healthy4u: Vertex Pharmaceutical

We have often discussed how health care organizations now seem prone to diversion from their stated missions, often when money is the object.  While the organizations in question are frequently academic, teaching hospitals, academic medical centers, or medical schools in particular, in May, the Milwaukee Journal Sentinel <a href="http://www.jsonline.com/watchdog/watchdogreports/charitys-investment-a-prescription-for-profits-for-drug-maker-p79tfc9-208027961.html">presented</a> an example of a disease specific charity.  This article deserves considerably more attention than it apparently initially received. Background The background was, <blockquote class="tr_bq">What happens when a disease-fighting charity dives into venture capitalism? In the first case of its kind, the results include one of the planet's most expensive pills, huge sales projections for a drug company and windfalls for executives who sold stock in the glow of enthusiastic news releases about the drug. Kalydeco is a breakthrough drug designed from knowledge of the genetic roots of cystic fibrosis, a lung disease that kills most victims before they reach middle age. Developed by Vertex Pharmaceuticals with a $75 million investment from the Cystic Fibrosis Foundation, it is an early example of 'venture philanthropy,' where a nonprofit helps finance development of a treatment in return for a cut of sales.</blockquote> Remember that while disease specific charities often sponsor basic and clinical research, in this case, the CFF sponsored drug development.  In fact, much of the research on which this development was based was sponsored by charities and the US National Institutes of Health: <blockquote class="tr_bq">In the 1980s, Francis Collins, now director of the National Institutes of Health, was a researcher at the University of Michigan and on his way to becoming a renowned gene hunter. Collins and a team headed up by Lap-Chee Tsui at the Hospital for Sick Children in Toronto collaborated to identify the gene responsible for cystic fibrosis. That breakthrough involved funding from the NIH, the Cystic Fibrosis Foundation and the Howard Hughes Medical Institute, said Collins. Another decade of intense basic science followed, much of it funded by NIH.</blockquote> The Price to Patients  Despite, or perhaps because of the funding provided by CFF, Vertex chose a stratospheric price for its new drug. <blockquote class="tr_bq"> Yet it costs each patient $307,000 a year to take two Kalydeco pills a day - a price borne by taxpayers through Medicaid and other government programs and by the workers and companies who finance employee health insurance plans. In 2012, with less than a full-year on the market, Vertex sold $172 million worth of Kalydeco....</blockquote> To put that in perspective, the yearly cost of Kalydeco is approximately six times the median family income in the US. Minimizing the Harms To put it further into perspective, keep in mind that for the moment, the data from the single best published clinical trial on Kalydeco suggests that while the drug seems to help the average patient, it is not without risks, and it is certainly not a cure. The largest published trial that followed patients for a reasonable amount of time appeared in 2011 in the New England Journal of Medicine.  [Ramsey BW, Davies J, McElvaney G et al.  A CFTR potentiator in patients with cystic fibrosis and the G551D mutation. N Engl J Med 2011; 365: 1663-1672.  Link <a href="http://www.nejm.org/doi/full/10.1056/NEJMoa1105185">here</a>.]  The study followed 161 patients for 48 weeks.  The patients treated with Kalydeco on average showed improved lung function (increase of FEV1 [forced expiratory volume in one second] of 10% compared to essentially no change (-0.2 percent) in the placebo group.  Treated patients were less likely to have an exacerbation of their pulmonary disease requiring hospitalization (31% vs 49%).  So the drug certainly seems to have benefits at least in the short term.  The number needed to treat to prevent one exacerbation requiring hospitalization in one year is five, which seems quite respectable. On the other hand, the drug may have significant harms, even thought the report of the study seems to have attempted to minimize them.  The article stated <blockquote class="tr_bq">there was a lower rate of serious adverse events in the ivacaftor [Kalydeco] group than in the placebo group (24% vs 42%).   </blockquote> However, this statement depended on a rather peculiar definition of severe adverse events.  In particular, pulmonary exacerbations of cystic fibrosis were included among severe adverse events.  Yet these are, as the term suggests, manifestations of the disease that is being treated.  