Biotech's Financial Troubles and CIRM's New Loan Program

The California stem cell agency is about to embark on an unprecedented, $500 million biotech lending program at a time when the industry finds itself in an “evolve or die” mode.

The loan effort has been sold to CIRM directors as a no-lose proposition that could generate $100 million in “profits” that could be plowed back into research. That would happen even with loan default rates as high as 50 percent, so the story goes.

However, all those predictions were based on assumptions from a different financial era – a time when the stock market was thriving, capital was flowing and optimism reigned.

Today, a much different picture is being painted by those who know the industry best.

The Burrill Report, published by the respected Burrill & Co. of San Francisco, today carried a piece by its editor-in-chief, Peter Winter – headlined “Evolve or Die” – concerning a recent report on the state of biotech. Winter wrote,

“In its 2009 Beyond Borders annual report on the biotechnology industry, Ernst & Young warns that the global financial crisis threatens to render the business models that have driven the sector to date unsustainable. According to Glen Giovannetti, Ernst & Young’s global biotechnology leader, the funding drought is placing these business models that fueled biotech’s growth since its inception under unprecedented strain.”

Winter continued,

“Currently, biotech finds itself caught in a financial crisis that has analysts speculating whether many biotech companies can recover. The situation that they find themselves is different this time because this crisis is deep-rooted, systemic, and persistent.”

Winter wrote,

“Those that do survive will have adapted to changes that are not only being brought about by the prevailing financial crisis, but also by several mega-trends that will shift existing paradigms and, in doing so, create new, sustainable business models, Giovannetti says.”

CIRM's lending program is supposed to target the riskiest biotech firms for loans – ones that cannot find conventional or even venture capital financing. Some CIRM directors who support the loan program find comfort in the belief that lending the money is better than just giving it away in the form of a grant.

They point to lending plans to give CIRM stock warrants in the recipient companies and a stake in any IP that is developed. What hasn't been fully discussed is the total collapse of a loan recipient. In such a case, the warrants would be worthless. And also in such cases, IP can sometimes vanish and computer files disappear, leaving CIRM holding a multimillion-dollar, empty bag.

CIRM is currently looking at three firms that will evaluate the business models of the loan applicants. Assuming that Burrill and Ernst & Young are correct, that evaluation will be trickier than ever, raising questions about whether both CIRM and the evaluators it hires can step outside of the box. Doing so may pose uncomfortable financial risks for a state-funded agency. But it may also be the only way CIRM has any hope of securing either a scientific or financial return on its $500 million in high-risk loans.

(Editor's note: You can find a host of links to information on the biotech lending program, including its financial assumptions via this item. No business plan, however, exists for the effort.)

CIRM Grant Oversight Receives $150,000 Boost

SAN FRANCISCO – A key panel of CIRM directors Tuesday approved a $150,000 increase in a contract to help improve the agency's important grants management efforts after being told that the task has become bigger and more complicated.

The boost in the $200,000 contract with Kutir Corp. of Newark, Ca., was ratified on an 8-0 vote by the Governance Subcommittee.

John Robson, vice president for operations of CIRM, told the directors' panel that the agency “could not run our program” without Kutir. The grants management system is involved in everything from the initial request for applications to conflicts of interests to monitoring grant progress reports.

Currently CIRM has approved $761 million in grants and is expected to hit the $1 billion mark later this year.

Following the meeting, Robson took issue with our July 13 item in which we described the grants management system as in “disarray.” He said that the system does provides the necessary information but is labor and time intensive. Robson indicated that he expected that situation to improve with additional work by Kutir.

Robson also said that he expected the current grant management system to save money compared to the previous arrangement with Grantium. Robson said CIRM and Grantium had come to the “mutual conclusion” that the Grantium system was “not a good fit.”

Grantium originally had a $702,000 contract with CIRM. Robson told the California Stem Cell Report that the firm had been paid $260,000 and was no longer under contract. CIRM is also not engaged in legal action involving Grantium.

Directors also asked for a more detailed breakdown later on expenditures for the grants management system.

