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Sunday, February 22, 2009

Voting Himself Rich: CDC Vaccine Adviser Made $29 Million Or More After Using Role to Create Market

Thirty pieces of silver By Dan Olmsted and Mark Blaxill

Dr. Paul Offit of the Children’s Hospital of Philadelphia (CHOP) took home a fortune of at least $29 million as part of a $182 million sale by CHOP of its worldwide royalty interest in the Merck Rotateq vaccine to Royalty Pharma in April of last year, according to an investigation by Age of Autism. Based on an analysis of current CHOP administrative policies, the amount of income distributed to Offit could be as high as $46 million.

There is nothing improper about receiving compensation for a patented innovation; but the extraordinary valuation placed on CHOP’s patents raises concerns over Offit’s use of his former position on the CDC’s Advisory Committee on Immunization Practices to help create the market for rotavirus vaccine -- to effectively vote himself rich.

Offit has steadfastly refused to say how much he made from the vaccine. Based on the income distribution guidelines set forth in CHOP’s current administrative policy manual (HERE) entitled “Patent and Intellectual Property Policy,” Offit’s share of this transaction -- the “inventor’s share of net income” -- would have earned him a personal distribution of 30%. In a Moody’s report dated June 2008, CHOP reported net proceeds from the Rotateq transaction of $153 million, a deal basis that would put the value of Offit’s 30% share at $45.9 million.
Although the royalty transaction amounts and current CHOP inventor shares are publicly known, several factors complicate a precise calculation of Offit’s income. Royalty Pharma paid $182 million for the Rotateq royalty stream, but CHOP reported proceeds of only $153 million. Since most universities calculate income based on net royalties, the lower number might more closely reflect the basis for calculating Offit’s income. If CHOP applied an inventor share of 30% to a transaction value of $153 million they would have then been required to distribute $45.9 million to Offit.

CHOP’s 30% policy for inventor share is consistent with the current practices of other children’s hospitals. But depending on what standard was in effect when the patents were filed and how it was applied to Offit’s proceeds, the amount could be lower. For example, the $29 million difference between the payment made by Royalty Pharma and the proceeds received by CHOP comprises 15.9% of the Royalty Pharma payment (15% is the lowest inventor share percentage we uncovered in our investigation) and could reflect the distribution to Offit, 

So although it is clear that Offit’s personal share of CHOP’s royalty transaction was large, the exact amount could range from as little as $29 million to as much as $55 million. Age of Autism chose to feature the smaller amounts in this report.

CHOP spokeswoman Rachel Salis-Silverman, contacted by Age of Autism about Offit’s income from the vaccine, first said, “I don’t even know. That’s not public information.” She initially refused to provide an e-mail to which Age of Autism could send a detailed account of how it determined Offit’s income, but subsequently sent an e-mail saying she was expecting the information.

 “We are declining comment to your questions,” she then replied after receiving our inquiry. Offit did not respond to an e-mail sent to his Children’s Hospital address.
While refusing to disclose his personal profit from this transaction, Offit told Newsweek reporter Claudia Kalb last year that he got a “small percentage” of the payment and confessed that “it’s like winning the lottery.”

The $29 million-$55 million range is consistent not only with CHOP’s published royalty arrangements but with typical medical patent standards:
-- At Boston Children’s Hospital, inventors get 25% of “net lifetime revenues” for all income over $500,000. For royalty amounts smaller than $500,000 inventors receive 45-100% of revenues.

-- At Arkansas Children’s Hospital, inventors get 35% of “net royalties” after the first $200K and 50% before that.

-- At the University of Virginia, inventors get 15% of “total royalty income” over $1 million and a sliding scale of 25-50%for amounts smaller than that.

-- At the University of California, inventors get 35% of “net royalties.”

  Offit’s claim to a share of the profits from Merck’s Rotateq revenues is based on his role as a listed inventor on the cluster of patents that protect Merck’s vaccine. These patents share the title “Rotavirus Reassortant Vaccine” and include four granted US patents -- US5626851, US5750109, US6113910 and US6290968 — and two granted European patents — EP323708 and EP493575.

  All of the patents are jointly owned by CHOP and the Wistar Institute. Offit is one of the three listed inventors on the vaccine patents but holds 100% of CHOP’s inventor rights. The other two inventors, Fred Clark and Stanley Plotkin, are both affiliated with the Wistar Institute (in a December 2005 transaction that was similar to CHOP’s deal with Royalty Pharma, the Wistar Institute sold its royalty interest in Rotateq to Paul Capital for $45 million).

The CHOP policy manual that delineates the distribution of income for inventions owned by CHOP can be found (HERE) (see section III B). Clearly, based on the distribution of income rights outlined in this manual, Paul Offit had a greater personal interest in Rotateq’s commercial success than any other single individual in the world. And more than other individual in the world, he found himself in a position to directly influence that success.

Unlike most other patented products, the market for mandated childhood vaccines is created not by consumer demand, but by the recommendation of an appointed body called the Advisory Committee on Immunization Practices (ACIP). In a single vote, ACIP can create a commercial market for a new vaccine that is worth hundreds of millions of dollars in a matter of months. For example, after ACIP approved the addition of Merck’s (and Offit’s) Rotateq vaccine to the childhood vaccination schedule, Merck’s Rotateq revenue rose from zero in the beginning of 2006 to $655 million in fiscal year 2008. When one multiplies a price of close to $200 per three dose series of Rotateq by a mandated market of four million children per year, it’s not hard to see the commercial value to Merck of favorable ACIP votes.