Reduction of pulmonary adverse events should be and was considered a measure of efficacy.  So placing exacerbations within the definition of adverse events essentially double counts these incidents.  Furthermore, the presence of these within the category of adverse events swamps out other events which may in fact be adverse results of the study drug.  If one subtracts pulmonary exacerbations and hemoptysis from the counts of serious adverse events, what remains is that patients on Kalydeco were more likely to have a serious adverse event (10%) than those on placebo (4%).  Thus the apparent number needed to harm was 17.  Thus, using this peculiar definition of adverse events appears to be a way to <a href="http://hcrenewal.blogspot.com/search/label/manipulating%20clinical%20research">manipulate the analysis</a> to minimize the apparent harmfulness of the drug. While the study did appear to show that more patient received the benefit of avoiding a hospitalization due to a pulmonary exacerbation of cystic fibrosis than had a serious adverse event, the study did not show that the drug had overwhelming efficacy, or tremendous safety.   The study did not last long enough to show long term advantages, or to rule out rare but severe side effects. This is the only drug available of this type, and it may well provide benefits that outweigh harms, at least over the short-term, but it is not a wonder drug, and the rationale to charge so much money for it, other than that is what the market will bear, is not obvious.   A Windfall for Corporate Executives, and a Question of Insider Trading The drug's approval has lead to a lot of financial success for stock holders, particularly Vertex executives: <blockquote class="tr_bq"> Last month, news about success of the drug sent Vertex stock soaring more than $6 billion in a single day. That surge and a similar one last May allowed top executives and directors of the company to sell stock and options worth more than $100 million.</blockquote> The executives' lavish windfall occurred in somewhat questionable circumstances: <blockquote class="tr_bq">Vertex and its executives have benefited greatly from Kalydeco and foundation funding. Last May, when <a href="http://investors.vrtx.com/releasedetail.cfm?ReleaseID=670755" target="_blank">Vertex</a> and the <a href="http://www.cff.org/aboutCFFoundation/NewsEvents/2012NewsArchive/5-7-Phase-2-Kalydeco-VX-809-Interim-Data-Results.cfm" target="_blank">foundation</a> reported positive results from a clinical trial involving Kalydeco and whether it could be combined with another drug to treat more patients, the company's stock jumped more than 70%, from $37.41 to $64.85 a share. Five executives and two directors sold off more than $35 million in shares, mainly at prices from about $55 to $64 a share. Many of the options were priced between $16 and $40 a share. Three weeks later, the <a href="http://investors.vrtx.com/releasedetail.cfm?ReleaseID=677520" target="_blank">company said it overstated</a> the effectiveness of the drug in that trial and the stock dropped about $7 a share, ultimately falling back under $40 by December. Vertex spokeswoman Nikki Levy said in an email the company does not comment on individual stock sales.  She said the executive stock sales either were part of pre-existing 10b5-1 plans or followed the company's internal stock trading policy. A 10b5-1 plan is an automatic trading tool in which executives specify timing or pricing of sales to avoid questions about inside information the seller had at the time. U.S. Sen. Chuck Grassley (R-Iowa) <a href="http://www.grassley.senate.gov/about/upload/2012-06-07-CEG-to-SEC-Vertex.pdf" target="_blank">wrote a letter</a> to the U.S. Securities and Exchange Commission, saying it could appear that Vertex executives took advantage of the situation, knowing the overstated clinical trial results would eventually be made public and cause the stock price to drop. The letter said the stock sales were troubling for industry investors and the federal government, which pays billions of dollars a year for drugs through Medicaid and Medicare. Judith Burns, a spokeswoman for the SEC, declined to comment on the Grassley letter. Last month, the company's stock shot up more than 60% again, from $52.87 to $85.60, after <a href="http://investors.vrtx.com/releasedetail.cfm?ReleaseID=757597" target="_blank">positive early data</a> from a clinical trial of Kalydeco and another drug it is developing with funding from the foundation. On April 19, the day after the news was released, the company's market value jumped by more than $6 billion. That same day, two company executives sold huge chunks of stock options. Executive Vice President and Chief Financial Officer Ian Smith alone sold 745,685 shares worth more than $60 million. Most shares were sold at $81.50, with options purchased from $29 to $39.