$3.3 Billion Investment Payout For Cystic Fibrosis

November 19, 2014       Mark Hrywna      

Every investor has their story about the stock or investment that they let get away. This is not one of those stories. The Cystic Fibrosis Foundation (CFF) cashed in on one of its biggest venture philanthropy efforts, selling future royalty rights for $3.3 billion — 10 times the revenue that the charity typically generates in a year.

“This is a transformational moment for the foundation and the entire CF community,” Robert J. Beall, Ph.D., CFF’s president and CEO, said in the announcement released this morning. “These new resources will allow us to supercharge our efforts to help all people with CF live long, healthy and fulfilling lives today and work to find a cure. We could not have taken this exciting step forward without the steadfast commitment and decades of hard work of many volunteers and donors, researchers and health care professionals, together with people with CF and their families,” he said.

“We have much work ahead of us, but we have a clear road map and are now better positioned to pursue exciting new opportunities,” Beall said.

Through its affiliate Cystic Fibrosis Foundation Therapeutics (CFFT) created in 2000, the Bethesda, Md.-based CFF has partnered with pharmaceutical companies to provide upfront funding for drugs that tackle so-called “orphan diseases.” Orphan diseases are those that affect less than 200,000 people in the U.S.; about 70,000 Americans are afflicted with CF. The genetic disorder creates mucus in the lungs and causes respiratory difficulties.

CFF helped to fund development by Boston-based Vertex Pharmaceuticals, Inc., of the drug Kalydeco, investing some $150 million over the years. The drug won approval from the Food and Drug Administration (FDA) in 2012 but treatment costs some $300,000 a year – a point of concern raised by critics of its venture philanthropy. CFF also has some 20 other drugs in the pipeline at various phases of the process, from pre-clinical trials to patients.

CFF sold its royalty rights to Royalty Pharma, which funds late-stage clinical trials in exchange for royalty interests. The New York City-based firm financed the acquisition with cash on hand and a $2.7-billion unsecured term loan from Bank of America Merrill Lynch.

CFF reported unrestricted net assets of $575 million last year, with $239 million designated by the board for drug discovery and development programs. Last year, the organization reported total revenue of almost $300 million, which was higher than recent years given almost $100 million recognized in royalty revenue from the Kalydeco arrangement.

Funds from any royalties received have historically been reinvested to accelerate further drug discovery to find a cure. CFF may receive additional funds depending on the success and further development of therapies by Vertex, according to the announcement.

CFF didn’t go into much detail in its announcement, only promising to increase “research funding for innovative strategies to target the genetic cause of CF,” and “strengthen the specialized care and support that people with CF and their families receive” at more than 120 foundation-accredited care centers in the U.S. The foundation also plans to expand its resources to help people afford costly medications and manage health care cover and insurance.

“Treating and eradicating this complex, rare disease while continuing to meet the needs of those living with it requires a long-term commitment of time, effort and money,” Beall said. “We still need the support of donors and volunteers to realize our goals. We plan to invest these funds in the wisest way possible: to help people with CF live healthier lives today and have more tomorrows,” he said.

CFF executives won’t necessarily see a direct dividend from the sale. Financial performance objectives in the organization’s incentive compensation plan for executives “do not include royalty-related revenues, such as royalty streams, lump-sum royalty payments and sales proceeds of royalty rights, related to CF drugs,” according to its Form 990.

CFF ranked No. 41 in The NPT 100, which appeared in the Nov. 1 edition of The NonProfit Times. If $3.3 billion were recognized in the 2014 fiscal year tax filings, CFF would easily reach the top five of the annual study of the nation’s largest nonprofits next year (American Red Cross ranked No. 6 this year with $3.4 billion in total revenue; The Y was No. 1 with $6.6 billion).