Financial Terms Approved Today for California's $150 Million, Stem Cell Powerhouse.

Highlights
Likely a major legacy
$75 million loan, 50 percent to be repaid
Convertible notes could sold by CIRM
Changes in application review?

Directors of California's stem cell agency this morning approved financing terms for a proposed, $150 million, public-private company that the agency hopes will accelerate the creation of long-sought stem cell therapies.

The plan to create a stem cell "powerhouse" is likely to be one of the landmark legacies of the state's $3 billion research effort -- for better or worse. Such a partnership would be unique in California history and nationally.

The agency has yet to produce the cures promised to voters in 2004 when they created the research effort and provided the billions in bond funding. Total costs, including interest, will run about $6 billion..

Today's action set the terms for the $75 million in a loan that the agency -- formally known as the California Institute for Regenerative Medicine (CIRM) -- would hand out. The funds would go to a private partner that would also put up $75 million.

A joint committee of the directors approved the terms, with virtually no discussion, on an 8-0 vote during a meeting that lasted only 10 minutes.

The aim of the agency is to "de-risk" development of therapies in order to entice a well-financed and well-managed partner to take CIRM research into the marketplace and make it widely available to the public. The partner would be expected to pay back only 50 percent of the loan plus interest. The new company would also have the pick of the 94 percent of CIRM research that doesn't already have a business partner.

The agency plans to provide the $75 million in three different notes. CIRM would then be able to sell the notes to another investor at time when it would appear to be most profitable. Or the agency could simply hold onto the loans.

The loans would be convertible to stock in the company, although state agencies cannot legally own such stock. However, a possible buyer for the notes might see an opportunity for profit and would be willing to pay the agency more than the value of the loan.

If the company is successful, it could generate royalties to the state's general fund under the provisions of CIRM's rules. Cash from the sale of the loans, however, would go directly to CIRM. The agency has not yet earned any royalties from the research it has funded.

Directors of the agency approved the concept for the new company -- minus today's finance terms -- at a meeting in December. Maria Millan, senior director for medical affairs, told them that the goal is "to create a therapeutic powerhouse that increases the likelihood of getting stem cell therapeutics to the patients."

Today's action set the stage for final preparation of a request for interested parties to apply for the $75 million for what it calls ATP3 (short for Accelerating Therapeutics through Public-Private Partnerships). CIRM has said the partner could be an existing company, a new one or some sort of combination. The agency said it consulted with companies, lawyers and venture capitalists to prepare the financing terms.

Under the current timetable, the application request would be posted in the third quarter of this year, according to Kevin McCormack, senior director for CIRM communications. The proposals would be reviewed the agency's grant reviewers behind closed doors during the first quarter of next year. In nearly all cases over the last 11 years, favorable decisions by the reviewers are routinely ratified by CIRM directors. The directors are expected to take their formal vote in early summer of 2017.

The blue ribbon reviewers come from out-of-state. The identities of reviewers on specific applications are withheld by the agency. Their professional and economic interests are not publicly disclosed, although agency asks for the information and asks the reviewers to recuse themselves if they (the reviewers) see a conflict.

CIRM Director Steve Juelsgaard, former executive vice president of Genentech, said the award is more about business than science and needs reviewers who understand what makes a business successful. CIRM officials said they would brief the joint committee on review procedures for the award when they are more developed.

McCormack confirmed to the California Stem Cell Report that proposal is unique. He said,

"CIRM diligently scoured the landscape for inspiration for its ATP3 model. This effort confirmed that ATP3 is a novel response to a unique set of challenges not commonly encountered in CIRM’s field. A given component of the program may be inspired by one example or another, but the design of ATP3 as a whole is custom tailored to CIRM’s environment."

McCormack also said that the state governor's, treasurer's and controller's offices have all been briefed on the plan. However, under the ballot initiative that created the agency, no state officials, including the legislature, have legal control of the agency policies or research funding.

Here are links to the presentation today, a CIRM staff memo on the loan terms and the term sheet. Here is a look at the risk-benefit analysis by CIRM, and a look at how the intellectual and royalty rights would work. Other background can be found here and here.

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."

A Book Review: Stem Cell Battles in California, a Pioneer's Perspective

(Editor's note: The following book review was offered by Raymond Barglow of Berkeley, who describes himself as a veteran of the Proposition 71 ballot campaign of 2004.) 

By Raymond Barglow

Don Reed's new book "Stem Cell Battles: Proposition 71 and Beyond" (available at Amazon) gives us an insider's perspective on the historical whirlwind that today is driving forward medical research in California and elsewhere. The author, who has been called the "Grandfather of Stem Cell Research Advocacy" for his longstanding commitment to this cause, is intimately familiar with the community of scientists, politicians, and patient activists who first came together over a decade ago to advocate stem cell research. Their signature achievement has been passage of Proposition 71 in California, which established financing for the research to the tune of three billion dollars. Largely as a result of their effort, we stand today at the threshold of medical breakthroughs that will save millions of lives.

As Reed explains, the stem cell research mission is advanced out not only in laboratories but also in the centers of political power. The research requires funding and has to withstand attack from

Don Reed on right, left is Bob Klein, former
 chairman of the stem cell agency,  and center is
Arnold Schwarzenegger, former governor of California

religious fanaticism that aims to shut it down. Standing staunchly against publicly funded embryonic stem cell research have been not only anti-government conservatives but also fundamentalist religious organizations and Catholic officialdom.

Claiming that the very earliest embryo, consisting of a few hundred cells and so small that it is invisible to the naked eye, has a sacred "right to life," opponents of embryonic stem cell research have organized to defeat funding in federal and state legislatures and have sued in court to make the research illegal. This has been and continues to be a hard-fought battle, with neither side clearly prevailing to date.

In the 1980s and '90s, AIDS activism united patient advocates with doctors and scientists to push forward the search for cures. Less well known is the stem cell research movement whose equally challenging path forward Reed chronicles for us. Although the story that he tells begins in California, many milestones have also been achieved in other states and abroad. Researchers in Canada, China, Singapore, Brazil, Japan and many other countries form a worldwide community to advance the search for deeper understanding of diseases and the invention of effective stem cell treatments to cure them. In a world torn apart by narrow interests and violent antagonisms, we have much to learn from the example of impassioned cooperation that the worldwide stem cell research community has set.

In brief, Don Reed provides in this book an inside view of the stem cell research saga, and he's done so with wisdom, spirit, and a sense of humor that combine to make the book entertaining as well as profoundly illuminating.

Will There Be Life After 2020 for the California Stem Cell Agency?

