Economy Makes Disease Foundations Get Choosier

12/15/08

The biotech industry is always on the lookout for cash, so one of the more positive developments of recent years has been the entrance of disease foundations into the pool of potential investors. Cambridge, MA-based Vertex Pharmaceuticals (NASDAQ:VRTX), for one, has said that their efforts to develop VX-770 for treating cystic fibrosis wouldn’t be possible without the support of the Cystic Fibrosis Foundation. But officials at disease foundations say the current financial morass has impacted their own budgets, and the groups are going to be choosier about which companies get their coveted investments.

For sure, disease groups like the CF Foundation, the Juvenile Diabetes Research Foundation, and the Michael J. Fox Foundation for Parkinson’s Research plan to continue to support private companies working to bring treatments to the marketplace. But disease foundations, like much of the field of biotech investors, are subject to the realities of the recession.

“I think we are finding that we are saying ‘no’ more often,” said Robert Beall, CEO of the Bethesda, MD-based CF Foundation, during a visit to Boston last week for the Massachusetts Biotechnology Council’s investors’ forum. He added that the economic climate and the high cost of drug development have caused his organization to fund biotechs’ CF drug programs through late-stage clinical trials, and his group is being careful to invest in companies that have the finances to advance projects with their own money. “Every voluntary health organization is going to have to establish priorities.”

Unlike venture capitalists, which invest in biotech firms to gain equity stakes, disease foundations tend to back biotechs’ for specific programs with direct benefits to its constituents, the patients. For biotechs, the foundation money often provides capital that boosts the value of the company without adding a new supply of shares that can dilute the value of existing ones. Plus, the relationships with the patient groups bring firms all-important access to experts in the field and patients for clinical trials. In return for investments, disease foundations hope to get new treatments for its patients and perhaps some financial return such as royalties on drug sales. But the business model relies in part on biotechs having the financial means to allocate their own resources to these programs, and that has become tougher in this economy.

Allison Formal, vice president of research and business development for the Leukemia & Lymphoma Society, noted that her group has seen a drop in donations this year. The recession has prompted the White Plains, NY-based society—which has invested in eight biotech firms including Cambridge, MA-based Ensemble Discovery—to focus on helping biotechs get early clinical data and validation. Formal, Beall and other disease group officials were on a panel discussion focused on disease foundations during the MBC conclave.

At least through last year, disease foundations’ investments in biotech outfits were on the rise. Boston-based research firm CenterWatch reports that disease foundations invested a total of $75 million in life sciences companies in 2007, and projected—albeit before the recession went into overdrive in late September—that the figure would rise to $90 million in 2008. (Rebecca compiled a list of several biotech firms in the Boston area on the receiving end of this venture philanthropy boom earlier this year.)

However, biotech firms with foundation support have not been immune to the realities of the recession. Beall (pronounced “Bell”) said in an interview that some of the companies his foundation has backed to develop drugs for cystic fibrosis are running short on capital, and his group is even working to help some of those biotechs move its cystic fibrosis programs to companies with enough money to pay for the projects. (Cystic fibrosis, which affects about 30,000 Americans, is a chronic disease that impairs lung and digestive functions.) Beall wouldn’t name names. We know that two CF Foundation-backed companies that have been shedding working to conserve capital include CombinatoRx (NASDAQ:CRXX), of Cambridge, and Lexington, MA-based Epix Pharmaceuticals (NASDAQ:EPIX). Both have publicly stated that they remain committed to their cystic fibrosis programs.

Beall says that he is not concerned that companies will decide to drop their cystic fibrosis projects altogether because the foundation covers much of the development costs. Still, he says, the foundation expects to reduce its own medical research budget by 10 percent to 15 percent and has to be careful to choose biotech partners that are capable of paying their share of development costs.

The Michael J. Fox Foundation, founded by its namesake after he was diagnosed with Parkinson’s, isn’t expecting a drop in its $25 million to $30 million annual budget this year, said Sohini Chowdhury, director of industry strategy for the New York-based foundation. But given the economy’s impact on biotech companies, she noted, “we realize that we are going to have to be pickier about what we fund.”

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