Taxpayers fund a cancer study, but the profit will go to a private company

Enthusiasm for cancer immunotherapy is soaring, and so is Arie Belldegrun's fortune.

Belldegrun, a physician, co-founded Kite Pharma, a company that could be the first to the market next year with a highly anticipated new immunotherapy treatment. But even without a product, Belldegrun has struck gold. His stock in Kite is worth about $170 million. Investors have profited along with him, as the company's share price has soared to about $50 from an initial price of $17 in 2014.

The results reflect widespread excitement over immunotherapy, which harnesses the body's immune system to attack cancer and has rescued some patients from near-certain death. But they also speak volumes about the value of Kite's main scientific partner: the U.S. government.

Kite's treatment, a form of immunotherapy called CAR-T, was initially developed by a team of researchers at the National Cancer Institute, led by a longtime friend and mentor of Belldegrun. Now Kite pays several million dollars a year to the government to support continuing research dedicated to the company's efforts.

The relationship puts U.S. taxpayers squarely in the middle of one of the hottest new drug markets. It also raises a question: Are taxpayers getting a good deal?

Defenders say that the partnership likely will bring a lifesaving treatment to patients, something the government cannot really do by itself, and that is what matters most. Critics say that taxpayers will end up paying twice for the same drug — once to support its development and a second time to buy it — while the company reaps the financial benefit.

"If this was not a government-funded cancer treatment — if it was for a new solar technology, for example — it would be scandalous to think that some private investors are reaping massive profits off a taxpayer-funded invention," said James Love, director of Knowledge Ecology International, an advocacy group concerned with access to medicines.

The debate goes squarely to one of the nation's most vexing challenges: rising health care and drug prices. Kite is one of a growing number of drug and biotech companies relying on federal laboratories. Analysts expect the company to charge at least $200,000 for the new treatment, which is intended as a one-time therapy for patients. While the law allows the government to demand drug-price concessions from its private-sector partners, the government has declined to do so with Kite and generally disdains the practice.

Insisting on lower prices, federal researchers say, would drive away innovative partners that speed the drug-development process and benefit patients. But with the government doing so much pivotal research, others say the private sector cannot afford to walk away.

"The market is so reliant on the knowledge and know-how that comes out of the government and academic labs," said Dr. Aaron Kesselheim, director of the Program on Regulation, Therapeutics and Law at Brigham & Women's Hospital in Boston. Price curbs, he said, "would not suddenly lead to a total abandonment of this pipeline. It couldn't possibly."

[Harnessing the immune system to fight cancer, even when standard treatments fail]

Drugmakers would be especially unlikely to turn away from immunotherapy, where the promising science has set off a "gold rush mentality," according to Mark Edwards of Bioscience Advisors, which tracks pharmaceutical licensing deals.

The National Institutes of Health, the parent agency of the National Cancer Institute, has about 400 cooperative research agreements with companies, and licenses hundreds of patented inventions for private-sector development.

Kite executives and national health officials characterize their partnership as a model arrangement in a system established by Congress three decades ago. The system has given birth to the cancer drug Taxol, the AIDS drug Prezista, two cervical cancer vaccines and a widely used test for HIV infection, among other innovations.

Kite's first drug, called KTE-C19, could help thousands of patients each year in the United States who have certain blood cancers. If it succeeds, it could generate sales of $1 billion to $2 billion annually, according to Wall Street analysts, making it among the most lucrative drugs to come from government research.

But the government's share of any Kite success would be modest, much lower than some academic research groups have wrangled in immunotherapy deals worth hundreds of millions of dollars. Federal officials counter that the reward to the taxpayer is not money but the drug itself.

"This is exactly the way things should work," said Dr. Steven Rosenberg, who has led the surgery branch at the National Cancer Institute for 42 years and led development of Kite's drug. Such partnerships, he said, are "absolutely essential or many discoveries will not see the light of day."