LOS ANGELES -- Directors of the California stem cell agency, which is due to run out of funds for new awards in five years, have begun what is likely to be a drawn-out public discussion of how to finance the agency's work beyond 2020.

The subject of life-after-death -- death being defined as termination of the agency's $3 billion in bond funds -- arose yesterday during a meeting of the agency's governing.

Options ranged from another bond issue to seeking private, philanthropic funds. However, unless the cash comes in the form of state bonds, it is not likely to amount to the $300 million-a-year the agency was authorized to spend during the last 11 years. California Gov. Jerry Brown has also more than once deplored the amount of state debt generated by state bonds.

The agency is funded through the bonds, money that the state borrows, that were authorized by a ballot initiative in 2004. Additional bonds could be provided through the initiative process, which requires millions of voter signatures, or by the state legislature placing another bond measure on the ballot. Then a campaign must be mounted. In 2004, the stem cell campaign cost more than $30 million.

No conclusions were reached yesterday other than referring the subject to the directors' legislative subcommittee, which is chaired by Art Torres, a former state lawmaker and chairman of the state Democratic Party.

One director, Jeff Sheehy, a communications manager at UC San Francisco, said it would be "weird" to have "somebody else control our fate by going out and collecting signatures." Sheehy did not mention it, but another initiative could also require changes in the agency itself, changes that the board might not welcome. Going to the legislature poses the same possibility of unwelcome changes.

The bond issue approach has been backed by Bob Klein, who directed the 2004 campaign and was the first chairman of the agency, largely as the result of specific, narrow qualifications for the post that he wrote into state via the initiative. In 2011, Klein left his post and the governing board.

Klein has talked about raising $5 billion for the agency through a bond measure, although not recently in publicly reported accounts. Last September, his stem cell advocacy group, which is headquartered in his real estate offices in Palo Alto, rose from hibernation with a Webinar highlighting "milestones" from Proposition 71, the measure that created the agency and which Klein has claimed credit for writing.

The California Stem Cell Report queried CIRM in September about the Webinar. Kevin McCormack, senior director for communications for the stem cell agency, replied that it was not asked to participate in the Webinar and would not have done so if asked.

CIRM director Sherry Lansing, former chair of the UC regents, urged a broad discussion of financing possibilities "the sooner the better." A number of other CIRM directors weighed in as well, indicating a general interest in moving forward on a path to future funding. No date for a meeting of the legislative committee was set.

The question of financial life after 2020 came up when CIRM Chairman Jonathan Thomas discussed a $30 million, "wind-down" fund for administrative expenses should the agency have to close its door because of a lack of funding. Thomas has secured $7 million in private donations as a start, but that money will not be available unless it is matched with an additional $23 million.

Randy Mills, CEO of the agency, presented an inscribed "game ball" to Thomas for raising the $7 million. It was the second game ball awarded at yesterday's meeting, apparently the beginning of a new tradition at the agency to recognize superlative performance. (For technically oriented readers, the award is a baseball -- not a football.)

Fifty New Clinical Trials, a $150 Million Partnership and Much More: California's Coming Stem Cell 'Powerhouse'

Highlights

50 new clinical trials

$150 million public-private partnership

"Long overdue," says venture capitalist
$30 million end plan

LOS ANGELES -- Directors of the California stem cell agency this morning approved an $890 million plan for the next five years as it surges forward with a risky and ambitious effort to build an “industrial stem cell therapeutic powerhouse” in the Golden State.

The agency proposes 50 new clinical trials on top of 15 already underway. Next year it expects to set up a $150 million partnership with private investors to turn research into cures. Investors would have first pick of the best research that CIRM has to offer that currently lacks a partner. 

Other ventures and goals for what could be the agency's last five years of life include:

• Introduction of 50 new therapeutic or device candidates into development
• Working to create a more favorable federal regulatory environment
• Reduction by 50 percent the time it takes basic research to move into a clinical trial
• Creation of two centers at $15 million each to assist in much of the "backroom" work needed for clinical trials
• Creation of an online, hook-up center for researchers looking for collaborators to advance their work

Directors of the agency, formally known as the California Institute 71 for Regenerative Medicine (CIRM), approved the plan unanimously at a meeting here. (Here is a link to its press release.)

Arlene Chiu, former director of CIRM's scientific programs and now with the City of Hope, told the agency board that the plan was audacious and bold. CIRM board member Sherry Lansing, former chair of the UC board of regents, praised the plan's "sense of urgency."  Another board member, Steve Juelsgaard, former executive vice president of Genentech, said the plan contained projects that he had never seen before in the biotech industry.

Asked for comment, CIRM board member Al Rowlett, who is chief executive officer of the Turning Point mental health program in Sacramento, said,

“It’s ambitious, but then isn’t that what the people of California were when they approved Proposition 71. They wanted to create something that was going to change the face of medicine. That’s what we hope to do….”

Proposition 71 was the ballot initiative that created the $3 billion agency in 2004. The campaign led voters to believe stem cell therapies were close on the horizon. None has been produced, and the agency's state bond funding is expected to run out in 2020.

CIRM directors later today will be briefed on a $30 million “wind-down” plan that has attracted $7 million in private donations. More funding is being sought. One source may be the state legislature.

The agency’s plan for the next five years says it would benefit the people of California by creating  “an industrial stem cell therapeutic powerhouse that expands the tax base, adds high quality jobs and increases the likelihood of the commercialization of stem cell treatments for patients with unmet needs.”

Randy Mills, CEO of the agency since May 2014, said the plan was devised to have "the greatest possible impact for our patients. We didn’t want something ‘good enough.’ We wanted something transformational."

He acknowledged the risk and size of the task, which he said is aimed at transforming regenerative medicine. But he remains optimistic that the agency’s tiny team of about 55 persons can pull it off. He gave his team full credit for developing the spending proposal. 

The CIRM plan calls for spending $620 million on clinical work and “translational” research, which is aimed at taking basic discoveries beyond the most preliminary stage. Basic research would receive $170 million. Educational programs total $50 million. Another $50 million would go for “infrastructure.” 

One of the riskier elements of the proposal may be the agency’s plan to offer $75 million to private investors to begin a partnership in which they would have access to the best of the CIRM-funded research that doesn’t already have a private partner. 

The investors, who could be a Big Pharma firm, an existing smaller company or venture capitalists, would have to add $75 million of their own money. The agency would also continue to support the selected research, thus minimizing the risk to the private investors.

For months, Mills has been commenting on the reluctance of private investors to engage in stem cell therapy development, which is expensive and novel. “De-risking” is important in attracting business interest, Mills says.