New Info on CIRM's Grant Management Problems

More details are now available on the latest attempt to solve major problems in the efforts to monitor $760 million in grants from the California stem cell agency.

The subject comes up at a teleconference meeting tomorrow morning of the Governance Committee of the agency's board of directors.

We wrote last week about the issue, which has troubled CIRM since 2006. The agency has not publicly disclosed the full nature of the difficulties, but discussed part of the problem briefly in a recent item on its Web site.

The latest posting shows that CIRM staff is seeking the directors' approval of a $350,000 contract with Kutir Corp., up $150,000 from $200,000 authorized for Nov. 20, 2008, to Nov. 20, 2009.

The staff memo says Kutir was brought aboard when Ed Dorrington resigned from CIRM in December 2008 as its director of grants managements systems. The staff memo says,

“When he departed there was no one on staff capable of taking over his responsibilities. Kutir now supplies those services, which include creating an application for each new RFA along with a matching review module. The review module takes data that are sorted and transferred from the application and uses this information to manage the Grants Working Group process, including conflicts of interest.”

The memo continues,

“Kutir now supplies (Dorrington's) services, which include creating an application for each new RFA along with a matching review module. The review module takes data that are sorted and transferred from the application and uses this information to manage the Grants Working Group process, including conflicts of interest. These tasks require progressively more time and effort for each RFA as CIRM has evolved and added new complexities to its programs, including collaborative funding partners, pre-application review and loans.

“In addition, CIRM is in the process of assessing and installing new grants management systems in order to meet its growing reporting and portfolio requirements. The IT developers from Kutir are assisting with this project by advising on how best to integrate CIRM’s existing custom-built software with the commercial products being purchased.”

Tomorrow's meeting begins at 11 a.m. And can be heard at teleconference locations in San Francisco (2), Los Angeles(2), La Jolla, Stanford and Irvine. Specific locations can be found on the agenda.

CIRM Director Love Wades into the Trenches at CIRM

It is not exactly an internship, but one of the directors of the California stem cell agency is working as a volunteer at CIRM during the next few months.

The director is Ted Love, a physician and businessman, who until recently was CEO of Nuvelo, Inc., of San Carlos, Ca. He has served on the CIRM board since its first meeting in December 2005.

Earlier this month, CIRM announced that Love will be assisting the agency's management one to two days a week until CIRM appoints a new chief scientific officer. The agency noted that Love has “extensive experience bringing medical therapies to the market.” CIRM said Love will be of “considerable value” in connection with the $210 million disease team grant round scheduled for approval later this year.

Love sits on the board of directors of Arca biopharma, Inc., of Broomfield, Colo., Affymax, Inc., of Palo Alto, Ca., and Santarus, Inc., of San Diego, Ca. Arca is the biopharmaceutical company that absorbed Nuvelo earlier this year. Affymax is another biopharmaceutical business, and Santarus acquires and develops products dealing with gastrointestinal problems.

Given ongoing issues about conflicts of interest at CIRM and more recent questions about micromanagement by CIRM directors, we posed several questions to the agency about Love's involvement.

Amy Adams, CIRM communications manager, responded. She said Love will not be acting chief scientific officer in the absence of Marie Csete, who has announced her resignation. Adams said,

“Ted Love is acting as a part time advisor to the president on the overall architecture of our grants programs.”

We asked,

“Does any of his work involve potential conflicts of interest considering his involvement in Arca and potential future employment in the biotech industry? “

Adams' response:

“No. To the extent that any potential conflicts arise, Ted will recuse himself from participating in the decision.”

She said none of his work will involve applications from any company that has applied for a grant or that is expected to apply for a grant. Adams said that it is “uncertain at this time” what role he will play in the review of the disease team applications by the grants working group.

We also asked,

“How can Love fulfill his oversight responsibilities as a CIRM board member when he is actually performing the tasks that could come under board scrutiny?”

Adams replied,

“He will be assisting the science office on an interim basis and does not expect that his brief tenure at CIRM will interfere with his oversight responsibilities. Indeed, he thinks it will give him a better understanding of CIRM's internal operations.”