Moreover, government officials say, companies in such deals must take significant financial risks and expenditures on their own, without any guarantee that the drug will be approved. Kite says it has spent more than $200 million on research and development, including running larger clinical trials than those conducted by the cancer institute, and recently spent about $30 million to build a factory that will be able to make treatments for up to 5,000 patients a year.

Setting the price of the drug, Rosenberg said, "is for the marketplace."

A public-private partnership

Like many business deals, this one began with a personal relationship — in this case between Rosenberg and Belldegrun.

After finishing medical school in his native Israel, performing surgery in helicopters for the Israeli armed forces, and completing residency at Brigham & Women's Hospital, Belldegrun became a research fellow for Rosenberg at the NCI. It was 1985, and Belldegrun was put to work on a new project of Rosenberg's — extracting tumor-fighting immune cells from cancer patients, multiplying them in the laboratory, and putting them back in.

"He was one of the more outstanding fellows to come through," said Rosenberg, 76, who is widely considered a cancer research luminary.

When the fellowship ended in 1988, Belldegrun became a prominent surgeon at the University of California, Los Angeles, but the two men stayed in touch. Eventually, Belldegrun, 67, got the entrepreneurial bug. He co-founded a biotech company, Agensys, which was acquired by a bigger company for more than $500 million. He was also involved with Cougar Biotechnology, which developed the prostate cancer drug Zytiga and was acquired by Johnson & Johnson for $1 billion in May 2009. A month later, Belldegrun formed Kite with a group of colleagues and investors to pursue cancer immunotherapy.

That same month, a Florida marine contractor named Eric Karlson, whose non-Hodgkin lymphoma was advancing despite four treatments, became the first patient treated by Rosenberg with what would eventually become KTE-C19. The treatment entailed removing some of Karlson's immune system T cells from his blood, genetically engineering them to recognize and fight his cancer, multiplying the T cells to huge numbers in the laboratory and transferring them back into his body. After two such treatments, Karlson remains alive and cancer-free eight years later.

Kite initially thought it would pursue an approach to immunotherapy known as cancer vaccines, but in 2010, Belldegrun visited Rosenberg and was shown the X-rays of Karlson and of a second patient.

Belldegrun was bowled over. "I had no doubt that this is going to be a drug and, more than that, it will become a platform for multiple products," he recalled. "We never looked back."

Over the next two years, the National Cancer Institute worked out a deal with Kite that was signed in 2012. It was the first of eight contracts between the government and the company that generally take two forms.

In one type of contract, Kite licenses patented inventions and agrees to pay the government royalties, roughly 5 percent of sales of any commercial product arising from a particular patent. However, there is no such license specifically for KTE-C19 because the underlying treatment was not patented by the NCI, so royalties will be minimal.

Officials say the agency did not apply for a patent because the treatment was similar to what others had been developing. Also, at the time the treatment was created, in 2007, immunotherapy was considered to have dim commercial prospects.

"Back then, we didn't even think about commercial aspects," said Dr. James N. Kochenderfer, a scientist at the agency who designed the treatment while working in Rosenberg's group.

Under the type of contract known as a cooperative research and development agreement, Kite provides money to the NCI to support research. Kite is paying $3 million a year to Rosenberg's lab and has provided $7.5 million to it in total since 2012. Based on its regulatory filings, Kite is paying $7.8 million a year for research agreements and licenses in total, with at least $4 million of that going to the cancer institute and the rest to academic or corporate partners.

The taxpayer has invested, too. Rosenberg estimated that the government has spent roughly $10 million over the years on what has become KTE-C19. He said Kite's $3 million a year is about equal to the taxpayer funding in that area and has helped speed research.

These days, researchers from Kite and the cancer institute, typically including Rosenberg and Belldegrun, confer by conference call every other Thursday for 90 minutes. Kite employees have spent long periods at the NCI, learning how to manufacture the therapy and how to treat patients in advance with chemotherapy.

