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 … Next Page »

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Just a few weeks after a similar arrangement with Cambridge, MA’s Vertex Pharmaceuticals (NASDAQ: VRTX) showed early signs of bearing fruit, the Cystic Fibrosis Foundation is expanding its collaboration with another local biotech, Lexington, MA’s Epix Pharmaceuticals (NASDAQ: EPIX). The nonprofit initially inked a research, development, and commercialization deal with Epix in 2005, aimed at developing drugs that target CFTR, the protein that malfunctions in cystic fibrosis patients. The expansion of the arrangement, announced today, puts additional payments to Epix of up to $37.7 million on the table, bringing the total potential value of the alliance to more than $50 million.

The Vertex and Epix deals are just the latest examples of what many believe is a growing trend of drug developers turning to disease foundations and other nonprofits as a way to fund research—particularly very early stage studies and work focused on rare diseases. An additional bonus of such “venture philanthropy” deals is that companies often wind up retaining equity, IP, and marketing rights that they would have had to give up in agreements with more traditional investors and partners. (For more on the latest Epix deal and local venture philanthropy deal-making in general, see this story from the Boston Globe.

Hard numbers on the growth of venture philanthropy are hard to find, but an oft-cited estimate from the research firm CenterWatch indicates that such deals totaled $75 million nationwide last year—a tenfold increase over 2000 levels. In addition to Epix and Vertex, local firms (all in Cambridge) cashing in on the trend include:

—Acceleron Pharma. The startup announced in January it had received a “biotech investment award” from the Multiple Myeloma Research Foundation; the Boston Globe today said the foundation has given the firm $1 million

—Alnylam (NASDAQ: ALNY), which has collaborations with and grants from the Cystic Fibrosis Foundation, the Michael J. Fox Foundation, and St. Jude Children’s Research Hospital

—Altus Pharmaceuticals (NASDAQ: ALTU), which has a strategic alliance with the Cystic Fibrosis Foundation dating back to 2001

—Biogen Idec (NASDAQ: BIIB), which was one of 22 companies to get a total of $25 million from the Juvenile Diabetes Research Foundation, according to the Globe

—CombinatoRx, (NASDAQ: CRXX) which has collaborations with the Cystic Fibrosis Foundation, CHDI, Accelerate Brain Cancer Cure, and the Spinal Muscular Atrophy Foundation

—FoldRx, which inked a $22 million agreement with the Cystic Fibrosis Foundation last summer.
(The Boston Globe had a nice write-up of the deal and venture philanthropy trends at the time.)

—Genzyme (NASDAQ: GENZ), which will share up to $1 million in milestone payments from the Juvenile Diabetes Research Foundation with Florida’s AGTC.

—Tolerx. The Juvenile Diabetes Research Foundation has been funding the development of Tolerx’s monoclonal antibody treatment for type 1 diabetes since 2006. (For more on that and other applications of the company’s technology, see David Stipp’s profile of Tolerx.)

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