Friday, October 28, 2005

Text of Legislative Staff Report on IP Issues and Prop. 71

Here is the text of the legislative staff report prepared for the Oct. 31 hearing on intellectual property issues and the California stem cell agency.


Joint Informational Hearing

Senate Health Committee
Senate Subcommittee on Stem Cell Research Oversight
Assembly Health Committee
Assembly Judiciary Committee

Chairs:
Senator Deborah Ortiz
Assemblymembers Wilma Chan and Dave Jones

“Implementation of Proposition 71:
Options for Handling Intellectual Property Associated
with Stem Cell Research Grants”


Background Paper

Proposition 71, the California Stem Cell Research and Cures Act (Act) approved by voters in November, 2004, provides $3 billion in general obligation bonds to provide funding for stem cell research and research facilities in California. The Act establishes the California Institute for Regenerative Medicine (CIRM) to award grants and loans for stem cell research and research facilities.

CIRM is governed by a 29-member Independent Citizen's Oversight Committee (ICOC), comprised of representatives of specified University of California campuses, other public or private California universities, nonprofit academic and medical research institutions, companies with expertise in developing medical therapies, and disease research advocacy groups. The ICOC and several of its working groups have been meeting regularly since December, 2004, and the ICOC awarded a first set of grants in September, 2005. For the most part, the organization has been unable to make grants because lawsuits challenging the validity of Proposition 71 have thus far prevented the state from issuing any bonds.

The Act authorizes the state to sell $3 billion in general obligation bonds, and limits bond sales to no more than $350 million per year, with the intent that the bonds be sold during a ten-year period. The Act provides that for the first five years, repayment of the principal is postponed and interest on the debt is to be repaid using bond proceeds rather than the General Fund revenues. The funds authorized for CIRM are continuously appropriated without regard to fiscal year.

While the Act does not specifically determine ownership rights for the research findings, tools and therapies to be developed with CIRM-awarded grants, it does contain language requiring that the ICOC balance the opportunity of the state to benefit from the patents, royalties, and licenses resulting from the taxpayer funded grants, with the need not to delay essential research.

The official text of the Act specifies that its purpose and intent is, among other things to “[p]rotect and benefit the California budget . . . by funding scientific and medical research that will significantly reduce state health care costs in the future; and by providing an opportunity for the state to benefit from royalties, patents, and licensing fees that result from the research.”[1] The Act also specifies fiscal benefits to the state through creation of “projects, jobs and therapies that will generate millions of dollars in new tax revenue in our state.”

The Legislative Analyst Office (LAO), in its official ballot information, stated that the state would “receive payments from patents, royalties, and licenses resulting from the research funded by CIRM” through ICOC-established standards “requiring that all grants and loans be subject to agreements allowing the state to financially benefit from patents, royalties, and licenses resulting from the research activities funded under the measure.” [2] The LAO found that the amount of revenue from this source is unknown, but could be significant and “would depend on the nature of the research funded by CIRM and the exact terms of any agreements for sharing of revenues resulting from that research.” In addition to these direct economic benefits, the LAO also noted the potential for indirect state and local revenue gains and cost savings, including job gains, increased tax revenue, and reduced government-funded health care expenditures.

An economic impact analysis commissioned by the proponents of Proposition 71 suggested that the initiative would provide total state revenues and health care cost savings of between $6.4 billion and $12.6 billion, including between $537 million and $1.1 billion in royalty payments, reduced health costs to the state of $3.4 to $6.9 billion, and direct and indirect tax revenues generated by increased biotechnology activity in the state and the creation of new jobs in California. The combination of royalties and savings from reduced costs to treat chronic diseases, the study concluded, would more than offset the $6 billion state taxpayers will be obligated to spend to repay the Proposition 71 bonds.[3]

Ballot arguments in favor of Proposition 71 claimed that the initiative would produce substantial direct and indirect economic benefit to the state, reduce health care costs by billions of dollars, and generate thousands of new jobs and millions in new state revenues by making California a leader in stem cell research and giving the state an opportunity to share in royalties from the research.



Limitations of Bond Financing

In approving Proposition 71, California voters agreed to the issuance of $3 billion in general obligation bonds for stem cell research and research facilities in California. General obligation bonds, used to finance a variety of public projects, are debt instruments issued by the state.

Proposition 71 authorizes CIRM to use both tax-exempt and taxable bonds to fund its operations and its grants for medical and scientific research. As stated above, the Proposition also requires the ICOC to establish standards that require that all grants and loans awards be subject to intellectual property agreements that balance the opportunity of the State of California to benefit from the patents, royalties, and licenses that result from basic research, therapy development, and clinical trials with the need to assure that essential medical research is not unreasonably hindered by the intellectual property agreements.

As discussed below, it is possible that royalty or license agreements that generate revenue for the state could affect the tax status of the bonds. Under the Internal Revenue Code, a bond is considered a taxable private activity bond if it satisfies two tests – the private business use test and the private security or payment test. If more than 10 percent of a bond’s proceeds are used for private business purposes, the private business use test is generally satisfied.[4] The private security or payment test is satisfied if payment of the principal or interest of more than 10 percent of the bond is secured or paid, whether directly or indirectly, with private property or funds.[5]

According to a recent Legislative Counsel opinion, the private use test is generally satisfied if more than 10 percent of the bond’s proceeds are used to fund nongovernmental entities (for 501 (c)(3) entities, the threshold is somewhat lower). The private security or payment test is generally satisfied if payment of the principal or interest of more than 10 percent of the bond is secured or paid, whether directly or indirectly, with private property or funds (again, for 501 (c)(3) entities the threshold is somewhat lower). A royalty or license agreement that provides an income stream to the state from private business activity that amounts to more than 10 percent of the principal and interest of the bond would satisfy this second test. Thus, it is conceivable that the tax-exempt status of bonds issued for stem cell research could be jeopardized if the sate contemplates or receives royalties or licensing fees pursuant to intellectual property agreements associated with the grants that total more than 10 percent of the bond costs.

The Legislative Counsel opinion indicates that research projects containing intellectual property agreements that call for the state to receive direct royalty payments are more likely to require use of taxable bonds, if the above thresholds are met, than those containing agreements requiring that clinical treatments, products, and services resulting from the research be made available at reduced cost to state health care programs.

However, even assuming the private activity tests are met, there may be ways to structure intellectual property agreements and bond sales to avoid having to use taxable bonds. For example, bonds for stem cell research may be packaged with bonds for other public purposes and have relatively short maturity dates that allow basic research to be funded and paid off before any intellectual property is developed. Alternatively, intellectual property agreements may be structured in a way that requires any revenue generated to be paid not to the state, but to a nonprofit entity. It is likely that further guidance will be sought by the Treasurer’s Office and CIRM from the Internal Revenue Service on permissible options for structuring grants and intellectual property provisions that permit use of tax-exempt status of bonds for Proposition 71 grants to the greatest extent.

According to informal estimates from the LAO, if the state were required to use taxable bonds in lieu of tax-exempt bonds for funding stem cell research, it could raise the debt servicing costs to the state by $700 million or more over the life of the program.

The Bayh-Dole Act

Historically, the federal government maintained ownership rights for inventions developed with public funds, including research grants to universities. The government usually allowed its inventions to be used freely. During the 1970s, however, many believed that the United States was losing its competitive edge to Germany and Japan, in part due to lack of commercially viably innovation, which, it was argued, was due to ineffective transfer of research from universities to the private sector. Though many federal agencies had long contracted with universities and private businesses to conduct research and development, patent policies were inconsistent and considered ineffective for businesses. As result, it was argued, substantial innovation never made it out of university laboratories to the marketplace. The Bayh-Dole Act, along with the development of the biotechnology industry itself, changed that.

In 1980, the Bayh-Dole Act (BDA)[6] created a uniform patent policy for federally funded research. The promulgation of this law expanded the government’s role in promoting technological innovation by providing inventors with a monetary incentive to move their ideas from the laboratories into the stream of commerce. The BDA generally allows non-profit organizations, including universities, and small businesses, to acquire ownership of inventions they develop under federally funded research, except in exceptional circumstances. In return, these institutions are expected to file for patent protection and to ensure commercialization upon licensing. Under BDA, all inventions conceived or first reduced to practice in the performance of a federally funded project, whether funded in full or in part by federal funds, must adhere to the following requirements:

Each new invention must be disclosed to the federal funding agency within two months of disclosure to the grantee's patent personnel;
The federal grantee must elect to retain title in writing within two years or less, as specified;
The grantee must file a patent application within one year of title election or less, as specified;
The grantee must grant the federal government a non-exclusive, irrevocable, paid-up license to practice the invention throughout the world;
If the grantee elects to exclusively license to a company for sales in the United States, the company must have substantial manufacturing capabilities to produce in the United States, except as specified;
In awarding licenses, the grantee must give preference to small businesses that have the resources and capability for bringing the invention to practical application;
The grantee must share with the inventor any income collected on the invention and use any additional income, after expenses, to support further scientific research or education;
The grantee can be required to periodically report on utilization of the invention by the grantee and its licensees;
The federal government retains the right to vest title to the invention to the contracting federal agency or to grant a license to a third party, called the “march-in” rights.