She said that Love will receive no compensation for his work, including the per diem granted board members for meetings.

We also queried longtime CIRM observer John M. Simpson, stem cell project director of Consumer Watchdog of Santa Monica, Ca., about his thoughts on Love's volunteer work. Simpson replied,

“Ted Love has been a substantial and important contributor to the ICOC. He is a talented executive who brings the perspective of the bio-medical industry to the table. That’s a necessary perspective, but by no means the only important perspective. If he can briefly help CIRM after the departure of Chief Science Officer Marie Csete, that’s probably a good thing. I worry, however, that if this arrangement lasts too long and he becomes too involved in day-to-day operations, it will be difficult for him to fulfill his oversight responsibilities on the board.

“I also wonder what advising 'the president on the overall architecture of our grants programs' means. That phrase prompts me to wonder about the status of the revised strategic plan, which was first presented in a draft last December. It was the subject of hearings in February and March, but still hasn’t come back to the ICOC. If I were a board member, I would have wanted to approve that revised plan before I even considered the budget for 2009-2010. “

A footnote on all this: Prop. 71 has specific criteria for board members. Love was appointed to the board when he was CEO of Nuvelo, but he no longer is an “executive officer of a commercial life science entity.” He can continue to sit on the board because of his position as board member of a life science firm.

CIRM Directors Rebuff Five Reform Proposals

CIRM directors listen to a presentation on the Little Hoover Commission report. From left to right, CIRM Chairman Robert Klein, Vice Chairman Art Torres and Jeff Sheehy. Torres is chairman of the Legislative Subcommittee.

SAN FRANCISCO – A key group of directors of the $3 billion California stem cell agency today rejected proposals that would cut their board in half and substantially reduce the power of its chairman.

The directors' Legislative Subcommittee formally opposed, on an 8-0 vote with one abstention, the reform proposals made by the state's Little Hoover Commission last month. The action came after CIRM Chairman Robert Klein, a real estate investment banker, warned that “the entire thing (CIRM) could be swept away.” He declared that “certain things should not be on the table.”

The subcommittee took up only five of 14 proposals by the Hoover Commission, the state's good government agency. Following months of study, the bipartisan panel said the current CIRM structure is "is not adequate to protect taxpayers’ interests or serve its own ambitious goals."

The other nine proposals are scheduled to be discussed by the Legislative Subcommittee sometime during the next month. Today's action and any later action will go before the entire board at its meeting Aug. 19-20. Ultimately, however, it is up to the legislature to decide whether to act on the recommendations, although CIRM could make some modest changes on its own.

In addition to proposals to reduce the board from 29 to 15 members and eliminate the dual CEO problem, the other recommendations rejected today call for permitting the board to select its own chairman instead of selecting from outside nominees, reducing the length of board members to four years and directing the governor to appoint 11 of the 15 members, four of whom would have to be public members. The board currently has no public members.

The Legislative Subcommittee's action today was largely based on Klein's arguments and earlier ones by CIRM's outside counsel James Harrison of Remcho, Johansen & Purcell of San Leandro, Ca. He contended that the legislature could not make the five changes and that the proposals would have to go a vote of the people. Harrison reasoned that the legislature could not enact the changes, even with a 70 percent vote and the signature of the governor, because they would not “enhance” the purposes of Prop. 71, which created the stem cell agency. The enhancement requirement is contained in the 10,000-word ballot initiative.

CIRM Director Jeff Sheehy, a communications manager at UC San Francisco, told directors that the Hoover report provided an opening to discuss what might be needed to create an “an organization that has long-term stability.” He said he hoped for “an agency that will outlast us all,” noting that conditions have changed since 2004 when Prop. 71 was approved.

Sheehy, who abstained from the motion by Klein to reject the five Hoover proposals, challenged Harrison on the question of what changes might be considered an enhancement to Prop. 71. He questioned Harrison's opinion that removing the 50 person cap on staff could be done by the legislature while the other changes could not.

Sheehy asked Harrison whether the courts would be likely to consider the five changes an “enhancement” if the CIRM board were to endorse them. Harrison did not answer the question directly.