</blockquote> So at least Senator Grassley raised the question of whether Vertex executives may have taken advantage of their insider knowledge to personally profit even more from this useful but not miraculous drug meant to be used on vulnerable patients. Keep in mind that those huge trading gains were layered on top of already lavish compensation.  The 2013 Vertex <a href="http://investors.vrtx.com/secfiling.cfm?filingID=875320-13-13&CIK=875320">proxy statement</a>, the total compensation and stock holdings of its top executives in 2012 was: Jeffrey M Leiden, CEO                                $5,656,684      441,160 shares Ian F Smith, CFO                                           $3,109,193      795,434 Stuart A Arbuckle, Chief Commercial Officer   $4,808,697         66,477 Kenneth L Horton, Chief Legal Officer             $2,802,735         41,161 Peter Mueller, Chief Scientific Officer              $3,614,890        997,651 Matthew W Emmens, Former CEO                  $6,896,029    1,486,748 David T Howton Jr, Fomer Chief Legal Officer $3,447,898           3,105 So the top executives of Vertex, while their company got $75 million from an ostensible charity to develop what became an extremely expensive drug, got very rich in the process, although how they got rich may yet attract attention from the SEC. A Windfall for the Cystic Fibrosis Foundation and its Executives Furthermore, it appears that the supposedly charitable Cystic Fibrosis Foundation also made quite a bit of money, and its executives, while not getting quite as rich as their associates in Vertex, did not do at all badly. As the Journal Sentinel noted, <blockquote class="tr_bq">the foundation cashed in by selling future royalties from the drug to an undisclosed firm for $150 million.</blockquote>Keep in mind that since the CFF was to receive royalties, the money it gave for drug development was not a grant, but an investment. Furthermore, according to the Foundation's 2011 form 990 (the latest available), its executives received the following total compensation from the foundation and its affiliated organizations: Robert J Beall, CEO                                                      $1,073,725 C Richard Mattingly, COO                                              $759,799 Preston W Campbell MD, Exec VP of Medical Affairs     $736,031 Vera H Twigg, CFO                                                         $445,183 Ann Palmer, Senior VP                                                     $276,029  Daniel Klein, Senior VP                                                    $277,300 Gregory August, CIO                                                       $262,698 David McLoughlin, Senior VP                                          $316,122 Glen Goldmark, VP                                                          $253,215 Amy DeMaria, Senior VP                                                 $241,672 Mary Dwight, Senior VP                                                   $246,232 These compensation amounts may be much lower than the gargantuan pay dealt out to for-profit health care corporate executives, but they are very high for those who are managing a supposed charity meant to help vulnerable patients. A More Complex Web While profiting from its underwriting of the development of Kalydeco, the CFF also sponsored guidelines about the treatment of cystic fibrosis, with not unexpected results. <blockquote class="tr_bq">Last month, new treatment guidelines for doctors who handle cystic fibrosis patients strongly recommended use of Kalydeco. The guidelines were funded by the Cystic Fibrosis Foundation. Three of the 10 authors of the guidelines were employees of the foundation and four others worked for institutions that received grants from the foundation. The chairman, Peter Mogayzel, is a professor of pediatrics at Johns Hopkins University, which foundation tax records show received more than $2 million in grants from 2009 through 2011.</blockquote>These guidelines hardly look like they would be deemed trustworthy according to the Institute of Medicine's standards (look <a href="http://hcrenewal.blogspot.com/2012/11/what-if-institute-of-medicine-wrote.html">here</a>).  However, they certainly look like they might help sell ivacaftor, and hence help justify higher pay for the executives listed above. Criticism of Venture Philanthropy Merriam-Webster online <a href="http://www.merriam-webster.com/dictionary/charity">suggests</a> one definition of a charity is an institution funded by a gift for public benevolent purposes. The Cystic Fibrosis Foundation appears to be such a charity, but now one that functions more as a venture capitalist.  In this case, it did provide venture capital to develop a new drug for its disease of interest.  