The “march-in” rights retained by the government allow the funding federal agency to vest title to an invention in itself or to grant a license to a third party, whether exclusively or nonexclusively, under several circumstances. These circumstances include if the invention is not brought to practical use within a reasonable time, if intervention is necessary to alleviate health or safety needs, or if public use of the invention is jeopardized.

Since the inception of the BDA, only a handful of petitions have been filed asking the federal government to exercise its march-in rights, and all have been denied. These include two 2004 petitions filed by a consumer advocacy organization asking the federal government to compel reasonable drug prices for two drugs developed with federal funding.[7] The first petition involved the HIV drug Norvir, whose price, petitioners alleged, was increased by its developer Abbott Laboratories to 400 percent more than its original price in order to maintain profits when medical advances reduced the drug's required dosage. The petition sought a compulsory licensing to a third party in order to make the drug more affordable and, within the provisions of BDA, to make the drug “available to the public under reasonable terms.” The second petition involved glaucoma drug Xalatan, which was developed by Pfizer based on federally funded research done at Columbia University. Petitioners alleged that Xalatan was sold at two to five times more in the United States than in other markets, in violation of the spirit of the Bayh-Dole “reasonable terms” provision, the petition claimed.[8] These petitions were both denied by the National Institute of Health.

In addition to its march-in rights, the federal government may retain title to a federally funded invention if the awarding agency determines that to do so would better promote the policy and objectives of the BDA.[9] This provision, known as the “exceptional circumstances” provision because it may only be used in those instances, allows a grantee to challenge the determination of exceptional circumstances and also requires a series of procedural steps that, according to commentators, have lead to its extremely rare invoking.[10]

In 1989 in response to rising drug prices, the National Institute of Health instituted a policy to require a reasonable relationship between (1) the pricing of licensed inventions developed with National Institute of Health funding, (2) the public investment in the invention, and (3) the public's health and safety needs. This policy, known as the “reasonable pricing clause,” was required in exclusive licensing agreements and Collaborative Research and Development Agreements. The reasonable pricing policy was revoked in 1995 as the result of intense opposition from industry.

It is important to note that the BDA does not apply to Proposition 71 grantees unless their inventions are also funded in part by federal grants. Legal analysis has not been completed to determine to what extent the state is bound to adhere to the BDA or is preempted by the BDA in the application of intellectual property policy to jointly funded projects. In addition, given that Proposition 71 funds are expected to be used for research that does not qualify for federal funding or that utilizes federally approved stem cell lines, the issue of how the BDA applies to Proposition 71 may not apply in many cases.

Impact of the Bayh-Dole Act

The Bayh-Dole Act (BDA) has resulted in significant changes in patenting and the commercialization process of federally funded research. Proponents of the BDA argue that it has been responsible for significant increases in patenting, commercialization of research tools into market products and income for universities. The Association of University Technology Managers reports that, in 2003, 3,933 U.S. patents were issued and 472 new commercial products were introduced to the marketplace under license agreements with commercial partners, a huge increase over pre-BDA statistics. For that same year, universities reported license income of $1.3 billion and royalties on product sales of $1.1 billion.[11] In addition to the explosive growth of patents, proponents of the BDA argue that it has created a consistent set of rules familiar to the public-private partners that have dramatically improved university-private industry relationships.

However, critics have reported significant unintended consequences of the BDA. A key concern among critics is that the BDA has hindered dissemination of and access to basic research findings. They argue that the BDA has made research more difficult and more costly by keeping basic research out of the public domain.[12] Upstream patenting can limit downstream innovation through, among other things, “patent thickets.” Patent thickets can arise when too many owners hold intellectual property rights in previous discoveries that constitute obstacles to future research and downstream inventions.[13]

Another concern is that the focus of research in United States universities has shifted away from fundamental research in order to focus on research targeted to commercial applications. The BDA, critics argue, may have created incentives that undermine the representation of the public interest in the calculus of determining which technologies should be patented and how they should be licensed.[14] They contend that as a result, investment in health-related research and development gravitates toward illness or symptoms that offer the greatest potential returns on investment, regardless of actual needs. Others argue that the commingling of the academic and commercial sectors in part facilitated by the BDA has created a bias in scientific findings and undermined public trust in medical research. BDA “has resulted in egregious conflicts of interest, especially in the biomedical sciences, and has contributed to the near-extinction of the norm of disinterestedness.”[15]

Finally, critics of the BDA have questioned the wisdom of having United States taxpayers pay for products twice, first through federally funded grants to their inventors and then for the products themselves, particularly when they argue that the BDA has had no impact on affordability or accessibility of inventions paid for by taxpayer's dollars.[16]

Legislation Related to Proposition 71 Intellectual Property Policy

In response to concerns that the intellectual property provisions of Proposition 71 do not go far enough to ensure that the state gets a return on its investment in stem cell research and that the provisions may also conflict with the goal of using tax-exempt bonds to finance the research, Senators Ortiz and Runner included language in SCA 13 in the current session requiring the ICOC to seek to ensure through its intellectual property agreements that treatments, therapies, and services resulting from the research are accessible and affordable to low-income residents, including those eligible for state and county-funded programs. The bill is currently on the Senate floor.
In order to provide guidance to the Legislature and to the ICOC in developing intellectual property policies that appropriately balance the return to the state with the need to develop and transfer technology to the market place as expeditiously as possible, the Legislature passed ACR24 (Mullin, Resolution Chapter 111 of 2005) directing the California Council on Science and Technology (CCST) to develop criteria to “determine how the state can achieve maximum public benefit under Proposition 71.”[17] The resolution specifically directed the CCST to study how the commercialization of technology developed with the investment of taxpayer dollars in the form of contracts, grants, and agreements could generate some public benefit, including, but not limited to, state revenues, favorable pricing, revenue sharing, and reinvestment into research.

As amended August 16 in the Senate Health Committee, the resolution requests that the options and recommendations identified by the study for Proposition 71-funded research reflect the constraints posed by the use of tax-exempt bonds for research and represent options and recommendations that are consistent with the goal and intent of using tax-exempt bonds to fund the research, including options and recommendations for achieving accessibility and affordability of treatments, products, and therapies resulting from Proposition 71-funded research.The amendments further request that the CCST establish a review group to include representatives of bond counsel firms, the Legislative Analyst, the Treasurer, consumer and public interest groups, and foundations engaged in funding biomedical research, to review and comment on the study and options and recommendations for generating public benefit from commercialization of technology developed with Proposition 71 funds prior to their release.

CCST Report

In August, 2005, the CCST released a set of “interim” recommendations that the state adopt policies that are consistent with the BDA. The report authors' argue that this is desirable to avoid confusion and potential conflict, and to leverage federal funds to the extent they may be available. The report also recommends that research results should be timely and widely published and that California Institute for Regenerative Medicine (CIRM) provide guidance on when data should be placed in the public domain or made available for use through open source or other broad licensing arrangements. The report suggests, among other things, the following principles for CIRM to consider when developing its intellectual property policy:

Permitting grantees to own intellectual property rights, similar to the BDA;
Granting research funds without committing a revenue stream to the state;
Generally, making research tools developed under Proposition 71 grants available to other researchers;
Retaining march-in rights, similar to the BDA;
Leaving license particulars to grantees who are in the best position to judge how best to ensure that discoveries are made widely available through commercialization or otherwise;
Reserving a non-exclusive, royalty-free license for CIRM, including the right for other CIRM grantees to use the inventions in their Proposition 71-funded research; and
Establishing a CIRM database to track all intellectual property generated through Proposition 71 funding.

In developing these recommendations, the CCST does not appear to have given significant consideration to any of the unintended consequences of the BDA discussed in the previous section.

With respect to the August 16 amendments, the report contains an addendum in which the CCST concludes that several organizations are pursuing innovative strategies to address issues of accessibility and affordability of therapies, but that it is too early to evaluate their success.

Policy Options Facing the State

In reviewing the language of Proposition 71, literature on the experience with the implementation of the Bayh-Dole Act (BDA), and recent trends in fields of technology transfer and intellectual property policy, it is clear that several major policy challenges will confront the state as it considers how to implement the intellectual property provisions of Proposition 71. The first is determining how to structure an intellectual property policy that ensures rapid and broad dissemination of basic research findings and tools. As many have noted, the ultimate development of therapies based on stem cell research is likely to require incremental improvements and discoveries in basic stem cell science, in addition to a need for close collaboration and sharing of information between researchers. A policy that favors open dissemination of basic research findings is likely to produce clinical applications the most quickly and efficiently.

A second key issue is how and in what form the state should seek to benefit from the patents and licenses associated with inventions developed with state funds. A reasonable reading of Proposition 71’s intellectual property provisions would indicate that the state is required under the proposition to seek an economic return associated with the grants it makes, where it is feasible to do so without impeding dissemination of research findings or violating the balancing test outlined in the initiative. Related issues are whether the state has an opportunity through its policy to address issues involving the accessibility and affordability of therapies that are developed with the assistance of state funds.