Competition for the $75 million is scheduled to begin behind closed doors early next year. But questions have been raised about the risk that no private investors would find any CIRM research attractive.

Gregory Bonfiglio, managing partner of Proteus Regenerative Medicine, a Portola Valley, Ca., a venture capital firm, said in an interview, however, such efforts by the agency are long overdue.

He said, 

“There are risks inherent in the development of new, disruptive technology. The bigger risk is failing to deliver on their underlying promise to bring new regenerative therapies to patients…. The bigger risk is not doing anything.”

Another important element of the plan involves creation of accelerating and “translating” centers, funded at $15 million each, beginning next year. The agency is also likely to expand its Alpha Clinic effort, which is aimed at providing one-stop treatment centers.

The translating and accelerating centers would work with the Alpha clinics and other researcher to provide much of the “backroom” work needed to negotiate federal rules and regulations and win ultimate approval of a therapy. 

George Bush, the California Stem Cell Agency and the Daily Beast: A Story for 20 Million Readers

The Daily Beast this morning carried a story with the headline “George W., Father of the Stem Cell Revolution.”

If that gives you pause, consider the Daily Beast’s next two paragraphs.

“It wasn’t what President George W. Bush had in mind. In 2001, Bush restricted the use of federal funding for embryonic stem cell research, giving conservatives what looked like a major victory in the nation’s culture wars.

“Three years later California thumbed its nose at the ban by starting its own multi-billion dollar stem cell program, and several states followed suit. Even though the restrictions were lifted in 2009, the insurgent movement survived and grew.”

The article was authored by Guy Gugliotta, who writes on science and public policy. The piece appeared both on the Daily Beast, which claims more than 20 million readers a month, and Kaiser Healthline, which is also carried on the Daily Beast. The article offers a lesson in unintended consequences for those who thought the federal restrictions would crush research using human embryonic stem cells. Gugliotta said,

“Today at least seven states offer stem cell research funding or other incentives to local scientists and industry.” 

The article covered the scene in states across the country, but dealt in more detail with the $3 billion California stem cell agency. Quoted was Randy Mills, president of the agency, as well as yours truly. Gugliotta wrote,

“’Without George Bush, this agency would not exist,’ said David Jensen, publisher of California Stem Cell Report, a blog focused on the California institute.” 

Bush’s restrictions created the justification for California to march -- on its own -- into the wilderness of stem cell research 11 years ago this month. Absent Bush's actions, there would have been virtually no perceived need for the state to embark independently.  

Gugliotta recounted the history of the agency and summarized the issues that have come up since 2004. He wrote,

“C. Randal Mills, chosen in 2014 as the institute’s new president and chief executive officer, said the organization is adjusting to ‘a world that has changed significantly’ since 2004 by moving away from simply funding good ideas in isolation to what he describes as a ‘system-based agency.’

“Last year the institute had 10 programs in clinical trials, but expects to have 20 by the end of this year.

“'We’re setting up continuous paths to move basic research to clinical trials,’ he added. ‘It’s like a train moving down a track, where each grant is the link to the next step down the line.’” 

Noting that President Obama has lifted the Bush restrictions, Gugliotta concluded,

“Despite the improved national (stem cell research) climate, states, both for economic and scientific reasons, have continued to fund their own programs. NIH lists initiatives in six states, not counting Minnesota, and other reports have suggested that as many as 15 states either have dedicated programs or fund stem cell research or did so in the past.

“Yet in a discipline that is just beginning to enter a translational phase, it is hard to evaluate the effectiveness of individual programs: ‘It’s a huge field, and it’s still early,’ said Heather Rooke, scientific director for the International Society for Stem Cell Research. “States will continue to do basic research, and California has certainly already had important influence driving the research to the clinic.’

“Results will take time, agreed Minnesota’s (Jakub) Tolar, but it is worth the trouble: ‘We started on drugs a hundred years ago. Then we went to monoclonal antibodies—biologicals,’ he said. ‘We are now getting ready to use cells as a third way of doing medicine. We are at a historical sweet spot.’”

Oversight Panel of California Stem Cell Agency Schedules First Meeting in 21 Months

The only governmental body specifically charged with oversight of the $3 billion California stem cell agency, an enterprise that operates beyond normal state controls, announced yesterday that it would meet in just three days.

The session of the oversight panel comes 21 months after the last meeting of the Citizens Financial and Accountability Oversight Committee(CFOAC). The panel is required by state law to meet annually. Its last meeting in January 2014 saw the agency criticized harshly by one of the members of the oversight panel.

The committee is chaired by the state controller, who currently is Betty Yee. At the time of the last meeting, the controller was John Chiang, who is now state treasurer.

The agenda for this Thursday's meeting contains no items that would seem to be controversial, only a review of a routine audit and a presentation by the agency itself.

In January of 2014, Jim Lott, one of the members of CFAOC, made it clear at some length that he was not pleased with the agency's performance. He said in part:

“What can we say we've done to advance to a cure or to cures? It's fine that we've got all -- we've contributed to all. What can you say that we've actually done? We don't really have any -- I'm going to just say this because it's a bias and I know it's a bias. We don't have any tangible specific and measurable results that I can point to.”

The $3 billion state stem cell agency is exempt from the usual state budgetary controls. It receives its funds directly from bond proceeds without intervention by the governor or the legislature. The agency’s independence was authorized by voters when they created the agency in 2004 through a ballot initiative that altered the state constitution.

Two sites are available for the public to observe and participate. One is in Emeryville in the San Francisco area and the other is in Los Angles. Addresses can be found on the agenda. The public can also listen to an audiocast of the proceedings. Directions are also on the agenda. 

Pay-for-Eggs Legislation: Strange Bedfellows and Existential Questions

 The California pay-for-eggs bill today generated a feature article that said the legislation has “sparked an unusual lineup of partisans on both sides and resonates far beyond” the Golden State.

The piece by Alex Mathews on Capitol Weekly, a news service specializing in California government and political coverage, said,

“(C)omplicating the issue is California’s role as a national leader in stem cell research, the existential question of who or what constitutes a research subject, and finally, the fact that compensation for fertility purposes is and has been legal for years in California.”

Mathews was writing about the measure (AB926) by Assemblywoman Susan Bonilla, D-Concord, that removes a ban in California on paying women for eggs for scientific research. Currently women can be paid in California for providing eggs for IVF. The measure would not alter a ban on compensation for eggs in research financed by the $3 billion California stem cell agency. However, later this month, the agency will consider modifying its position somewhat.

The bill has passed the legislature and is on its way to Gov. Jerry Brown. The industry association sponsoring the bill expects the governor to sign it later this month although the governor, as a general rule, does not make public commitments on legislation.

