BioWorld International Correspondent

BOSTON - Biotechnology holds the key to treating rare disease, while patient groups have money that could unlock that potential. Now medical research charities are dropping the old model of passively handling out grants and looking to set up collaborations with biotechs that have far more in common with conventional business-driven deals.

But given the different objectives of each party, there remain many issues around how venture philanthropy deals are structured, how alliances are managed, who pays for what and who gets what rights.

The question from a foundation viewpoint is, "How does not-for-profit funding that supports research in low incidence diseases accelerate progress?" Kate Carr, president and CEO of Accelerate Brain Cancer Cure (ABCC), told delegates. "You have to have a business plan that articulates your goals. I've been in the not-for-profit sector for 10 years, and it is very hard to find foundations that do that."

In the new model, companies getting charitable funding have to be fully accountable and meet traditional research milestones. "They have got to report findings whether positive or negative," Carr said. ABCC has a deal with Genentech Inc. that has very strict timelines around selecting a molecule, agreeing to budgets and putting it into development. For those molecules that make the cut, ABCC takes all responsibility for conducting and financing Phase I and II studies, with Genentech picking up in Phase III and beyond.

While Genentech, of South San Francisco, owns all the intellectual property, the charity receives royalties on any products. "We are always thinking of the small market size and trying to mitigate risk. We have to answer to our stakeholders or donors, but maybe we can take slightly more risk than other types of funders," Carr said.

One company systematically tapping this funding source is CombinatoRx Inc., which is developing combination drugs based on marketed products that have novel mechanisms of action. "Venture philanthropy has played a very big role for us," said Dan Grau, senior vice president of commercial operations.

In a discovery deal with the Cystic Fibrosis Foundation (CFF), the charity gave $13.8 million to cover all expenses up to Phase I, with CombinatoRx owning all IP and commercial rights. Between Phase I and Phase IIa, CFF covers 75 percent of the costs and makes milestone payments, while CombinatoRx pays 100 percent of costs beyond that point. "This is a good deal for biotech. You wouldn't get this kind of a deal from pharma," Grau said.

There are important advantages of a philanthropic deal beyond the purely financial. For example, research foundations have access to patients and know all the experts in the field.

Venture philanthropy can be an important source of value for early stage companies, believes Bob Gallotto, vice president of strategic planning and alliance management at Altus Pharmaceuticals Inc., of Cambridge, Mass. Soon after the company's formation in 2000, it received $1 million from CFF, providing the means for the company to demonstrate proof of principle for its oral protein delivery technology in administering pancreatic enzymes in an animal model. That provided proof of concept for the technology platform as a whole.

Building on that, CFF has since given Altus $25 million in milestone-based grants for the development of ALTU-135 for treating pancreatic insufficiency in cystic fibrosis. "While the CFF money is nondilutive, Altus also retains all rights to the product, enabling us to build more value than if we had gone the traditional venture capital route," Gallotto said.

"Small biotech needs money, but that is only part of the problem," Gallotto said. CFF gave us access to intellectual capital through working with groups that have a unique perspective on the disease." In addition, it is possible to accelerate development because it is easier to recruit patients. ALTU-135 will start Phase III development shortly.

"Venture philanthropy money allows you to de-risk clinical programs," Gallotto said. "CFF complements traditional investors as they both have different mindsets and capabilities."

Engaging with research charities was not a choice for PTC Therapeutics Inc., of South Plainfield, N.J. The question was which one to pick. The company's lead product, PTC-124, blocks the action of nonsense mutations that arrest protein expression, resulting in a truncated, and therefore inactive, protein.

"There are 1,800 potential indications, and at the time, we have no clinical tools," said Claudia Hirawat, senior vice president of corporate development at PTC. "We went to CFF to find out how this might work in cystic fibrosis." PTC-124 is now in clinical development in cystic fibrosis and Duchene's muscular dystrophy, and there are 20 other programs in the portfolio. Patient groups continually approach PTC to apply its technology to their diseases.

"This is placing a responsibility on PTC, Hirawat said. "CFF is used to working with biotechs, but many others are not. You need to understand the expectations of patient groups."

Vertex Pharmaceuticals Inc., of Cambridge, Mass., has had a 10-year relationship with CFF, resulting in an oral drug for treating the root cause of the disease reaching Phase II development.

While the foundation put in $21 million in 2004, it has been very good in understanding the constraints Vertex faces, said Philippe Tinmouth, senior director.

"The net present value of the project is relatively low, there is potential for competition for resources and our costs are not tapped," Tinmouth said.

CFF is credited as being one of the prime movers in creating the new model for charitable funding of research. "You have to have significant funding to get involved in this. We have to get into the queue to bring biotech to the cystic fibrosis effort," said Robert Beall, president of CFF.

One of the keys is giving up all IP rights. "Venture capitalists wouldn't accept this," Beall said. But we can't walk away from a deal. We need drugs."