How Do Nonprofit Pharmaceutical Companies Get Funding?

What Is a Nonprofit Pharma Company?

According to Arnold Ventures, one of the benefits of a nonprofit pharmaceutical company is that they are not at the mercy of shareholders looking for higher profits. Without appeasing shareholders, nonprofit companies can focus on developing lower-cost drugs.

The United States Chamber of Commerce identifies 27 different nonprofit designations nationwide. Each assignment has different federal requirements and tax exemptions. While not all nonprofit designations suit a pharmaceutical company, existing companies fall into several categories.  

For example, the 501(c)(3) designation is for charitable organizations funded through donations, grants from private organizations or the federal government, membership dues, or a combination of those categories. The IRS notes that 501(c)(3) companies are only eligible for tax exemption if they do not financially benefit private shareholders or individuals. Additionally, these companies cannot lobby for legislative changes or operate to benefit private interests. Although companies can participate in advocacy efforts, they cannot promote legislative changes.

Other nonprofit pharmaceutical companies may opt for the 501(c)(4) designation, which applies to civic leagues, social welfare organizations, and local employee associations. Nonprofit pharmaceutical companies would fall under the social welfare organization tab.

How Do Nonprofit Pharma Companies Get Funding?

The capital required to fund a pharmaceutical company is significant, as research and development efforts can be expensive. Getting this capital can be challenging for companies considering a nonprofit model.

While big pharma — and other for-profit pharmaceutical companies — tend to rely on funding from venture capital firms for early research and development, these companies cannot focus financing on a specific disease or therapeutic area. According to a 2020 article in the Harvard Business Review, “This is where nonprofit foundations can play a critical role in raising funding and activating a broader ecosystem.”

In the drug development space, nonprofit organizations rely on donations, grants, and partnerships to sustain their organization.

In 2011, Derek Lowe, PhD, a chemist who has worked for several major pharmaceutical companies in drug discovery, published an article on funding a nonprofit pharmaceutical company. Lowe mentions the potential fallacies of accepting nonprofit contributions for developing specific drugs, noting that sponsors and donors may be enraged by a lack of success since most drugs do not make it to market.

Lowe explained that nonprofit pharmaceutical companies could fundraise at multiple points in the drug discovery life cycle; however, risk levels and stakeholder anxiety may vary at each step. For example, collecting funding for a single compound with a defined mechanism is precarious, as many clinical trials are unsuccessful. Comparatively, getting financing to research multiple therapeutic areas is relatively low risk in managing sponsors, donors, and stakeholders’ emotions.

The article in the Harvard Business Review identifies three approaches to raising capital that may be beneficial for funding nonprofit pharmaceutical companies. These strategies include creating sustainable revenue streams, venture philanthropy, and impact funds.

Revenue sustainability is a critical goal for pharmaceutical research, as expenses can be astronomical. Developing a businesslike model for replenishing revenue is an unparalleled benefit.

“The idea is for nonprofits to have more of a business orientation by looking for appropriate opportunities to leverage the organization’s assets resources in recoup some of the research-related costs. Doing so can help sustain the organization’s efforts,” noted the review.

Venture philanthropy allows donors to contribute research funding for a nonprofit and receive tax deductions while setting aside a portion of funds for for-profit investments.

Impact funds can also be used for investing in pharmaceutical research; however, this funding route is primarily used for diseases with advanced research efforts rather than new products or technologies.

Strategic partnerships can also be a critical tool for nonprofit drug development, explained Ashley Winslow, PhD, president and chief scientific officer of Odylia Therapeutics, a nonprofit biotech company, in an article published in Cell & Gene. Winslow added that nonprofit organizations can develop partnerships without concerns about competing with other companies.

Examples of Nonprofit Pharma Companies

CivicaRx is one example of a nonprofit pharmaceutical company that focuses on developing accessible and affordable medications. The company launched in 2018 as a 501(c)(4) nonprofit social welfare organization to manufacture cheap generic drugs. Hospitals and philanthropic organizations fund the company.

According to an article in the New England Journal of Medicine Catalyst, CivicaRx had multiple novel tenants in its business model. First, no one owns the company. It’s a nonstock nonprofit drug manufacturer without equity holders, dividends, or stock options. There is a stipulation that if the company or assets were sold, the proceeds would be donated to a charitable organization.

Another novel tenant is that all customers will be charged the same drug price. The company notes that as more organizations supply from Civica, the company would manufacture higher quantities and reduce costs equally for all consumers.

The organization also uniquely launched at a national level with 500 organizations involved. To combat competition from for-profit pharmaceutical companies, Civica developed contracts with a minimum viable volume, which required healthcare facilities to obtain 50% of its expected drug volume from Civica for five years on a drug-by-drug basis.

