Klein's Silence Ill Serves Stem Cell Agency

California stem cell Chairman Robert Klein remains publicly mum on a $700 million question involving his actions during the Prop. 71 campaign a year ago.

Each day, his continued silence damages his credibility as well as that of the California Institute for Regenerative Medicine.

At issue is a report in the San Francisco Chronicle last week that said Klein knew that there was a federal cloud over the use of tax-exempt bonds during the campaign but failed to disclose the information. At least one neutral observer, Bob Stern from the Center for Governmental Studies in Los Angeles, has said Klein had a moral obligation to disclose the matter.

While it is seemingly a technical tax issue, it could increase taxpayer costs for the stem cell research program by an additional $700 million – close to $7 billion instead of $6 billion.

The Chronicle article came up again at the legislative hearing earlier this week into billion-dollar intellectual property issues involving CIRM, an agency that has taken a "trust us" position on many key matters before it.

"If this report is true, then Mr. Klein knowingly misled the voters of California and the supporters of Prop. 71," said Jesse Reynolds, director of biotechnology accountability for the Center for Genetics and Society in Oakland.

Trust is what is involved here. Klein was the most visible advocate for Prop. 71, carrying its water on television, radio and print media. It would be one thing if he had slipped out of the public limelight following the campaign, as do many electioneers. Instead he took charge of the agency that he is credited with creating. Now he is in a different role – that of a public steward, whose rhetoric must be connected to reality.

It hardly seems in his best personal interest or that of CIRM to let stand unanswered allegations that he deceived the public. How does that reflect on his future promises and plans for the stem cell agency? Can he be trusted on the complex and financially important issues of intellectual property?

One public relations strategy on issues such as this is to ignore them publicly, hoping that they will go away. The public has a short memory, goes the reasoning. In many ways, however, the public may not be the most significant constituency. In this instance, the international stem cell community is probably more important. So are the political and business decisionmakers in California. The questions raised by the Chronicle article are not likely to be forgotten when they evaluate future statements by Klein.

He may want to look at the example of Nelson Rockefeller, the former governor of New York. Rockefeller once had a tough re-election campaign that focused heavily on taxes. During the election, he promised that he would not support a tax hike. Rockefeller won the election and offered up a tax increase the next year. He was asked how he could square that with his election promise. "That was the biggest mistake of my life," he replied.

Penhoet on IP and Stem Cells

Ed Penhoet, vice chairman of the California stem cell agency and chair of the IP task force, did not break a lot of new ground with his testimony earlier this week on intellectual property. Here is the essence of what he had to say. The full text can be found at the CIRM web site.

"Our role is to spur development of new treatments and therapies – science in the service of therapies – in the promising area of stem cell research. To accomplish this, we recognize the importance of partnerships, especially with the private sector, to develop new tools to treat and study disease and injury.

"I believe that the State of California may achieve economic benefits from CIRM-funded research in a number of different ways including:

"• Providing cures as opposed to lifelong therapies for patients

"• Increased economic activity resulting from growth of an industry based on stem cell science: jobs, taxes, and economic development

"• Direct remuneration to the state from arrangements with industry which provide royalties or other forms of revenue-sharing

"• Attracting substantial increases in research and development funding to California by non-Californian entities."

Ability to Deal Calmly Wanted

The California stem cell agency has 72 applicants for its general counsel position despite a hiring freeze at the financially constrained organization.

Writing for Inhousecounsel.com, Petra Pasternak said the job posting has appeared on such Internet locations as craigslist.com and biospace.com.

"The ideal applicant would combine an in-depth knowledge of IP law with a broad business background -- a big job, according to lawyers," Pasternak wrote.

"'It's not quite like searching for a general counsel in a tech company,' said Stacy Taylor a partner in Foley & Lardner's San Diego office. 'I would guess it's more of a hybrid with experience at a tech company, but also experience dealing with essentially publicly funded research.'

"Frederick Dorey, a special counsel in the life sciences group at Cooley Godward (Palo Alto office), said that the position will require good negotiating skills and a cool head.

"'You'll be dealing with activists, people who are passionate about these issues,' he said, adding that a key skill will be the ability to deal calmly with widely divergent views."

Looking for Stem Cell Research Money?

Zach Hall, president of the California stem cell agency, has provided some clues to the direction of upcoming research grants – should CIRM be able to secure funding.

Reporter Rebecca Vesely of the Oakland Tribune carried Hall's comments in her story about Wednesday's meeting of the Oversight Committee.

"Hall said in the short term he would like to start approving innovation grants of several hundred thousand dollars each, with a focus on new ideas and bringing the brightest scientists into the field of stem cell research," Vesely wrote.

"'I think we should not be afraid at this point to try some risky fields,' he said.

"Hall also said the institute should start issuing 'safe haven' grants — those that would fund physical space to do embryonic stem cell research. Federal rules restricting embryonic stem cell research prohibit scientists from using federally funded laboratories for most embryonic stem cell research."

Vesely said the agency is drawing up plans for a one-day conference on the health risks of embryo donation, focusing on the scientific evidence of the risks -- not on the political debate surrounding egg donation.

Marisa Lagos of the San Francisco Examiner quoted Hall as saying, “We believe it is our responsibility to become better informed … to look critically at the evidence. What is the data? What is the best end? What are the best practices to reduce risks?”

Unanswered Questions about Stem Cell Research and IP

We received an interesting and detailed note from a well-informed observer about many of the issues involving California stem cell research and intellectual property. The immediate impetus for his comments was the background paper provided for Monday's legislative hearing on IP issues.

The writer is Terry Feuerborn, formerly Executive Director of Research Administration and Technology Transfer within the Office of the President at the University of California. He currently serves as the Technology Transfer Ombudsman for the Lawrence Livermore National Laboratory and the Lawrence Berkeley National Laboratory. Here are his comments.

"There are a lot of problems with the Background Paper. There is little real understanding of the higher education research environment, academic science, the pros and cons of the Bayh-Dole Act, or the realities of patenting and licensing new technology. It is not possible to deal with all the deficiencies of this report. Much of it is devoted to dealing with aspects of Prop. 71 that present issues. One such issue is the provision that the state "benefit from royalties, patents, and licensing fees that result from the research." This requirement, admirable on the surface, needs more analysis than the report provides.

"The proposition assumed that there would eventually be royalty income and that this should be shared with the state. Where will this royalty income come from and how will it be generated? Let us begin with the total dollars committed to basic research by CIRM. Funds used for buildings, training, and for administration are not likely to produce inventions. For the sake of being very conservative, however, let us say that all $3 billion will go to support basic research. How many inventions will that produce? For many years, technology transfer managers have used various estimates for the number of inventions that can be expected for a given amount of basic research conducted. Realities vary, of course, from institution to institution based on local factors. A handy estimate used a good bit of the time, however, is that you can expect one invention to be reported for every $2 million of funded basic research. Other estimates can be used, but the logic involved is what is important. Accordingly, for $3 billion, there may be 1500 inventions reported--give or take hundreds in either direction. Each invention reported will require a highly specialized technical analysis just to decide whether or not a patent application should be filed. This is necessary because it is too costly to file a patent application for every invention reported.

"There are often legal and scientific reasons for not filing a patent application as well. Who will perform these evaluations and who will bear the cost? CIRM? The State of California? Where will the expertise and funds come from? Most likely it will have to be from the grantees--who already have patenting and licensing offices. How many patent applications will be filed from the pool of reported inventions? If research grants are made with good judgment, to the best scientists, it is possible that patent applications will be filed on 25% to 50% of the reported inventions. The higher estimate would cast a broad net to insure that patent applications are filed on all of the most promising inventions. Accordingly, there could be up to 750 patent applications, give or take hundreds in either direction.
It costs a lot to file and prosecute patent applications in the US. It can cost $200,000 or more to file corresponding patent applications in Europe and Japan. Who will pay these costs? CIRM? The State?
Licensees can be expected to pay for the costs of patenting inventions for which they have a license, but how many patents will be licensed? For that matter, how many patents will be awarded in response to all of the patent applications? In addition, patenting is an extremely litigious activity. There are infringement suits, interferences in the Patent Office, and legal disputes of all sorts--particularly if breakthrough inventions are involved. In other words, patenting and licensing is a very difficult and costly activity for an institution of higher education with a lot of risk involved. To what extent will the State share in those costs and risks if it expects to share in the benefits? If there is to be a state share of royalties, will it come from the grantee institutions or directly from licensees? There are serious practical and legal issues involved in either approach. And finally, what formula for sharing would seem to be appropriate? Until matters such as this are discussed in detail and dealt with in a reasonable and fair way, policies may be put in place that will have unanticipated consequences."

