Venture Philanthropy: A New Business Model for Non-Profits

Curing rare diseases with strategic investment

My name is Alex Silver, and I am the chairman and co-founder of the EB Research Partnership, which is the largest non-profit dedicated to funding research aimed at treating and curing Epidermolysis Bullosa, a group of devastating blistering disorders that affect children from birth.

The EB Research Partnership started in 2010 around my kitchen table. Our first event raised $65,000. We ended 2014 with over $2 million in annual revenue and a strategic plan to grow to $5 million per annum. Like many people who dedicate their time to curing a rare disease, I am personally touched by EB. My 7 year-old son, Jackson, was born with a severe form of it.

For those of you new to EB, it is a debilitating and potentially deadly genetic skin condition that causes blisters and wounds all over the body — inside and out. EB is excruciatingly painful. Imagine the pain you feel when you walk around in a new pair of shoes and end up with raw blisters on your feet. Now imagine that feeling all over your body.

For a child with EB, even the simplest of everyday activities — accidentally tripping on the playground or swallowing a piece of candy — can rip skin off the body and leave wounds that never heal. A young man with EB explained: “My body feels like it is always on fire and pain is a constant in my life.” This is what my son Jackson, and many of the thousands of other people in the U.S. that live with EB, contend with every day. I shudder to think that this constant sensation of burning is my son’s status quo.

It is a parent’s job to keep his or her children safe. EB makes that a challenge.

How do you protect a child whose skin is constantly tearing off?

Everyday, Jackson is bathed in bleach and wrapped in bandages. Caring for him means causing him pain in order to make a wound better. We go through $10,000 worth of bandages and hundreds of needles a month to try to keep Jackson free of infection. We are in a constant battle with EB and live in fear that one day it will win. The harsh reality is that, at present, the life expectancy of someone with a severe form of EB is at least 50 percent shorter than yours or mine. I am the father of a seven-year-old with EB. I know how precious his time is.

There are reasons to be optimistic as well as obstacles to overcome to make an EB cure a reality. First, we have a stellar team fighting this battle. Preeminent researchers are working on protein, gene, and cell-based therapies. EB is the perfect model for research. Scientists know exactly what causes this single gene disorder.

Second, it will be visibly apparent when a therapeutic treatment is working. A treatment’s effectiveness will be easy for the human eye to measure — fewer blisters, wounds that heal more quickly.

Third, research for EB may have multiple applications. Some of the treatments being developed, including non-viral gene editing, could potentially help those who suffer from many of the other 5,400 incurable genetic conditions.

Finally, we have a vibrant and engaged community. I am confident that individuals with EB are eager to participate in clinical trials. Children with EB are considered “lucky” if they live into adulthood, and, again, they live in unimaginable pain. These realities obviously influence the risk-benefit calculation when it comes to experimental treatments. Watching your child suffer the way I do and knowing that the clock is ticking makes inaction the riskier choice.

EB research has been going on for over 40 years, though. So why is it taking so long to heal EB? What are the obstacles, and why do I believe that the non-profit model has to evolve to better help those in need?

The short answers to these questions are

1. Funding for rare conditions is grossly insufficient and the costs for drug development are too high.
2. The regulatory process is too burdensome, especially for treatments intended for small populations.
3. The disease-specific non-profit model is outdated.

I want to spend most of my time today discussing the non-profit business model, as it is the factor most within all of our control. Making modest changes would increase the volume of rare disease treatments going through FDA review, which should stimulate more interest in modernizing the regulatory framework.

Before addressing the non-profit model, I must say that it is essential to invest in drugs for rare diseases. Beyond the normative reasons for bringing these conditions under control, they are tremendously costly to the healthcare system. The NIH is a partner, and a good one, but it is unreasonable to think that NIH can cure every rare-disease while also funding basic research. I serve on the NIAMS advisory council and understand how much they are trying to accomplish with limited resources. NIH should heighten its focus on and draw attention to rare diseases because they affect 10 percent of Americans, and the health care costs of someone with a rare disease are typically incredibly high.

At $10,000 a month, Jackson’s bandages will have cost over $1 million dollars by the time he is ten. Multiply that by the 30,000 people in this country with EB — that’s $3 billion dollars. Investing in a treatment for EB, all of a sudden, makes a lot more sense.

It also goes without saying that the regulatory process must be faster and more transparent for patients suffering from rare diseases. By creating a framework that decreases the risk of failures, creates regulatory efficiencies to reduce development costs, and increases the return on investment, we as a society can significantly increase the flow of capital into the battle to cure rare diseases like EB. We also need to look at the risk of any treatment relative to the risk of non-action from the perspective of the person suffering from a rare condition. In reality, risk is relative. The risk/benefit calculations at FDA can be absolute and should take the rare-disease patient perspective into account.

