Inside California Stem Cell IP: A Look at the Royalty Money Trail

The $4.9 billion purchase last week of a California immunology firm is a rich deal for Forty Seven, Inc., but it is no immediate cash cow for the state's stem cell agency, which backed the firm's "don't-eat-me" research with upwards of $45 million.

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. 

The stem cell agency has awarded Forty Seven directly $15 million for its cancer-fighting trials. Noted Stanford researcher Irv Weissman separately has received $30 million from the agency, much of which went for the basic research behind Forty Seven. Weissman, who co-founded the firm and is on its board of directors, stands to gain $191 million. Stanford is set to receive $67 million.

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.  

California Stem Cell Report: Can you refresh me on the date of the changes in the IP rules related to the loan conversion and the justification? .... My recollection is that conversions were authorized because of pressures from grantees. 

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. 

Transcript of Intellectual Property Subcommittee May 19, 2015

and

Transcript of CIRM governing board meeting May 21, 2015 
(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.)

CIRM: Our goal is to always give every project we fund the greatest chance of success and that often means creating the easiest path for companies we fund to partner with other commercialization partners that have the capital to successfully bring the program through the necessary steps to move the given therapeutics to market and to patients. If a project is successful, and clearly that’s why CIRM was created, the company is still obligated to repay the funding we provided it but it has the option of doing so in a lump sum or to allow that repayment through potential, but still uncertain, future royalties.

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.

Bloomberg News: $191 Million Payout for Stanford Researcher in Immunotherapy Deal

Renowned stem cell scientist Irv Weissman of Stanford University stands to gain $191 million from the sale of a Menlo Park, Ca., immunotherapy firm that he co-founded to develop a cancer treatment, Bloomberg News reported this afternoon.

The firm is Forty Seven, Inc., whose scientific underpinnings were developed in Weissman's lab. Gilead Sciences, Inc., of Foster City, Ca., announced Monday that it is buying Forty Seven for $4.9 billion which amounts to a price of $95.50 a share.

Weissman serves on the company's board and holds 4.2 percent of the company's stock, according to the article.

Weissman was not immediately available for comment on the report.

The article by Devon Pendleton said,

"Stanford’s payout from the sale is $67.1 million. Other winners from the deal include billionaire Stanley Druckenmiller’s Duquesne Family Office and the Rockefeller family’s venture capital firm Venrock Associates. The entities, which own stakes of 0.8% and 1.2%, respectively, acquired their holdings in the last quarter of 2019, filings show, when the shares traded for as low as $5.53 and as high as $45.39."

Pendleton wrote that Weissman "credits the support of the nonprofit Ludwig Institute for Cancer Research and the state-funded California Institute for Regenerative Medicine (CIRM) with funding Forty Seven’s early clinical research and development."

CIRM, commonly known as the state stem cell agency, awarded Forty Seven directly and Weissman $30 million for earlier research. The agency does not stand to benefit from the sale unless the proposed therapies reach the marketplace and generate a profit. That could trigger royalties to the state.  However, the agency has said that the deal validates its efforts to successfully stimulate research that leads to a product and fills an unmet medical need.

Bloomberg said,

"Biotechs saw it as too dicey to invest in at an early stage, Weissman said. So he and (Ravindra) Majeti formed Forty Seven, with Stanford getting an equity stake and future royalties that it agreed to share with the state."

Majeti is a professor of medicine at Stanford, a director of Forty Seven and also held stock. The Bloomberg piece did not identify his gain.

(A slightly earlier version of this story attributed the initial report to the Los Angeles Times. It was a Bloomberg News story that was picked up by the Los Angeles Times.) 

Tentacles, Railroads and California Stem Cell Finances: Looking for Greater Returns

The tentacles of railroad greed were the subject of many a political
cartoon in 19th and early 20th century California. 

California's $3 billion stem cell agency owes a "debt," you might say, to the Golden State's railroad, robber barons of the 19th century. 

The railroads were regarded as an evil "octopus," preying on helpless Californians. And the long-ago, railroad power over the state and its economy was a key reason behind a provision in the state Constitution that bars the state and its stem cell agency from owning stock in companies. 

The rationale was that buying railroad stock with taxpayer dollars amounted to unnecessary and most likely corrupt financial assistance to the "octopus" -- the old quid-pro-quo thing. 