However, the foundation appeared to have done so not to provide public benevolence, but to generate a  return on its investment.  It is using that return not for public benevolence, but to provide more venture capital to other drug companies, presumably with the goal of getting further returns.  Meanwhile, its executives make generous compensation for people who are supposed to be running a charity.  Finally, the drug has an astronomical price, and its pricing has helped make investors in and executives of the company supported by the CFF very rich. This has not been lost on some dissidents, per the Journal Sentinel, <blockquote class="tr_bq">'The concept of a charitable, not-for-profit taking on the role of a venture capitalist is new and difficult to digest at the moment,' said Paul Quinton, a cystic fibrosis researcher at the University of California, Riverside and the University California, San Diego. Quinton, who has cystic fibrosis, is one of 28 doctors and scientists who sent a <a href="http://media.jsonline.com/documents/CFletteruse.pdf">letter</a> to Vertex calling the price of Kalydeco 'unconscionable.' A copy of the letter was provided to the Journal Sentinel and MedPage Today. Kalydeco, the doctors wrote, costs 10 times more than what a typical cystic fibrosis patient pays in total drug costs. 'This action could appear to be leveraging pain and suffering into huge financial gain for speculators, some of whom were your top executives who reportedly made millions of dollars in a single day,' the doctors wrote.</blockquote> Vertex responded with seeming contempt, <blockquote class="tr_bq"> Since receiving the letter last July, Vertex has raised the annual price of Kalydeco another $13,000.</blockquote> The funding by the supposedly charitable CFF of guidelines that promote the drug it financed has also drawn criticism, <blockquote class="tr_bq"> 'It is definitely a conflict of interest,' said Eric Campbell, an associate professor at Harvard Medical School who has researched conflicts of interest in patient treatment guidelines. In the past, drug companies have been criticized for funding treatment guidelines that recommend their drugs. It is no different if the guidelines are funded by a foundation that gets royalties from drug sales, Campbell said.</blockquote> Also, <blockquote class="tr_bq">'It is concerning that the organization now stands to profit when patients choose to use the drug,' ... [Prof Lisa Schwartz of Dartmouth Medical School] said. 'Financial entanglement with industry, even with the best of intentions, creates a conflict of interest.' </blockquote> However, the very well paid CEO of the CFF pooh poohed concerns about conflicts of interest, <blockquote class="tr_bq">Robert Beall, president of the Cystic Fibrosis Foundation, said that without its financial support, drugs such as Kalydeco would never get to patients. Neither insurance companies nor patients have voiced any concern to him about conflicts of interest, he said. 'They applaud the decision and our business model to the utmost,' Beall said. 'The patients are excited.' He rejected the idea of using the royalty money to help patients pay for the medical care, noting that the foundation needed the money to entice drug companies to get involved in risky cystic fibrosis drug research.</blockquote> One wonders when patients would ever have the opportunity to voice any "concerns" to Mr Beall, who also disdained any restraints on the price of the drug, <blockquote class="tr_bq">.Beall said the foundation did not ask Vertex to price the drug more affordably. 'That would have been a deal-breaker,' he said.</blockquote>That seems to put making money ahead of patients' needs.  Was this venture philanthropy, or vulture philanthropy?   Summary We have discussed numerous cases in which non-profit health care organizations seem to put short term revenue ahead of their missions to further patients' and the public's health.  In this case, a disease specific charity seems to have foregone its mission to directly support patient care, teaching, or research to provide venture capital, an action which lead to a profit for the organization, huge profits for a drug company, large rewards for the charity's executives, and even greater wealth for the drug company's executives.  It did also lead to the marketing of a beneficial drug, but at a breathtaking price that no middle-class patient without exceedingly good insurance could afford.   Where is the public benevolence here?  Where is the charity?  How much is about patients and how much is about  making insider executives wealthy?  As we have said until blue in the face, true health care reform would ensure health care organizational leadership that upholds the health care mission, not their personal finances.

