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.