Today the prohibition on owning stock in companies rankles some directors of the California Institute for Regenerative Medicine (CIRM), as the stem cell agency is formally known.

The matter revolves around the desire to secure a better financial return on CIRM's investment in companies such as Forty Seven, Inc., whose stock has skyrocketed in the last four months. 

The agency has pumped many millions into Forty Seven, which is testing an "eat me" immune therapy aimed at destroying cancer cells. The state could realize a return on royalties at some point --  if an "eat me" treatment ever makes a profit. But meanwhile, other private investors in the company are enjoying a handsome return, if they bought Forty Seven stock at the right time and sell at the right time. 

CIRM Director Jeff Sheehy has long been concerned about finding a way to generate better financial returns on CIRM's financial support of stem cell companies, along with the basic research that that the agency backs. 

In response to a query last week, Sheehy said in an email to the California Stem Cell Report, 

"You're asking the right question...and a central one as voters consider more funding for CIRM. Clearly in this instance (Forty Seven's stock price hike), a lot of money will be made off research funded by CIRM. 

"What exactly is the state's cut?  Will the state see any money if (the purchase of Forty Seven by) Gilead goes through and if not, why?

 "If the problem is the inability of the state via CIRM to hold equity, why doesn't the new measure fix this so that the investment by state realizes a fair return to our taxpayers? 

"I note that Stanford will make out like a bandit on this deal, and it's ironic that the (stem cell agency) board had to force Stanford to fulfill its commitment to co-fund another project with a similar product, that btw, is also licensed to Forty Seven.  

"Stanford has received about 12.5% of CIRM's funds. With the next measure, the same percentage going to this institution will mean that Stanford will have received over $1 billion from the state.  Should we not guarantee that the state receives its full share so it can fund healthcare, schools, teachers, community colleges, mental health needs, ending homelessness etc?"

The new measure that Sheehy refers to is a proposed ballot initiative to give the agency an additional $5.5 billion. CIRM is running out of money and will begin closing its doors if voters do not approve the proposal next November. 

While the complex measure significantly broadens the scope of CIRM operations, it does not alter the state Constitution. Doing so would require more signatures to qualify the measure for the ballot (meaning more cost to the initiative backers). 

A major constitutional change could also open a significant, new opportunity to attack the stem cell program and imperil passage of the current proposal.

During its 15-year history, CIRM has not conducted a major public examination of removing the ban to generate a better payoff for the state. The fact that the ban has been around for a century may testify to the political difficulties of such a task.

As for Stanford, it is the No. 1 recipient of CIRM awards with a total of $338 million and has had a representative on the CIRM board since its inception, a situation not uncommon with other recipient institutions. The agency has rules in place to prevent legal conflicts of interest. But about 90 percent of CIRM funding has gone to institutions with board representation, according to an accounting by the California Stem Cell Report. 

Leland Stanford, Wikipedia image

A final note of irony: Stanford University was founded by Leland Stanford, one of the four robber barons of California. He and his colleagues initially earned their reputation by building the western half of the transcontinental railroad with government funding. They were paid for each mile of track they laid, generating a hasty process that did not encourage quality work. 

Wikipedia adds,

"In 1975 the student body of Stanford University voted to use 'Robber Barons' as the nickname for their sports teams. However, school administrators disallowed it, saying it was disrespectful to the school's founder."

Booming Stock Price This Morning for Firm Backed by California Stem Cell Agency

Google chart

California's more than $15 million investment in a San Francisco Bay area company could be paying off more than handsomely this morning -- for the company.

The firm is called Forty Seven, Inc. Its stock skyrocketed overnight and was up 24 percent this morning at the time of this writing.  The jump occurred as the rest of the market continued its deep slump.

The trigger for Forty Seven was a report from Bloomberg News that Gilead Sciences, Inc., had approached the Menlo Park, Ca., company with a takeover bid.

This morning's stock price of $60,34, however, was still below the company's 52-week high of $65. That compares to the 52-week low of $5.53.

The hike in Forty Seven's stock price will not necessarily directly benefit the stem cell agency, which is formally known as the California Institute for Regenerative Medicine (CIRM).  The California state constitution bars the state from holding stock in companies, which has rankled some of CIRM's top officials.

Any financial return on the two CIRM awards made directly to Forty Seven would come through possible royalties from use of research that the agency has helped to finance. 