Is the Cystic Fibrosis Foundation a Charity or a Venture Capital Firm?

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Pay-for-performance has been a persistently fashionable mantra for health care business leaders and policy advocates, particularly as applied to physicians to control costs and perhaps even improve quality.  We have been highly critical of current methods proposed to measure performance and tie pay to it (e.g., <a href="http://hcrenewal.blogspot.com/2006/09/p4p-band-wagon-rolls-but-in-whose.html">here</a>), and other bloggers, notably Dr Robert Centor at DB's Medical Rants, have vigorously pursued this issue (e.g., <a href="http://www.medrants.com/archives/5837">here</a>). It is beyond ironic that meanwhile, the pay of health care organizations' leaders seems less and less related to their performance.  For example, in a recent series on local executive pay in the Boston Globe <a href="http://www.boston.com/business/articles/2010/10/03/executive_share/">there were</a> these examples: Hologic <blockquote>Hologic Inc. gave its chief executive, John W. Cumming, a $1.5 million “retention payment’’ as part of his $10.5 million pay package last year. He was promised the payment in mid-2006 if he remained with the company through the end of 2008. At the same time, the Bedford women’s health care products company posted a $2.2 billion loss, largely resulting from a big write-down related to the 2007 purchase of Cytic Corp. Cumming has since stepped down as chief executive, but remains chairman. Hologic declined to comment.</blockquote> Charles River Laboratories <blockquote>Charles River Laboratories International Inc. chief executive James C. Foster received $1.3 million in deferred compensation in a year when the company disclosed plans to cut 300 workers, or 3 percent of its workforce. Charles River declined to comment.</blockquote> Note that a Charles River board member was one of the authors of an Institute of Medicine report advocating P4P for physicians, as we posted <a href="http://hcrenewal.blogspot.com/2006/09/p4p-band-wagon-rolls-but-in-whose.html">here</a>. Ah, the irony. Boston Scientific <blockquote>New Boston Scientific Corp. CEO J. Raymond Elliott started midyear and received a $1.5 million bonus. Boston Scientific posted a $1 billion loss last year. </blockquote>Elliott got a lot more than that, as reported in a <a href="http://www.boston.com/business/articles/2010/10/03/like_sports_stars_top_business_players_command_big_bucks/">companion Boston Globe article</a>: <blockquote>Elliott, whose experience includes running another medical device company, Zimmer Holdings Inc., was paid a performance bonus of nearly $608,000 last year, in addition to a $1.5 million signing bonus and $29.4 million in stock awards and options.</blockquote> Meanwhile, the company's losses continue to mount: <blockquote>And in February, Boston Scientific agreed to pay $1.7 billion to settle patent infringement charges from rival Johnson & Johnson, making it likely the company will post another loss this year.</blockquote>Note that Boston Scientific has had its ethical as well as financial failings, especially involving the case of the faulty implantable cardiac defibrillators, which resulted in settlements of civil lawsuits alleging that it hid data about the defects, and two guilty pleas by a company subsidiary to charges that it did not notify the FDA about these problems (see post <a href="http://hcrenewal.blogspot.com/2010/04/who-guards-guardians-case-of-boston.html">here</a>). Vertex Pharmaceuticals Inc <blockquote>At Vertex Pharmaceuticals Inc., chief Matthew W. Emmens, who took over five months into the year, received $2.8 million performance award last year, a year in which the company lost $642 million.</blockquote> He actually got a lot more than that, too, as per the second Globe article: <blockquote>His pay package included more than $15 million in restricted stock and options. </blockquote> Cephalon At the same time, an <a href="http://articles.latimes.com/2010/oct/03/business/la-fi-hiltzik-20101003">op-ed </a>by Michael Hiltzik in the Los Angeles Times noted that a health care company had the most unfairly paid CEO, according to "veteran compensation consultant Fraef Crystal," <blockquote>Cephalon Inc., ... CEO, Frank Baldino, Crystal identifies as the most overpaid chief executive in his database. (Baldino's $11.1 million pay last year is 832% of what would be fair, Crystal calculated.)