From 1998 to 2003, Offit served as a member of ACIP. Before and during his ACIP term, Offit was involved in rotavirus vaccine development activities, the value of which ACIP influenced. Shortly before his term began in October 1998, Offit’s first two rotavirus patents were granted by the U.S. Patent and Trademark Office, the first on May 6, 1997 and the second on May 12, 1998. During his ACIP term, Offit received two additional patents in 2000 and 2001.

Receiving a patent provides the potential but not the certainty of financial reward. In most cases, when an inventor’s employer receives a patent, the commercial value of the patent award is highly uncertain. In the case of Rotateq, the business uncertainty revolved around three factors: 1) the creation and eventual size of the rotavirus vaccine market, 2) the market share of competing products such as Wyeth’s RotaShield vaccine and 3) the success of Merck’s clinical trial for Rotateq and subsequent FDA approval. For the first two of these three factors, Offit’s ACIP membership gave him a direct opportunity to favorably influence his personal financial stake in Rotateq.

Four months before Offit was appointed to ACIP in October 1998, the committee had voted to give the rotavirus category a “Routine Vaccination” status, in anticipation of an FDA approval of RotaShield (oddly, ACIP made this vote before the FDA approved Wyeth’s RotaShield vaccine on October 1, 1998). Shortly after Offit’s term began, there were several additional votes involved in establishing the rotavirus vaccine market and Offit voted yes in every case. In May of 1999, the CDC published its revised childhood vaccination schedule and rotavirus vaccine was included. This series of favorable votes clearly enhanced the monetary value of Offit’s stake in Merck’s rotavirus vaccine, which was five years into clinical trials.

Nevertheless, Merck’s Rotateq vaccine was several years behind Wyeth’s RotaShield, which stood to be the market leader based on its lead in making its way through clinical trials. But when the widespread administration of RotaShield to infants started producing a high incidence of intussusception reports, including numerous fatalities, ACIP was forced to reverse itself. On October 22, 1999, ACIP voted to rescind its recommendation of the RotaShield vaccine.

Offit recused himself from this vote, although he participated in the discussion. In the meeting in which ACIP discussed RotaShield, Offit remarked, "I'm not conflicted with Wyeth, but because I consult with Merck on the development of rotavirus vaccine, I would still prefer to abstain because it creates a perception of conflict.” CDC records make it clear that Offit was not silent on RotaShield. By 2001, he was actively advancing a “unique strain” hypothesis, an argument that RotaShield was formulated in a way that did increase intussusception risk whereas other formulations (e.g. Rotateq) would not.

In commercial terms, Offit had a clear stake in the earlier RotaShield decision. As a competitor to Rotateq, RotaShield’s withdrawal provided a financial opportunity for Offit’s partner, Merck. Not only did RotaShield’s withdrawal give Rotateq an opportunity to gain 100% of the rotavirus vaccine market Offit had voted to create (until April 2008, when GlaxoSmithKline’s Rotarix vaccine was approved, Merck held a monopoly on the rotavirus vaccine market), but the absence of competition enabled Merck to charge a premium price for its vaccine, significantly more than Wyeth had charged for RotaShield.

With RotaShield out of the market and the favorable rotavirus policy precedent established, when the FDA approved Rotateq on February 3, 2006, the path to profitability for Merck was set. And for CHOP, which had licensed its patent rights to Merck, the valuation of its patent portfolio soared. Faced with this newly valuable asset, CHOP chose not to take their profits in the form of a series of smaller royalty checks. Instead, they opted to sell off their rights to the income stream and receive a lump sum payment in its place. Royalty Pharma -- an intellectual property investment firm that “provides liquidity to royalty owners and assumes the future risks and rewards of ownership” -- stepped in to pay CHOP for the rights to its Merck royalties. CHOP, in turn, paid Offit his inventor share. Although neither CHOP nor Merck has disclosed Merck’s royalty obligation around CHOP’s patents, the fact that Royalty Pharma was motivated to pay CHOP $182 million for the right to receive the Rotateq royalty stream suggests that obligation was significant.

Other news organizations, most notably CBS News, have asked Offit to disclose the financial details of his Merck relationship. CBS New reporter Sharyl Attkisson wrote last July that, “future royalties for the [Rotateq] vaccine were just sold for $182 million cash. Dr. Offit's share of vaccine profits? Unknown.”

Offit protested loudly over the CBS News report and went so far as accusing Attkisson of unethical conduct. “Did [Attkisson] lie about whether or not we provided materials? Of course,” Offit claimed in an August interview with the Orange County Register. He argued that in responding to a CBS News investigation of his financial ties to Merck, he readily provided full details of the payments that CBS asked for including: “the sources and amounts of every grant he has received since 1980”; “the details of his relationship, and Children’s Hospital of Philadelphia’s relationship, with pharmaceutical company Merck”; and “the details of every talk he has given for the past three years.”

A personal profit of at least $29 million seems like more than a small detail to leave out.

Dan Olmsted is Editor and Mark Blaxill is Editor At Large of Age of Autism.

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