CIRM's intellectual property (IP) regulations, which have received little public attention, are key to determining who gets what out of the arrangement. However, at this point, nobody knows how much or when any cash will come back to the state.
The IP rules are currently aimed at financing more research and production of therapies as opposed to generating the most income possible for the state. It is a balancing act, according to CIRM.
At the request of the California Stem Cell Report, the agency last week answered a number of questions concerning some of the details that come into play in cases such as Forty Seven. The upshot is that a grant, which is what Forty Seven received, can be converted to a loan, paid off and thus end any obligation to pay royalties.
Here is how the agency's intellectual property rules work, starting with the sale of Forty Seven.
The per share price to be paid for Forty Seven is $95.50, up 1,600 percent since last October's low of $5.53. The agency does not share in that run-up. State agencies are barred by the State Constitution from owning stock.
Any payout for the agency, known formally as the California Institute for Regenerative Medicine (CIRM), is down the road. If a profitable treatment ultimately emerges, the state -- not the agency -- might get some royalties through the company or Stanford. In that case, state lawmakers could spend the funds for anything from salaries at the Department of Motor Vehicles to purchase of office furniture.
Or Gilead Sciences, Inc., the new owner of Forty Seven, could convert the CIRM grant to a loan, which then could be paid off with interest, ending the possibility of extended royalties from the company. In that case, the payoff would go to CIRM for research purposes -- not the state's general fund.
In 2015, when CIRM directors approved the loan conversion provision, Randy Mills, then president of the agency, said the mission of the agency is to produce therapies -- not to generate large profits. He said loan conversions would recycle CIRM cash with interest into more research faster than royalties.
Here is the text of our questions and CIRM's responses concerning IP rules, with more details on how it all works.
CIRM: The interim loan conversion policy was implemented in May 2015. Our then President and CEO Randy Mills recommended the changes, and the CIRM Board approved them, to try and bring in more for-profit applications. He felt the existing policy added complications on the commercial development path for therapies, making it less attractive for for-profit companies to apply to us for funding. Engaging with for-profit companies is key to delivering on our mission so we made the changes, not because of pressure from existing grantees or anyone else.
(The meetings involved approval of the current IP regulations.)
California Stem Cell Report: Is it accurate to say that a company can escape any obligation to pay royalties by unilaterally converting a grant to a loan? Can CIRM do anything to prevent the company from such a conversion? (See here for language from an federal document filed by Forty Seven.)
As these policies were discussed and approved by our Board it does not make sense for us to try and prevent a company from following our rules.
California Stem Cell Report: Does the proposed new initiative do anything to prevent that from occurring or affect it in any way?
CIRM: The new initiative does not address this issue. Our Board has, as it always has had, the flexibility to change the IP policy if it so chooses.
California Stem Cell Report: Can you please clarify the language concerning the interest rate on the loan? Does the interest take effect retroactively beginning with the date of the award? In other words, let's say the award was made in 2016. The company converts to a loan in 2026. Does it have to pay interest for all of those 10 years?
CIRM: Yes, the interest takes effect retroactively but only to the date of each individual payment. Since the grant is paid out over the life of the Award, each payment is treated individually in determining the compounded interest up the conversion date. The specific interest rates are determined by the stage of clinical development at the time of election.
California Stem Cell Report: Can you also clarify the following language from the SEC document related to how the total interest amount is calculated. It raises a possibility that interest could be as much as 30 percent in year in some cases. The phrase I am referring is "plus zero to 30% per annum that varies depending on the stage of the research and the stage of development at the time the election is made."
CIRM: The election point at the time of conversion as well as the starting point of the CIRM-Funded Project affects the return. Please see page 29 of the CIRM GAP linked here for the chart.
California Stem Cell Report: If a unilateral conversion is allowed, doesn't that adversely affect the interests of the state of California by providing a relatively inexpensive way to avoid paying potentially many more millions to the state?
CIRM: There is a balancing act between the CIRM’s mission - accelerating stem cell therapies to patients with unmet medical needs - and a financial return back to the State. In the interests of funding for-profits, who are generally better prepared to advance clinical projects to cure patients, this loan conversion policy was adopted by the CIRM Board. Since it is a loan, the money returns to CIRM for further reinvestment in other projects. Indeed, without the adoption of the conversion option by our Board it is possible that companies like Forty Seven Inc. might not have applied to CIRM for funding. Before these new regulations were introduced CIRM had few for-profit companies applying for our funding.