CIRM's support for the firm's research actually exceeds the $15.2 million in direct awards. The $3 billion agency, which is running out of cash, has financed other awards that laid the ground work for Forty Seven. They  went to Irv Weissman at Stanford University, who is on the company's board of directors and a co-founder of the firm. Weissman has received $30 million from CIRM.  

Last October the agency cited its investment with Forty Seven as part of the economic benefits chalked up by CIRM and provided this quote from the company.

"'CIRM’s support has been instrumental to our early successes and our ability to rapidly progress Forty Seven’s CD47 antibody targeting approach with magrolimab,” says Mark Chao, M.D., Ph.D., Founder and Vice President of Clinical Development at Forty Seven Inc. 'CIRM was an early collaborator in our clinical programs, and will continue to be a valued partner as we move forward with our MDS/AML clinical trials.'"

Earlier this month, CIRM President Maria Millan highlighted Forty Seven as a "pivotal" clinical trial in a briefing for CIRM directors, producing the slide below. 

Look for more coverage involving the Forty Seven-Gilead news later today right here on the California Stem Cell Report. 

Aussie Bioethics Web Site Negative on California Stem Cell Royalties

The California stem cell agency and its royalty news drew attention today from down under in an article that did not exactly view the research effort with warm regards.

The piece appeared on the bioethics blog called Bioedge and was written by Michael Cook, who publishes the web site. He picked up on American news about the royalty matter, largely from the California Stem Cell Report, but also from the $3 billion agency itself.

Cook described the critics as scathing. He concluded,

"During the campaign for Proposition 71, supporters strongly argued that destructive research on human embryos was absolutely necessary for the science to proceed and that cures would certainly come. Almost 14 years later, there have been no cures. The royalty cheque was for a potential therapy for glioblastoma, a deadly brain tumour – but even this not on the market yet. Thus far, it has only passed Stage I clinical trials and been written up in glowing terms in O, The Oprah Magazine."

Sacramento Bee, Royalties and California Stem Cell Payoff

The Sacramento Bee this morning carried an article by this writer on the California stem cell agency and its first $190,345.87, royalty check. The article is aimed at a more general audience including policy makers in the state Capitol. Here is a link to the piece, which carries this headline on The Bee web site:

 "Will California's $3 billion in stem cell spending pay off? First royalty check arrives"

The full text of comments summarized in the piece will be carried later today on the California Stem Cell Report. 

'Less Than a Drop in the Bucket' -- Dueling Perspectives on California's First Stem Cell Royalty Check

California is counting its first royalties from a 13-year-old effort to develop stem cell cures and has declared that it hopes that the check will be the first in a flood of payments.

Others, however, warn of the dangers of over-excitement about the $190,345.87 payment from the City of Hope, saying that it is "less than a drop in the bucket" compared to the cost of the $3 billion California Institute for Regenerative Medicine or CIRM, as the state stem cell agency is formally known.

Here is a longer look at the two perspectives in the wake of Monday's royalty report.

John McCain, Washington Times photo

 The royalties were generated from a $5.2 million award in 2012 to the City of Hope for research involving a potential therapy for glioblastoma, one of the deadliest forms of brain cancer and the type afflicting U.S. Sen. John McCain. 

"A little piece of history" is how Kevin McCormack, senior director for communications for the  stem cell agency, described the royalty in an email. He also wrote on the agency's blog,

"It’s the first of what we hope will be many such checks, helping repay, not just the investment the state made in the field, but also the trust the voters of California showed when they created CIRM."

McCormack continued,

"Maria Millan, CIRM’s President & CEO, says the amount of the payment is not the most significant part of this milestone – after all CIRM has invested more than $2.5 billion in stem cell research since 2004. She says the fact that we are starting to see a return on the investment is important and reflects some of the many benefits CIRM brings to the state."

Asked for comment on the payment, John M. Simpson of Consumer Watchdog in Santa Monica, Ca., who was deeply involved in the development of the agency's initial intellectual property rules, said,

“Once again it’s clear that Proposition 71 (the ballot initiative that created the agency) was oversold by its sponsors. Despite campaign hype, it’s only now that we are seeing the first royalty payment and a rather modest one at that."