Turning our attention to the business model of non-profits around curing a specific condition — I distinguish this from basic research, as we are now standing on the shoulders of tremendous basic research — I believe non-profits need to invest more strategically, honing in on research that is intended to lead to commercial treatments. When the EB Research Partnership evaluates a project for funding, we try to understand how and when the project in question can be made into a commercial therapy. The operative words are “commercial therapy.” A viable treatment that no manufacturer will produce or that does not meet FDA risk-benefit calculations is not, in fact, viable. The key questions of what the product roadmap will look like, how much will it cost, and how will it fare in the regulatory process must be identified early on. I can’t stress this enough.

Our goal is to treat and cure EB. That can only be accomplished if the academic research can be translated into products for patients suffering from EB.

We always keep that in mind and work backwards from that goal by involving commercial parties, other non-profits, and members of the community from the outset. You can fund the world’s best minds, and they can conduct highly promising research, but if their ideas can’t make it to patients, you are wasting the most precious resource of all — time.

In addition, we need to ensure that non-profits participate in the commercial success of projects that they fund. At EBRP, we call this our venture philanthropy model.

My background and career has been spent in principal investing — including venture capital and private and public equities. If you look at how a new business is often funded, early stage investors, typically known as angel investors, invest funds to prove out a business model or concept. In return for their capital and reducing the risk of the investment, the angel investors maintain a meaningful financial interest in the company. They do not, and I stress do not, simply hand over the company and their financial interest to someone else without being compensated for it. The angel investors of Google, Microsoft, Facebook, and any company that you can think of were all rewarded for their investment.

There is only one sector in the world where the angel investors simply relinquish their financial interest and where they are expected to do so. Can you guess what it is? The non-profit sector.

Rare disease non-profits are often the angel investors of early stage translational research. We, for good reason, fund very early stage disease-targeted research to help loved ones and others in a similar position of suffering. We provide resources to test theories and advance the work of brilliant researchers. This is risky work that often fails. If we back the right team that has excellent work and execution — and throw in some good fortune — we find ourselves in the position of having a potentially viable therapy.

So, why are we then expected to give away any financial participation to the university or future commercial party that could become involved? The answer is that we should not be expected to do so and should stop giving our financial participation away for free today. Fundamentally, non-profit should be understood to mean re-investing all your profits back into your goal; it does not mean a goal of not-to-make any profit for itself.

I suggest the following: in return for funding early stage research, the EB Research Partnership participates in the commercial value generated from any project that we fund.

Any proceeds that we receive are reinvested into funding more EB Research. The same financial pie that has existed still does; we are just carving it up in a different way. The EB Research Partnership has put these agreements in place with major universities as well as commercial partners. This model is not only better for the non-profit but also for all the parties involved. Here are the reasons.

First, this model helps us raise larger amounts of funds and therefore commit to larger projects. These larger projects ensure the research can recruit the talent needed to see a project through. In our most recent experience, the researcher estimated that project-based funding cut the time to determining commercialization by 50 percent. In essence, we are maximizing the use of the most precious resource of someone with EB — time. Given the shortened life expectancy for someone with EB, the time saved can be the difference between living and dying.

Second, venture philanthropy agreements inherently align incentives for commercialization upfront. Since the non-profit is tied early on to potential commercial partners, we can incorporate what those who develop therapies need to see and how to sequence it. I am all too familiar with the time lost when the treatment process chosen won’t meet commercial or regulatory muster. We can now reduce this uncertainty at the onset.

Third, via this model, EBRP is helping to vet out EB treatments that will not work and reducing the risk of EB therapy developments. From a pure business perspective, commercial partners benefit greatly from another party taking the risk on their own capital. Commercial parties should be thrilled and should foster venture philanthropy even if that means sharing in some of the economics. It will likely improve the commercial party’s success rate, not to mention that a non-profit is probably a cheaper cost of capital than a straight equity issuance.

Fourth, as non-profits have success with this model, they become more sustainable entities. Let’s face it — the current non-profit model stinks. Every year, we have to recreate the wheel to stay in business. If non-profits embrace the venture philanthropy model and fund solid research that succeeds, the non-profit revenue stream is augmented by its shares of the commercial revenue stream. The non-profit is now a stronger and more sustainable entity, which benefits the communities that it serves.

Finally, as if all these factors weren’t enough, how else are we possibly going to cure 7,000 rare diseases? If each disease needed only $30 million of funding to get to commercialization, we would need over $200 billion of funding. The numbers simply don’t work if we don’t change the model. The government can’t afford it, and corporations want to invest in therapies that are as proven as possible. The solution is to change the incentives. This model helps all the players involved and, most importantly, those who are in desperate need of cures.

We need to reshape how disease-specific non-profits fund early-stage medical research, especially for rare diseases, where resources are heavily constrained. The same applies to other non-profits funding any issue with limited resources, which, let’s face it, is just about any non-profit that exists.

Curing a rare disease can only happen through true partnership between the rare disease community, the government, for-profit investors, non-profits, universities, and drug companies.

Together, we can drive research forward at the rate it needs to benefit this generation of those living with rare diseases — Jackson’s generation. We owe it to 10 percent of our fellow Americans to get them treatments and cures as quickly as possible.