We are always interested in comments from readers. They can be posted directly by clicking on the comments link at the end of each item. It provides for anonymous commentary, although we prefer that writers identify themselves. Or comments can be sent to us at djensen@californiastemcellreport.com.

Stem Cell Training Grant Program Stalls

Many California institutions selected for stem cell research training grants are "holding tight," reluctant to begin their efforts without cash from the California stem cell agency, The Sacramento Bee reported today.

Reporter Edie Lau said that CIRM has backed away from suggestions that the medical schools begin the programs and seek reimbursement later. She also wrote that efforts to raise funds for the program are taking longer than anticipated.

The agency in September approved $39 million in training grants for 16 California institutions. The University of California, San Francisco, garnered one of the larger grants, $3.6 million to train 16 scientists.

"Obviously, we're disappointed," said Dr. Arnold Kriegstein, director of the school's Institute for Stem Cell and Tissue Biology. "We really have it on hold until we're guaranteed or at least assured that there's funding," Kriegstein said.

New Water Fountains for Stem Cell Science

San Francisco city and California stem cell agency officials snipped a red ribbon Tuesday at the official opening of CIRM's new headquarters in Baghdad-by-the-Bay.

Reporter Rachael Gordon of the San Francisco Chronicle wrote that optimism prevailed at the event, the usual course for such ribbon cuttings.

"The mayor's director of economic development, Jesse Blout, said no new stem cell related companies have put down stakes in San Francisco since the decision on where to locate the headquarters was made. But, he said, 'they're circling,'' she reported. "(San Francisco Mayor Gavin) Newsom said he expects some announcements to be made soon."

Noting the ample communal areas in the headquarters, Gordon quoted CIRM president Zach Hall as saying they will foster collaboration. "I'm a great believer in science by the water fountain,'' said Hall.

CIRM staff has not moved into the facility. That will come Nov. 11.

It was interesting decision by the Chronicle to cover the ribbon cutting but skip the legislative hearing into the intellectual property issues involving CIRM, although the Chron has been one of the leaders in coverage of the stem cell agency.

More Reporting from Monday's IP Hearing

The Contra Costa Times and the San Francisco Examiner also carried reports on Monday's legislative hearing into intellectual property issues involving the California stem cell agency.

Here is the lead on the Examiner story by Marisa Lagos:

"Almost exactly a year after California voters approved $3 billion in public funds for stem cell research, it is still unclear who will own the rights and revenue from any research findings — and whether taxpayers will get a return on their investment."

Here is the lead on the Times story by Sandy Kleffman:

"During the campaign for California's $3 billion stem cell initiative, supporters predicted as much as $1 billion would be returned to state coffers through royalties from stem cell therapies. But now, some question whether the state will get a dime."

Whoops! Monday's IP Hearing Generates a Story

The trouble with computer-based automated tools is that sometimes they turn on you.

No sooner had we written that no California newspaper had printed a story on Monday's IP hearing than up popped one from the Oakland Tribune, found by a dilatory search engine that we had working for us.

The article by Rebecca Vesely said, among other things, that we should not expect to see IRS rulings on the tax-exempt status of California stem cell bonds any time soon, according to the state treasurer's office.

Juan Fernandez, counsel in that office, said the IRS will be consulted only after lawsuits against CIRM are settled and a CIRM IP policy is in place. By some reckoning that may push off an IRS opinion well into 2007.

As for the CIRM timetable on IP, Ed Penhoet, vice chairman of the agency, said the Oversight Committee would not make any IP decisions until February. That seems to conflict with a timetable proposed for tomorrow's Oversight Committee meeting, which shows IP policy coming before that body in December. A wild guess is that a December decision is a tad optimistic.

Among The Missing

Even the San Francisco Chronicle skipped the meeting.

No doubt about it. The term intellectual property must be truly odious to California newspaper editors, although it is a $6 billion issue involving the state's newest bureaucracy.

No newspaper – at least one that is published on Web – carried a story on Monday's legislative hearing into the IP issues involving the California stem cell agency. Not even the agency's hometown paper, the Chronicle, covered it for this morning's paper.

Chalk up part of it to this fall's election in California, which is diverting newsroom resources from subjects that might normally be covered. But IP also doesn't have the surface sizzle of many other subjects.

Nonetheless, old newspaper editor once told me, "There are no dull stories, only dull reporters."

New Report: Too Soon To Tell About CIRM?

A new report on the California stem cell agency concludes that "it is too soon to tell whether the state’s effort is the right way, or even a good way, to support research the federal government will not."

At least that is the conclusion drawn by the organization that sponsored the study, entitled "Prop. 71: A Model for State Involvement in Biomedical Research?"

“California’s bold stroke to pursue stem cell research free from federal restrictions – and federal dollars – has been slowed by the debate over how to assemble a governing structure for the new institute," said Greg Simon, president of FasterCures, which commissioned the report.

"They’ve come a long way. But the real question is whether they can quickly resolve these debates in a way that allows them to fund the kind of high risk, high reward research that the public expects in order to make progress in the fight against disease,” Simon said.

Kathi E. Hanna oversaw and wrote the study on behalf of FasterCures, an offshoot of the Milken Institute that works for faster development of medical therapies. Hanna is a science and health policy consultant and once served as research director and senior consultant to President Clinton’s National Bioethics Advisory Commission.

Hanna wrote that four lessons can be drawn from the experience so far of the California stem cell agency.

1. "The passing of Prop. 71 did not insulate embryonic stem cell research from political risk. Even after California voters gave the go-ahead to Prop. 71, opponents in Sacramento and around the state found ways to challenge its very existence as well as its policies and nascent procedures."

2. "An initiative that promises success and preaches optimism can have far-ranging impact.(CIRM President) Zach Hall says he is reminded every day that 'a message of hope' is what propels him and supporters of the initiative to keep at it, despite the daily challenges of bureaucracies and politics."

3. "There are dangers in overselling the potential benefits of such an investment. High expectations that cannot be met, either in the form of cures or intellectual property revenues, will result in heightened scrutiny and dwindling political support. This requires educating policymakers and the public about what they can reasonably expect. In addition, tying complex social
goals, such as affordable healthcare, to a research program imposes an unreachable standard."

4. "There are advantages and disadvantages to creating a new research infrastructure from the ground up rather than using existing infrastructure and institutions. One advantage is that the program is relatively free from the political and administrative constraints of entrenched bureaucracies. On the other hand, CIRM has had to re-create an administrative infrastructure that in essence replicates that which is already in place in California agencies and academic institutions or in the federal research environment, but is inaccessible because of the requirement for CIRM’s independence. On the other hand, once established, CIRM will be able to leverage existing infrastructure as it makes awards to California researchers and institutions. (California Stem Cell Report Publisher David) Jensen doubts that the measure would have passed if the recipient institutions—University of California schools, for example—had been named at the outset. 'It would have brought out the usual enemies of the University of California, complaints about its lack of transparency, its past failures, for example, oversight of the Livermore Lab, and so forth,' said Jensen. 'What helped to make Prop. 71 attractive is that the new agency carried no baggage.'”

Hanna concludes:

"The true measure of whether Prop. 71 is a success will be in the science conducted and the results translated, not in how well CIRM operates administratively. There will continue to be conflict between those who expect efficiency and streamlining as a measure of wise public investment and those who understand that science is imprecise and unpredictable, that it cannot aim for efficiency as a goal. And one can expect that other measures of success, such as patents, royalties, and revenue streams will continue to create conflicts between those who want to fill state coffers and those who want to spur commercialization."

No IP Debate in South Korea?

While Californians are debating this Halloween about how to share the stem cell "treats," South Koreans are expecting to have therapies from embryonic stem cells within a decade.

According to a news story about a government report in that country, 110 clinical tests of adult stem cells are underway and three companies are already at commercial stages.

The story written by Wohn Dong-hee and carried on the Joongangdaily web site also said, "Provided laws on such medication allow, treatment developed from adult stem cells would be available as early as 2007. It (the study) said treatment drugs from embryonic stem cells would probably be on the market by 2015."

Ortiz: CCST IP Report Tilted by Insiders

An influential California state legislator today sharply criticized an earlier report on stem cell intellectual property, declaring that the state was not "well-served" by a "premature" study that "glosses over" important issues.

Sen. Deborah Ortiz, D-Sacramento, released the statement at the beginning of the hearing by the Senate and Assembly Health Committees into IP issues involving the California stem cell agency.

She targeted a stem cell IP report this summer by the California Council on Science and Technology, which she said was prepared by industry insiders.

“We need very clear and strong standards to ensure that the state’s interests are protected and that the state receives a meaningful economic return on its investment,” said Ortiz, who is chair of the Senate Health Committee and the Capitol's most influential legislator on stem cell issues.

