The Royalty/IP Angle on California's Proposed $150 Million Stem Cell Powerhouse

California's stem cell agency was born in 2004 with promises to voters of up $1.1 billion in royalties from new, effective and lucrative therapies. At the time, however, creation of a unique, $150 million, public-private stem cell company was not even a gleam in anybody's eye.

This Friday, the agency is scheduled to act on details of the financing structure for such a company with the hope of luring industry into a deal with the Oakland-based agency. The bold and risky proposal -- dubbed ATP3 -- has raised questions, including some from readers of this report, about how the intellectual property (IP) and royalty provisions would work.

The California Stem Cell Report last week queried the California Institute for Regenerative Medicine (CIRM), as the agency is formally known, and again this week about the matter, which is a tad complicated but very important indeed. To be clear from the start, CIRM does not own any IP, just the rights to some royalties which would flow to the state's overall budget.

Here is what Kevin McCormick, senior director of communications, told us today via email:

"It is very complex as its something completely new.  

"For the royalties that the (research) grantees negotiate with ATP3, the (state's) general fund will take a percentage of the licensing revenue that the grantees received.  All revenue-sharing fees go to the general fund. 

"If the ATP3 Newco (the hypothetical company) “takes over” a current CIRM grant and becomes the grantee of record, it has the same rights as any other grantee.  For CIRM 2.0 awards, there is an option right to convert the grant to a loan.  Under a loan, the payback of the loan returns to CIRM.  For CIRM 1.0 awards, no such conversion right exists.
If the ATP3 convertible note is sold, the proceeds of such sale will return to CIRM. (The agency plans to use $75 million in convertible notes to help finance the company). In such a case, the grantees’ revenue-sharing obligations will still exist.

"Here is an example:

"Grantee X has a cell therapy which was developed under a closed Disease Team 1 grant and is in Phase I clinical trial under a current CIRM 2.0 CLINI grant.  NEWCO licenses the cell therapy IP and data from Grantee X.

"A)  If Newco decides to take over the current CLINI grant, it will become the Grantee of record for the CLINI grant and have revenue-sharing obligations to the General Fund for that grant (which may be converted to a loan).  Grantee X will have a separate revenue-sharing obligation to the General Fund for the closed Disease Team 1 grant.  In this scenario, the General Fund may have two sources of revenue from the two different grants.

"B)  If Newco decides not to take over the current grant, then Grantee X will have revenue sharing obligations under both of the grants back to the general fund."

Last week McCormick also addressed some of the issues involving what might be considered the "yield" on the state's proposed $75 million investment with a partner that would also put up $75 million to create the company. He said,

"In addition to the state general fund, David, we would also identify CIRM, potential grantee/researchers and developers, academic institutions in the state, and more broadly the citizens of California.  CIRM will benefit in the event the program is successful, ensuring additional funds are available to CIRM to leverage CIRM research programs across the spectrum.  Existing and future grantees, researchers and institutions will benefit by opening up commercialization opportunities and providing a path forward for development of CIRM-funded research. As for the general fund, by providing an avenue for commercial exploitation of existing CIRM-funded IP (which are subject to existing revenue sharing rules under CIRM’s IP policies), the general fund will benefit by the commercial success of these projects that might not otherwise occur."