Sheehy's arguments found little support among the other directors. Their positions may have been best summarized by Vice Chairman Duane Roth, who said the current structure “may not be optimal but is workable.”

Our comment: Klein had the directors in a box. By ordering up the June 23 opinion from the board's counsel, he effectively limited the board's possible action. To do anything other than what they did today would have meant rejecting the advice of their $592,000-a-year outside lawyer, a man who helped Klein write Prop. 71. And it would have been a rebuff to Klein and his strongly held position that the survival of CIRM is at stake.

In going along with Klein, the board, however, indirectly lent support to a finding by the Little Hoover Commission that CIRM is, in many ways, “personality driven.” The commission declared:

“An agency governance structure that features key positions built around
specific individuals does not serve the best interests of the mission of the
agency or the state of California, however well-qualified the individuals
may be.”

Candidates Reportedly On Line for CIRM Chief Scientific Officer Slot

The California stem cell agency reports that “several highly respected candidates” have approached the agency to fill the vacancy created when Marie Csete resigned as chief scientific officer.

In response to a query, Don Gibbons, chief communications officer for CIRM, said last week that the scientists have come forward since Csete disclosed that she was leaving.

Gibbons also said that no decision has been made on whether to hire a search firm to assist in finding a replacement.

CIRM has sometimes been slow in finding top-level executives, particularly for the president’s slot. However, the salary for the chief scientific officer might help speed the process. The top of the range is $332,000 annually. Csete made $310,000.

Applicants should take note that CIRM is not suffering the same financial woes as the rest of California state government because of the nature of the agency’s protected funding.

CIRM Directors and Blogging

It is probably too early to call it a trend, but a couple members of the board of the $3 billion California stem cell agency have joined the world of bloggers in the past few weeks.

The first was Jeff Sheehy, a communications manager at UC San Francisco, who filed an item on the California Stem Cell Report last month. His dealt with recommendations for reforms in CIRM’s structure.

This week Sherry Lansing, the former head of a Hollywood film studio and a UC regent, filed an item for the Huffington Post. It dealt with finding cures for cancer, reflecting her work as head of a nonprofit that fights cancer.

Welcome to both and to any other board members who feel so moved.

CIRM's Troubled Grant Management System: A $1 Billion Oversight Matter

The California stem cell agency is likely to have approved $1 billion in grants by the end of this year, but its grants management system appears to be in disarray, which may be something of an understatement.

CIRM has never publicly revealed the full nature of the problems, which date at least back to 2006. However, in its budget presentation last month, the agency identified oversight of grants as an area of “risk.”

In January, the California State Auditor reported that CIRM was not in compliance with the auditor’s two-year-old recommendations for implementation of a comprehensive grants management system. As the result of a months-long study in 2006, the auditor said that a system was needed to provide accountability and assess how well CIRM was meeting its strategic goals.

CIRM plans to spend at least $575,000 and likely more this year to help fix its problems. CIRM did not provide comparable figures for last year.

It is not clear how much has been spent in the last two years since directors were told that the “complete cost” of a solution from Grantium would be $757,000. The Grantium software now appears to have been tossed out.

CIRM’s budget for this year allots $335,000 for software, training and development connected to the grant management system. Another $240,000 is slated for Kutir Corp. of Newark, Ca., for information technology services. Kutir had a $200,000 contract during the last fiscal year.

This year’s contract with Kutir – size unspecified -- comes before the CIRM directors Governance Subcommittee on July 21 at a teleconference meeting with locations around California.

The June staff's budget commentary on the grants management system said,

“CIRM’s ability to track and report on its grant research portfolio
needs improvement.

“There is a critical need to have a robust electronic grants management system for managing grants, reporting outcomes, monitoring finances, complying with regulations and meeting other requirements as they arise. CIRM had been testing a grants management program that is not able to meet all if its needs. CIRM has revised its approach and has purchased, or is investigating, components of a grant management system that will be flexible enough to handle its evolving programs and processes. Funds for this process are included in this budget. In the long run it is expected that this new approach will be less costly to CIRM than the previous approach."