"We’ll hear significant concerns today that that report was premature, and that it glosses over many important issues that we should be spending time deliberating, including important unintended effects of the Bayh-Dole Act that have become apparent over time, the special constraints posed by the use of tax-exempt bonds as a source of financing for the research, as well as viable opportunities we may have to ensure that the stem cell therapies and treatments that ultimately result from Prop. 71, which we are all hoping for, are accessible and affordable to lower as well as upper income Californians.

"The bottom line is I don’t believe the CCST report provides either an objective or comprehensive analysis of the full array of options that are available to us to draw on in developing an IP policy for stem cell research grants.”

Ortiz said California must manage IP rights so that they provide for affordable access to any therapies that result and also do not "impede the rapid and broad dissemination of basic research findings and tools."

She additionally addressed the issue of using tax-exempt bonds for stem cell research, declaring that her proposed constitutional amendment would make that more likely.

“If we are not able to use tax-exempt bonds, the $200 million annual cost of paying off the bonds becomes even larger in five years when the state begins paying off the bonds, potentially forcing us to make cuts in other vital programs. Given that we are unlikely to see any real economic benefits from the research for 10 years or more, it becomes imperative that we use tax-exempt financing to the greatest extent possible.

“That’s why my SCA 13, currently on the Senate floor, requires the Independent Citizen’s Oversight Committee when it is negotiating intellectual property agreements, to seek to ensure that treatments, therapies, and products resulting from Prop. 71-funded research are accessible and affordable to low-income residents, an approach that is more likely to be possible using tax-exempt bonds for the research.”

Below is the text of Ortiz' excerpted remarks, which are not yet available on her web site.

Text of Sen. Ortiz IP Remarks

Here is the text of Sen. Deborah Ortiz' excerpted remarks on IP issues, as released by her office.

“The important questions of who owns the rights to research findings and inventions coming out of Prop. 71- funded research, what they can do with them, and most importantly, how we ensure that California residents receive a significant and direct return on their investment in stem cell research are among the most perplexing that we face in implementing Proposition 71.”

“Our task is complicated by the fact that some options for obtaining economic benefits, particularly those that involve the state receiving benefits in the form of royalty or other direct payments, may not be possible if we want to use tax exempt bonds to pay for the research.”

“If we are not able to use tax-exempt bonds, the $200 million annual cost of paying off the bonds becomes even larger in five years when the state begins paying off the bonds, potentially forcing us to make cuts in other vital programs. Given that we are unlikely to see any real economic benefits from the research for 10 years or more, it becomes imperative that we use tax-exempt financing to the greatest extent possible.”

“That’s why my SCA 13, currently on the Senate floor, requires the Independent Citizen’s Oversight Committee (ICOC) when it is negotiating intellectual property agreements, to seek to ensure that treatments, therapies, and products resulting from Proposition 71-funded research are accessible and affordable to low-income residents, an approach that is more likely to be possible using tax-exempt bonds for the research.”

“My own position has been and continues to be that we need very clear and strong standards to ensure that the state’s interests are protected and that the state receives a meaningful economic return on its investment.”

“We also need strong policies to ensure that the way we manage IP rights do not in and of itself impede the rapid and broad dissemination of basic research findings and tools.”

“Finally, in 2005, at a time of escalating problems with the affordability of prescription drugs and therapies, we would be remiss if we didn’t attempt to ensure that the issue of the ultimate accessibility and affordability of stem cell therapies and treatments relying on Proposition 71 – funded research is addressed. As we’ll hear today, that goal is not addressed very well by the prevailing model of IP management that we have, the federal Bayh-Dole Act, but we have an opportunity to do so with the policy that we develop here in California.”

“Personally, I don’t think the ICOC or Californians generally have been well-served by the one report that has been issued on this topic, the report of the California Council on Science and Technology. I think we’ll hear significant concerns today that that report was premature, and that it glosses over many important issues that we should be spending time deliberating, including important unintended effects of the Bayh-Dole Act that have become apparent over time, the special constraints posed by the use of tax-exempt bonds as a source of financing for the research, as well as viable opportunities we may have to ensure that the stem cell therapies and treatments that ultimately result from Proposition 71, which we are all hoping for, are accessible and affordable to lower as well as upper income Californians.”

“The bottom line is I don’t believe the CCST report provides either an objective or comprehensive analysis of the full array of options that are available to us to draw on in developing an IP policy for stem cell research grants.”

“I am perhaps most distressed that, despite legislative admonition that the CCST broaden its study group and solicit broader representation of Bayh-Dole critics and public interest groups, they chose to ignore that request. Instead, what we have before us is the product of thinking by technology transfer insiders, who despite their expertise, may be missing the broader issues of public interest.”

“I know I speak for many in saying that we are less interested in seeing the state adopt a status quo policy for management of intellectual property rights than we are in seeing the state adopt a policy that makes sense and serves the public, which is footing the bill for the research.”

“This hearing is the first of what will probably be many forums for discussion of this issue. The ICOC’s subcommittee will be meeting throughout the fall and hopefully this hearing will spur debate and broad consideration of the options that are possible in this complex, but vitally important, issue.”


# # #

FTCR: Affordable Therapy, Strong Public Oversight, Diverse Research

Publicly financed stem cell research may be a "gold mine" for biotech companies, but California taxpayers should not "get the shaft," the California Foundation for Taxpayer and Consumer Rights said today.

Jerry Flanagan, health care policy director for the group, said in a statement that the California stem cell agency should ensure that taxpayers and patients "have a controlling interest" in any therapies developed through CIRM grants.

"Drug and biotech companies see publicly-financed research as a gold mine. Policymakers must ensure that taxpayers and patients don’t get the shaft. That means that the stem cell research institute must adopt policies that guarantee that new treatments are affordable,” Flanagan said prior to the beginning of this morning's legislative hearing into intellectual property policies involving the stem cell agency.

The group enunciated three principles for IP and the agency: affordability, public control and oversight and diversity of research.

Flanagan said the agency should provide "on-going public control of how research products are priced" and ensure that results are "shared with other researchers to guarantee open access to new research tools."

"Intellectual property guidelines must encourage broad investment of funds to develop cures for the widest ranges of illnesses, not just those with well-heeled advocates," the organization said, citing sickle cell anemia which afflicts a portion of the African-American population. Flanagan also renewed his group's call for better public oversight of conflicts of interest between grantors and grant recipients.

Below is the full text of the organization's press release, which has not yet been posted on its web site.

Text of FTCR IP Press Release

Here is the full text of the press release this morning by the California Foundation for Taxpayer and Consumer Rights. More of its comments on California stem cell matters can be found here.

CA Stem Cell Institute Must Allow Taxpayers and Patients to Have a Controlling Interest in New Medical Breakthroughs Consumer Group Calls on Regulators to Protect $3 Billion Investment

San Francisco, CA - Prior to a public hearing convened by the state legislature today, the Foundation for Taxpayer and Consumer Rights (FCTR) issued three principles that must be adhered to by the stem cell research institute when issuing $3 billion in bonds under voter-approved Prop. 71 (see below).

The key to fulfilling the promise of Prop. 71 is to “ensure that new medical breakthroughs developed with taxpayer money are available to all Californians. That means that the stem cell research institute must adopt policies that guarantee that new treatments are affordable,” according to FTCR.

“Drug and biotech companies see publicly-financed research as a gold mine. Policymakers must ensure that taxpayers and patients don’t get the shaft,” said Jerry Flanagan of FTCR.

“Many Californians support stem cell research but are unwilling to provide a blank check to biotech and drug companies to develop it. Voters were told they would benefit from stem cell research, but if the drug companies own new medical treatments they will likely price them out of reach of average Californians. What is the benefit of new stem-cell technologies if we cannot afford them?”

The stem cell institute has been broadly criticized for deep conflicts of interest between the overseers of public funds, drug companies, and grant recipients. The public hearing was called in response to concern raised over whether taxpayers and voters will benefit from Prop. 71 research, as they were promised by Prop. 71 proponents, or whether biotech and pharmaceutical companies that control the Prop. 71 research institute will profit at the state’s expense.

The Prop. 71 research institute is in the process of adopting “intellectual property” guidelines that will determine who will control new medical breakthroughs and receive royalties from new products. The current recommendation is to adopt flawed national guidelines, called the Bayh-Dole Act, which has failed to keep new medications developed with taxpayer money affordable to average Americans.

For example, under federal guidelines, the rights to the blockbuster glaucoma drug Xalatan, developed with $4 million of taxpayer grants at Columbia University, were sold to Pharmacia Corp. (now Pfizer) for less than $150,000. Pharmacia made $507 million on Xalatan in 1999 alone, charging U.S. patients $50 a bottle for ingredients that cost only pennies to produce.