Mathews' article covered the background and arguments on the bill and noted that it has received little mainstream media attention.

Lisa Ikemoto
UC Davis photo

She also quoted Lisa Ikemoto, a law professor and bioethicist at UC Davis, on the sensitive nature of the issue. Ikemoto said,

“On the fertility side, it’s politically hard to touch because it’s all around family formation. Nobody wants to restrict family formation. On the research side, when the issue of payment for eggs came up, it was connected with human embryonic stem cell research, and human embryonic stem cell research was politicized from the outset.”

Mathews also wrote about the strange bedfellows opposing the bill. She said,

“Groups that fundamentally oppose stem cell research such as the California Catholic Conference and other pro-life groups are natural opponents of the bill, but they are joined by a number of pro-choice groups who expressed concerns over the limited research on the effects of egg donation on women’s health.”

IOM Report: Chronicle Says Prompt and Major Changes Needed at Stem Cell Agency

The San Francisco Chronicle today said the $3 billion California stem cell agency needs to make major changes “to avoid conflicts of interest and retain its credibility with the public, and it needs to do so sooner rather than later.”

In an editorial that came in response to the sweeping recommendations of the Institute of Medicine last week, the Chronicle declared,

“The California Institute for Regenerative Medicine (CIRM), the stem cell funding agency that state voters approved in 2004, has been an 'innovative initiative' that's strengthened California's biotechnology industry and furthered the cause of basic stem cell research, according to a new independent review by the Institute of Medicine (IOM). But the agency needs to make some major structural changes in order to avoid conflicts of interest and retain its credibility with the public, and it needs to do so sooner rather than later.”

The editorial continued,

“The institute also needs to respond to the criticisms in the report, and to do so as quickly as possible. In particular, the institute needs to reform its management if it's to continue its mission after state funding runs out, as it appears the institute's chairman would like to do. Its governing board is too involved in day-to-day management. Nearly all the 29 members of that same board are on the payroll of institutions that have won grants - a serious conflict of interest.”

The Chronicle editorial was the first that we have seen on the subject, but additional comments from individuals have come the way of the California Stem Cell Report.

In an email, Tom Hall, a retired history professor in Berkeley, said,

“At the risk of being too cynical, it seems to me that those who expect the agency to implement the proposals are being more than a bit naïve. The proposals amount to asking people to commit suicide. Those presently involved have too much self-interest at stake to voluntarily drop out. Some kind of pressure will have to be applied.”

Hall referred to IOM recommendations that the 29-member CIRM governing board be barred from voting on individual grant applications and its members be removed from the grant review process. The IOM also said that the majority on the board should consist of “independent” members, which would likely mean that some current board members would lose their seats.

Another email from a person with close knowledge of the stem cell agency, but who must remain anonymous, said,

“I worry that CIRM (governing board) will once again circle the wagons and construct elaborate excuses for inaction and preserving the status quo. It's really terrible because you could make incredible advances if only the energy and dollars were directed properly.”

The Sacramento Bee ran a related editorial yesterday that called for “putting the brakes” on "the initiative machine," which was the process used to create the stem cell agency in 2004. The Bee said that initiatives are “driven by special interests and buttressed by a business network of signature gatherers, legal services and campaign consulting.”

The stem cell initiative, Proposition 71, also has become a two-edged sword for the agency, locking in management minutia and making it nearly impossible to make needed changes, such as those recommended last week by the blue-ribbon Institute of Medicine panel.

Among other things, The Bee indicates that it would support “a sunset of 10 to 15 years for laws passed by voters – or automatically putting such laws back on the ballot for voters to reject or affirm.”

The Bee has yet to editorialize directly on the IOM report.

Excerpts from the IOM Report on the California Stem Cell agency

Here are excerpts from the $700,000 Institute of Medicine (IOM) report on the $3 billion California stem cell agency -- the California Institute of Regenerative Medicine (CIRM).

Overall Comments

“Improvements to CIRM’s governance structure, scientific program, and policies are critical to bet­ter serving California taxpayers who elected to devote funding to promote stem cell research in the state. The necessary changes outlined by the IOM committee, if enacted by the state and/or the institute, would help to instill confidence among the scientific community and California residents in the vital work that CIRM is accomplishing.”

“It is the committee’s judgment that overall, CIRM has done a very good job of initially establishing and then updating the strategic plans that have set priorities for and guided its programs, and of taking advantage of its guaranteed flow of $300 million a year for 10 years to establish a sustainable position in regenerative medicine for California. The challenge of moving its research programs closer to the clinic and California’s large biotechnology sector is certainly on CIRM’s agenda, but substantial achievements in this arena remain to be made.

“Despite its demonstrable achievements to date, as well as the largely positive independent reports covering various aspects of its operations, no one would claim that CIRM is a perfect organization or that it should adhere slavishly to its initial form of organization, set of regulations, or pattern of priorities. The field of regenerative medicine has advanced rapidly since November 2004, and CIRM itself has seen the need to alter its activities and approaches in some areas. The committee believes the same should be true of its governance structure, some of its administrative practices, and its use of external perspectives on strategic scientific priorities and on the evaluation of other key policies, such as intellectual property, to ensure that they continue to encourage the development and deployment of new treatments.”

“While the restrictions on amending the administrative structure of CIRM established in Proposition 71 had the advantage of protecting the institute’s ongoing operations from outside interference in an ethically controversial arena, they also made it difficult to modify the organization’s structure in response to experience and/or changing circumstances. Moreover, these protections, whatever their benefits, appear to some to shield CIRM from the normal accountability mechanisms in place for state agencies.”

Conflicts of Interest

“Far too many board mem­bers represent organizations that receive CIRM funding or benefit from that funding. These com­peting personal and professional interests com­promise the perceived independence of the ICOC, introduce potential bias into the board’s decision making, and threaten to undermine confidence in the board. Neither the board chair nor board members should serve on any working group. The board itself should include representatives of the diverse constituencies that have an interest in stem cell research, but no institution or organiza­tion should be guaranteed a seat.”

“The problematic perception of conflicts of interest has persisted for as long as CIRM has existed. The IOM committee would be less concerned about individual board members with actual or perceived conflicts of interest if the board membership included more truly independent members. The majority of board members should be independent, with no competing or conflicting personal or professional interest. Broader representation from a wider variety of stakeholders will inject new perspectives into the panel and will help to dispel the perception of conflicts of interest.