A final issue is how to seek an economic return in a manner that maximizes, to the extent possible, the state’s ability to use tax-exempt bonds to fund the research.

The remainder of this section discusses options for ensuring dissemination of basic research findings and options for obtaining direct economic returns to the state from the research.

Options for Ensuring Dissemination of Basic Research Findings

. The state could require grantees to make basic research findings and tools that they develop openly available to other researchers via simple material transfer agreements (MTAs), while still allowing grantees to patent and license the inventions they develop. The CCST report appears to favor this approach by recommending that applicants be required to provide a plan describing how they will manage intellectual property to ensure that research tools will be made broadly available for further advancement of science.

As some experts have noted, however, even though they are simple 1 to 2 page documents, MTAs can impose impediments to dissemination of research findings if they are not developed and applied consistently from institution to institution, and through the imposition of “reach through” provisions by the provider of the MTA. The latter provisions seek to give the owner of the invention an ownership interest in any new inventions developed by the recipient, require royalty payments to the provider of the MTA, or give the provider joint or exclusive rights to any new intellectual property developed by the recipient. This option also entails costs to owners of intellectual property to protect their interests if a transferee subsequently seeks to license or use the invention for commercial purposes.

. The state could require grantees to license any inventions they develop to any interested party (open source licensing) or at least preclude them from entering into exclusive licensing arrangements in which one party obtains an exclusive license to use the technology (nonexclusive licensing). The advantage of these approaches is that they would ensure greater dissemination of research findings; the disadvantage of both is that there may be situations in which an exclusive license is needed to give a commercial entity the incentive to develop a product or therapy using the invention.

Alternatively, and similar to the recommendations some experts have made for the BDA, the state could allow grantees to enter into exclusive licensing arrangements at their discretion, but retain the authority to declare certain areas of research off-limits for exclusive licensing if CIRM judges that scientific advancement would be better served by maintaining open access to the research findings and tools. The impetus for this suggestion are the findings of a number of researchers that the presumption in the BDA that grantees must seek to patent inventions except in “exceptional circumstances” has led to too much patenting and exclusive licensing of basic research findings, and that the procedural requirements on federal agencies for invoking the “special circumstances” provisions are too burdensome.

Nonexclusive licensing or open source licensing would also entail costs of enforcing licensing terms to ensure that licensees do not license or commercialize the underlying inventions.

Adopt viable march-in provisions. Similar to the language of the BDA, the state could retain the right to step in or require a grantee to grant a license to a responsible applicant on reasonable terms if effective steps are not being taken to achieve practical application of a CIRM-funded invention (referred to as “march – in” rights). CIRM could also retain a non-exclusive, royalty-free license to all CIRM-funded inventions, including the right to allow other CIRM grantees to use such inventions in their CIRM-funded research. These were recommended by the CCST report.

However, a number of experts have questioned the viability of the march-in authority under the BDA. As noted above, the BDA currently requires exercise of march-in rights by sponsoring agencies to be held in abeyance pending exhaustion of all court appeals by the grantee, which many experts believe hinders the exercise of the authority and also hampers the government’s ability to ensure that practical application of inventions is achieved within a reasonable time and to meet health and safety needs. These experts have advocated streamlining the process for invoking march-in provisions, a policy which the state could emulate if it decided to adopt this option for ensuring dissemination of research findings.

Patent pooling. Several patenting and licensing experts have recommended patent pools as a mechanism for more effectively managing intellectual property for areas of research such as biomedical research, in which incremental improvements and collaboration between research institutions is needed to advance the technology. Under this approach, the state would require its grant recipients to agree to donate or share the rights to any inventions or research tools with a patent pool which would be administered by the state or a nonprofit organization. Any researcher could use the inventions or tools in the pool for further research; as a condition of doing so, they would have to agree to contribute the rights to any inventions or improvements that they develop back to the pool. The pool would collectively negotiate licensing arrangements with commercial entities on behalf of the participants in the pool.

A number of such pools currently operate in other fields of scientific research, including the Center for Application of Molecular Biology to International Agriculture (CAMBIA).

Advocates of patent pools point out that pooling would have a number of advantages over patenting and licensing of inventions by individual research institutions, including that it would allow researchers’ easier access to patented ideas and technologies and lower transaction costs associated with accessing them. In addition, the pool would have greater leverage in negotiating licenses with commercial entities than individual pool participants would have on their own. Theoretically, this could enable the state, as a participant in the pool, to obtain greater economic benefits in return for its contributions, which could take the form of greater royalties, pricing concessions for targeted programs and populations, and more favorable limits on the duration of exclusive licenses to use technology owned by the pool. Some advocates have further recommended that patent pools have the ability to auction off the rights to their inventions as a means of promoting competition between biotechnology companies and of generating greater economic returns to pool participants. Some have also suggested that the state could perhaps use the leverage of such a pool to negotiate more favorable terms for access to critical technologies and tools owned by other entities, such as Geron and the Wisconsin Alumni Research Fund (WARF).

A key difficulty associated with administration of patent pools is the difficulty of determining how to apportion economic benefits derived from technology or inventions owned by the pool among its participants.

The CCST did not make findings or recommendations on this option, but instead recommended that CIRM maintain a database to track all intellectual property generated through CIRM funding as a means of facilitating researchers’ access to intellectual property relevant to their research.

Options for Achieving Economic Benefits from the State’s Investment in Research

Assuming Proposition 71 requires or intends for the state to obtain direct economic benefits from the research where it is feasible to do so without impeding dissemination of research, the state has a number of options for doing so.

Direct a share of royalties to the state. The state could require, as a condition of its grants, that a share of the net royalties resulting from commercialization of any findings or inventions developed with grant funds be given to the state. A major drawback of this approach is that it could likely require greater use of taxable bonds for financing the research. As the CCST report notes, the additional costs to the state of using taxable bonds may outweigh the value of economic benefits the state is able to negotiate from its funded research. In part because of this, the CCST report rejects this approach in favor of the Bayh-Dole Act (BDA) model, in which grant recipients are allowed to keep royalties and licensing fees on inventions they develop as long as they use those revenues to fund their education and research programs. However, it is not clear that the CCST’s recommended approach complies with the language and intent of Proposition 71.

Reasonable pricing requirement. The state could adopt a policy similar to that adopted by the National Institutes of Health (NIH) in 1989 requiring that there be a reasonable relationship between the pricing of a licensed product, the public investment in that product, and the health and safety needs of the public. As mentioned above, NIH applied this policy to licenses to inventions developed under its Cooperative Research and Development Agreement (CRADA) program but discarded it in 1995 on the grounds that it was impeding commercialization of research findings.

The CCST report also rejected adoption of a reasonable pricing policy and instead recommended that a more detailed examination begin of the range of technical expertise required to identify and deliberate over the issues involved in reasonable pricing or favorable pricing of treatments and therapies that emerge from CIRM-funded research.

Socially responsible licensing. The state could require its grantees to require any entities to which they license any Proposition 71-funded inventions to demonstrate how their use of the technology will benefit underserved populations or regions of the state. A number of university-based technology transfer managers throughout the U.S. have been advocating that universities and other research funding entities look for ways to direct the benefits of their inventions and technologies to underserved countries and populations, for example by foregoing royalties on sales of products and treatments to underserved populations and seeking commitments from licenses to produce products and treatments or otherwise make investments in underserved communities.

Tiered pricing arrangements. The state could attach conditions to its grants requiring that any entity that acquires the rights to any inventions or tools developed with the grant funds must agree to make any resulting therapies or treatments accessible and affordable to low-income populations or programs that serve them. This approach is used by a number of grant making organizations, including the Gates Foundation, the International AIDS Vaccine Initiative (IAVI), and the Foundation for the National Institutes of Health.

In 2003, the Gates Foundation established a Grand Challenges in Global Health initiative, designed to foster breakthroughs against diseases that plague residents of the world’s poorest countries. The $450 million in funding for the initiative includes $200 million which is managed by the Foundation for the National Institutes for Health. A package of 43 initial grants totaling $437 million was announced in June, 2005. Under the initiative, Gates requires its grantees to outline a global access strategy indicating how they will use any inventions they develop with the funding to facilitate the availability and affordability of therapies to people in the developing world.

IAVI generally retains the rights to inventions developed with its funding and collaborates with commercial partners for development of vaccines and treatments using the inventions. In its partnerships, IAVI seeks commitments that resulting vaccines and treatments will be made available in developing countries at reasonable prices and in sufficient quantities, and has successfully negotiated a number of agreements containing those conditions. In effect, the commercial entity agrees to discount the price of the product in certain markets while retaining the right to price it freely in others.

A number of biomedical patenting and licensing experts maintain that tiered pricing arrangements are feasible and acceptable to biotechnology and pharmaceutical companies if the scope of pricing concession is well-defined. An example might be an agreement on the part of a biotechnology or pharmaceutical company to sell any resulting products or treatments to public health care programs at the best price they sell it to any purchaser.

