By Heidi Ledford of Nature magazine

Early next year, a drug for cystic fibrosis is expected to come before the US Food and Drug Administration for approval. It is a moment that the Cystic Fibrosis Foundation (CFF) will have waited 12 years and invested US$75 million to witness. Approval of the drug, VX-770--developed by Vertex Pharmaceuticals of Cambridge, Massachusetts, with support from the foundation--would provide a new treatment for patients, and a revenue stream for the charity.

The CFF, based in Bethesda, Maryland, has a stake in the intellectual property underlying VX-770, and is entitled to royalties from sales of the drug. Such 'venture philanthropy' is increasing among charities. Like venture capitalists, non-profit groups are managing research projects, making funding dependent on the projects reaching predetermined milestones and potentially reaping a financial return. They are also keeping control over the fruits of their investment in case the journey from lab to treatment encounters obstacles.

"Philanthropies are looking to have more of a hand in managing intellectual property," says Timothy Coetzee, chief research officer of the National Multiple Sclerosis Society in New York, and former president of Fast Forward, the society's venture-philanthropy arm. Philanthropic donations for medical research are increasing (see 'Growing influence'), even as government granting agencies tighten their purse strings and venture capitalists cut back on biotechnology investments. As a result, non-profits have more bargaining power than ever before--especially for early-stage, high-risk projects that tend to be unattractive to private and federal investors.

"The charities are providing funds at the time when the risk is the very highest," says Ken Schaner, an attorney at Schaner & Lubitz--a law firm in Bethesda, Maryland, that specializes in working with non-profit organizations. "But yes, they expect a return." The CFF is not alone: charities including the ALS Association in Washington DC, the Muscular Dystrophy Association in Tucson, Arizona, and the Wellcome Trust in London have also demanded royalties from some projects. Schaner says that the value of the return often depends on the size of the investment--for example, a foundation might be entitled to six times its input. In some cases, Schaner estimates that the payout could be as much as $1 billion.

But organizations aren't interested only in generating revenue for their charitable work. Their involvement also helps to ensure that therapies reach the people who need them, in case anything happens to the drug companies with which they are collaborating.

In 2000, Schaner worked with the CFF to carve out a deal with Aurora Biosciences in San Diego, California--a pharmaceutical company that was later sold to Vertex--to develop the drug that was to become VX-770. The deal was one of the first examples of venture philanthropy.

But Schaner says that he couldn't sleep the night after the deal was signed. "I started thinking about what would happen if Aurora lost interest in the project. It could just sit there on the shelf untouched," he says. So he created an 'interruption license' that is now used widely to give charities the intellectual-property rights behind a project if a company abandons it.

Those rights came in handy in another deal. The CFF had invested about $25 million in a recombinant enzyme that could treat pancreatic deficiencies in people with cystic fibrosis. When the developer, Altus Pharmaceuticals in Waltham, Massachusetts, confessed that it could not afford a phase III clinical trial, the foundation snatched up the license to the patent and shopped around for a new taker.

The technology ended up with Eli Lilly, a drug firm based in Indianapolis, Indiana. The foundation then sold off its royalty rights, funneling the money into another program. The recombinant enzyme came up for approval this year, but the Food and Drug Administration has requested further clinical trials.

Philanthropic organizations don't always go unchallenged: universities and companies can chafe at handing over intellectual-property rights. "Some philanthropies are getting more aggressive and greedy," says Jeffrey Quillen, a lawyer at the law firm Foley & Hoag in Boston, Massachusetts, who represents start-up companies and university spin-outs. "They see what big pharma gets from these deals and they decide they want stock or co-ownership of intellectual property, too." Some non-profits reduce their intellectual-property demands to ensure that the project doesn't stall because of disputes.

There is also strife when it comes to sharing royalties. "It's tough, but we'll do it sometimes," says Lita Nelsen, director of technology licensing at Massachusetts Institute of Technology in Cambridge. For example, the university might agree "if the foundation shares in the patent costs". Charities, for their part, tend to resist compensating universities for the 'indirect costs' that might result from a grant--which range from utilities to administrative support. That, notes Nelsen, adds to frustration in negotiations. "They think they're giving us money, but they're costing us," she says.

For the charities, royalties can help to fill the void left by the economic crisis. "Traditional fund-raising is still down for us," says Robert Beall, president of the CFF. "We took the Lilly royalties and put them right back into research--that's what we intend to do to make up for the deficit." The foundation reported more than $53 million in royalty revenues last year.

But despite growing awareness of the importance of royalties and intellectual property, Schaner says that some non-profit organizations still give the issue short shrift. "Often, charities don't think past the first year or two when the grant is being made," he says. "They're so accustomed to clinical failures that they don't put enough emphasis on, 'We might have a success, and what happens then?'"

This article is reproduced with permission from the magazine Nature. The article was first published on July 20, 2011.