The stem cell institute is considering a recommendation to allow grant recipients to keep all royalties garnered from publicly-financed research, though prior to voter approval of Prop. 71 proponents claimed that California would receive up to $1 billion in royalties and $11 billion in other savings.

“For most Californians, the affordability of new treatments will determine whether or not they are accessible,” said Flanagan.

The debate over ownership of intellectual property and the question of royalties must be carried out with the interests of taxpayers and patients in mind, not the private companies that have a financial stake in the outcome of policy decisions.

FTCR called on policymakers to adopt the following principles before approving additional grants:

1. Affordability is the key to access. Prop. 71 promised that voters and taxpayers would benefit from new medical breakthroughs. Essential to fulfilling the goal of public benefit is to ensure that new medical breakthroughs are affordable. An example of failed intellectual property standards is the national Bayh-Dole Act which has failed to keep prescription drugs and the results of other publicly funded research affordable even though that nationally 44% of health related research is funded by taxpayers.

As a result, taxpayers who have already paid for research provided by government grants are often required to pay huge prices for new prescriptions at a doctor’s office or pharmacy.

2. Public Control & Oversight of Intellectual Property. Despite huge investments of taxpayer money, the federal government has never used a provision of the federal Bayh-Dole Act allowing regulators to require affordable prices and that research tools developed with public grants are widely available. Essential to the success of Prop. 71 research is a policy that provides on-going public control of how research products are priced, shared with other researchers to guarantee “open access” to new research tools, as well as provide public oversight of conflicts of interest between grantors and grant recipients.

A possible model for public control of stem cell research in California is the International AIDS Vaccine Initiative (IAVI). IAVI retains the rights to inventions developed with its funding and seeks commitments from commercial partners that will result in vaccines and treatments made available to the public at reasonable prices and in sufficient quantities.

The stem cell research institute could build on this model by requiring companies developing medications with public funds to provide discounts to Californians, particularly to low and medium-income patients.

3. Diversity of research. The Prop. 71 stem cell institute oversight board is dominated by biotech interests and a handful of select disease group advocates that will likely steer research grants to a narrow field of medical conditions. Intellectual property guidelines must encourage broad investment of funds to develop cures for the widest ranges of illnesses, not just those with well-heeled advocates.

Under Bayh-Dole the focus of national research has shifted to products that have immediate commercial potential for large markets -- towards illnesses and/or symptoms that guarantee profit returns, not necessarily where need is greatest. For example, sickle cell anemia, which primarily effects African American communities and is not represented at the stem cell institute, has been successfully treated with the use of adult cord blood stem cells. Prop. 71 stem cell research grants could provided new breakthrough treatments for sickle cell anemia only if the stem cell research institute votes to approve such grants.

Coming Up

A little later this morning, we will have news out of the legislative hearing today in San Francisco concerning intellectual property and the California stem cell agency. Look for a statement from Sen. Deborah Ortiz and the Foundation for Consumer and Taxpayer rights, among other things.

Sharing the Stem Cell Wealth (Assuming There Is Some)

If you want to stifle innovation and drive up the cost of medical therapies, stick with the current arrangements for sharing the wealth from government-funded research, say some critics.

Or you can open up research findings to stimulate even more research or attempt to require therapies to be made available those who might not be able to afford them, as done by the grant program funded by Microsoft billionaire Bill Gates.

Discussion of those options and more are contained in a background paper to be presented to state lawmakers Monday at a hearing in San Francisco conducted by the Senate and Assembly Health Committees.

Sen. Deborah Ortiz, D-Sacramento and chair of the Senate Committee, is leading the hearing into ways the state can share the wealth expected to be generated by its $6 billion investment in stem cell research.

The staff report (see item below for the full text) examines the background of Prop. 71, the limits of bond financing, the impact of the Bayh-Dole Act, legislation related to Prop. 71 IP policy, the IP report by the California Council on Science and Technology and policy options for the state. Those include tiered or reasonable pricing arrangements, socially responsible licensing, direct royalty sharing and patent pooling, among other things.

Following the report's overview of the Bayh-Dole Act (BDA), it notes that "critics have reported significant unintended consequences of the BDA. A key concern among critics is that the BDA has hindered dissemination of and access to basic research findings. They argue that the BDA has made research more difficult and more costly by keeping basic research out of the public domain. Upstream patenting can limit downstream innovation through, among other things, 'patent thickets.' Patent thickets can arise when too many owners hold intellectual property rights in previous discoveries that constitute obstacles to future research and downstream inventions.

"Another concern is that the focus of research in United States universities has shifted away from fundamental research in order to focus on research targeted to commercial applications. The BDA, critics argue, may have created incentives that undermine the representation of the public interest in the calculus of determining which technologies should be patented and how they should be licensed. They contend that as a result, investment in health-related research and development gravitates toward illness or symptoms that offer the greatest potential returns on investment, regardless of actual needs. Others argue that the commingling of the academic and commercial sectors in part facilitated by the BDA has created a bias in scientific findings and undermined public trust in medical research. BDA 'has resulted in egregious conflicts of interest, especially in the biomedical sciences, and has contributed to the near-extinction of the norm of disinterestedness.' "

"Finally, critics of the BDA have questioned the wisdom of having United States taxpayers pay for products twice, first through federally funded grants to their inventors and then for the products themselves, particularly when they argue that the BDA has had no impact on affordability or accessibility of inventions paid for by taxpayer's dollars."

In addition to citing the Gates Foundation's policies, the report briefly discusses the International Aids Vaccine Initiative, which Ortiz has mentioned as a model to be considered. The legislative staff report said the Aids program "generally retains the rights to inventions developed with its funding and collaborates with commercial partners for development of vaccines and treatments using the inventions."

"In its partnerships, (the Aids effort) seeks commitments that resulting vaccines and treatments will be made available in developing countries at reasonable prices and in sufficient quantities, and has successfully negotiated a number of agreements containing those conditions. In effect, the commercial entity agrees to discount the price of the product in certain markets while retaining the right to price it freely in others," the report said.

In the item immediately below, we discuss the report's look at the royalty-tax issue that the Chronicle reported on earlier this week. Following that is the full text of the staff report.

The $700 Million Piffle

Just a mere piffle, this business about royalties endangering the tax-exempt status of bonds to be issued for stem cell research in California, right?

Not exactly. The first estimate we have seen places the size of this piffle at roughly $700 million or more. It is contained in the legislative staff report on IP issues involving the California stem cell agency.

Here is the key language from the report: "According to informal estimates from the (legislative analyst's office), if the state were required to use taxable bonds in lieu of tax-exempt bonds for funding stem cell research, it could raise the debt servicing costs to the state by $700 million or more over the life of the program."

The report also cites a legislative counsel opinion that "indicates that research projects containing intellectual property agreements that call for the state to receive direct royalty payments are more likely to require use of taxable bonds, if the above thresholds are met, than those containing agreements requiring that clinical treatments, products, and services resulting from the research be made available at reduced cost to state health care programs."

The report discusses the various federal tests that are used to determine whether bonds can be tax exempt. And it says there may be ways to structure "agreements and bond sales to avoid having to use taxable bonds. For example, bonds for stem cell research may be packaged with bonds for other public purposes and have relatively short maturity dates that allow basic research to be funded and paid off before any intellectual property is developed. Alternatively, intellectual property agreements may be structured in a way that requires any revenue generated to be paid not to the state, but to a nonprofit entity. It is likely that further guidance will be sought by the Treasurer’s Office and CIRM from the Internal Revenue Service on permissible options for structuring grants and intellectual property provisions that permit use of tax-exempt status of bonds for Prop. 71 grants to the greatest extent."

The full text of the staff report is below.

Text of Legislative Staff Report on IP Issues and Prop. 71

Here is the text of the legislative staff report prepared for the Oct. 31 hearing on intellectual property issues and the California stem cell agency.


Joint Informational Hearing

Senate Health Committee
Senate Subcommittee on Stem Cell Research Oversight
Assembly Health Committee
Assembly Judiciary Committee

Chairs:
Senator Deborah Ortiz
Assemblymembers Wilma Chan and Dave Jones

“Implementation of Proposition 71:
Options for Handling Intellectual Property Associated
with Stem Cell Research Grants”


Background Paper

Proposition 71, the California Stem Cell Research and Cures Act (Act) approved by voters in November, 2004, provides $3 billion in general obligation bonds to provide funding for stem cell research and research facilities in California. The Act establishes the California Institute for Regenerative Medicine (CIRM) to award grants and loans for stem cell research and research facilities.