Bernard Munos

Bernard Munos, a senior fellow at FasterCures. a think tank aimed at speeding medical research, elaborated at more length in his response to a query by the California Stem Cell Report. He said,

"The $200,000 check from City of Hope should be acknowledged, but it only represents 0.02% of the $1.1 billion in royalties that were promised to California taxpayers -- and does not even cover the annual salary of CIRM’s part-time vice chairman.

"It is also unclear how the licensing (by the City of Hope) of a discovery to a New York-based company, Mustang Bio, Inc., will generate jobs and investment in California, as proponents of CIRM originally promised voters. 

"The world has changed since 2003 when George W. Bush severely restricted government-funded research on embryonic stem cells. The Obama administration lifted those restrictions, and regenerative medicine has diversified into many lines of research that have taken the field well beyond the embryonic vs. adult stem cell debate of the early days, which gave CIRM its initial impetus. Looking ahead, it is unclear whether CIRM still has a role to play. 

"Regenerative medicine offers enormous promises, and Californians may indeed want to leverage that opportunity by supplementing federal funding with their own. We have proposed a way to do this, as an alternative to developing plans to extend CIRM with another $5 billion in California bonds, to be paid out of the state’s general fund. 

"Whenever a multi-billion dollar fund is created, it tends to attract all kinds of people who want a piece of it. Unless strong governance is in place with clear rules on how the money must be disbursed, some of it is likely to fund projects that don't get the scrutiny they should, or even lie outside the organization's remit. Inadequate governance has been a problem at CIRM, as documented by reports from the Institute of Medicine -- now the National Academy of Medicine -- and others. Before consenting to an extension of CIRM's mandate, Californians should look at the returns they have gotten, and are likely to get (or not) from CIRM's past investments, and should demand an independent assessment of whether these investments are consistent with what they were promised and with CIRM's mission."

Marcy Darnovsky, FIXED photo

Marcy Darnovsky, executive director of the Center for Genetics and Society, in Berkeley, Ca., said in her email,

"Many Californians voted to establish CIRM because they believed the promises that its backers were making: that we'd soon see revolutionary medical breakthroughs, that our state would get back a billion dollars or more in royalties, that the agency would be run by an 'independent' board. Almost a decade and a half later, none of that has come to pass. 

"The rules and regulations about royalty returns to California are confusing and unclear, and need to be made far more transparent. But it's hard not to ask whether this first royalty payment is anything other than theater, meant to assuage and allure voters now that CIRM is talking about another ballot measure for $5 billion more from the public purse.

"The royalty check from City of Hope is less than a drop in the bucket. It's almost as if you loaned someone $3000 (at your own expense) because they promised to do some good work and pay you back $1000. Years later, they haven’t finished the work but they are offering you twenty cents instead of $1000, and asking for thousands more."

The debate over what Millan has called the "value proposition" of the agency's work is likely to intensify over the next two years. CIRM expects to run out of cash within that period and is pinning its hopes for survival on a proposed $5 billion ballot initiative on the November 2020 ballot -- a campaign that should excite some considerable interest if it is not heavily overshadowed by the presidential election that year.

Counting the Stem Cell Beans: Inside California's First Stem Cell Royalty Check

Readers who really want to dig into the numbers involving the first royalty check generated by  research funded by the $3 billion California stem cell agency have a special treat.

Below is a look at how the royalty payment by the City of Hope was calculated. The royalties grew out of an arrangement with Mustang Bio, Inc. of New York City.

 First Royalty Payment Generated by California  State Stem Cell Agency by DavidJensen on Scribd

After 13 years, California Receives Its First Stem Cell Royalty Check

California's $3 billion stem cell agency this morning reported the first royalty check resulting from its 13-year-old research program -- a payment of nearly $200,000 from the City of Hope.

The money, however, did not go to the agency, which is scheduled to run out of cash by 2020. It went to the state's general fund and can be used for anything from smog prevention to patching up the state's freeways. 

The royalties resulted from a $5.2 million grant in 2012 to Stephen Forman at the City of Hope in the Los Angeles area. The research, now overseen by Christine Brown, involved the use of genetically modified CAR-T cells to improve cure rates of patients with "high-grade" malignant glioma, an aggressive type of brain cancer.

In an email today, Kevin McCormack, senior director of communications for the agency, described the $190,345.87 royalty check as a "little bit of history."