The CCST report notes that IAVI and the Grand Challenges program have pushed researchers, business managers, and intellectual property professionals to think in new ways about how to manage intellectual property on biomedical inventions in ways that benefit underserved populations, but concludes that both efforts are too new to provide reliable models for Proposition 71.

[1] Proposition 71, California Stem Cell Research and Cures Initiative, Sec. 3.
[2] Proposition 71 Analysis by the Legislative Analyst.
[3] Analysis Group, “Economic Impact Analysis: Proposition 71, California Stem Cell Research and Cures Initiative”, September 13, 2004.
[4] Internal Revenue Code Sec. 141(b)(1)
[5] Internal Revenue Code Sec. 141(b)(2)
[6] P.L. 96-517, Patent and Trademark Act Amendments of 1980 as amended by P.L. 98-620 (1984), codified in 35 U.S.C. Sec 200 et seq.
[7] Chemical and Engineering News, Vol. 82, No. 38, pp. 34-35 (Sept. 2004). Available at http://pubs.acs.org/isubscribe/journals/cen/82/i38/html/8238gov1.html.
[8] Id.
[9] 35 U.S.C. Sec 202(a); 37 CFR 401.3, 401.4.
[10] Rai, Arti, and Rebecca Eisenberg, Bayh-Dole Reform and the Progress of Biomedicine, American Scientist, Vol. 91, p. 54 (Jan.-Feb. 2003).
[11] AUTM, Licensing Survey: FY 2003. Available at http://www.autm.net/surveys/dsp.surveyDetail.cfm?pid=16.
[12] Heller, Michael and Rebecca Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, Science Vol. 280, Issue 5364, pp. 698-701 (May 1998); Kesselheim, Aaron and Jerry Avorn, University-Based Science and Biotechnology Products: Defining the Boundaries of Intellectual Property, Journal of the American Medical Association, Vol. 293, No. 7, pp. 850-54 (Feb. 2005).
[13] Heller and Eisenberg (1998).
[14] Rai and Eisenberg (2003).
[15] Tansey, Bernadette, The building of biotech 25 years later, 1980 Bayh-Dole act honored as foundation of an industry, San Francisco Chronicle (June 21, 2005) (quoting Tufts University Professor Sheldon Krimsky).
[16] Arno, Peter and Michael Davis, Why Don't We Enforce Existing Drug Price Controls? The Unrecognized and Unenforced Reasonable Pricing Requirements Imposed upon Patents Deriving in Whole or in Part from Federally Funded Research, Tulane Law Review, Vol. 75, pp. 631-93 (2001).
[17] ACR 24 (Mullin), Resolution Chapter 111, 2005.

Coming Up

Laer today we will look at the background paper being presented to legislators at Monday's hearing into IP and stem cell research. The paper says, among other things, that the IP options include open source or nonexclusive licensing and sharing of basic research findings and tools.

Thursday, October 27, 2005

Stem Cell IP Slated for More Critical Look

California's newspaper editors were less than enthralled about a hearing this week into how the state is going to reap the benefits of its $6 billion investment in stem cell research.

If the usual Web searches are to be believed, no state newspaper – or any others, for that matter – dipped into Tuesday's hearing by the stem cell agency on the intellectual property that might result from its grants. Not one story has appeared.

However, we may see some IP stories in the future, perhaps as early as next Tuesday, the day following the hearing by Sen. Deborah Ortiz on the same subject. That hearing will be in San Francisco. It is a good bet that the Chronicle will cover it, given that stem cells are pretty much a home town story for the newspaper.

Ortiz' line-up for the session also offers more novelty. CIRM's agenda for its hearing appeared to be pretty much the same stuff, a presentation involving August's report from the California Council on Science and Technology. Plus she has a vehicle – SCA13 -- for implementing new IP requirements concerning the stem cell agency.

According to a draft of the agenda, one of the witnesses scheduled to appear is Jennifer Washburn, author of "University Inc.," who is likely to take a skeptical view of the existing IP world involving university research and private collaboration.

For example, she said in an interview with UTWatch (University of Texas group), "Putting so much emphasis on patenting and licensing, as the Bayh-Dole Act did, may actually be detrimental because universities may be imposing proprietary restrictions on research that would be more broadly used if it was transferred through the public domain."

She also wrote the following in American Prospect:

"Universities’ loyalties are now so conflicted that schools are increasingly willing to cave in to narrow commercial demands rather than defend their own professors’ academic freedom or the public interest. When researchers at the University of Utah discovered an important human gene responsible for hereditary breast cancer, for example, they didn’t make it freely available to other scientists, even though we -- the U.S. taxpayers -- paid $4.6 million to finance the research. The university raced to patent it, then granted the monopoly rights to Myriad Genetics Inc., a startup company founded by a University of Utah professor, which proceeded to hoard the gene and prevent other academic scientists from using it.

"Professors, too, are increasingly driven by the bottom line. More and more, they not only accept industry grants to support their research but also hold stock in or have other financial ties to the companies funding them. Many experts fear this skewing of professors’ research toward short-term commercial goals will impede long-term scientific and technological innovation. Financial entanglements between researchers and corporations have grown so common that the Securities and Exchange Commission has investigated numerous academic researchers suspected of engaging in insider trading."

Scheduled to represent CIRM is Ed Penhoet, vice chairman of the agency and co-founder of Chiron, the folks who are bringing us the flu vaccine this fall. A former academician at UC Berkeley, he knows whereof he speaks on IP issues.
Also slated to testify is Labeeb Abboud, general counsel for the International AIDS Vaccine Initiative, which Ortiz has cited as possibly something to emulate with stem cell research.

For more on stem cell IP issues, see "Soothing Anxieties," and "Higher Risk." See the item below for a copy of the draft agenda for Ortiz' hearing

Agenda for IP Hearing Monday

Here is the text of the draft agenda for next Monday's legislative hearing into intellectual property and the California stem cell agency.

Joint Informational Hearing

Senate Health Committee
Senate Subcommittee on Stem Cell Research Oversight
Assembly Health Committee
Assembly Judiciary Committee

Chairs:
Senator Deborah Ortiz
Assemblymembers Wilma Chan and Dave Jones

“Implementation of Proposition 71:
Options for Handling Intellectual Property Associated
with Stem Cell Research Grants”


Draft Agenda

I. Opening Remarks (9:30 – 9:45)
· Senator Deborah Ortiz, Chair, Senate Health Committee and the Subcommittee on Stem Cell Research Oversight
· Assemblymember Wilma Chan, Chair, Assembly Health Committee
· Assemblymember Dave Jones, Chair, Assembly Judiciary Committee
· Other members present

II. Purpose and Intent of Proposition 71 Intellectual Property Provisions (9:45 – 10:00)
· Dan Carson, Legislative Analyst Office
· Francisco Martin, Legislative Counsel (available for questions)

III. Constraints on IP Options From Use of Tax-Exempt Bonds (10:00 – 10:25)
· Juan Fernandez, Treasurer’s Office
· Bill Heir, Legislative Counsel
· Perry Israel, Orrick, Herrington, and Sutcliffe

IV. CCST Report and Status of ICOC policy (10:25 – 11:00)
· James Pooley, Partner, Milbank, Tweed, Hadley & McCloy LLP
· Ed Penhoet, Vice Chairman, Independent Citizen’s Oversight Committee

V. The Bayh Dole Act as a Model for Intellectual Property Policy forProposition 71 (11:00 – 11:55)
· Rebecca Eisenberg, Professor, University of Michigan Law School
· Alan Bennett, Associate Vice Chancellor, University of California - Davis
· Merrill Goozner, Center for Science in the Public Interest
· Jennifer Washburn, Fellow, New America Foundation and author

VI. Alternative Models for Developing IP Policy (11:55 – 12:25)
· Labeeb Abboud, General Counsel, International AIDS Vaccine Initiative
· Carol Mimura, Acting Assistant Vice Chancellor, UC – Berkeley

VII. Stakeholder Perspectives (12:25 – 12:50)
· Jesse Reynolds, Center for Genetics and Society
· David Gollaher, President and CEO, California Healthcare Institute
· Jean Ross, California Budget Project

VIII. Public Testimony (12:50 – 1:20)

IX. Closing Remarks (1:20 – 1:30)

Judge Nixes Stem Cell Lawsuit

One of the lawsuits against the California stem cell agency has been dismissed, but the major battle still remains scheduled for Nov. 17 in Hayward.

Reporter Laura Mecoy of The Sacramento Bee wrote: "A federal judge in Los Angeles dismissed a lawsuit Monday that threatened to cause more problems for the state's troubled stem cell research program, but the lawsuit could be revived in another court, according to the state attorney general's office."

"The lawsuit dismissed on Monday challenged the destruction of human embryos for stem cell research and sought to have embryos declared persons with constitutional rights," Mecoy said.

The hearing on the 17th involves constitutional objections by several conservative groups to the existence of the stem cell agency.

Tuesday, October 25, 2005

Chronicle: Klein Failed to Disclose Royalty Problem with Prop. 71

Stem cell chairman Robert Klein knew before last fall's electoral approval of Prop. 71 that the promised stem cell royalty sharing with the state was under a federal cloud, but he did not disclose the fact publicly, the San Francisco Chronicle reported Tuesday.