CIRM is governed by a 29-member Independent Citizen's Oversight Committee (ICOC), comprised of representatives of specified University of California campuses, other public or private California universities, nonprofit academic and medical research institutions, companies with expertise in developing medical therapies, and disease research advocacy groups. The ICOC and several of its working groups have been meeting regularly since December, 2004, and the ICOC awarded a first set of grants in September, 2005. For the most part, the organization has been unable to make grants because lawsuits challenging the validity of Proposition 71 have thus far prevented the state from issuing any bonds.

The Act authorizes the state to sell $3 billion in general obligation bonds, and limits bond sales to no more than $350 million per year, with the intent that the bonds be sold during a ten-year period. The Act provides that for the first five years, repayment of the principal is postponed and interest on the debt is to be repaid using bond proceeds rather than the General Fund revenues. The funds authorized for CIRM are continuously appropriated without regard to fiscal year.

While the Act does not specifically determine ownership rights for the research findings, tools and therapies to be developed with CIRM-awarded grants, it does contain language requiring that the ICOC balance the opportunity of the state to benefit from the patents, royalties, and licenses resulting from the taxpayer funded grants, with the need not to delay essential research.

The official text of the Act specifies that its purpose and intent is, among other things to “[p]rotect and benefit the California budget . . . by funding scientific and medical research that will significantly reduce state health care costs in the future; and by providing an opportunity for the state to benefit from royalties, patents, and licensing fees that result from the research.”[1] The Act also specifies fiscal benefits to the state through creation of “projects, jobs and therapies that will generate millions of dollars in new tax revenue in our state.”

The Legislative Analyst Office (LAO), in its official ballot information, stated that the state would “receive payments from patents, royalties, and licenses resulting from the research funded by CIRM” through ICOC-established standards “requiring that all grants and loans be subject to agreements allowing the state to financially benefit from patents, royalties, and licenses resulting from the research activities funded under the measure.” [2] The LAO found that the amount of revenue from this source is unknown, but could be significant and “would depend on the nature of the research funded by CIRM and the exact terms of any agreements for sharing of revenues resulting from that research.” In addition to these direct economic benefits, the LAO also noted the potential for indirect state and local revenue gains and cost savings, including job gains, increased tax revenue, and reduced government-funded health care expenditures.

An economic impact analysis commissioned by the proponents of Proposition 71 suggested that the initiative would provide total state revenues and health care cost savings of between $6.4 billion and $12.6 billion, including between $537 million and $1.1 billion in royalty payments, reduced health costs to the state of $3.4 to $6.9 billion, and direct and indirect tax revenues generated by increased biotechnology activity in the state and the creation of new jobs in California. The combination of royalties and savings from reduced costs to treat chronic diseases, the study concluded, would more than offset the $6 billion state taxpayers will be obligated to spend to repay the Proposition 71 bonds.[3]

Ballot arguments in favor of Proposition 71 claimed that the initiative would produce substantial direct and indirect economic benefit to the state, reduce health care costs by billions of dollars, and generate thousands of new jobs and millions in new state revenues by making California a leader in stem cell research and giving the state an opportunity to share in royalties from the research.



Limitations of Bond Financing

In approving Proposition 71, California voters agreed to the issuance of $3 billion in general obligation bonds for stem cell research and research facilities in California. General obligation bonds, used to finance a variety of public projects, are debt instruments issued by the state.

Proposition 71 authorizes CIRM to use both tax-exempt and taxable bonds to fund its operations and its grants for medical and scientific research. As stated above, the Proposition also requires the ICOC to establish standards that require that all grants and loans awards be subject to intellectual property agreements that balance the opportunity of the State of California to benefit from the patents, royalties, and licenses that result from basic research, therapy development, and clinical trials with the need to assure that essential medical research is not unreasonably hindered by the intellectual property agreements.

As discussed below, it is possible that royalty or license agreements that generate revenue for the state could affect the tax status of the bonds. Under the Internal Revenue Code, a bond is considered a taxable private activity bond if it satisfies two tests – the private business use test and the private security or payment test. If more than 10 percent of a bond’s proceeds are used for private business purposes, the private business use test is generally satisfied.[4] The private security or payment test is satisfied if payment of the principal or interest of more than 10 percent of the bond is secured or paid, whether directly or indirectly, with private property or funds.[5]

According to a recent Legislative Counsel opinion, the private use test is generally satisfied if more than 10 percent of the bond’s proceeds are used to fund nongovernmental entities (for 501 (c)(3) entities, the threshold is somewhat lower). The private security or payment test is generally satisfied if payment of the principal or interest of more than 10 percent of the bond is secured or paid, whether directly or indirectly, with private property or funds (again, for 501 (c)(3) entities the threshold is somewhat lower). A royalty or license agreement that provides an income stream to the state from private business activity that amounts to more than 10 percent of the principal and interest of the bond would satisfy this second test. Thus, it is conceivable that the tax-exempt status of bonds issued for stem cell research could be jeopardized if the sate contemplates or receives royalties or licensing fees pursuant to intellectual property agreements associated with the grants that total more than 10 percent of the bond costs.

The Legislative Counsel opinion indicates that research projects containing intellectual property agreements that call for the state to receive direct royalty payments are more likely to require use of taxable bonds, if the above thresholds are met, than those containing agreements requiring that clinical treatments, products, and services resulting from the research be made available at reduced cost to state health care programs.

However, even assuming the private activity tests are met, there may be ways to structure intellectual property agreements and bond sales to avoid having to use taxable bonds. For example, bonds for stem cell research may be packaged with bonds for other public purposes and have relatively short maturity dates that allow basic research to be funded and paid off before any intellectual property is developed. Alternatively, intellectual property agreements may be structured in a way that requires any revenue generated to be paid not to the state, but to a nonprofit entity. It is likely that further guidance will be sought by the Treasurer’s Office and CIRM from the Internal Revenue Service on permissible options for structuring grants and intellectual property provisions that permit use of tax-exempt status of bonds for Proposition 71 grants to the greatest extent.

According to informal estimates from the LAO, if the state were required to use taxable bonds in lieu of tax-exempt bonds for funding stem cell research, it could raise the debt servicing costs to the state by $700 million or more over the life of the program.

The Bayh-Dole Act

Historically, the federal government maintained ownership rights for inventions developed with public funds, including research grants to universities. The government usually allowed its inventions to be used freely. During the 1970s, however, many believed that the United States was losing its competitive edge to Germany and Japan, in part due to lack of commercially viably innovation, which, it was argued, was due to ineffective transfer of research from universities to the private sector. Though many federal agencies had long contracted with universities and private businesses to conduct research and development, patent policies were inconsistent and considered ineffective for businesses. As result, it was argued, substantial innovation never made it out of university laboratories to the marketplace. The Bayh-Dole Act, along with the development of the biotechnology industry itself, changed that.

In 1980, the Bayh-Dole Act (BDA)[6] created a uniform patent policy for federally funded research. The promulgation of this law expanded the government’s role in promoting technological innovation by providing inventors with a monetary incentive to move their ideas from the laboratories into the stream of commerce. The BDA generally allows non-profit organizations, including universities, and small businesses, to acquire ownership of inventions they develop under federally funded research, except in exceptional circumstances. In return, these institutions are expected to file for patent protection and to ensure commercialization upon licensing. Under BDA, all inventions conceived or first reduced to practice in the performance of a federally funded project, whether funded in full or in part by federal funds, must adhere to the following requirements:

Each new invention must be disclosed to the federal funding agency within two months of disclosure to the grantee's patent personnel;
The federal grantee must elect to retain title in writing within two years or less, as specified;
The grantee must file a patent application within one year of title election or less, as specified;
The grantee must grant the federal government a non-exclusive, irrevocable, paid-up license to practice the invention throughout the world;
If the grantee elects to exclusively license to a company for sales in the United States, the company must have substantial manufacturing capabilities to produce in the United States, except as specified;
In awarding licenses, the grantee must give preference to small businesses that have the resources and capability for bringing the invention to practical application;
The grantee must share with the inventor any income collected on the invention and use any additional income, after expenses, to support further scientific research or education;
The grantee can be required to periodically report on utilization of the invention by the grantee and its licensees;
The federal government retains the right to vest title to the invention to the contracting federal agency or to grant a license to a third party, called the “march-in” rights.

The “march-in” rights retained by the government allow the funding federal agency to vest title to an invention in itself or to grant a license to a third party, whether exclusively or nonexclusively, under several circumstances. These circumstances include if the invention is not brought to practical use within a reasonable time, if intervention is necessary to alleviate health or safety needs, or if public use of the invention is jeopardized.

