Royalties and California Stem Cell Research: $1.1 Billion Promise Still to be Fulfilled

California’s 11-year-old stem cell research effort was born with the extravagant promise that it would generate something like  $1.1 billion in royalties that would flow into the Golden State’s coffers.

None of that bonanza has yet surfaced, but there is no doubt that scientific research generally has the potential to generate economic value for state entities. A case in point was news this morning in the Los Angeles Times that the sale of drug rights (intellectual property or IP) held by UCLA will generate “hundreds of millions of dollars.”

The story by Teresa Watanabe said the deal involved a prostate cancer drug developed at the campus. She reported,

“Royal Pharma, a New York-based pharmaceutical company, paid $1.14 billion for royalty rights to the drug known as Xtandi. It was the largest-ever technology transfer deal involving a University of California invention.”

 California’s $3 billion stem cell agency is not involved in the UCLA-Royal Pharma arrangement. However, the agency, known formally as the California Institute for Regenerative Medicine (CIRM), has acquired other bits and pieces of IP as the result of the $1.9 billion that it has given to researchers over the last decade.

So far the agency has not been able to turn that IP into cash largely because no therapies have reached the marketplace, although the agency has a number of clinical trials underway.

Back in 2005, the royalty promises made during the ballot campaign that created the stem cell agency came under fire as the result of actions by the man who headed the campaign, Robert Klein. He also served as the agency’s first chairman.

Bernadette Tansey, writing in the San Francisco Chronicle, reported,

“The billion dollars in royalties that voters were told could flow to the state if they passed California's $3 billion stem cell research funding initiative in 2004 may turn into an empty promise.”

Stuart Leavenworth, then editor of The Sacramento Bee’s editorial pages, wrote,

“In marketing this initiative, proponents said the state would receive not only miracle cures and reduced medical costs, but also up to $1.1 billion in royalties from new stem cell innovations.

“Now we are learning that this promise, at best, was misleading. At worst, it was a cynical ruse.”

The issue turned on whether tax-exempt bonds would be used to finance the agency, which depends solely on state borrowing. Federal tax laws restrict the use of such bonds. To date, however, no tax-exempt bonds have been used to support CIRM, according to last report.

The use of taxable bonds, however, raises the cost of borrowing and the cost of the research. Estimates in 2004 were that that the total cost of the agency would exceed $6 billion, including the interest on the borrowed $3 billion. No revised, upward estimate has been made public, if it exists.

The issue of the agency’s IP, its possible value and protection has surfaced only intermittently over the years. The most recent mention came last November in the agency’s plan for spending its last $900 million. (The agency expects to run out of cash for new awards in less than four years.)

The agency’s five-year plan said that it would “demand creation (from universities)  for the out-licensing of CIRM-funded technologies with a greater opportunity to achieve a financial return.” Aligned with that is a $75 million proposal to partner with specific enterprises and give them pick of the agency’s best research that does not currently have a partner. (See here and here.)

Relationships with universities can be touchy at the agency because its governing board includes top executives from virtually all of the major, academic stem cell research centers in California. Sometimes those board members can be protective of the interest of their institutions, which have received hundreds of millions of dollars in agency cash over the years.

For those who want to dig more deeply into CIRM’s IP policy, the regulations can be found here and here.