Reporter Bernadette Tansey wrote the story that said California "might actually be forbidden from sharing royalties by federal tax laws -- that is, if California chooses to finance the program by the cheapest possible route: tax-exempt bonds."

The problem with the tax laws has been floating around for at least several months. What is new in Tansey's thorough-going piece is that Klein was aware of the issue before voters approved creation of the stem cell agency. Passage of Prop. 71 came in the wake of a campaign-financed study that predicted the state could receive one billion dollars or more in royalties.

The Chronicle reported that neither Klein or CIRM would comment on the question of when he knew about the royalty sharing problem.

Tansey quoted Robert Feyer, an attorney with Orrick, Herrington & Sutcliffe, as the source for Klein's prior knowledge. Orrick helped draft the initiative and also serves as bond counsel to the state of California.

"'It starts to have the look of a bait and switch," said Jesse Reynolds, a spokesman for the Center for Genetics and Society," according to Tansey.

She reported, "The potential problems have to do with a complex and unsettled question: how federal tax law will apply to a novel state research venture, supported by tax-exempt bonds, that involves a state split of private profits.

"But IRS rules largely forbid the states to use tax-exempt bonds to benefit specific private enterprises rather than serving a general public good -- and to share revenue from an enterprise to the extent that the state becomes like a business partner."

How the question will shake out is very much up in the air.

"Whether Klein should have told voters (about the issue) depends on how you look at it, said Robert Stern of the Center for Governmental Studies in Los Angeles, a nonprofit institute focused on government reform," the Chronicle reported.

"'A legal obligation? No,' Stern said. 'A moral obligation? Sure."

Chronicle Primer on Stem Royalty Issue

Reporter Bernadette Tansey of the San Francisco Chronicle produced a primer on the royalty tax law issue affecting the California stem cell agency. Here are a few excerpts.

"A state would be barred from using tax-exempt bonds to build a sewage treatment system tailored to the needs of a manufacturing plant in an area where few other ratepayers need such service.

"To guard against such selective private boons, the IRS looks not only at who is benefiting from the bond money but also at who is repaying the state bond debt. If private business involvement is too high on both counts, the IRS withholds tax-exempt bond status.

"The question is whether these rules could raise any barriers for the stem cell institute, whose grants can be sought by private biomedical firms as well as private research institutions and state-funded universities. The grants to businesses might not pose a problem by themselves, unless the state also repays the bonds with a significant level of revenue coming back from the businesses."

Proposal for a California Stem Cell Venture Fund

How does the Golden State of California get a return on its $6 billion investment in stem cell research? Certainly the question of the month. Two separate hearings involving the issue, including one session today in Sacramento, are scheduled for the final six days of October.

Now comes a suggestion that the state create a venture fund with a single investor (the state) so that all the proceeds from stem cell investments flow back to the state.

"It seems a lot simpler than some of the other proposals put forth," says David J. Pyrce, who operates Bear Creek Advisors, a California life science consulting firm.

Pyrce made his suggestion in an email to the California Stem Cell Report. He pointed to Maryland which has a venture capital fund that has invested $24 million since 1994 and generated $48 million.

Here is how Pyrce thinks the California Stem Cell Venture Fund might operate:

"1. The State of California creates a for-profit investment fund, with a commitment of $3 billion.
"2. This fund makes investments in stem cell based research efforts.
"3. In exchange for that investment, the fund establishes an ownership position in that research.
"4. This is commonly done in academia. When a pharmaceutical company invests in research efforts of an academic, it is called
sponsored-research.
"5. From that point forward, the fund will own a percentage of any products resulting from that funded research.
"6. The administrative process of this investment vehicle is also quite simple, typically run with an organization of less than 10
people."

Such a proposal may well require changes in the law that created the California stem cell agency. But a vehicle for those changes, SCA13, is before the California State Senate, should this concept attract interest.

Monday, October 24, 2005

"Big-headed?" -- Stem Cell Perspective from South Korea

Last week, South Korea announced plans for a Stem Cell Hub that would have operations in California. Here is a comment from Digital Chosun, a Korean news outlet on the Web.

"It is a precious accomplishment for our country's bioengineering brains, who immersed themselves in research and sacrificed their private lives to the extent of being sometimes portrayed as an army.

"We are one step ahead: there is no need to get big-headed. For cell cloning technology to be used in clinical treatment, we need the technology to grow stem cells into particular organ tissues, and there we lag behind the U.S. and Britain. The California state government, spurred by the Hwang team's success in cloning somatic cells, is pouring W3 trillion (US$3 billion) over 10 years into bioengineering. Britain, where bioengineering started much earlier, is also a strong contender. "

"The Right to Be Cured, Quickly"

Reporter Ralph Brave of The Sacramento News and Review examined the performance of the California stem cell agency recently. His piece was heavy on science and short on firm conclusions about whether the agency was fulfilling the promise of the campaign.

Here are a couple of excerpts:

"The tension between the hope for cures embodied in California’s big stem-cell adventure and the scientific challenges in meeting those hopes is almost palpable at every stem-cell meeting and conference. The lectures from most scientists almost always include a proviso that stem-cell therapies or cures are a decade or more away. But there is clearly pressure building to find stem-cell cures rapidly, and there’s at least one proposal to move toward the first human clinical trials next year."

"No matter one’s view on the issues involved, this has to stand as some of the most unusual language in any constitution anywhere in the world: a constitutional right to a particular line of scientific research, directly tied to a prospect for cures that are to come 'as speedily as possible.' In a way, it’s an expression of the ultimate California dream: the right to be cured, quickly."

Sunday, October 23, 2005

Will California Produce Biology's Holy Grail?

Some of California's top business leaders are going to get a fast sell on the future of stem cell research next Monday, assuming that the three men and one woman selected to make the presentation follow the program.

The event is the 2005 State of the State Conference sponsored by the Milken Institute, which says that 20 percent of the attendees have been chairmen, president or CEOs of their companies. Fifty percent hold the title of CO, chairman, president, vice president, CIO, partner or director.

The event includes a one-hour panel on "Stem Cell Innovation: The Next Frontier Economy?" The program notes for the session say:

"It is hoped that this holy grail of modern biology will yield not only treatments and cures for things like spinal cord injuries, Parkinson’s and Alzheimer’s, but maintain California’s global leadership in technology – one of its key economic drivers. Several states are following California’s lead, but the U.K., South Korea, Singapore and other countries have been providing a research-rich environment. Among the issues this panel will tackle: Where are we in terms of research capacity relative to other countries? How far away are we from developing therapeutic products? What are realistic expectations for commercial success? Will this translate into high-quality jobs? How will the state receive a return on its investment? "

Charged with exploring the topic are Robert Klein, chairman of CIRM;Peter Mountford, CEO, Stem Cell Sciences Ltd.; Thomas Okarma, president and CEO, Geron Corp., and Susan Hackwood, executive director, California Council on Science and Technology; professor, electrical engineering, University of California, Riverside.

Registration for the Los Angeles event is $495. For more information, see here.

California Stem Cell Calendar

(This calendar appears late Sunday or each Monday on the California Stem Cell Report. If you would like an event placed on the calendar, please send it to djensen@californiastemcellreport.com.)

October

No meeting of the CIRM Oversight Committee is scheduled for October.

Oct. 24

10 a.m. - 6 p.m. -- CIRM Scientific and Medical Accountability Standards Working Group, Luxe Hotel Sunset Blvd., 11461 Sunset Blvd., Sunset Ballroom, Los Angeles, discussion of regulations, "ESCRO" membership, banking requirements and compensation.

Oct. 25

2 p.m. - 6 p.m. -- CIRM Intellectual Property Task Force, Sacramento Convention Center, Room 103, 1400 J St., Sacramento, consideration of the IP report prepared by the California Council on Science and Technology. For more on this, see "Report Negative," "Report Released," "Who Benefits."

Oct. 28

9 a.m. -12 noon (estimated) – CIRM Facilities Working Group, Grand Hyatt at Union Square, Ballroom East, 345 Stockton St., San Francisco, consideration of bylaws, review procedures for facilities grants. See www.cirm.ca.gov for full agenda.

Oct. 31


9:30 a.m.-2 p.m. -- Informational hearing on IP issues and CIRM, State Senate and Assembly Health Committees, Hiram Johnson State Building, Milton Marks Conference Center Auditiorium 455 Golden Gate Ave., San Francisco. For more on this subject, see links in item above.
9:35 a.m.-10:35 a.m. -- "Stem Cell Innovation: The Next Frontier Economy," State of the State Conference, sponsored by the Milken Institute, Beverly Hilton Hotel, Los Angeles, registration $495, see full program here.

November

Nov. 2

8:30 a.m.-5:30 p.m. (estimated) – CIRM Oversight Committee meeting, Moscone Center South, Room 304, San Francisco, subjects include conflict of interest code, formation of strategic planning subcommittee, IP report, guidelines for embryonic stem cell research, training grants policy and criteria. See http://www.cirm.ca.gov/ for full agenda.