Since the inception of the BDA, only a handful of petitions have been filed asking the federal government to exercise its march-in rights, and all have been denied. These include two 2004 petitions filed by a consumer advocacy organization asking the federal government to compel reasonable drug prices for two drugs developed with federal funding.[7] The first petition involved the HIV drug Norvir, whose price, petitioners alleged, was increased by its developer Abbott Laboratories to 400 percent more than its original price in order to maintain profits when medical advances reduced the drug's required dosage. The petition sought a compulsory licensing to a third party in order to make the drug more affordable and, within the provisions of BDA, to make the drug “available to the public under reasonable terms.” The second petition involved glaucoma drug Xalatan, which was developed by Pfizer based on federally funded research done at Columbia University. Petitioners alleged that Xalatan was sold at two to five times more in the United States than in other markets, in violation of the spirit of the Bayh-Dole “reasonable terms” provision, the petition claimed.[8] These petitions were both denied by the National Institute of Health.

In addition to its march-in rights, the federal government may retain title to a federally funded invention if the awarding agency determines that to do so would better promote the policy and objectives of the BDA.[9] This provision, known as the “exceptional circumstances” provision because it may only be used in those instances, allows a grantee to challenge the determination of exceptional circumstances and also requires a series of procedural steps that, according to commentators, have lead to its extremely rare invoking.[10]

In 1989 in response to rising drug prices, the National Institute of Health instituted a policy to require a reasonable relationship between (1) the pricing of licensed inventions developed with National Institute of Health funding, (2) the public investment in the invention, and (3) the public's health and safety needs. This policy, known as the “reasonable pricing clause,” was required in exclusive licensing agreements and Collaborative Research and Development Agreements. The reasonable pricing policy was revoked in 1995 as the result of intense opposition from industry.

It is important to note that the BDA does not apply to Proposition 71 grantees unless their inventions are also funded in part by federal grants. Legal analysis has not been completed to determine to what extent the state is bound to adhere to the BDA or is preempted by the BDA in the application of intellectual property policy to jointly funded projects. In addition, given that Proposition 71 funds are expected to be used for research that does not qualify for federal funding or that utilizes federally approved stem cell lines, the issue of how the BDA applies to Proposition 71 may not apply in many cases.

Impact of the Bayh-Dole Act

The Bayh-Dole Act (BDA) has resulted in significant changes in patenting and the commercialization process of federally funded research. Proponents of the BDA argue that it has been responsible for significant increases in patenting, commercialization of research tools into market products and income for universities. The Association of University Technology Managers reports that, in 2003, 3,933 U.S. patents were issued and 472 new commercial products were introduced to the marketplace under license agreements with commercial partners, a huge increase over pre-BDA statistics. For that same year, universities reported license income of $1.3 billion and royalties on product sales of $1.1 billion.[11] In addition to the explosive growth of patents, proponents of the BDA argue that it has created a consistent set of rules familiar to the public-private partners that have dramatically improved university-private industry relationships.

However, critics have reported significant unintended consequences of the BDA. A key concern among critics is that the BDA has hindered dissemination of and access to basic research findings. They argue that the BDA has made research more difficult and more costly by keeping basic research out of the public domain.[12] Upstream patenting can limit downstream innovation through, among other things, “patent thickets.” Patent thickets can arise when too many owners hold intellectual property rights in previous discoveries that constitute obstacles to future research and downstream inventions.[13]

Another concern is that the focus of research in United States universities has shifted away from fundamental research in order to focus on research targeted to commercial applications. The BDA, critics argue, may have created incentives that undermine the representation of the public interest in the calculus of determining which technologies should be patented and how they should be licensed.[14] They contend that as a result, investment in health-related research and development gravitates toward illness or symptoms that offer the greatest potential returns on investment, regardless of actual needs. Others argue that the commingling of the academic and commercial sectors in part facilitated by the BDA has created a bias in scientific findings and undermined public trust in medical research. BDA “has resulted in egregious conflicts of interest, especially in the biomedical sciences, and has contributed to the near-extinction of the norm of disinterestedness.”[15]

Finally, critics of the BDA have questioned the wisdom of having United States taxpayers pay for products twice, first through federally funded grants to their inventors and then for the products themselves, particularly when they argue that the BDA has had no impact on affordability or accessibility of inventions paid for by taxpayer's dollars.[16]

Legislation Related to Proposition 71 Intellectual Property Policy

In response to concerns that the intellectual property provisions of Proposition 71 do not go far enough to ensure that the state gets a return on its investment in stem cell research and that the provisions may also conflict with the goal of using tax-exempt bonds to finance the research, Senators Ortiz and Runner included language in SCA 13 in the current session requiring the ICOC to seek to ensure through its intellectual property agreements that treatments, therapies, and services resulting from the research are accessible and affordable to low-income residents, including those eligible for state and county-funded programs. The bill is currently on the Senate floor.
In order to provide guidance to the Legislature and to the ICOC in developing intellectual property policies that appropriately balance the return to the state with the need to develop and transfer technology to the market place as expeditiously as possible, the Legislature passed ACR24 (Mullin, Resolution Chapter 111 of 2005) directing the California Council on Science and Technology (CCST) to develop criteria to “determine how the state can achieve maximum public benefit under Proposition 71.”[17] The resolution specifically directed the CCST to study how the commercialization of technology developed with the investment of taxpayer dollars in the form of contracts, grants, and agreements could generate some public benefit, including, but not limited to, state revenues, favorable pricing, revenue sharing, and reinvestment into research.

As amended August 16 in the Senate Health Committee, the resolution requests that the options and recommendations identified by the study for Proposition 71-funded research reflect the constraints posed by the use of tax-exempt bonds for research and represent options and recommendations that are consistent with the goal and intent of using tax-exempt bonds to fund the research, including options and recommendations for achieving accessibility and affordability of treatments, products, and therapies resulting from Proposition 71-funded research.The amendments further request that the CCST establish a review group to include representatives of bond counsel firms, the Legislative Analyst, the Treasurer, consumer and public interest groups, and foundations engaged in funding biomedical research, to review and comment on the study and options and recommendations for generating public benefit from commercialization of technology developed with Proposition 71 funds prior to their release.

CCST Report

In August, 2005, the CCST released a set of “interim” recommendations that the state adopt policies that are consistent with the BDA. The report authors' argue that this is desirable to avoid confusion and potential conflict, and to leverage federal funds to the extent they may be available. The report also recommends that research results should be timely and widely published and that California Institute for Regenerative Medicine (CIRM) provide guidance on when data should be placed in the public domain or made available for use through open source or other broad licensing arrangements. The report suggests, among other things, the following principles for CIRM to consider when developing its intellectual property policy:

Permitting grantees to own intellectual property rights, similar to the BDA;
Granting research funds without committing a revenue stream to the state;
Generally, making research tools developed under Proposition 71 grants available to other researchers;
Retaining march-in rights, similar to the BDA;
Leaving license particulars to grantees who are in the best position to judge how best to ensure that discoveries are made widely available through commercialization or otherwise;
Reserving a non-exclusive, royalty-free license for CIRM, including the right for other CIRM grantees to use the inventions in their Proposition 71-funded research; and
Establishing a CIRM database to track all intellectual property generated through Proposition 71 funding.

In developing these recommendations, the CCST does not appear to have given significant consideration to any of the unintended consequences of the BDA discussed in the previous section.

With respect to the August 16 amendments, the report contains an addendum in which the CCST concludes that several organizations are pursuing innovative strategies to address issues of accessibility and affordability of therapies, but that it is too early to evaluate their success.

Policy Options Facing the State

In reviewing the language of Proposition 71, literature on the experience with the implementation of the Bayh-Dole Act (BDA), and recent trends in fields of technology transfer and intellectual property policy, it is clear that several major policy challenges will confront the state as it considers how to implement the intellectual property provisions of Proposition 71. The first is determining how to structure an intellectual property policy that ensures rapid and broad dissemination of basic research findings and tools. As many have noted, the ultimate development of therapies based on stem cell research is likely to require incremental improvements and discoveries in basic stem cell science, in addition to a need for close collaboration and sharing of information between researchers. A policy that favors open dissemination of basic research findings is likely to produce clinical applications the most quickly and efficiently.

A second key issue is how and in what form the state should seek to benefit from the patents and licenses associated with inventions developed with state funds. A reasonable reading of Proposition 71’s intellectual property provisions would indicate that the state is required under the proposition to seek an economic return associated with the grants it makes, where it is feasible to do so without impeding dissemination of research findings or violating the balancing test outlined in the initiative. Related issues are whether the state has an opportunity through its policy to address issues involving the accessibility and affordability of therapies that are developed with the assistance of state funds.

A final issue is how to seek an economic return in a manner that maximizes, to the extent possible, the state’s ability to use tax-exempt bonds to fund the research.

The remainder of this section discusses options for ensuring dissemination of basic research findings and options for obtaining direct economic returns to the state from the research.