During next week's look at the Kutir contract, one would hope that there would be a full discussion of past costs connected to the Grantium system, the nature of the problems, the plan to resolve the issues and its likely cost.

Locations where the public can take part can be found in San Francisco (2), Los Angeles (2), La Jolla, Sacramento, Irvine and Stanford. Specific addresses are on the agenda.

CIRM Made Last Minute Bid to Delay Hoover Report

The California stem cell agency made a last-ditch effort to stall release of the results of an investigation into the agency by California’s good government commission despite the fact it had been underway for seven months

The attempt came in the form of a letter signed by four members of the CIRM board of directors, including Chairman Robert Klein, and its president, Alan Trounson. One anonymous critic suggested the letter was a violation of the state open meeting laws because “it was prepared and approved outside any public process” and involved the four board members.

In response to a query from the California Stem Cell Report, James Harrison of Remcho, Johansen & Purcell of San Leandro, Ca, CIRM’s outside counsel, said,

“The letter was not intended to be a statement on behalf of the Board with
respect to the draft proposals. Rather, it was intended to reflect, and
did reflect, only the views of the individuals who signed it. The Board
has not taken any action with respect to the Little Hoover Commission
report.”

The June 8 letter was directed to the Little Hoover Commission, which last month recommended an overhaul of the operations of the California stem cell agency. The commission said changes were needed in CIRM's structure because it is "is not adequate to protect taxpayers’ interests or serve its own ambitious goals."

The letter urged the commission to postpone consideration of the draft recommendations “to allow us time to engage in a meaningful dialogue.” The Hoover Commission began its investigation last November. CIRM knew months earlier that the inquiry would be forthcoming. The commission released its report on June 26.

In addition to Klein and Trounson, Art Torres and Duane Roth, co-vice chairmen of the agency, and Sherry Lansing, chair of the CIRM board’s Goverance Subcommittee signed the letter.

Our comment: It is not uncommon for enterprises under public fire to engage in dilatory tactics. The reasoning is that prolonging an inquiry weakens it, exhausts the investigators and could likely be outdated by the time it is concluded.

Below is the full text of Harrison’s response concerning the legality of the process leading to the June 8 letter.

Harrison Response on June 8 Letter

We asked James Harrison of Remcho, Johansen & Purcell of San Leandro, Ca., outside counsel for CIRM, for his opinion on whether the process leading to the June 8 letter to the Little Hoover Commission violated the state’s open meeting laws. Here is the text of his response.

“In fact, the letter states that the authors would like to thank the Little Hoover Commission, on behalf of the Board, for the invitation to meet with LHC staff. The letter was not intended to be a statement on behalf of the Board with respect to the draft proposals. Rather, it was intended to reflect, and did reflect, only the views of the individuals who signed it. The Board has not taken any action with respect to the Little Hoover Commission report. As you know, the Legislative Subcommittee has scheduled a meeting to discuss the report and to consider the views of other Board members. I hope this clarifies the matter.”

‘Boiling Blood,’ Biotech and Rainmaking

The headline in the Wall Street Journal this morning read “Blood Boils Over Bill to Protect Biotech Drugs.”

And on Friday, the story on Politico.com was about a “king of K Street” in Washington, D.C., the man who is the $240,000 federal lobbyist for the California stem cell agency.

Both stories are related to the agency’s lobbying efforts in Congress on behalf of an industry-backed bill to stall competition from generic companies that may seek to duplicate biotech drugs.

The WSJ story indirectly makes it clear how picayune is the CIRM lobbying effort. The bill endorsed by the agency is not even mentioned. The players are many and powerful. The stage is vast, encompassing the Obama administration’s sweeping health plan effort.

Reporter Alicia Mundy focused on a proposal by Sen. Ted Kennedy that would give biotech firms 13.5 years of protection from generic competition on what the WSJ called “lucrative” drugs. That is about twice as long as proposed by President Obama, who is wrapping the IP legislation into his health care package.

Mundy reported that Kennedy’s effort “may prevail because it would help keep the pharmaceutical industry on board with the (Obama) overhaul, said industry lobbyists and Senate staffers.”