It was a "bit of history" that goes back to the ballot initiative campaign of 2004 that created the California Institute of Regenerative Medicine or CIRM as the agency is formally known.  Backers of the measure created what some say were unrealistic expectations that the agency would generate $1.1 billion in royalties. 

The royalty payment resulted from an agreement by the City of Hope to license the technology to Mustang, Bio, Inc., of New York City. It is a subsidiary of Fortress Biotech, Inc. Both are publicly traded firms.

The San Francisco Chronicle first reported the size of the payment, although the fact that a royalty check was coming was disclosed last summer. Joaquin Palomino wrote in the Chronicle this morning, 

"'This is an initial payment for the recognition of the potential of this therapy,' Brown said. 'If it’s ultimately approved by the FDA as a commercial product, this could be a continued revenue source' for California."

The Chronicle article also said, 

"'In order to prove that it was a good investment for California taxpayers, we are going to need to see returns in the tens or hundreds of millions of dollars, not in the hundreds of thousands,' said Bernard Munos, a senior fellow at the medical think tank FasterCures and a close observer of CIRM. 'It’s too early to claim victory, or to claim this was a great deal for the taxpayers of California."

Here is a link to CIRM's blog item on the payment. Below is a letter from the City of Hope to CIRM about how the royalty payment was calculated.

   First Royalty Payment Generated by California  State Stem Cell Agency by DavidJensen on Scribd

California Stem Cell Agency's First Royalty Payment: Beginning of a $1 Billion Flood? No One is Saying

The check is in the mail for California's $3 billion stem cell research effort. But it is something of a secret.

So reports Ron Leuty of the San Francisco Business Times concerning the expectation that the agency, formally known as the California Institute for Regenerative Medicine (CIRM), would generate $1 billion in royalties. In an article online yesterday afternoon, Leuty said,

"We are expecting the first check to be delivered to the state very soon," CIRM spokesman Kevin McCormack said in an email.

"Yet even as a public state agency, CIRM officials are holding tight to key information about the first royalty check: How large (or small) is the check? When will the check actually be forwarded to the general fund? And from which CIRM-funded project did it spring?

"'The royalty check is something that is still being worked out so it’s premature to say anything at the moment,' McCormack said in a followup email. 'Sorry to sound so secretive but it is a big deal, the first of what we hope will be many such repayments for the state’s investment.'"

During the ballot initiative campaign that led voters in 2004 to create the stem cell agency, supporters said that the agency's research could generate up to $1.1 billion in royalties. None have yet surfaced. And at least one description of the royalty promise has called it a "cynical ruse."

Clarifying the Path to Cash: California Looking for Money from Its Stem Cell Investments

CIRM chart

The $3 billion California stem cell agency is moving to revise its rules for royalties and revenues that may be derived from its research, simplifying them while focusing more sharply on likely cash-generating products.

The proposal comes before the agency's Intellectual Property  (IP) Subcommittee Thursday at a 10 a.m. meeting that has a number of locations throughout California where the public can participate.

A document prepared for the meeting said the complexity of the existing IP regulations has led to disagreements, created an excessive administrative burden and treated for-profit and non-profit enterprises differently.

John M. Simpson of Consumer Watchdog in Santa Monica, Ca., who participated extensively in the early development of the IP rules, praised the proposed changes.

Responding to an inquiry from the California Stem Cell Report, he said:

"The proposed changes in the IP regulations should simplify oversight for CIRM and make expectations for all awardees clearer.  It puts nonprofit and commercial entities on the same footing with regard to their revenue sharing responsibilities. Most importantly the new rules will emphasize getting revenue for the state  from  companies who actually commercialize the results of CIRM-funded research.  That’s exactly as it should be. 

“Nonetheless, despite the overblown promises of Prop. 71 campaigners, the state as yet to realize any revenue from research CIRM has funded.  There could be a little money this year."

"This change in the IP rules makes sense and is the best way forward,  but realistically I doubt the state will ever see significant revenue from the research it has funded."

Proposition 71 created the California stem cell effort, known officially as the California Institute for Regenerative Medicine or CIRM. One of the promises of the 2004 campaign was that it would lead to as much as $1.1 billion in revenues to the state. No royalties have yet been announced. 

Telephonic locations for the public exist in Irvine, Napa, South San Francisco, San Diego and San Francisco in addition to the agency's headquarters in Oakland. Specific addresses can be found on the agenda, which also includes directions for a listen-only audiocast.
 