Options for Ensuring Dissemination of Basic Research Findings

. The state could require grantees to make basic research findings and tools that they develop openly available to other researchers via simple material transfer agreements (MTAs), while still allowing grantees to patent and license the inventions they develop. The CCST report appears to favor this approach by recommending that applicants be required to provide a plan describing how they will manage intellectual property to ensure that research tools will be made broadly available for further advancement of science.

As some experts have noted, however, even though they are simple 1 to 2 page documents, MTAs can impose impediments to dissemination of research findings if they are not developed and applied consistently from institution to institution, and through the imposition of “reach through” provisions by the provider of the MTA. The latter provisions seek to give the owner of the invention an ownership interest in any new inventions developed by the recipient, require royalty payments to the provider of the MTA, or give the provider joint or exclusive rights to any new intellectual property developed by the recipient. This option also entails costs to owners of intellectual property to protect their interests if a transferee subsequently seeks to license or use the invention for commercial purposes.

. The state could require grantees to license any inventions they develop to any interested party (open source licensing) or at least preclude them from entering into exclusive licensing arrangements in which one party obtains an exclusive license to use the technology (nonexclusive licensing). The advantage of these approaches is that they would ensure greater dissemination of research findings; the disadvantage of both is that there may be situations in which an exclusive license is needed to give a commercial entity the incentive to develop a product or therapy using the invention.

Alternatively, and similar to the recommendations some experts have made for the BDA, the state could allow grantees to enter into exclusive licensing arrangements at their discretion, but retain the authority to declare certain areas of research off-limits for exclusive licensing if CIRM judges that scientific advancement would be better served by maintaining open access to the research findings and tools. The impetus for this suggestion are the findings of a number of researchers that the presumption in the BDA that grantees must seek to patent inventions except in “exceptional circumstances” has led to too much patenting and exclusive licensing of basic research findings, and that the procedural requirements on federal agencies for invoking the “special circumstances” provisions are too burdensome.

Nonexclusive licensing or open source licensing would also entail costs of enforcing licensing terms to ensure that licensees do not license or commercialize the underlying inventions.

Adopt viable march-in provisions. Similar to the language of the BDA, the state could retain the right to step in or require a grantee to grant a license to a responsible applicant on reasonable terms if effective steps are not being taken to achieve practical application of a CIRM-funded invention (referred to as “march – in” rights). CIRM could also retain a non-exclusive, royalty-free license to all CIRM-funded inventions, including the right to allow other CIRM grantees to use such inventions in their CIRM-funded research. These were recommended by the CCST report.

However, a number of experts have questioned the viability of the march-in authority under the BDA. As noted above, the BDA currently requires exercise of march-in rights by sponsoring agencies to be held in abeyance pending exhaustion of all court appeals by the grantee, which many experts believe hinders the exercise of the authority and also hampers the government’s ability to ensure that practical application of inventions is achieved within a reasonable time and to meet health and safety needs. These experts have advocated streamlining the process for invoking march-in provisions, a policy which the state could emulate if it decided to adopt this option for ensuring dissemination of research findings.

Patent pooling. Several patenting and licensing experts have recommended patent pools as a mechanism for more effectively managing intellectual property for areas of research such as biomedical research, in which incremental improvements and collaboration between research institutions is needed to advance the technology. Under this approach, the state would require its grant recipients to agree to donate or share the rights to any inventions or research tools with a patent pool which would be administered by the state or a nonprofit organization. Any researcher could use the inventions or tools in the pool for further research; as a condition of doing so, they would have to agree to contribute the rights to any inventions or improvements that they develop back to the pool. The pool would collectively negotiate licensing arrangements with commercial entities on behalf of the participants in the pool.

A number of such pools currently operate in other fields of scientific research, including the Center for Application of Molecular Biology to International Agriculture (CAMBIA).

Advocates of patent pools point out that pooling would have a number of advantages over patenting and licensing of inventions by individual research institutions, including that it would allow researchers’ easier access to patented ideas and technologies and lower transaction costs associated with accessing them. In addition, the pool would have greater leverage in negotiating licenses with commercial entities than individual pool participants would have on their own. Theoretically, this could enable the state, as a participant in the pool, to obtain greater economic benefits in return for its contributions, which could take the form of greater royalties, pricing concessions for targeted programs and populations, and more favorable limits on the duration of exclusive licenses to use technology owned by the pool. Some advocates have further recommended that patent pools have the ability to auction off the rights to their inventions as a means of promoting competition between biotechnology companies and of generating greater economic returns to pool participants. Some have also suggested that the state could perhaps use the leverage of such a pool to negotiate more favorable terms for access to critical technologies and tools owned by other entities, such as Geron and the Wisconsin Alumni Research Fund (WARF).

A key difficulty associated with administration of patent pools is the difficulty of determining how to apportion economic benefits derived from technology or inventions owned by the pool among its participants.

The CCST did not make findings or recommendations on this option, but instead recommended that CIRM maintain a database to track all intellectual property generated through CIRM funding as a means of facilitating researchers’ access to intellectual property relevant to their research.

Options for Achieving Economic Benefits from the State’s Investment in Research

Assuming Proposition 71 requires or intends for the state to obtain direct economic benefits from the research where it is feasible to do so without impeding dissemination of research, the state has a number of options for doing so.

Direct a share of royalties to the state. The state could require, as a condition of its grants, that a share of the net royalties resulting from commercialization of any findings or inventions developed with grant funds be given to the state. A major drawback of this approach is that it could likely require greater use of taxable bonds for financing the research. As the CCST report notes, the additional costs to the state of using taxable bonds may outweigh the value of economic benefits the state is able to negotiate from its funded research. In part because of this, the CCST report rejects this approach in favor of the Bayh-Dole Act (BDA) model, in which grant recipients are allowed to keep royalties and licensing fees on inventions they develop as long as they use those revenues to fund their education and research programs. However, it is not clear that the CCST’s recommended approach complies with the language and intent of Proposition 71.

Reasonable pricing requirement. The state could adopt a policy similar to that adopted by the National Institutes of Health (NIH) in 1989 requiring that there be a reasonable relationship between the pricing of a licensed product, the public investment in that product, and the health and safety needs of the public. As mentioned above, NIH applied this policy to licenses to inventions developed under its Cooperative Research and Development Agreement (CRADA) program but discarded it in 1995 on the grounds that it was impeding commercialization of research findings.

The CCST report also rejected adoption of a reasonable pricing policy and instead recommended that a more detailed examination begin of the range of technical expertise required to identify and deliberate over the issues involved in reasonable pricing or favorable pricing of treatments and therapies that emerge from CIRM-funded research.

Socially responsible licensing. The state could require its grantees to require any entities to which they license any Proposition 71-funded inventions to demonstrate how their use of the technology will benefit underserved populations or regions of the state. A number of university-based technology transfer managers throughout the U.S. have been advocating that universities and other research funding entities look for ways to direct the benefits of their inventions and technologies to underserved countries and populations, for example by foregoing royalties on sales of products and treatments to underserved populations and seeking commitments from licenses to produce products and treatments or otherwise make investments in underserved communities.

Tiered pricing arrangements. The state could attach conditions to its grants requiring that any entity that acquires the rights to any inventions or tools developed with the grant funds must agree to make any resulting therapies or treatments accessible and affordable to low-income populations or programs that serve them. This approach is used by a number of grant making organizations, including the Gates Foundation, the International AIDS Vaccine Initiative (IAVI), and the Foundation for the National Institutes of Health.

In 2003, the Gates Foundation established a Grand Challenges in Global Health initiative, designed to foster breakthroughs against diseases that plague residents of the world’s poorest countries. The $450 million in funding for the initiative includes $200 million which is managed by the Foundation for the National Institutes for Health. A package of 43 initial grants totaling $437 million was announced in June, 2005. Under the initiative, Gates requires its grantees to outline a global access strategy indicating how they will use any inventions they develop with the funding to facilitate the availability and affordability of therapies to people in the developing world.

IAVI generally retains the rights to inventions developed with its funding and collaborates with commercial partners for development of vaccines and treatments using the inventions. In its partnerships, IAVI seeks commitments that resulting vaccines and treatments will be made available in developing countries at reasonable prices and in sufficient quantities, and has successfully negotiated a number of agreements containing those conditions. In effect, the commercial entity agrees to discount the price of the product in certain markets while retaining the right to price it freely in others.

A number of biomedical patenting and licensing experts maintain that tiered pricing arrangements are feasible and acceptable to biotechnology and pharmaceutical companies if the scope of pricing concession is well-defined. An example might be an agreement on the part of a biotechnology or pharmaceutical company to sell any resulting products or treatments to public health care programs at the best price they sell it to any purchaser.

The CCST report notes that IAVI and the Grand Challenges program have pushed researchers, business managers, and intellectual property professionals to think in new ways about how to manage intellectual property on biomedical inventions in ways that benefit underserved populations, but concludes that both efforts are too new to provide reliable models for Proposition 71.