“CIRM also should revise its conflict of interest definitions to include non-financial interests, such as the potential for personal conflicts of interest to arise from one’s own affliction with a disease or personal advocacy on behalf of that disease. CIRM policies for managing conflicts of interest should apply to that broader definition.”

Structure and Governance

“Currently, the ICOC (the agency's governing board) functions both as an executor and as an overseer—competing duties that compromise the ICOC’s critical role of pro­viding independent oversight and strategic direc­tion. The IOM committee recommends that CIRM’s operations be separated from its over­sight. The board should delegate more author­ity and responsibility for day-to-day affairs to the president and senior management, and the ICOC’s three working groups should report to senior management within CIRM, rather than to the ICOC. The moves would permit the board to better focus its energy and collective talent on strategic planning, overseeing financial perfor­mance, ensuring legal compliance, assessing the president’s performance, and devising a plan for preserving and expanding its considerable assets to permit the institute to continue its important work after the bond measures end.”

Unrealistic Goals

“While the latest round of awards challenge teams to have filed a request to begin clinical trials or to have completed early-stage trials in patients within four years, the committee feels these ambi­tious goals are unrealistic. New therapies take more time to progress to federal approval, and early-stage clinical trials are beset by a stagger­ingly high failure rate. Rather than judging suc­cess by simply tallying the number of active clini­cal trials, the IOM committee suggests that CIRM also continue its focus on underlying biological mechanisms that drive the success or failure of a promising therapy and on careful design of clini­cal trials. Advances in these areas will help the entire field progress, even if a specific drug candi­date is not approved." 

Economic Impact

“In the short term, CIRM’s expenditures are supporting approximately 3,400 jobs and their innovative efforts have also attracted substantial additional private and institutional resources to this research arena in California CIRM’s long-term impact on such critical aspects of the California economy as state tax revenues and health care costs beyond the shorter-term and temporary impact of its direct expenditures cannot be reliably estimated at this point in CIRM’s history.... (T)he estimate of the Analysis Group (2008) that the CIRM program alone would support about 3,400 jobs as long as it was allocating about $300 million per year in research and development grants appears quite reasonable to the committee. To put this estimate in context, however, total employment in California is roughly 16 million, and NIH alone provides more than $3.5 billion per year to California research institutions.”

Intellectual Property

“CIRM should propose regulations that specify who will have the power and authority to assert and enforce in the future rights retained by the state in CIRM-funded intellectual property. CIRM should seek to clarify which state agencies and actors will be responsible for the exercise of discretion currently allocated to CIRM and the ICOC (the CIRM governing board) over future determinations on issues regarding march-in rights, access plans, and revenue-sharing rights that might arise years after CIRM's initial funding period has passed.... (T)he ICOC should reconsider whether its goal of developing cures would be better served by harmonizing CIRM’s IP policies wherever possible with the more familiar policies of the Bayh-Dole Act(federal IP law).

Bob Klein, "Lobbying" and Reader Reaction

A robust discussion has arisen concerning Bob Klein and his appearance last month before the governing board of the $3 billion California stem cell agency, a body that he once chaired and an enterprise that he once oversaw.

The comments were triggered by the original "unseemly performance" item on the California Stem Cell Report and a subsequent comment by Francisco Prieto, a longtime member of the board.

The comments discussed whether Klein was manipulated and whether he was engaged in so-called “revolving door” activity – the practice of former government officials, such as Klein, becoming paid representatives of enterprises that were involved with their former agency.

The comments raise a number of interesting questions that we will discuss on the California Stem Cell Report during the next few days.

You can read the remarks by going to this item and scrolling down to the end of the piece.

(Editor's note: Our apologies to some of those who commented for the delay in posting their remarks.)

CIRM Board Member Prieto Defends Klein's Right to Appear Before Board

A member of the governing board of the California stem cell agency, Francisco Prieto, has commented in an email about the “unseemly performance” item concerning the agency's former chairman, Robert Klein. Prieto is a Sacramento physician who serves as a patient advocate member of the board. He has been on the board since its inception. Here are his remarks.

“I wanted to comment on this piece from the perspective of another patient advocate.  While I think you know that I did not always agree with Bob Klein during his tenure on the ICOC(the agency's governing board), I would strongly defend his right to appear and give his opinions to the Board.  He is a private citizen now, albeit one with considerable experience and expertise, and I think his greatest vested interest in this case stems (you should pardon the expression) from being the child of a parent with Alzheimers.  As you point out, some eyebrows may be raised, and I can imagine that some board members might be swayed in either direction by his testimony, but  he is a passionate and committed advocate, and he has the right to advocate before us.”

Michael J. Fox Backs Away From Stem Cell Cure for Parkinson's

It was not exactly a case of "Back to the Future," the hit movie starring Michael J. Fox, but it did offer a reflection on the past.

It involves the actor's changing views on stem cell research in connection with Parkinson's disease, which he has had since the 1990s.

Fox's 2004 Ad

Early on, Fox was well-known for his support of human embryonic stem cell research. ABC News recently described him as having become "one of the country’s most visible advocates for stem cell research." In California, Fox was a prominent promoter of the ballot initiative, Proposition 71, that created the $3 billion California stem cell agency in 2004. "

He filmed a TV commercial that was aired widely during the 2004 campaign to create the stem cell agency, declaring,

 "It could save the life of someone you love."

Today he is considerably less confident. In an interview last week with ABC, he cited "problems along the way." Fox said,

“It’s not so much that [stem cell research has] diminished in its prospects for breakthroughs as much as it’s the other avenues of research have grown and multiplied and become as much or more promising. So, an answer may come from stem cell research but it’s more than likely to come from another area.”

New Multibillion Dollar Stem Cell Bond Measure Wins Endorsement with a Caveat

A blogger on the web site of Los Angeles television station KNBC today supported a new multibillion bond measure for the California stem cell agency but with an interesting qualification.

Joe Mathews, author and a senior fellow at the New America Foundation, said the new bonds should be backed by a tax on the people and companies involved in the business of health care. He wrote,

"New stem cell moneys can't come out of funds that would otherwise go to other programs."

Mathews said voters "probably" shouldn't approve another multibillion dollar bond measure for CIRM that is paid back through the state's general fund. He wrote, however,

"(T)hat doesn't necessarily mean there shouldn't be another stem cell bond. California's major universities have invested in stem cell research, with help from the agency.

"Major researchers have relocated to the state. And the unknown nature of stem cell research's promise, while frustrating efforts to justify the research dollar for dollar, argues for doing more to learn more.

"What the state budget picture does require is that any stem cell bond should have a clear funding mechanism -- a specific tax or new revenue source (some sort of levy on companies and people involved in the business of health care) -- that would be more than enough to pay back any bond."