Nov. 17

8:30 a.m. -- Alameda Superior Court hearing on lawsuit against CIRM, Department 512, Hayward. For more on this see "Apricot City Showdown."

December

Dec. 6
Oversight Committee, City of Hope, Duarte. No agenda available. No teleconferencing available.

For a national and international calendar of scientific stem cell conferences, see this one prepared the International Society for Stem Cell Research.

Web Mystery

We have had a bit of mystery involving the Internet during the past several weeks. As a result, we have not had the best links to some documents posted by the California stem cell agency. For some unknown reason, we and others in the same geographic area here in Mexico have not been able to access the CIRM site or the California home page and the governor's home page. On the other hand, we have been able to access other California state agencies, such as the Department of Justice. An American information tech specialist, who researched the issue, tells us the problem lies somewhere in the Web as opposed to difficulties locally with our computers or ISP. We have queried the folks handling the California web pages, seeking their assistance as well as CIRM. The point being: Bear with us until the problem is resolved, and we can once again bring you timely and direct links to CIRM documents.

Wednesday, October 19, 2005

California and the South Korean Stem Cell Network

The California stem cell agency says it is not going to participate at this point in South Korea's plans for a worldwide stem cell consortium. Nonetheless, the network expects to have facilities in San Francisco and ties with organizations in California.

Reporter Carl Hall of the San Francisco Chronicle reported the developments in a story today that said, "South Korea is moving to establish an international consortium to generate hundreds of stem cell lines from human embryos using controversial cloning technology, possibly the boldest foray yet in the sizzling new field known as regenerative medicine."

The network is being created by stem cell superstar Woo Suk Hwang and his colleagues. The Chronicle quoted Hwang as saying California would be the best place for its US facility because of its stem cell-friendly climate.

Hall wrote that Stanford and UC San Francisco were recruited "but so far have declined, citing reservations about the project's legal and bioethical framework."

"The biggest issues include figuring out how to protect the health of research participants, set out financing and intellectual property rules, and ensure that any stem cell treatments will be affordable," Hall said.

As for CIRM, Hall wrote, it "has opted against becoming a formal part of the network. The California program's chairman, Robert Klein, traveled to Seoul to appear today with Hwang and his colleagues, but a spokeswoman said Klein's appearance was intended mainly as an endorsement of 'the science the South Korean government has made such a priority,' rather than as an endorsement of the network itself.

"Zach Hall, president of the California institute, said it's unclear how successful the South Korean venture might be given all the uncertainties.

"Hwang has been 'quite open,' Hall said, 'and we're delighted with that and want to encourage that. But whether this world stem cell hub will be helpful remains to be seen. We don't know enough about it to have any sort of opinion on it ... and at this time we felt it was premature for us to affiliate with them in any formal way.'"

The Chronicle said that women in California are likely to be recruited to donate human eggs. Hall noted that the governor recently vetoed a measure (SB18) by Sen. Deborah Ortiz, D-Sacramento, to add additional protection for egg donors.

Pacific Fertility Center, a San Francisco infertility clinic, will work with the network to procure eggs, according to the Chronicle.

"One of the first research projects is expected to be financed by grants from a Santa Barbara patient-advocacy organization called the Children's Neurobiological Solutions Foundation, which promotes research on pediatric brain disease," Hall said.

"'Our foundation wants to be a founding partner of this world stem cell effort,'" said Shane Smith, Bay Area-based science director for the foundation."

Soothing Anxieties in the Stem Cell Sector

The California stem cell agency has taken pretty much of a get-along, go-along position in its relationships with the stem cell industry and existing academic and research procedures.

That is not likely to change much as CIRM begins formally to establish the rules which will help determine who gets the potentially huge profits that could be generated from the $3 billion in research it intends to finance.

The business executives on the agency's board understand that the corporate world likes predictability. If a business is to undertake development of a stem cell therapy, it wants to eliminate as much risk as possible. Development of a product could cost hundreds of millions of dollars or more over years. Novel royalty or compensation arrangements introduce uncertainty into the possible return on investment. Uncertainly creates fear. Fear creates an unwillingness to even begin development of a new product.

CIRM plans to hold a hearing Monday in Sacramento on intellectual property issues. The focus will be on a report released earlier this year by the California Council on Science and Technology. Many on CIRM's Oversight Committee will find comfort in much of the council's work. For example, this advice on private investment:

"Encourage private investors to invest in further research and development of new technologies resulting from CIRM-funded research. Venture capital investment plays a critical role in the development of IP after initial research and before late-stage R&D which is more generally funded by private industry."

As it resists efforts to impose new IP rules, CIRM is also likely to cite the council's conclusion on share-the-wealth proposals:

"Royalty revenue sharing may have negative impacts on both non-profit and for-profit grantees. Revenue sharing imposed by CIRM on its non-profit grantees may act as a disincentive to invest the effort and cost necessary to secure patent protection, find an appropriate licensee, and ultimately transfer a promising technology to the commercial sector for the development of treatments and drugs that prove beneficial to the general public. In addition, for non-profit grantees, a royalty sharing requirement could, depending on how it is administered, prevent them from maximizing the impact of CIRM funding by using it to leverage federal funds, since federal funding rules require them to use net royalties for education and research purposes. Royalty revenue sharing imposed on for-profit grantees could discourage their participation in CIRM funding altogether."

Earlier this year, the CIRM staff analyzed a May version of SCA13. Many of the staff's critical remarks no longer apply because of changes made in the legislation. But some of its comments are likely to surface again in one form or another.

"Prop. 71 was carefully written with the involvement of three separate law firms and based upon case law research to avoid the constant litigation that would be likely should SCA 13 become law as written," the staff report said.

"The legal battles could paralyze the institute’s mission for years to come. While well-intentioned, these provisions could have a host of unfortunate and unintended consequences, including discouraging industry from involvement with the Institute.

"Private industry is a critical partner in developing scientific discoveries into safe and effective drugs and treatments that benefit the public. If an affordable drug-pricing requirement or a revenue sharing requirement were to discourage industry from participating in technology transfer, it would be to the detriment of the public health and well being."

Later, stem cell chairman Robert Klein commented that SCA13 could "create major legal problems and obstacles for the Institute in the development of therapies."

A venture capitalist once told told us that VCs decide to make an investment when their greed overwhelms their fear. We can expect CIRM to sooth anxieties in the private sector as it establishes its rules for sharing the stem cell wealth.

Tuesday, October 18, 2005

The Higher the Risk, the Higher the Reward?

Think of the state of California as a venture capitalist putting up seed money for risky endeavors. In the private sector, venture capitalists enjoy enormous rates of return. But they also lose lots on enterprises that fail.

Acting through the California stem cell agency, the state is serving as something of a venture capitalist, providing funds for research that private sector is unwilling to pay for because of risk. In the private sector, the higher the risk is, the higher the potential reward. The cost to state will be $6 billion. What should be the payoff to the state?

That is the question at the heart of the intellectual property discussions involving CIRM and a proposed constitutional change that could be on the ballot next June.

California's most influential state legislator on stem cell issues is the lead author on the measure, SCA13. Sen. Deborah Ortiz, D-Sacramento, proposed the legislation earlier this year. It already has cleared three committees in the Senate with bipartisan support and with no negative votes. It is now on the Senate floor.

The proposal includes language to tighten accountability and openness of the stem cell agency. But for our purposes today we are going to deal only with the issues of return on California's investment.

In its current form, SCA13 requires CIRM "to ensure that treatments, therapies, products, and services resulting from technologies and inventions derived from grants awarded are accessible and affordable to low-income residents, including those residents eligible for state and county-funded health care programs," according to a Senate staff analysis.

Ortiz removed more sweeping language after discussions with Robert Klein, chairman of the stem cell agency, which remains opposed to the ballot measure, largely on the grounds that its requirements would be so costly that it would discourage or prevent development of stem cell therapies. (We will have more on CIRM's position later this week.)

She has scheduled hearings for Oct. 31 in San Francisco on intellectual property and stem cell research. CIRM has its own hearing one week from today in Sacramento. Changes in the measure could easily come out of developments at the hearings.

Ortiz, who was a supporter of Prop. 71, has signalled her intent to aggressively pursue avenues that will lead to greater returns to the state than CIRM supports.

After the California Council on Science and Technology told California this summer to lower its expectations about big returns on stem cell research, she said, "As the council notes, there is an expectation that intellectual property policies need to direct a revenue stream to the state. The council also acknowledges that federal tax laws prevent Prop. 71, as written, from delivering on its promise to provide royalties or revenue streams back to the state while using tax-exempt bonds.

“Senate Constitutional Amendment 13, however, would establish a method for providing benefits to the state without jeopardizing the use of tax-exempt bonds. SCA 13 would require that the state’s public health programs have access at affordable, below-market costs to the products, medicines and therapies that eventually will be developed under Prop. 71. California should not have to pay twice for medical therapies that can assist our citizens who suffer from debilitating and life-threatening chronic conditions."