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."

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.

California Stem Cell Audit: Praise for Mills but More Work Needed on IP, Conflicts of Interest

The California stem cell agency this week received good marks for changes made by its new president, but it is also being told that it needs to improve how it tracks potential royalties and how it prevents grant reviewer conflicts of interest.

A "performance audit" by Moss-Adams, a Seattle business consulting firm, made 12 recommendations for the $3 billion research enterprise. One of the 12 was to implement the unfulfilled recommendations made by Moss-Adams three years ago.  Seven of the 24 from that audit still need more action, the firm said.

On Thursday, the agency's governing board is scheduled to discuss the latest audit at a meeting in Berkeley.  The study is required by state law every three years. The agency's scientific performance, however,  is specifically excluded from being examined. Moss-Adams is scheduled to receive $230,000 from the agency for the audit, which was for the 2013-14 year.

On Sunday, the California Stem Cell Report covered the deficiencies involving disclosures of the financial interests of grant reviewers.

Other areas of concern included the need for better tracking of intellectual property that could mean royalties for the state, more timely review of progress reports from grantees, more timely, formal evaluation of employees and keeping up-to-date on technology related to grant management and agency efficiency.

Under the subject of "commendations," Moss-Adams said that CIRM had "many strengths."  The consultant said the agency has made "significant strides" in three areas: the grant management system, grants process improvements and "organizational culture."

The grants process comment referred to CIRM 2.0, the fast-track funding program initiated by Randy Mills since he became president a year ago. The organizational culture commendation also involved Mills' efforts, but touched indirectly and delicately on the resignation of Robert Klein as chairman and the election of Jonathan Thomas to replace him in June of 2011. 

Moss-Adams reported "enhanced seamlessness" between the president's and chairman's offices. Proposition 71, which created the agency, dictated a controversial dual executive situation that has troubled the agency since its inception.

The audit found significant deficiencies involving the treatment of CIRM employees, some of which have been addressed in a positive way already by Mills. One example cited by the audit involved performance evaluations that are tied to pay increases. It said that evaluations that were scheduled to occur in 2013-14 did not actually take place until January of this year.  

Moss-Adams said the agency also needs to do better in monitoring and protecting its intellectual property (IP), which could generate royalties. Without tight tracking of the IP and inventions funded by CIRM research, the state could lose out on revenue. Backers of Proposition 71 told voters in 2004 that the state could receive more than $1 billion in royalties from CIRM research. So far, none has resulted. 

Moss-Adams said that royalties are now more possible because the agency is backing late stage research that is more likely to make it into the market place. 

Moss-Adams said more work was needed on implementing the seven recommendations from three years ago, including those involving IP, the transition plan to deal with the possible demise of the agency and a grants outcome database. 

Business-friendly Changes in California's $500 Million Stem Cell Loan Program

The California stem cell agency is set to overhaul its $500 million loan program, acknowledging that it has been far less than successful.

The change would allow companies to accept a multimillion dollar grant and then convert it to a loan. The process would enable a firm to escape paying royalties on a lucrative product that might be developed partially as a result of CIRM funding. Royalties are required under the terms of a grant but not on a loan.

Backers of Proposition 71, the ballot measure that created the Callifornia stem cell program, touted the promise of royalties to help convince voters to approve the measure.

A memo by James Harrison, general counsel to the agency, said the loan program failed to meet its objectives. Only two loans are currently outstanding. They are to Viacyte of San Diego and Capricor of Beverly Hills.

The original intent of the 2008 program was to generate additional cash through interest on the loans to help with research funding.

Harrison said,
"Under this proposal, recipients of CIRM’s clinical stage project awards (PA 15-01, 15-02 and 15-03) would have the option to elect to convert their award from a grant to a loan within the earlier of marketing approval by the Food and Drug Administration or seven years from the effective date of the award. Unless the parties agreed to different terms, the awardee would be required to repay the loan balance within ten days of making the election to convert from a grant to a loan at a rate that would escalate based on the date of repayment. Conversion from a grant to a loan would become final only after the awardee has satisfied the terms of the conversion."

The proposal is scheduled to be heard Monday by the agency's intellectual property subcommittee and finalized May 21 by its full board.