[1] Proposition 71, California Stem Cell Research and Cures Initiative, Sec. 3.
[2] Proposition 71 Analysis by the Legislative Analyst.
[3] Analysis Group, “Economic Impact Analysis: Proposition 71, California Stem Cell Research and Cures Initiative”, September 13, 2004.
[4] Internal Revenue Code Sec. 141(b)(1)
[5] Internal Revenue Code Sec. 141(b)(2)
[6] P.L. 96-517, Patent and Trademark Act Amendments of 1980 as amended by P.L. 98-620 (1984), codified in 35 U.S.C. Sec 200 et seq.
[7] Chemical and Engineering News, Vol. 82, No. 38, pp. 34-35 (Sept. 2004). Available at http://pubs.acs.org/isubscribe/journals/cen/82/i38/html/8238gov1.html.
[8] Id.
[9] 35 U.S.C. Sec 202(a); 37 CFR 401.3, 401.4.
[10] Rai, Arti, and Rebecca Eisenberg, Bayh-Dole Reform and the Progress of Biomedicine, American Scientist, Vol. 91, p. 54 (Jan.-Feb. 2003).
[11] AUTM, Licensing Survey: FY 2003. Available at http://www.autm.net/surveys/dsp.surveyDetail.cfm?pid=16.
[12] Heller, Michael and Rebecca Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, Science Vol. 280, Issue 5364, pp. 698-701 (May 1998); Kesselheim, Aaron and Jerry Avorn, University-Based Science and Biotechnology Products: Defining the Boundaries of Intellectual Property, Journal of the American Medical Association, Vol. 293, No. 7, pp. 850-54 (Feb. 2005).
[13] Heller and Eisenberg (1998).
[14] Rai and Eisenberg (2003).
[15] Tansey, Bernadette, The building of biotech 25 years later, 1980 Bayh-Dole act honored as foundation of an industry, San Francisco Chronicle (June 21, 2005) (quoting Tufts University Professor Sheldon Krimsky).
[16] Arno, Peter and Michael Davis, Why Don't We Enforce Existing Drug Price Controls? The Unrecognized and Unenforced Reasonable Pricing Requirements Imposed upon Patents Deriving in Whole or in Part from Federally Funded Research, Tulane Law Review, Vol. 75, pp. 631-93 (2001).
[17] ACR 24 (Mullin), Resolution Chapter 111, 2005.

Coming Up

Laer today we will look at the background paper being presented to legislators at Monday's hearing into IP and stem cell research. The paper says, among other things, that the IP options include open source or nonexclusive licensing and sharing of basic research findings and tools.

Stem Cell IP Slated for More Critical Look

California's newspaper editors were less than enthralled about a hearing this week into how the state is going to reap the benefits of its $6 billion investment in stem cell research.

If the usual Web searches are to be believed, no state newspaper – or any others, for that matter – dipped into Tuesday's hearing by the stem cell agency on the intellectual property that might result from its grants. Not one story has appeared.

However, we may see some IP stories in the future, perhaps as early as next Tuesday, the day following the hearing by Sen. Deborah Ortiz on the same subject. That hearing will be in San Francisco. It is a good bet that the Chronicle will cover it, given that stem cells are pretty much a home town story for the newspaper.

Ortiz' line-up for the session also offers more novelty. CIRM's agenda for its hearing appeared to be pretty much the same stuff, a presentation involving August's report from the California Council on Science and Technology. Plus she has a vehicle – SCA13 -- for implementing new IP requirements concerning the stem cell agency.

According to a draft of the agenda, one of the witnesses scheduled to appear is Jennifer Washburn, author of "University Inc.," who is likely to take a skeptical view of the existing IP world involving university research and private collaboration.

For example, she said in an interview with UTWatch (University of Texas group), "Putting so much emphasis on patenting and licensing, as the Bayh-Dole Act did, may actually be detrimental because universities may be imposing proprietary restrictions on research that would be more broadly used if it was transferred through the public domain."

She also wrote the following in American Prospect:

"Universities’ loyalties are now so conflicted that schools are increasingly willing to cave in to narrow commercial demands rather than defend their own professors’ academic freedom or the public interest. When researchers at the University of Utah discovered an important human gene responsible for hereditary breast cancer, for example, they didn’t make it freely available to other scientists, even though we -- the U.S. taxpayers -- paid $4.6 million to finance the research. The university raced to patent it, then granted the monopoly rights to Myriad Genetics Inc., a startup company founded by a University of Utah professor, which proceeded to hoard the gene and prevent other academic scientists from using it.

"Professors, too, are increasingly driven by the bottom line. More and more, they not only accept industry grants to support their research but also hold stock in or have other financial ties to the companies funding them. Many experts fear this skewing of professors’ research toward short-term commercial goals will impede long-term scientific and technological innovation. Financial entanglements between researchers and corporations have grown so common that the Securities and Exchange Commission has investigated numerous academic researchers suspected of engaging in insider trading."

Scheduled to represent CIRM is Ed Penhoet, vice chairman of the agency and co-founder of Chiron, the folks who are bringing us the flu vaccine this fall. A former academician at UC Berkeley, he knows whereof he speaks on IP issues.
Also slated to testify is Labeeb Abboud, general counsel for the International AIDS Vaccine Initiative, which Ortiz has cited as possibly something to emulate with stem cell research.

For more on stem cell IP issues, see "Soothing Anxieties," and "Higher Risk." See the item below for a copy of the draft agenda for Ortiz' hearing

Agenda for IP Hearing Monday

Here is the text of the draft agenda for next Monday's legislative hearing into intellectual property and the California stem cell agency.

Joint Informational Hearing

Senate Health Committee
Senate Subcommittee on Stem Cell Research Oversight
Assembly Health Committee
Assembly Judiciary Committee

Chairs:
Senator Deborah Ortiz
Assemblymembers Wilma Chan and Dave Jones

“Implementation of Proposition 71:
Options for Handling Intellectual Property Associated
with Stem Cell Research Grants”


Draft Agenda

I. Opening Remarks (9:30 – 9:45)
· Senator Deborah Ortiz, Chair, Senate Health Committee and the Subcommittee on Stem Cell Research Oversight
· Assemblymember Wilma Chan, Chair, Assembly Health Committee
· Assemblymember Dave Jones, Chair, Assembly Judiciary Committee
· Other members present

II. Purpose and Intent of Proposition 71 Intellectual Property Provisions (9:45 – 10:00)
· Dan Carson, Legislative Analyst Office
· Francisco Martin, Legislative Counsel (available for questions)

III. Constraints on IP Options From Use of Tax-Exempt Bonds (10:00 – 10:25)
· Juan Fernandez, Treasurer’s Office
· Bill Heir, Legislative Counsel
· Perry Israel, Orrick, Herrington, and Sutcliffe

IV. CCST Report and Status of ICOC policy (10:25 – 11:00)
· James Pooley, Partner, Milbank, Tweed, Hadley & McCloy LLP
· Ed Penhoet, Vice Chairman, Independent Citizen’s Oversight Committee

V. The Bayh Dole Act as a Model for Intellectual Property Policy forProposition 71 (11:00 – 11:55)
· Rebecca Eisenberg, Professor, University of Michigan Law School
· Alan Bennett, Associate Vice Chancellor, University of California - Davis
· Merrill Goozner, Center for Science in the Public Interest
· Jennifer Washburn, Fellow, New America Foundation and author

VI. Alternative Models for Developing IP Policy (11:55 – 12:25)
· Labeeb Abboud, General Counsel, International AIDS Vaccine Initiative
· Carol Mimura, Acting Assistant Vice Chancellor, UC – Berkeley

VII. Stakeholder Perspectives (12:25 – 12:50)
· Jesse Reynolds, Center for Genetics and Society
· David Gollaher, President and CEO, California Healthcare Institute
· Jean Ross, California Budget Project

VIII. Public Testimony (12:50 – 1:20)

IX. Closing Remarks (1:20 – 1:30)

Judge Nixes Stem Cell Lawsuit

One of the lawsuits against the California stem cell agency has been dismissed, but the major battle still remains scheduled for Nov. 17 in Hayward.

Reporter Laura Mecoy of The Sacramento Bee wrote: "A federal judge in Los Angeles dismissed a lawsuit Monday that threatened to cause more problems for the state's troubled stem cell research program, but the lawsuit could be revived in another court, according to the state attorney general's office."

"The lawsuit dismissed on Monday challenged the destruction of human embryos for stem cell research and sought to have embryos declared persons with constitutional rights," Mecoy said.

The hearing on the 17th involves constitutional objections by several conservative groups to the existence of the stem cell agency.