Following the earlier meeting between Klein and Ortiz, she said they both agree that the state should have some sort of return on its investment. She suggested that CIRM should examine "the model used by the International AIDS Vaccine Initiative, which requires entities receiving funding to commit to make vaccines available at reasonable prices and in sufficient supplies."

Klein suggested directing a "portion of the royalty payments negotiated by the ICOC into programs or initiatives to promote access to low cost therapies."

Also opposed to SCA13, according to the Senate analysis, are the Bay Area Science and Innovation Consortium, Bay Area Economic Forum and the Bay Area Council.

Supporting the measure are the California Association for Tax Reform, California Public Interest Research Group, Californians Aware and Common Cause.

Ortiz shelved SCA13 earlier this year when the Senate's Democratic leadership indicated it wanted to focus on the measures currently on the November ballot in California.

Once the election is past, the proposal is expected to clear the Senate and move on the Assembly, where it could be substantially modified by Ortiz.

CIRM staged a late, but major effort last spring to stall the proposal on its merits. But largely not discussed publicly was the potenial impact of another stem cell measure on the ballot in California less than two years after approval of Prop. 71.

SCA13 would likely become a referendum on the conduct of the stem cell agency, attract major attention from the conservative and religious right and become a major distraction from CIRM's primary efforts.

Correction

We incorrectly identified an organization in our Monday item, "Who Gets the Money?" It should have been the Center for Genetics and Society instead of the Center on Policy and Genetics.

Monday, October 17, 2005

Correction

Earlier today, we incorrectly reported that SCA13 had passed the California State Senate and was now in the Assembly. The measure, however, is still awaiting passage in the Senate. The error occurred in an item called "Who Gets the Money?"

CIRM Lawsuit Filings Available

If you are interested in receiving copies of the actual filings last week by the California attorney general and amicus brief in the lawsuit against CIRM, please send a note to djensen@californiastemcellreport.com. We will send them to you promptly.

Who Gets the Money?

Probably the biggest question of the year for the California stem cell agency is: Where's the money?

The second biggest is: Who gets the money?

That is what is at the heart of the intellectual property issue and CIRM. Two major hearings are scheduled for this month on the topic. One is being held by the stem cell agency on Oct. 25 in Sacramento. The other will be conducted by the Health committees of the State Senate and Assembly in San Francisco on Oct. 31.

During the election campaign one year ago, California voters were told to expect billions of dollars in benefits from passage of Proposition 71. A few months ago, a report from the California Council on Science and Technology said, "Get real." Don't expect huge bags of swag anytime soon, the council reported.

But State Sen. Deborah Ortiz, chair of Senate Health Committee, has authored a proposed constitutional amendment that would provide for greater benefits to the state than now proposed by stem cell agency leaders. The measure, SCA13, has already passed the Senate and is before the Assembly. It could be placed on the ballot in June of next year.

Look for folks from the Center on Policy and Genetics, Greenlining and the Foundation for Taxpayer & Consumer Rights to testify at one or both of the hearings. All three have indicated that they differ sharply with CIRM on IP issues.

Later this week we will have more to say on SCA13 and CIRM's position on intellectual property.

At this point, neither of the two hearings has remote access, either on the Web or otherwise. You can find the physical locations of both sessions in the California Stem Cell Calendar below.

Friday, October 14, 2005

Stem Cell Showdown in Apricot City

The stem cell stage is now set for a bit of courtroom drama Nov. 17 at 8:30 a.m. in a community east of San Francisco that was once known as "The Apricot City."

Directing the affair in Department 512 in Hayward will be Superior Court Judge Bonnie Lewman Sabraw, who was Alameda County trial judge of the year in 2001 and who was named to the bench by former Gov. Pete Wilson.

At stake is the existence of the California Institute for Regenerative Medicine. The Life Legal Foundation, which was deeply involved in the Terry Schiavo case, and a couple of conservative groups called People's Advocate and the National Tax Limitation Foundation, want to euthanize the stem cell agency.

Their contention is that CIRM violates the California constitution despite the fact that it was created by a constitutional amendment approved by voters in a process permitted by the constitution. Their suit says that the agency is not under "the exclusive control" of the state government.

California Attorney General Bill Lockyer argued in a brief earlier this week, "The voters' will as expressed through the initiative process is entitled to great deference. Yet the mere pendency of these challenges, even though they are without merit, has effectively prevented the state from marketing the bonds(to fund stem cell research).''

Entering the stage this week was an array of groups that filed an argument supporting the state's position. Prepared by the Los Angeles law firm of Munger, Tolles & Olson, it said, "Given the highly politicized nature of the subject, embryonic stem cell research remains especially vulnerable to shifts in political winds and the political fortunes of particular officials and candidates."

The brief continued, "No one wants to start down a new path of research that shows great promise only to have funding for that research up for grabs every election cycle."

The filing by Munger, whose clients include Warren Buffet, noted that the petitioners had something at stake. For example, Munger said, some of the organizations are engaged in scientific research and, "like other scientific institutions in this country, have benefited from public financial support."

Reporter Terri Somers of the San Diego Union Tribune, in fact, pointed out that the Burnham Institute, the Salk Research Institute, Stanford University and the University of Southern California, which supported the Munger filing, have been selected for CIRM grants worth millions of dollars.

Other supporters include the Christopher Reeve and Michael J. Fox foundations. A complete list can be found in the CIRM press release.

While the friend-of-the-court filing noted that Proposition 71 created CIRM "notwithstanding any other provision of the constitution," its main focus was on the effectiveness and history of the peer review process that has been used at the national and other levels to make grants.

It said, "In the United States, decisions concerning government funding of research proposals have largely been separated from politics. That separation has been achieved by a system that allows political input when establishing broad policy goals, followed by scientific decision-making through the peer review process to determine which specific proposals should be funded to achieve those goals. Peer review ensures that the quality of research proposals is judged by scientific merit and by the likelihood that the research proposal will achieve the goal of improving public health."

We should note that the People's Advocate and National Tax Limitation Foundation are two groups that have supported the virtually unfettered right of the people to the initiative process. It is odd that they now find the voters' will dubious.

Reporter Bernadette Tansey of the San Francisco Chronicle also wrote about this week's filings.

Wednesday, October 12, 2005

Stem Cell Legislation to Rise Again

In California's Capitol, few things are certain – even death and taxes.

Particularly the death of legislation.

Few measures ever truly die, they just are reincarnated in one fashion or another. Such is the case with the stem cell measure (SB18) vetoed recently by our governor. It would have required a performance audit of the California stem cell agency and provided protection for egg donors.

The bill by Sen. Deborah Ortiz, D-Sacramento, cleared the legislature with only two votes against it. But only one vote really counted – Arnold's.

Her office says the measure will rise once more when the legislature returns. Some changes are likely, but the California Institute for Regenerative Medicine cannot rest easy yet.

Low Hanging Fruit vs. Embryonic Stem Cell Research

"Scientists want to be free," according to the New York Times, which reports that the California stem cell agency is going to have to sort through conflicting agendas involving patient groups and scientists as it dispenses billions of dollars in stem cell research funds.

Reporter Nicholas Wade wrote Tuesday about the agency's stem cell conference earlier this month, extensively quoting Zach Hall, CIRM's president.

"Perhaps his most formidable problem is that the public's hopes for immediate success run high," said Wade, "but scientists at the conference warned that many basic problems with human embryonic stem cells remained to be solved - a sign that no therapeutic use of the cells is likely for years. Underlining that caution, few companies are in the cell therapy field and venture capitalists have shown little interest, some speakers complained."

Wade continued, "Because of the pressure for quick progress, several scientists urged Dr. Hall to focus on the 'low hanging fruit,' meaning research with the adult stem cells like the blood-forming cells of the bone marrow. Bone marrow transplantation has been developed into a routine though still hazardous therapy that can now treat eight diseases and could be extended to more, said Dr. Robert S. Negrin, chief of the Stanford blood and marrow transplant program.

"The idea of seeking quick gains from adult stem cells was resisted by some patients' advocates who said the intent of Proposition 71 was to focus on the research with human embryonic stem cells that the federal government cannot support.

"The new institute will have to sort through other conflicting agendas. Scientists want to be free to follow long-term goals, and some voiced the fear that patients' advocates would seek to force short-term solutions or channel the most money to the diseases with the most sufferers."

Wade did not really discuss the role of the Oversight Committee in making decisions about research strategy. Nor did he spend much time on the role of stem cell chairman Robert Klein. His name was only mentioned once in the piece in the New York Times, which has rarely reported on CIRM. Chalk up the Times' attention to the staging of the international stem cell conference, which was partially aimed at generating this sort of article, among other many other things.

Tuesday, October 11, 2005

Villains, Big Pharma and Stem Cell Research

California political life has some perennial villains. For example, Big Oil. You can't go wrong attacking Big Oil, goes the general political wisdom.

A newcomer to that pantheon is Big Pharma. While the phrase does not exactly roll off your tongue, Big Pharma has major problems with its public image. And now Big Pharma is being invoked in connection with the California stem cell agency. At issue is who stands to benefit from $3 billion in taxpayer-financed stem cell research.