Here is the link to the subcommittee agenda where Harrison's full memo can be found. It also shows locations in San Francisco, San Diego, Irvine, Napa and Redwood City where interested parties can listen in and participate in the proceedings. https://www.cirm.ca.gov/agendas/05082015/ip-subcommittee-meeting

Here is a link to an item about the history of the program, which was originally scheduled for change in March. http://californiastemcellreport.blogspot.com.es/2015/03/500-million-stem-cell-loan-effort-klein.html

Stem Cell Bonds, Royalties and Campaign Promises

The upcoming sale of California state bonds for its unprecedented stem cell research effort raises anew a $700 million question along with allegations of deceit in the campaign for Prop. 71, the measure that created the Golden State program.

On the surface, the matters involve an arcane financial issue. Can California sell non-taxable bonds to finance the activities of CIRM or must they be taxable. If they are taxable (meaning the dividends are taxable to buyers), the state will have to offer a higher interest rate to purchasers. That, according to one estimate, could mean as much as $700 million in additional costs to the state.

Such additional potential costs did not surface in the 2004 campaign. At the time, interest costs to the state were reported as $3 billion, rather than as much as $3.7 billion. Those amounts would be needed to borrow the $3 billion for the grants for stem cell research.

Nearly a year after Prop. 71 passed, reporter Bernadette Tansey of the San Francisco Chronicle wrote that California stem cell chairman Robert Klein knew before the election that taxable bonds might be needed but did not disclose the matter to the public. Klein was leading the effort on behalf of Prop. 71.

What triggers the use of taxable bonds is CIRM's requirement that royalties be paid to the state if state-funded research generates a significant amount of income.

Tansey reported,

"The potential problems have to do with a complex and unsettled question: how federal tax law will apply to a novel state research venture, supported by tax-exempt bonds, that involves a state split of private profits.

"But IRS rules largely forbid the states to use tax-exempt bonds to benefit specific private enterprises rather than serving a general public good -- and to share revenue from an enterprise to the extent that the state becomes like a business partner."

The issue of taxability was nearly invisible prior to Tansey's article, which subsequently generated allegations of bait-and-switch tactics and statements that Klein had a moral responsibility to be more forthright about the matter.

Stu Leavenworth, associate editor of The Sacramento Bee, interviewed Klein following the Chronicle report. Leavenworth wrote,

"The integrity of Prop. 71 is at stake in the royalty(taxable bond) debate. During the campaign, advocates of Prop. 71 mentioned royalties repeatedly, with Klein touting it on the PBS NewsHour with Jim Lehrer. This wasn't by accident. California was in the midst of a budget crisis, so Klein needed to create the impression - no matter how tenuous - that Californians would get some direct return on their investment."

Leavenworth described the conduct during the campaign at best misleading. "At worst, it was a cynical ruse," he wrote.

We queried both CIRM and the office of state Treasurer Bill Lockyer, which issues the bonds, concerning whether future stem cell bonds would be taxable.

Dale Carlson, chief communications officer for CIRM, replied,

"Bonds have never been used before to fund research, and so we want to be certain that the Prop 71 offerings are eligible for tax-exempt status. (See, for example, the transcript of the 11/05 IP task force meeting beginning at page 19 (http://www.cirm.ca.gov/transcripts/pdf/2005/11-22-05.pdf)) The Treasurer's office assumes that they'll qualify, but will be seeking guidance from the IRS to be sure. In the meantime, this first offering will be taxable."

The response from spokesmanTom Dreassler in the treasurer's office was similar:

"We want to complete the initial sale ASAP so we can pay back the bridge financing provided by the state General Fund and private foundations. At this point, however, we do not have an IRS determination that we can sell stem cell bonds as tax-exempt. So, we will issue this initial $250 as taxable. Then we hope to get a formal determination from the IRS that establishes the extent to which we can issue tax-exempt stem cell bonds. Once we get that ruling, we can refinance the $250 million as tax-exempt, thus cutting taxpayers' costs. Our long-term intent is to sell as much as possible of the $3 billion as tax-exempt, consistent with the IRS determination."

CIRM presumably could eliminate the cost of the added interest by withdrawing requirements that royalties be paid. However, that is extremely unlikely. Meanwhile, the IRS opinion could be some time in coming.

You can find all the coverage by the California Stem Cell Report and links to the stories mentioned above, plus much, much more by searching the label "bonds" below.