Mathews is co-author of "California Crackup: How Reform Broke the Golden State and How We Can Fix It," which declares that the initiative process is one of major fault points in California government. The initiative was used to create the $3 billion stem cell agency in 2004, making it immune from normal state government accountability and locking in funding that cannot be touched by the legislature or government despite any other financial needs of the state.

Los Angeles Times: 'Geron Fiasco' Poses Questions About California Stem Cell Agency

The Los Angeles Times, California's largest circulation newspaper with more than 900,000 subscribers, today said the "Geron fiasco" raises questions about the conduct of business at the California stem cell agency and whether it "does a disservice to patients and taxpayers."

The comments came in a column by Pulitzer Prize-winning journalist and author Michael Hiltzik, who wrote about Geron's abandonment of its hESC trial only five months after the firm was awarded a $25 million loan by the stem cell agency. Hiltzik said,

"So we're talking at least about months of wasted effort by CIRM and Geron's researchers, crushing disappointment for those patients and conceivably a major setback for stem cell science generally. (CIRM Chairman Jonathan) Thomas observes that Geron said it made its decision strictly on financial grounds, not because of scientific reversals. But for an R&D company financial considerations always encompass scientific judgments, and Geron plainly concluded that the prospect for profits from stem cell therapies was receding.

"The Geron fiasco underscores the old questions, and raises new ones, about what CIRM is supposed to accomplish, how it does business and whether its addiction to hype does a disservice to patients and taxpayers."

Hiltzik's column contained brief remarks from Thomas. The columnist wrote,

"'There are going to be fits and starts,' its chairman, Jonathan Thomas, told me last week. Even so, he maintained, 'we remain unwavering in our commitment to pursuing the science.'"

Hiltzik has followed CIRM since the 2004 ballot initiative campaign that created the $3 billion enterprise. The effort was headed by real estate investment banker Robert Klein, who later served as CIRM's chairman for seven years. Hiltzik wrote,

"CIRM loves to compare itself to the federal government's biomedical research agency, the National Institutes of Health, but the two bodies are very different. The responsibilities of NIH are broad enough for it to make disinterested judgments about programs and scientific approaches. CIRM, however, was designed from the start (by Klein, who oversaw the drafting of Proposition 71) to focus on a very narrow field of biomedical science — embryonic stem cell research — and to promote that research in California as a sort of economic development tool.

"These two goals have always been ethically and scientifically incompatible, and the Geron case points to why."

Hiltzik said evidence exists to show that CIRM "downplayed legitimate questions about the state of Geron's science and the design of the clinical trial" in its efforts to fulfill the excessive promises of the electoral campaign. The issues, he said, included over-promising results, questions by other researchers about the trial and whether a spinal cord injury was the best subject for the first tests of stem cell therapies on humans.

Hiltzik continued,

"None of these issues were aired publicly in the run-up to the vote, because CIRM didn't disclose in advance that Geron was the loan applicant. Nor did it disclose that its own scientific review panel had awarded the Geron trial a scientific score of only 66 out of 100; that fact, along with other details of the board's consideration of the Geron loan, was pried out of CIRM later by David Jensen, the tireless proprietor of the indispensable California Stem Cell Report.

"CIRM told Jensen that although it customarily discloses its reviewers' scientific scoring of funding proposals, it didn't in this case because it was using 'new criteria' and thus the public might not find the result 'meaningful.' Call me a cynic, but I'd bet that if the score were, say, 90 out of 100, CIRM would have shouted it from the rooftops, rather than pleading that Californians were too dumb to understand what the number meant."

Hiltzik concluded,

"Another problem illuminated by the Geron case is that CIRM remains infected by the hype virus. Only a week after Geron parachuted out of the stem cell business, Thomas issued a statement bemoaning the public impression that CIRM isn't making any progress toward therapies. He declared: 'CIRM is turning stem cells into cures.'

"Well, no it isn't, not yet. Geron's now-halted project was the most advanced human clinical trial in CIRM's portfolio; yet it was at an extremely early stage, involved all of five human subjects and might still have been years away from showing that a cure was even possible. CIRM needs to take a good look at whether it pushed too hard for the Geron loan and overplayed the significance of the trial; otherwise its path toward building credibility with the public will only get longer."

The California Stem Cell Report has asked CIRM Chairman Thomas if he would like to respond in more detail to the Los Angeles Times column, with a commitment to carry his remarks verbatim.

High Level Changes at iPierian, a Firm With Deep Roots in California Stem Cell Effort

The South San Francisco stem cell firm, iPierian, which has a special and early connection to the California stem cell agency, has been undergoing major changes in the past few months.

 The latest came last week when it announced it has hired a new CEO, Nancy Stagliano, who was replaced Aug. 11 as CEO at another South San Francisco firm, CytomX Therapeutics.

Luke Timmerman of the Xconomy website wrote on Sept. 7 that Stagliano was named to the iPierian post after the firm "prioritized the company’s efforts over the past several months toward using its (ips) stem cell technology to help discover drugs for neurodegenerative disorders like Alzheimer’s, amyotrophic lateral sclerosis (ALS), and spinal muscular atrophy."

 Last May,  iPierian unloaded most of its executive team. A few weeks later, the board chairman, Corey Goodman, quit. With Stagliano's arrival, interim CEO Peter Van Vlasselaer will become executive chairman of the board.

Major investors in iPierian, including John Doerr of Kleiner Perkins Caufield & Byers of Menlo Park, contributed nearly $6 million to the 2004 campaign for Prop. 71. The figure was 25 percent of the total contributed to the campaign, which was run by former CIRM Chairman Robert Klein, a real estate investment banker. As far as we know, no other biotech firm can claim to have that sort of early linkage to the $3 billion California stem cell agency.

CIRM has awarded $7.2 million to iPierian. One grant amounted to about $1.5 million with Berta Strulovici as the principal investigator. The other was for about $5.7 million with Michael Venuti as the PI.

The firm has a cast of stem cell luminaries associated with it, including Shinya Yamanaka of Kyoto University and the Gladstone Institute, along with  George Daley of Harvard University. Daley is a co-founder of iPierian. He also was a member of the blue-ribbon review panel that analyzed CIRM's activities last fall and is a current member of the CIRM grants review group.

Deepak Srivastava of UC San Francisco and Gladstone is also a co-founder and scientific adviser to the firm. He holds $6.6 million in CIRM grants. Other scientific advisers include CIRM grant recipients Benoit Bruneau, UCSF-Gladstone, $2.8 million, and Bruce Conklin, UCSF-Gladstone, $1.7 million.