Another example of a nonprofit pharmaceutical company is Harm Reduction Therapeutics. The company is a registered 501(c)(3) organization that focuses on making naloxone available to minimize opioid overdose deaths.

Although the company was developed to combat the opioid epidemic, it is funded by one of the primary perpetrators of the epidemic: Purdue Pharma. In a press release from Purdue Pharma, the company explained that it has been financing Harm Reduction Therapeutics since 2018, when it donated $3.4 million.

In addition to funding from private donors, Harm Reduction Therapeutics has also received money from the bankruptcy court administering Purdue Pharma’s Chapter 11 proceedings.

Benefits and Drawbacks

People hearing about nonprofit pharmaceutical companies for the first time may question their purpose, especially with many for-profit companies driving innovation. However, the for-profit pharmaceutical industry has significantly driven up drug prices, making them unaffordable and unattainable for many communities.

Many organizations have looked toward nonprofit pharmaceutical companies to combat exorbitant drug costs, improve public health, and address inequities. These organizations can generate and develop more affordable alternatives while advancing pharmaceutical and life sciences research.

Winslow notes that the traditional pharmaceutical development model is not conducive to rare disease research because of the limited commercial benefits. However, a nonprofit model can focus on the clinical benefits, weighing them more heavily than potential profits.

In December 2019, Waxman Strategies published a white paper based on a discussion with multiple leaders at nonprofit pharmaceutical companies, including the following:

• Drew Quality Group
• Medicines360
• CivicaRx
• Harm Reduction Therapeutics
• BIO Ventures for Global Health
• Fair Access Medicines
• Dilingentia Strategy

According to pharmaceutical company executives, nonprofit pharmaceutical companies face challenges in multiple categories, including tax status, capital investment and funding, FDA issues, and supply chain and distribution systems.

Tax Status

Waxman Strategies explains that currently available nonprofit designations are insufficient for nonprofit pharmaceutical companies. Specifically, legal restraints under section 501(c)(3) of the Internal Revenue Code can cause funding challenges. While these companies can register as public charities, funding restrictions require them to maintain diverse funding sources, which can be difficult for niche fields such as Alzheimer’s drug development, rare disease treatments, and novel oncology approaches.

Conversely, these companies can be considered medical research organizations, but under federal law, these companies must continually partake in research, which is linked to extremely high costs.

Capital Investment and Funding

Funding and investments are also significant challenges for nonprofit pharma companies, as they cannot use traditional funding routes. For example, federal Small Business Innovation Research (SBIR) grant funding is only available to for-profit organizations.

Additionally, Waxman Strategies notes, “Despite the growing importance of corporate social responsibility (CSR) programs, large for-profit pharmaceutical companies currently have little incentive — even disincentives, in some instances — to partner or share resources with nonprofit pharmaceutical companies.”

FDA

While FDA regulations are vital for ensuring that only safe and effective drugs enter the market, user fees and application fees are a financial barrier for nonprofit pharmaceutical companies.

Supply Chain and Distribution Systems

According to multiple nonprofit pharma company leaders, current supply chain protocols are more suited for for-profit companies. “If a nonprofit pharmaceutical company were to attempt to distribute its products via these channels, wholesalers would sustain opportunity cost compared to distributing higher cost for-profit drugs. For this reason, wholesalers may be disinclined to work with nonprofit companies without imposing prohibitive fees to recoup that loss,” stated Waxman Strategies.

Strategies for Successful Nonprofit Drug Development

In her article, Winslow identified four keys to success in nonprofit drug development: sustainability, a compelling mission, focus, and adaptability.

As mentioned above, financial sustainability is vital for the success of any drug development organization, especially nonprofit pharmaceutical companies. While nonprofit companies cannot generate revenue to turn a profit, they can use any income to re-invest in the organization. Alongside a substantial donor base, re-investing revenue can help foster financial sustainability.

In addition to sustaining the company, having a compelling mission can help a nonprofit develop a robust donor base with a shared goal. It may also attract collaborations, sponsorships, or donations that can fund drug research, clinical development, and other expenditures.

Similarly, dedication to the company’s focus and commitment to improving healthcare, developing new drugs and therapies, and focusing on initiatives that advance research in the target disease can reassure funders of the company’s sincerity. A focus also ensures that funding is being allocated appropriately.

Finally, as with any business model, nonprofit pharmaceutical companies must be able to adapt to an ever-changing economy. Beyond economic adaptability, these companies must be ready to retain and apply new scientific discoveries, accommodate regulatory changes, and be resourceful while focusing on the mission or focus.

“Americans are in search of solutions to the high price of prescription drugs. Nonprofit pharmaceutical companies represent one potential alternative to the dominant for-profit drug industry, which has long prioritized the generation of profit over ensuring access and affordability. Despite their promise, however, nonprofit pharmaceutical companies face an uphill battle succeeding in the current policy environment,” concluded Waxman Strategies.