Nature Medicine: Mission Control: Drug Developers Test the ‘Benefit Corporation’ Business Model

Summary: Nature Medicine takes a close look at how various drug development organizations are creating public benefit corporations instead of traditional for-profit business models. The article highlights MAPS as a leading example of a non-profit organization creating a public benefit corporation to advance a strategic mission. The MAPS Public Benefit Corporation (MPBC) was founded in January 2015 to manage prescription sales of MDMA, a taxable activity not possible with MAPS’ 501(c)(3) designation. MPBC is a wholly owned subsidiary of MAPS. Income collected from prescription sales of MDMA will help to fund MAPS’ ongoing psychedelic research and educational projects.

Originally appearing here.

The outsized role that money can have in drug development has become a hot-button issue. One July 2017 working paper found, for example, that some of the largest pharmaceutical companies in the world spend more money buying back shares in their own company and paying dividends to shareholders than they spend on core research and development. The report, entitled ‘US Pharma’s Financialized Business Model,’ comes from the Institute for New Economic Thinking, an economics think tank in New York City. It found that the 18 drug companies in the S&P 500 Index spent a combined $516 billion on these so-called share buy-backs and dividend payments from 2006 to 2015, a full 10% more than the $465 billion that they collectively spent on researching and developing new drugs.

Part of the problem is the theory of shareholder primacy, which holds that the interests of shareholders in a company take priority over those of all other corporate stakeholders, such as staff, consumers or the community. Legal precedent has established that shareholders can intercede in the decisions that corporations make, including using litigation (and threats of it) to pressure company directors to pursue strategies that shareholders think will bring in the highest monetary returns.

Companies fearful of lawsuits from dissatisfied shareholders may replace directors who fail to please this contingency. But a new business structure has emerged in the US—one whose proponents say can offer some protection against overeager shareholders.

Since 2010, 33 states in the US have passed legislation making it possible for companies to incorporate as ‘public benefit corporations.’ This status requires a company to write its mission statement into the company’s official charter. Whether that mission is to make products or to serve a community, its inclusion, in theory, provides a degree of legal protection against shareholder primacy; because a company’s goals are clearly stated for investors to read before they buy its shares, it could make it harder for shareholders to sue the company for making good on its stated long-term aims at the expense of short-term profit. All other policies, such as employment law and tax rates, are exactly the same as for a regular corporation.

Well-known benefit corporations include the crowdfunding platform Kickstarter and the social-media-management platform Hootsuite. Now, a handful of benefit corporations have arisen in the biomedical space. That includes Beta Bionics, the brainchild of Ed and Serafina Raskin, Ed Damiano and Jeff Hitchcock. They formed the company with the objective of developing a bionic pancreas: a wearable device that can autonomously monitor and control type 1 diabetes by delivering insulin and glucagon. They decided to register Beta Bionics as a benefit corporation in Massachusetts. “This way, we could control the company’s mission and vision without being subservient to the interests of investors first and foremost,” Damiano says. “We could put the best interests of the type 1 diabetes community at the heart of every business and management decision.”

The formation of benefit corporations is going global, with moves under way in Australia, Argentina and other countries to introduce legislation similar to edicts already in place in parts of the US. But although benefit corporations are becoming more established, questions remain about whether this type of incorporation tool will work for drug development.

Huge upfront costs are needed to take drug candidates from lab to patient, and some venture capitalists looking primarily for financial returns might be put off by companies with declared ‘benefits over profits’ missions, according to Robert Field, a healthcare policy and regulation researcher based at the Drexel University Dornsife School of Public Health in Philadelphia. “However, there is a growing number of socially conscious investors who may be attracted to the benefit-corporation concept,” he says. “It is yet to be seen whether there are enough of them to enable this sector to thrive.”

Patients over profits

As Beta Bionics CEO Ed Damiano and his partner spoke with potential investors, he says, it became clear that traditional investors had mainly a profit-making agenda, and were likely to try to persuade Beta Bionics to license out their technology rather than keeping it in-house for patients. In a search for more like- minded investors, at first, Beta Bionics turned to crowdfunding, raising a total of $1 million from more than 700 individual donors through the platform Wefunder, which, as it happens, is a benefit corporation as well. But the choice to become a benefit corporation has not blocked Beta Bionics from attracting investment from big names: the company has received a combined $10 million from pharmaceutical giants Eli Lilly and Novo Nordisk. Raskin, Beta Bionics’s vice-president for public-benefit development and corporate strategy, says he thinks that their benefit-corporation structure is one of the reasons that the pharma giants invested in them. “We’re not going to enter into exclusive relationships with any of our investors and be beholden to one partner or another, because it’s contrary to our charter and bylaws,” Raskin says. “That’s an argument you can’t make as a traditional corporation.”