Kevin Eggan, Amy Wagers and Chad Cowan, all of Harvard, are scientific advisers to iPierian as well as members of the CIRM grant review group.

Members of the CIRM grant review group are barred from taking part in the discussions or voting on grants on which they have conflicts of interests. Reviews are conducted behind closed doors.

Yamanaka said in an iPierian news release earlier this year,

“Many of my colleagues at The Gladstone Institute, UCSF and Harvard are already actively involved with iPierian, and I am delighted to join them in guiding iPierian’s industrialization of iPSC technology for drug discovery and development.”

Here is a link to the iPierian press release on the new CEO and a related story in the San Francisco Business Times.

Politics and Stem Cells California Style: More to Come in the Next Few Years

Seven years ago, backers of the ballot initiative that created the $3 billion California stem cell agency promised that it would take the politics out of stem cell research.

But, as the directors of the research enterprise discovered last month, that is far from the case. California Gov. Jerry Brown and state Treasurer Bill Lockyer exercised their governmental perogatives and lobbied persuasively on behalf of their nominee, Jonathan Thomas, to chair the board for the next six years.

Some of the 29 board members looked askance at what they regarded as arm-twisting. They noted that the formal name of the CIRM governing board is the Independent Citizens Oversight Committee and placed the emphasis on the word "independent." But, like other parts of Prop. 71, the name is more of a political marketing gimmick aimed at voters in 2004 than a reflection of reality.

The fact is that when you have your snout in the public trough, you are always subject to political pressures. That is the nature of government in the United States.

Nonetheless, we should add that former CIRM Chairman Robert Klein, a real estate investment banker, and a handful of his associates who drafted Prop. 71, have been successful in isolating the stem cell agency from other political maneuvers – well-intentioned or otherwise. Under the initiative, the governor and state lawmakers cannot get their hands on CIRM funds or fiddle with its budget. Another provision of Prop. 71 mandates that even the tiniest changes in the law dealing with CIRM require the same kind of supermajority vote that has crippled California's state budget process. Some of Prop. 71's provisions cannot even be changed short of another vote of the people.

All of which has a downside. Under the ballot measure, CIRM dodged conventional state budgetary funding. Instead it required funding through state bonds – borrowed money that flows directly to the agency. But with interest, that means that a $20 million research grant really costs California taxpayers roughly $40 million. And the $490,000 salary of CIRM President Alan Trounson really costs nearly $1 million.

While some CIRM directors took umbrage at the lobbying by Brown and Lockyer, one should expect no less from public officials who have a keen sense of both their power and responsibilities. They are elected because voters generally trust their judgment – at least at the time of the election – and expect them to exercise their authority. Indeed, do-nothing lawmakers are one of the reasons the public is less than enchanted with affairs under the Capitol dome.

As for the next six years, directors of the stem cell agency will be increasingly immersed in political and electoral matters if they want to extend the life of CIRM beyond 2017 or so, when bond funds will run out.

By electing Thomas, CIRM directors clearly indicated their priorities are cash. They are concerned with both short and long term financing of the agency. "Without money, there will be no research," one director told the California Stem Cell Report. Thomas has made a career in bond financing. His scientific background was minimal when compared to rival candidate Frank Litvack, a cardiologist and medical science enterpreneuer.

Thomas is talking about raising money privately, but the main source of funds will be billions more in state bonds. That will require voter approval, and right now that is extremely unlikely given the state's financial crisis and CIRM's limited accomplishments, which have little public visibility. To persuade voters in 2014 or 2016, the agency will need results that will resonate with the public, creating a virtual rush to provide more billions to CIRM.

One of Thomas' major initiatives is do just that, through both aggressive funding of research more likely to produce a clinical therapy and better marketing of the agency to the public. A "communications war" is how he describes it. The agency is now seeking a $200,000-a-year public relations field marshal to direct it.

CIRM will be dancing close to the edge in terms of appropriate use of public funds. Electoral campaigning on the taxpayer's dollar is generally not acceptable and can even be illegal. At the same time, the agency has a responsibility to inform the public about its activities. Should the agency slip over the edge, it could generate a scandal that could doom a new bond measure.

CIRM must also move so that a bond measure will be supported by the governor, treasurer, controller and lieutenant governor, the very same Democratic political officials who nominate candidates for chairman and appoint many of the CIRM board members. The preferred position would be one of support although neutral would be tolerable. Outright opposition by the governor, which is conceivable given the state's financial condition, is likely to be fatal for a bond measure.

Then there is the matter of raising anywhere from $30 to $40 million or more to actually finance the ballot campaign. Who will be the major donors? Will they represent or have ties to current applicants or future applicants for CIRM's billions? Another touchy issue.

Thomas is short on political experience, but standing by is CIRM's Co-vice Chairman Art Torres, former head of the state Democratic Party. In the wings as CIRM's chairman emeritus is Robert Klein, who headed the 2004 campaign for Prop. 71, although his role is likely to be circumscribed at the agency if Thomas is to be truly effective.

The California stem cell agency has made a significant mark in the world of stem cell science, according to its supporters, although it has not fulfilled the generous and overstated promises of the 2004 campaign. Thomas' political and financial challenges are daunting. That is not to mention major scientific issues as well as the strategic direction of CIRM. If Thomas is not successful, the Los Angeles bond financier could be well be the last chairman of the California Institute for Regenerative Medicine.

Kleiner Piece Listed in 'Best of Web'

Our article last week on the Kleiner-CIRM connection rated a “Best of the Web” listing on the widely read Gooznews Web site.

The article shared the distinction with stories from the Wall St. Journal and New York Times, among others.

Gooznews is published by Merrill Goozner, a longtime journalist and author of “The $800 Million Pill.”

For those of you who may have missed the Kleiner piece, here is the first paragraph:

"A biotech company heavily backed by venture capitalists who contributed nearly $6 million to the election campaign that created the California stem cell agency was awarded a $1.5 million grant this spring from the very same agency."

The piece was also mentioned on healthycal.org, a solid government policy Web site published  by Dan Weintraub, the former Sacramento political columnist. 

Text of CIRM Response on iPierian Grant and Campaign Contribution

Here is the text of an email June 15, 2010, from James Harrison, outside counsel to the California stem cell agency, concerning the iPierian grant.