Here is how the matter was defined in an op-ed piece Monday in the San Jose Mercury News written by Jerry Flanagan, health care policy director for the Foundation for Taxpayer and Consumer Rights, and Deborah Burger, president of the California Nurses Association:

"The proposal to apply federal ownership rules to California stem-cell research raises key questions: Do taxpayers who are funding stem-cell research deserve a return on their investment? Should private industry be allowed to charge the public whatever price it chooses to access medical treatments whose discovery and development the public already paid for?"

The article gave this example of past performance involving Big Pharma: "The rights to the blockbuster glaucoma drug Xalatan, developed with $4 million in taxpayer grants at Columbia University, were sold to Pharmacia Corp. for less than $150,000. Pharmacia made $507 million on Xalatan in 1999 alone, charging U.S. patients $50 a bottle for ingredients that cost only pennies."

Flanagan and Burger also noted that there are some signs that Californians should be wary of the intellectual property position of the California stem cell agency.

"At least 13 of the 16 applicants to receive the first round of Proposition 71 grants have already fostered deep ties with the drug and biotech industries," they wrote. "For example:

•"One university grant recipient, the University of California-San Francisco, has staff who serve on pharmaceutical company boards and the stem-cell oversight board (which approves grant applications), receives funding from one of the world's largest drug manufacturers (Bristol-Myers Squibb), and has a research center on campus paid for by biotech giant Genentech.

•"At least eight of 11 universities to receive grants have staff serving on the boards of, or are employed by, pharmaceutical and biotech companies such as Amgen, Genentech, Bristol-Myers Squibb and Johnson & Johnson.

•"The private Burnham Institute has four board members with ties to biotech or pharmaceutical companies and its president is a member of the stem-cell oversight board."

Monday, October 10, 2005

The Bee: Stem Cell Conference Wise, But CIRM Leaders Still Bogus on Disclosure

The Sacramento Bee does not find many matters to be pleased about concerning the California stem cell agency.

Editorially it has been been a frequent and vociferous critic. But during the weekend, it wrote approvingly about the $215,000 stem cell conference earlier this month. That was the one with the secret budget that we wrote about earlier.

The Bee called the session "one of the wisest expenditures we've seen yet from this agency." The conference "exposed the challenges researchers face in studying embryonic stem cells, which have the ability to develop into any tissue and organ of the body."

As an example, The Bee wrote, "Say that scientists find a stem cell cure for Type 1 diabetes, which afflicts 1 million Americans. How do you mass-produce the billions of islet cells needed to treat these people? Should that be a private or public enterprise? If it is private, will only the rich be able to afford it?"

The editorial continued, "Unfortunately, in assembling a series of panel discussions that were broad in scope, conference organizers ignored any discussion of the many ethical quandaries that confront this field. One key question is how research institutes will ensure that women aren't exploited, or put at undue risk, when they donate eggs and embryos for research. Similar concerns surround people who may one day volunteer for experimental - and potentially risky - stem cell therapies.

"At the moment, lawsuits have blocked the stem cell institute from distributing grant money, so these issues may seem premature. They are not. During this period of limbo, institute leaders would be smart to deal with all outstanding concerns about the institute's operations, so they can hit the ground running if and when they have money to spend.

"Speaking of outstanding concerns, it was heartening to hear scientists publicly disclose their business relationships during presentations at the conference. For months, institute leaders have claimed that scientists wouldn't want to serve as advisers if they had to publicly reveal their economic interests. Last week's confab, once again, proved such claims are completely bogus."

Friday, October 07, 2005

“Everything” Targeted in Stem Cell Research

Reporter Edie Lau of The Sacramento Bee had another take on last weekend’s stem cell conference that we missed in our search.

She wrote, “What should California spend its stem cell money on to produce good medicine? Scientists called together over the weekend to give their ideas had, in sum, a short answer: On everything.”

She noted that stem cell research is still in the early stages and that much needs to be done.

She also had this: “Dr. Irving Weissman, director of the Institute for Cancer and Stem Cell Biology and Medicine at Stanford University, said one method for testing cells is by putting them into mice and seeing how the cells behave.

“Weissman acknowledged that the step is, to some minds, objectionable. That's because in creating animals possessing human cells, scientists would be creating human chimeras, calling to mind monsters of Greek mythology. Nevertheless, Weissman said the work is essential, and raised concerns over a bill in Congress that would ban such research.”

Wednesday, October 05, 2005

Want a Stem Cell Grant? Here Are Some Clues, Sort Of

If Californians wanted to know about the big international stem cell conference staged last weekend by the state's stem cell agency, the man they needed to rely on was reporter Carl Hall of the San Francisco Chronicle.

He appears to have been the only newspaper reporter filing reports on the two-day conference in San Francisco. His stories Sunday and Monday (a shared byline with Cornelia Stolze)provided some insight into the thinking at the agency and some details on how it intends to proceed, although it is still facing a court battle over its existence that will extend into 2006.

Hall wrote on Sunday that presentations Saturday "broke little new ground." On Monday, he reported that the session "marked a turning point for the state stem cell agency as officials try to shift from the frustrations of starting a controversial new enterprise into solving some of the most exciting challenges of biology." ("Turning point" may have been a bit optimistic.)

Hall said stem cell directors compared the presentations at the $215,000 conference to "reading about political candidates on the eve of an election: Even though they had heard it all before, they were still primed for a fresh summary. 'We're getting a solid scientific and clinical foundation for the institute's future work,' said Michael Goldberg, a venture capitalist who serves on the Prop. 71 governing board, known as the Independent Citizens Oversight Committee.'"

Hall's stories provided some fresh reporting on possible future direction of the agency.

"Several committee members said it's clear the program must bankroll novel collaborations to solve the big problems and avoid duplicating efforts, such as creating central facilities for banking lines of stem cells and carrying out clinical trials.

"That pointed to some obvious conflicts if research centers long used to competing with one another suddenly find themselves trying to collaborate, while also allying with profit-seeking companies on projects backed by tax-exempt bonds.


"Dr. Edward Holmes, medical school dean at UC San Diego and a member of the stem cell board, said the "industrial model" of drug development is a hard sell in academia.

"'Academics are rewarded for not doing the same thing twice,' he said.

Dr. Francisco Prieto, a diabetes specialist on the stem cell board, suggested it will be no simple matter to turn the scientific priorities into a workable program, adding that some key elements were absent from the weekend agenda. 'We've heard a lot about the what and how of stem cell research, but we've talked very little about the ethical and social implications,' he said.

Jeff Sheehy, a board member appointed to represent people with HIV/AIDS, said the talks highlighted 'a fundamental tension here between basic science and clinical science.'

"'How much do you have to know before you can actually start putting these cells into somebody?' he said, a question regulators also are beginning to tackle."

If researchers are looking for clues to what types of grants they might be able get funded in the future, Hall wrote, "Although it's hardly the final list, these appear to be some of the most important recommendations most experts endorsed:

"-- A centralized bank of human embryonic stem cell colonies and other raw materials to do the research, probably one in Northern California and another in Southern California to serve labs in each region.

"-- Fundamental research on the basic tools of stem cell research, in particular how to reliably coax the ultra-flexible stem cells into forming the many specialized cells of the body, a process known as differentiation."

"-- More efficient ways to genetically reprogram stem cells to represent particular genetic diseases, probably using a type of research cloning technology, called somatic cell nuclear transfer.

"-- Foster collaborations among many institutions, drawing in corporate partners early on to ensure that basic research is done in a way that will satisfy regulators and is directed toward projects with the best chance of paying off."

Hall reported that the agency plans to create subcommittee to come up with a strategic plan, a process that could cost hundreds of thousands of dollars, according to CIRM documents. Presumably most of that will go to a private consulting firm, given its minimal staffing and high use of outside firms.

Saturday, October 01, 2005

Otis Aims at Stem Cell Report; Governor Nixes SB18

Hurricane Otis is taking a run at the California Stem Cell Report. As of this posting, it should brush by us down here in Romantic Old Mexico near Guaymas. But preparations for all possibilities are distracting us from postings.

However, we can tell you that the governor vetoed a measure to tighten oversight of the California stem cell agency. Reporter Carl Hall of the San Francisco Chronicle looks like he may be the only writer this morning to cover the veto.

The measure by Sen. Deborah Ortiz, D-Sacramento, would have added performance audit requirement and egg-donor protections to the California stem cell program.

Hall wrote, "In a veto message, the governor said he supported the main provisions of the bill but found it to be "in direct conflict" with a provision in Prop. 71 barring amendments until 2008."

"Ortiz issued a news release Friday decrying the veto, arguing that the bill
was 'carefully drafted' to avoid conflict with Prop. 71. She said that
'patient protections and appropriate public accountability must be included to
maintain the public's confidence' in the stem cell effort. Zach Hall, the institute's president, said during an interview Friday that the
institute never took a formal position on the bill. Officials already are
working through details of egg-donor protections, he said, and support the
need for routine audits.

"'We have always assumed we would be audited, and we want to be," Hall said.
'Exactly how it happens is not a major issue for us. It can be by whatever
mechanism the Legislature feels is appropriate.'"

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