"We shouldn't underestimate the value and the importance of NIH, not only to Kite but to the whole field of engineered T-cell therapy," Belldegrun said. When Kite signed its first deal with the cancer agency, he said, it "tapped into six years of monumental work that they had done."

Some immunotherapy competitors marvel at the company's coup in tapping into the agency's expertise. "They got 20 years of research all together in one scoop," said Dr. Carlos Paya, chief executive of Immune Design, which is pursuing a different approach.

But government officials say few, if any, other companies were interested in the technology at the time Belldegrun came calling. Rosenberg said that before Kite, a few companies, including Johnson & Johnson, had looked at an earlier version of his technology but were wary because treatment involved processing each patient's cells.

[The list of cancers being taken down by immunotherapy keeps growing]

Government-developed technology available to be licensed to companies is posted on the website of the National Institutes of Health. And when the agency intends to grant a license to a particular company, it publishes that in the Federal Register, inviting public comment and possible competing offers. Both steps were taken in the case of Kite, officials said.

Kite did not get everything the cancer institute has developed in the field. Some other companies, including Opus Bio and Bluebird Bio, got rights to some products, in part because the companies had special expertise that the agency's researchers desired. But Kite seems to have gotten the balance of them, and NCI technology accounts for the majority of its pipeline of possible products, though the company is diversifying.

Rosenberg professes no interest in the business side of the Kite relationship. He does not own stock in any company, even Kite, though he could get up to $150,000 a year in patent royalties if some of Kite's efforts pay off.

Belldegrun, in contrast to his mentor, has commercial flair. He is known for his sharp business suits, lives in the Bel-Air neighborhood of Los Angeles, and seems as comfortable on Wall Street or high society as in the operating room.

Kite's relationship with the NCI is an important part of its appeal to investors. In some presentations, Belldegrun has shown a photograph of himself with Rosenberg in their younger days. And he persuaded Rosenberg to speak at Kite's first big meeting for investors in June 2015, the only time he has ever spoken to Wall Street.

In emails obtained through a Freedom of Information Act request by Knowledge Ecology International, Belldegrun praised Rosenberg's talk and sent him copies of investment reports from the conference written by Wall Street analysts.

"Thank you for making the effort to come to NY," Belldegrun wrote. "I heard only raving reviews about your presence and presentation."

A ‘reasonable’ question

The reliance of private companies on government-funded research goes well beyond obvious cases like Kite. In many instances, companies work with universities or medical centers that, in turn, have been funded from the $32 billion annual budget of the National Institutes of Health.

Kite's two main competitors, Novartis and Juno Therapeutics, for instance, derived similar immunotherapy treatments largely from academic institutions, developed at least in part with government funding. Novartis has a relationship with the University of Pennsylvania, and Juno with the Memorial Sloan Kettering Cancer Center, the Fred Hutchinson Cancer Research Center and Seattle Children's Hospital.

"For the most important drugs you'll see some public-sector involvement," said Bhaven Sampat, an associate professor of health policy and management at Columbia University. He was one author of a study that found that 9 percent of all drugs approved between 1988 and 2005 were based directly on a patent held by the public sector. But 47.8 percent of the drugs relied at least indirectly on some federally funded research.

The figures were higher for more medically important drugs: 17.4 percent had a direct public-sector patent, while 64.5 percent had at least an indirect public-sector influence.

These figures are up sharply from before the 1980s. Such partnerships and licensing deals were encouraged by the 1980 Bayh-Dole and Stevenson-Wydler Acts, and the 1986 Federal Technology Transfer Act. The laws are credited with jump-starting the biotechnology industry.

But from the beginning, some people questioned whether taxpayers were getting a bad deal.

[New tricks in canine cancer aim to treat humans, too]

Perhaps the best-known drug developed from a cooperative research and development agreement — the cancer drug Taxol — was the subject of several congressional hearings in the early 1990s that investigated whether the drug's maker, Bristol-Myers Squibb, charged too much and whether the government recouped enough of its investment. In the end, the pricing was left unchanged.