David,

Thanks for speaking with me this morning. CIRM's Governing Board has
set conflict of interest standards that exceed the requirements of state
law, and Mr. Klein has exceeded even these standards by refraining from
holding any financial interest in biotech companies during his tenure.
I understand that your story will suggest that Bob Klein should have
recused himself from the Board's consideration of an application
submitted by iPierian for a Basic Biology II Award because iPierian is
backed by Kleiner Perkins Caufield & Byers, one of whose principals is
John Doerr who, along with his wife, contributed money to the Prop. 71
campaign. I strongly disagree with your suggestion that Mr. Klein's
participation in the Board's consideration of the iPierian application
creates a conflict. Here are the facts:

1. The Board awarded a Basic Biology II grant ($1.48 million) to
iPierian in April 2010.

2. KPC&B invested $20 million in iZumi in July 2008.

3. iZumi merged with Pierian to form iPierian in July 2009.

4. In 2003 and 2004, John and Ann Doerr contributed to the Prop. 71
campaign.

5. Chairman Klein had no knowledge that: (a) KPC&B had invested in
iZumi; (b) iZumi had merged with Pierian to form iPierian; (c) KPC&B
became an investor in the new company as a result of the merger; or (d)
that George Daley was associated with iPierian (although had he known,
it may have increased his respect for the company).

6. Chairman Klein has no financial interests in biotech companies and
has pledged to refrain from holding any financial interests in biotech
companies as long as he is Chairman.

7. California conflict of interest law does not require recusal under
these circumstances. Indeed, the connection is so attenuated, it is
difficult even to understand how this could ever rise to the level of a
conflict.

8. In order to advance CIRM's mission, it is critical that venture
firms like KPC&B invest in stem cell companies so that these start-up
companies have the funds necessary to bring therapies to the market.

Bob also asked me to relay to you that he has great respect for John and
Ann Doerr, who contributed to the Prop. 71 campaign and to other
research institutions to support their efforts to find a cure for cancer
and other major diseases.

Thanks for your consideration of these points.
__________________________
James C. Harrison
Remcho, Johansen & Purcell, LLP
201 Dolores Ave.
San Leandro, CA 94577

CIRM's Openness Failures Raise Broader Questions

The chairman of the California stem cell agency, Robert Klein, frequently is given to declaring that the $3 billion research effort adheres to the highest standards of openness and transparency.

Recently, however, the agency has had difficulty even complying with the basic state public records law and the state Constitution's public access guarantees, much less achieving a higher level of performance.

The specific instances are relatively minor, but they raise important questions concerning the conduct of the public's business. How is CIRM, which cannot operate without outside contractors, overseeing their efforts? Is CIRM becoming too cozy with industry? And how can CIRM maintain its credibility unless it is forthright about its affairs?

One longtime CIRM observer, John M. Simpson, stem cell project director of Consumer Watchdog of Santa Monica, Ca., described as “outrageous” CIRM's most recent failure to comply with the open records law.

In response to a query, he said,

"CIRM's lawyers need to learn who their client is when they are employed at a public agency. It's the citizens of California, not vested special interests."

The two most recent cases involving CIRM's failure to comply with state public records law both concern contracts with private firms. The first is a $100,000 contract with Levin & Co., of Boston, Mass., to help search for candidates for the position of vice president for research and development. The second involves a $250,000 contract with Square One Bank to conduct a financial review of Novocell, which was approved for a $20 million loan by CIRM directors last month.

In the case of Levin, the censored material involved 16 pieces of information including its legal business name, address, whether it is a partnership or corporation, name of the person signing the document and his or her title along with his signature and date of the signing. Even the names of those categories were blacked out.

(See page 14 of the contract for a look at the redaction. A blank copy of the state form involved can be found here.

Previously CIRM had posted such information for other companies voluntarily on its Web site, so we had assumed that the redactions were a mistake and consequently did not write about the matter. (After we questioned the redaction, CIRM ultimately provided the material it had chosen to withhold.)

Then came the response to our Oct. 16 request for a copy of the contract with Square One bank. It was another relatively routine matter, although it involves the start-up stages of a $500 million biotech loan program that is expected to have default rates up to 50 percent.

The copy of the contract showed that it was capped at $250,000, but that information had been reported earlier. Censored was the following information: underwriting fee to be paid per loan, annual service fee, warrant administration fee and the legal fee to be paid by CIRM to Square One

Such information is public record and commonly disclosed by state agencies. Otherwise, invoices to CIRM and payments by the agency containing that information would be cloaked in secrecy.

On Nov. 8, we asked CIRM for the legal justification for not providing the Square One fee information. Yesterday (Nov. 16), Don Gibbons, chief communications officer for CIRM, replied with one sentence,

“From our legal team: The redactions were made at the request of Square 1 Bank, based on its determination that the fee structure is confidential and proprietary.“

In response, we emailed Gibbons,

“I assume that your response ...means that the lawyers agree that the material is confidential under state law. It does not directly say that, however. Please let me know if CIRM lawyers think otherwise.”

Gibbons' complete reply:

“We let all contractors make initial decisions on what is proprietary. Square One made the decision that the structure of their fees, not the ultimate amount paid, was proprietary. In the interest of transparency, we have asked them to reconsider that decision.”

As of this writing, we have received no further response from Gibbons. Also yesterday, we asked Square One about its justification for censoring the information, but have received no response. (We will carry its response verbatim if we receive one.)

As Consumer Watchdog's Simpson indicated earlier, CIRM's actions raise questions about the management of its outside contractors, which are essential to the agency's operations. CIRM would cease to function without its outside help. It is restricted by an ill-considered provision in Prop. 71 to only 50 employees. Currently the cost of contracting is the second largest item ($3.1 million) in its operational budget, just behind salaries and benefits.

In the case of Square One, CIRM's attorneys should have told the firm that its request did not comply with state law. CIRM should have then released the entire document. In our case, we have had decades of experience with public record law and can generally tell when there is a flagrant violation. But other members of the public are likely to accept whatever CIRM, driven by desires of its suppliers, deigns to pass along.

The contracts signed by Levin and Square One are state documents. CIRM is required by law to determine what is public or confidential, not the outside contractors. Certainly they can and should be consulted, but their wishes must not be blindly followed. To do so is to open CIRM to unnecessary legal challenges by foes of stem cell research.

Failure to be forthright also raises questions about other areas of CIRM that bear attention, such as the problems with the software that is critical to the oversight of what is now a $1 billion grant portfolio along with the $250,000 federal lobbying contract with Tony Podesta, also heavily censored and we suspect unnecessarily so.

Managing outside contractors has always been difficult for government, both at the state and national levels. The stories of abuses are legion, whether it is a Defense Department boondoggle or fouled up databases at the state Department of Motor Vehicles. CIRM must make it clear to its contractors that the agency's needs must be met and that the interests of the taxpayers do not necessarily coincide with those of the contractors.