Sunday, September 23, 2007

Ensuring a Stem Cell Future: CIRM's Proposed Biotech Loan Program

The California stem cell agency is preparing to take the first step towards setting up a loan program that would help to extend its life well beyond 10 years and solve some of the sticky problems associated with sharing the potential wealth created by its grants.

The Oversight Committee for the $3 billion agency will meet Oct. 3 in San Diego to consider creation of a task force to develop a "biotech loan program." No details for the effort were available today on the CIRM web site, but the task force is likely to be similar to an intellectual property task force that drew up the standards for sharing potential gains from inventions that result from CIRM grants.

We have discussed the concept of a loan program on a couple of occasions with the chairman of CIRM, Robert Klein(photo above). He told us that it would be one way to assure that funding continues for stem cell research for some time. The effort would do so by generating income from interest charged on the loans. Klein noted that it is imperative to begin the program soon in order to generate cash that could presumably be reinvested in additional loans and, we speculate, in other financial instruments.

Intellectual property issues have bedeviled the grant program, generating controversy over the size of the state's potential royalties from stem cell inventions. Sharing-the-wealth questions are among the concerns that have surfaced in the California Legislature, and they are likely to surface again. Another contentious area revolves around sharing results of research with other scientists at low or no cost, a shibboleth of science. Profit-oriented researchers regard such requirements with skepticism.

A loan program could erase many of these IP issues because the return to the state would come from repayment of the loan – not royalties -- although other conditions obviously could be attached to lending.

A loan program also is linked to what is widely and wrongly believed to be the 10-year life span of the California stem cell program. No "sunset" provision exists in Prop. 71, although the 2004 debate about the ballot measure constantly referenced a 10-year period. The agency is limited to the issuance of $3 billion in bonds at a rate not to exceed $350 million a year, although it can carry over amounts not issued from year to year. In addition, CIRM enjoys a special status among state agencies. It can accept private funds, much as a nonprofit charity does, including those from fundraisers. The only other state department that we know of that has a similar capability is the Fair Political Practices Commission, another agency created by a ballot measure. There could be others, however. One possibility concerning financing for CIRM beyond 10 years could involve earmarking donations to the agency for loans to industry.

A loan program also carries with it a series of other interesting questions such as:

How does the agency establish the credit-worthiness and perform due diligence on applicants? It has no expertise in this area. Presumably it would rely on outside contractors.

But where does it find even an oversight staff for a lending and investment program that could run into hundreds of millions of dollars? The agency is limited by law to 50 employees. It currently has 26. Even at 50, some Oversight Committee members believe it will be understaffed for its existing programs. Contracting out such critical functions also involves difficult conflict-of interest questions, since outside firms do not have to file public statements of their economic interests.

How does CIRM deal with defaults? Does it take a share of the company in return, which may be worth nothing or even less than nothing(i.e. loaded with unpayable debt)? Does it sue for payment? The biotech industry currently consists primarily of companies that are hard-pressed to maintain their own financial viability.

Presumably those questions and many more will be addressed by the new biotech task force.

Klein has had experience in creating and running state lending programs. He served for six years as a member of the board of the multi-billion dollar California Housing Financing Agency. Klein says he authored the legislation creating the agency when he was an aide in the legislature. Klein notes his own business, a real estate investment banking firm, has never obtained any financing from the housing agency.

Because of his background, Klein is likely to be even more immersed in the loan program than he is in other agency matters, and will probably seek additional personal staff from the 50 allotted to the agency.

To learn about other matters on the Oct. 3 Oversight Committee agenda, see the item below.

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