The NIH argues that if it imposes pricing restrictions, it won't get partners. In fact, in 1995, it struck from its negotiating tactics a goal that prices be "reasonable."

"Companies will not take technologies from us if we say the government will decide in the future what the price will be," said Mark Rohrbaugh, who ran the technology transfer office at the institutes from 2001-13 and is now an adviser to the agency. After the "reasonable price" clause was struck, he said that there was a threefold increase in partnership deals.

The NIH can collect royalties from successful products to help offset the costs of the research, but these royalties have been small, amounting to $137 million in the last fiscal year from 870 licenses, with the bulk of the money coming from a small number of drugs.

"We're not preoccupied with financial value," Rohrbaugh said. "Our mission is treatment of people and improving public health."

In that regard, the government's bet on a small company like Kite, which might have seemed risky, appears to be paying off so far. Belldegrun has largely delivered on promises to raise money, assemble an experienced staff, build the factory, conduct clinical trials and begin to apply for regulatory approval. Once considered the underdog to the giant Novartis and richer Juno, Kite might be the first of the three to reach the market.

Academic centers and companies often drive harder bargains in licensing technology. In some cases, academic centers own a stake in a company they license technology to, allowing them to reap a financial windfall if the company does well. Both the Hutchinson cancer center and Sloan Kettering have owned stock in Juno and are entitled to substantial payments — up to $350 million and $150 million — if Juno's stock reaches certain levels.

The NIH does not take equity positions in companies to avoid an appearance of a conflict of interest. So to critics of the government deals, drug prices are crucial to understanding taxpayer value. After all, they ask, is a drug truly widely available — which is what the government says is its measure of success — if it costs too much for some people?

Rachel Sachs, an associate law professor at Washington University in St. Louis and expert in innovation policy, said the government had every right to seek price concessions. She noted that the government, through Medicare and Medicaid, was effectively buying its inventions back from itself. "The public is paying for the research and to the extent that many people, if not most, will pay through public insurance, we're paying again," she said.

Hillary Clinton, in her campaign for president, promised to set new rules for federal support of research so that Americans "get the value they deserve" for the money taxpayers spend in supporting research. It is not clear how President-elect Donald Trump will approach these issues; he has said he favors reducing health care costs, but Republicans, who control Congress, too, have opposed government involvement in price setting.

One mechanism to control pricing exists. It is called march-in rights, and it lets the NIH take back control of a patent on an invention made with federal funding if the drug is not being made available to the public on reasonable terms. The tool has gone unused.

This year, Knowledge Ecology International and another advocacy group, the Union for Affordable Cancer Treatment, petitioned the agency to exercise march-in rights on Xtandi, a prostate cancer drug that was developed by federally funded researchers at UCLA. It said the price in the United States of about $129,000 a year, two to four times that in other developed countries, meant the drug was not reasonably available. The effort was supported by other public interest groups and some Democratic members of Congress.

UCLA made more than $500 million by selling its royalty rights to the drug. But the NIH declined to exercise its march-in rights on Xtandi, arguing that it was not qualified to judge whether a drug's price is reasonable and that a high price does not mean a drug is not being made available to the public.

"NIH has made it clear that its job is not to decide prices of drugs, period," Rohrbaugh said.

Kite says it has not decided what to charge for KTE-C19, but Belldegrun hinted that Kite's therapy might be relatively expensive because ideally it would be a single treatment that would cure the patient, not a drug that would have to be taken continuously. He added that Kite would take steps to make sure that everyone who needed the product could get it.

Meantime, the relationship between Kite and the National Cancer Institute is expanding to develop treatments for other cancers, including one technique Rosenberg thinks could be used to attack solid tumors like colon, breast and lung cancer.

"The potential for broad applicability is huge," he said.

That could mean many lives saved and maybe more billion-dollar drugs for Kite and its investors, with the U.S. taxpayer right in the middle of the deal.