Jeremy Chen, a social enterprises, startups and nonprofits attorney based in San Francisco, California, says that benefit corporations have the potential to align investors with a company’s stated mission. “A company that wears its values on its sleeve is more likely to attract like- minded investors,” says Chen. “Sophisticated investors will perform due diligence, and should take into account the stated mission of the company before investing in a company that is incorporated as a benefit corporation.” Drug-resistance detection start-up Aldatu Biosciences, based in Boston, Massachusetts, also wanted investors that shared its vision. The three-year-old company converted from a classic corporation to a benefit corporation in 2015 to send signals to investors that it is a mission-driven company. “If we turn off some investors from the beginning, that’s fine,” says Aldatu CEO and co-founder David Raiser. This, he adds, “makes our job easier, because we won’t have to convince people later” of its commitment to fighting drug resistance, rather than chasing after bigger profit margins for the
advantage of shareholders.

Raiser and fellow former Harvard University researcher Iain MacLeod founded Aldatu Biosciences to bring their quantitative polymerase chain reaction (qPCR)-based HIV-drug-resistance tests, called PANDAA, to Africa. “It’s a central part of our mission to make sure it’s getting into labs and the hands of people who will benefit,” says Raiser, who says that they are attracting investment from mission-driven organizations. These investors include Harvard’s Office of Technology Development, which has granted their company a royalty-free license to use the PANDAA technology for patient-drug matching on the front line in low- and middle- income countries.

In a similar vein, benefit corporation Perlara was founded in 2014 in San Francisco, California, to screen massive numbers of drug candidates for rare and neglected diseases. It signed an agreement last year with Swiss pharma company Novartis, which will test a compound that Perlara has identified through its mass- screening programme as a possible treatment for Niemann–Pick type C (NPC) disease, a rare, fatal genetic disorder that causes cholesterol to build up inside cell lysosomes.

Drug rediscovery

Until now, companies choosing to structure themselves as benefit corporations have done so to bring forth technologies and medicines that are patentable and licensable. But until now, no company had launched a benefit corporation spinoff to bring unpatented controlled substances to market for medical use. Since 1986, the Multidisciplinary Association for Psychedelic Studies (MAPS) in Santa Cruz has funded and promoted research into the potential therapeutic benefits of prohibited drugs, such as MDMA, LSD and marijuana.

For decades, MAPS has relied on donations to support clinical trials, but it is now searching for alternative revenue streams that would offer more sustainable funding.

On the back of phase 1 and phase 2 clinical trials investigating MDMA, MAPS, a nonprofit organization, has set up the for-profit MAPS Benefit Corporation (MPBC). The initial aim of this spinoff will be to bring MDMA, combined with psychotherapy, to market as a treatment for post-traumatic stress disorder (PTSD). MAPS’s phase 3 trials for MDMA are planned to begin in the first half of 2018, buoyed by the US Food and Drug Administration’s decision in August to grant the drug ‘breakthrough therapy’ designation for PTSD, which means that the agency will expedite its review of the trials’ findings. If—and it’s still a big if—the trials are successful and the drug is approved for this use despite its current illicit status, then the MPBC will funnel revenue from treatment back into research to study and develop drugs such as marijuana and other psychedelics as potential prescription medicines. Executive director and founder of MAPS, Rick Doblin, says it’s the first time that a company under the benefit-corporation structure has announced an intent to generate revenue for research into prohibited drugs.

“It’s important for us to be able to say to donors that if you help us develop MDMA into a medicine, then you’re helping develop an income stream for additional research,” Doblin says. “But selling drugs for more than they cost is not something that can stay inside a nonprofit—it’s a profitable activity that should be taxed as such.”

Benefit of the doubt?

When a company launches as or becomes a public benefit corporation, it is defining itself as a specific kind of legal entity. (Self-reporting standards vary from state to state, depending on where incorporation occurs, and shareholders can sue a benefit corporation if it fails to issue a benefit report or pursue its stated purpose.) However, in addition to the ability of companies in certain US states to incorporate as a public benefit corporation, any existing company anywhere in the world can apply for ‘B-Corp certification’—even if that company isn’t yet registered in a US state as a benefit corporation. People tend to use the terms ‘benefit corporation’ and ‘B-Corp’ interchangeably, but there’s a big difference. B-Corp certification is awarded by a nonprofit company, B Lab, to companies that demonstrate high standards of transparency and accountability. Passing B Lab’s online B Impact Assessment (and paying a fee based on annual revenues) every two years allows a company to use the logo to tell the world that it is B-Corp certified. “I think pharma is ripe for benefit corporations,” says Frederick Alexander, a corporate lawyer who is now head of legal policy at B Lab. “It’s a natural fit, and I think we’ll see more of it in the not-too-distant future .”

One medical company that sees the B-Corp certified model as a good fit is Optel Group, a company in Quebec, Canada, that develops traceability systems to tackle drug and medical- device counterfeiting in the pharmaceutical industry. Founded in 1989, the company received B-Corp certification this past May. Optel Group communications and public- affairs manager Erica Boisvert says that part of their mission is to inspire other business leaders to adopt socio-responsible principles. “We wanted to prove our engagement toward our employees and other entrepreneurs, and we strongly believe that social responsibility can coexist with profitability.”