$307,000-a-year Vertex Drug: Billions in Sales?

Here is a question that is likely to plague the pharmaceutical industry and patient advocacy groups for some time to come: when might a non-profit charity involved in funding research for a hard-to-treat disease cross a line and become conflicted because of its financial arrangements?

The issue has surfaced concerning the Cystic Fibrosis Foundation, which provided $75 million in funding that was used to help develop Kalydeco, an expensive treatment that is sold by Vertex Pharmaceutical (VRTX) and is generating considerable excitement on Wall Street.

The drug, which was approved for treating patients with an uncommon mutation that accounts for just 4 percent of cystic fibrosis patients, sells for $307,000 a year. However, recent study results suggest a potentially wider patient population can be treated when combining Kalydeco with an experimental Vertex medication, prompting Wall Street to forecast annual Kalydeco sales in the billions of dollars. With first-quarter sales of $62 million for Kalydeco, out of a corporate total of $328 million, the company would be transformed should these expectations come true.

VRTX Revenue TTM Chart

VRTX Revenue TTM data by YCharts

The CFF, however, stands to gain handsomely. Why? The foundation receives a royalty on sales and, at the same time, also funded new treatment guidelines strongly recommending the use of the drug. The guidelines were overseen by 10 people, including three who are CFF employees and another whose employer – Johns Hopkins University – received more than $2 million in grants from CFF between 2009 and 2011.

“It is concern that the organization now stands to profit when patients choose to use the drug,” Lisa Schwartz, a professor of medicine at Dartmouth Medical School tells The Milwaukee Sentinel-Journal and MedPage Today, which investigated the CFF and its role in Kalydeco. “Financial entanglement with industry, even with the best of intentions, creates a conflict of interest.”

As David Cornfield, a professor of pulmonary medicine at Stanford University School of Medicine, notes, the financial arrangement between the Cystic Fibrosis Foundation and Vertex was "fraught with peril." Such guidelines, he tells the papers, are followed by doctors around the country - boosting the market for Kalydeco, which directly benefits the foundation.

The CFF, though, argues that without its financial support, such medicines will not get to patients. “They applaud the decision and our business model to the utmost,” CFF president Robert Beall tells the papers. “The patients are excited.” He adds that royalty money is needed to help the CFF entice drugmakers to get involved in risky research and should not be used to help patients pay for the expensive drug.

A CFF spokeswoman, however, added that 110 cystic fibrosis centers around the country receive funding to provide patient care from the foundation, and research and training grants are regularly made to institutions.

Insurers are unlikely to balk at the cost, given that the existing patient population is small – about 1,200 people in the US – and negative publicity is not worth the risk. But the pricing is still coming under fire, especially since Kalydeco research was funded, in part, with money provided by the National Institutes of Health and taxpayers programs such as Medicare and Medicaid also pay for the drug.

The pricing, in fact, last year prompted 28 physicians and scientists to write Vertex over the “unconscionable” cost after several Vertex executives made headlines for stock sales that followed a questionable release of study data and prompted US Senator Chuck Grassley to ask the US Securities and Exchange Commission to investigate (covered in earlier Pharma news). The SEC has remained silent concerning his request.

A year ago, Vertex revised previously announced interim results of a Phase II study of a combination of Kalydeco and another treatment, which sent its shares soaring 73 percent. Two weeks later, though, the drugmaker disclosed the results were overstated and blamed the mistake on a contract research organization. Meanwhile, several Vertex execs sold stock and options worth more than $100 million (see earlier Pharma news).

It has made for an interesting stock chart.

VRTX Chart

VRTX data by YCharts

Vertex has maintained that most of stock sold by executives and board members following the first announcement of study results were part of pre-existing 10B5-1 plans, which allow for the sale of stock at regular intervals or when pre-specified share prices are reached. There were some additional shares sold outside the 10B5-1 plans, and these sales followed Vertex's regular internal stock trading policy.

To read the remainder of this article, go to Pharmalot.

Ed Silverman, a contributing editor of YCharts, is the founder and editor of Pharmalot. He previously reported on the pharmaceutical industry and other business topics for the Star-Ledger of New Jersey, New York Newsday and Investor’s Business Daily. He can be reached at editor@ycharts.com.

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