</blockquote> Note that Cephalon settled charges of off-label promotion of narcotics for over $400 million in 2008 (see post <a href="http://hcrenewal.blogspot.com/2008/09/whats-drug-addicts-life-worth-to.html">here</a>). Summary So the general rule seem to be that top executives of health care organizations make large, sometimes enormous amounts of money, and that occurs regardless of company or personal performance. The riches keep flowing even if the company loses millions or billions, or lays off significant chunks of its workforce. Hiltzik identified corporate executive pay as: <blockquote>the No. 1 scandal of American business — executive pay that bears scant relationship to what these people are worth. The CEO pay curve has been galloping out of control for so long that it has achieved the status of a cliche. In 1965 the average U.S. CEO earned 24 times the pay of the average worker. Four decades later the ratio was 411 to 1..</blockquote> Furthermore, <blockquote>The dismal reality of CEO pay is that it comprises two problems, not one. Top executive pay generally is too lavish in the U.S. no matter what performance standard you apply. Good performance or bad, the pay disparity between the CEO and the rank and file is larger than in any other country, contributing to rising income inequality and to its consequent social pathologies. It's also based on several flawed assumptions, argue Jay Lorsch and Rakesh Khurana of Harvard Business School in a recent article for Harvard Magazine. One is that money is the only motivating factor behind executive performance. Another is that shareholders are the only stakeholders in corporate performance whose interests matter. This is a relatively recent paradigm, they observe; as late as 1990 business groups recognized the importance of a corporation's responsibility to stakeholders such as employees, customers, suppliers and the community. The flaw in the latter assumption is that it ties CEO pay to stock prices, which they can't influence on their own. But the picture of the CEO as virtually the sole auteur of a corporation's fate permeates American society. Listen to a Meg Whitman campaign ad talking about 'the EBay Meg created.' If you pay attention you may catch a reference to the 15,000 employees who were there when she left, at least a few of whom must have had something to do with the company's success.</blockquote> A further problem is that the pay of top corporate leaders is generally set not by the share-holders, that is, the owners of the company, but by boards of their cronies, many of whom are also members of the CEO club.  As Hiltzik noted, <blockquote>although most corporate boards make a show of placing pay decisions in the hands of a committee of 'independent' directors, the members are almost always current or former top executives themselves, members of a tight club.</blockquote> By the way, as we posted <a href="http://hcrenewal.blogspot.com/2009/09/safety-net-medical-center-ceo-gets.html">here</a>, a member of both the Hologic and Vertex boards was a former hospital CEO who got a generous retirement package despite its financial straits. So while their policy flacks continue to push pay-for-performance for physicians, maybe health care corporate leaders should set an example by embracing real pay for performance themselves. To repeat, again, again, again,.... Until they do, top executives remain really different from you and me.  If we do not hold health care leaders accountable, if we do not provide them with incentives that are proportional to their actual performance, why should we expect health care organizations to do any more than satisfy their leaders' self-interest?

Pay for What? - Redux: Surrealistic Pay for Health Care Corporate CEOs

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