cost of our drugs?” The high cost for such drugs are unsustainable in his view. “Where will we get the money? And an even better question is, where is all that money going to go?”
Moreover, the foundation’s investments create a potential conflict for a charity. “It was like a doctor owning a drug company that makes drugs he then prescribes to his patients. He can’t do that. That’s a conflict of interest. So the CF Foundation was somewhat in the same situation in owning part of a company that provides drugs to their patients,” says Quinton, adding that charities that get involved in drug development are redefining altruism. “Is altruism for sale? Did the Cystic Fibrosis Foundation sell altruism because the money that they had to invest in Vertex/Aurora came from people who were altruistic?” he commented. “The parents and the friends and the members of the CF community raised money and gave their time and money to the foundation. Is it still altruistic to pursue venture capitalism that profits a few with such extravagant costs to others? It is a rough question.”
One question some advocates are asking about venture philanthropy is whether the not-for-profits involved could play a role in setting prices on drugs. Liz Philpots, head of research and impact at the Association of Medical Research Charities (AMRC) in London, which represents 138 large and small British health charities, is skeptical about charities being able to lobby successfully for lower prices even on medications they helped develop. “We know that as patient organizations we can be a bit more emotional about affordability, as we are all too aware how much our patients desperately need new treatments. But we also know emotional arguments to industry won’t work,” she says.
Sharon Terry is the mother of two children with pseudoxanthoma elasticum (PXE), a progressive disorder characterized by the mineralization of tissue and co-founder of PXE International, a research advocacy organization. Terry, who has a theology degree, and her husband, Pat, a former construction manager, borrowed lab space at Harvard University and, tutored by postdocs, discovered the gene that causes PXE. They subsequently developed a diagnostic test, created a research consortium, and have started clinical trials.
Terry is also president of the Genetic Alliance, a network of disease organizations critical of the profits that pharma is making off of orphan diseases and the advocacy groups getting into venture philanthropy. “Most drug companies today, even the very large pharmaceutical companies, have opened rare disease divisions. It’s the thing to do now. And the reason they’re doing it is because their business model for blockbuster drugs has failed,” she says. “They are looking at the rare disease market with big eyes because they see that these drugs can garner hundreds of thousands of dollars a year per patient.”
Disease organizations and patient groups ought to have a hand in setting the price as part of their advocacy mission, says Terry, and her group pushes companies to set prices so they are affordable. “We’re not going to work with a company that’s going to go for a killing,” she says.
Conflicts of interest have to be carefully managed, says Schneeman at FasterCures, but she sees a role for not-for-profits getting involved in research and helping to get new products to patients. If the idea is good enough, one hopes that a company would carry the ball the rest of the way, she says. “I think a lot of patient groups are right now wrestling with whether they help support the development of drugs or not, or just purely play an advocacy role.”