Also involved in this is Tony Podesta, an accomplished rainmaker and CIRM’s Washington lobbyist(the agency has another lobbyist in Sacramento). Chris Frates of Politico.com wrote that “in the age of Obama, it’s a particularly good time to be named Podesta.”

Frates recounted the Podesta family ties to Obama, including brother John Podesta’s co-chairmanship of the president’s transition team.

Frates said Tony Podesta is active in campaign fund-raising, hosting a recent event that funneled $500,000 to the Democratic Senatorial Campaign Committee.

Some CIRM directors and others have questioned the agency’s lobbying effort as largely meaningless given the vast issues in play in Washington. However, $240,000 would not be meaningless to a stem cell researcher in California looking for help to push science along to finding a cure for one of the array of ailments many believe could be alleviated through stem cell therapy.

Assuming that protecting the biotech industry from generic competition is the correct position for a California state agency, the question remains: What do the people of California get out of the expenditure of $240,000, which does not even buy a bleacher seat in the Capitol? And that amount does not count the additional staff and directors time, travel and expenses. Does any of it change the outcome?

CIRM directors will receive a briefing on Thursday on the legislation at a teleconference meeting of their Legislative Subcommittee. The public can participate in session at locations in San Francisco, Elk Grove, Healdsburg, La Jolla (2), Irvine and Palo Alto. Specific addresses can be found on the agenda.

(Editor’s note: The WSJ article is only available to online subscribers. If you would like a copy, please email djensen@californiastemcellreport.com.)

CIRM on Lawsuit and Hoover

We want to call attention to a comment posted yesterday by the California stem cell agency concerning its reaction to the Little Hoover Commission report. Amy Adams, CIRM’s communication manager, filed the comment on the “Klein Warns Stem Cell Directors” item that went up July 10.

She says that CIRM is not threatening a lawsuit in connection with legislative enactment of the Hoover recommendations.

We have posted a response to her comments, which can be found either through the “recent comments” column to the left or at the end of the “Klein Warns” item. Her comments can be found there as well.

Trotter: Memories, Water and Life

Last night, I stumbled across a photographer, John Trotter, who was almost beaten to death in the late 90s while on assignment for our old paper, The Sacramento Bee.

The attack left Trotter unable to walk and with major brain injuries. But today he has regained his career and has shot impressive and evocative photos, ranging from Mexican babies in the dry Southwest to men and women struggling to recover their lives after suffering injuries or disease.

It was an arduous journey for John as well. He says he not only had to learn how to walk again but “re-learn how to remember.”

Our chance meeting came in Sacramento, where we are visiting. He was in the city for an exhibit at the Viewpoint Gallery of some of his work, a series of photos called “The Burden of Memory.” They were taken at the brain injury clinic where Trotter did much of his rehab.

I asked him about a project he was working on that was not on display but mentioned in some biographical notes at the show. It is called “No Agua, No Vida” (No Water, No Life) and deals with the Colorado River in a far-flung way.

The Colorado River is the main artery for much of the American Southwest, including Southern California. It has been dammed and diverted over the years and now is only a relative trickle when it enters Mexico’s Sea of Cortez. Mexico is not happy about that. In the U.S., states battle over the rights to the river water, much of which flows 242 miles across the desert to quench the thirst of Los Angeles.

It also has turned the Imperial Valley, a scorching-hot bit of sandy desolation, into a sometimes thriving industrial-agricultural community where I grew up. In fact, my first paid assignment as a reporter involved coverage of a campaign there to secede from California because of Colorado River water issues.

Trotter’s photos capture the desolation of the desert and dramatically depict how the water is being used and its impact on the lives of many.

You can see and purchase his photos on his Web site. In addition to the Viewpoint show, Trotter’s work is scheduled to be on display beginning Sept. 19 at the Mumm Fine Art Photography Galley in Napa, Ca.

Klein Warns Stem Cell Directors on CIRM Reform Proposal

Recommendations for sweeping changes in the $3 billion California stem cell agency come before its directors next Thursday, although the agency's chairman has warned that support of some of the proposals would violate the directors' oath of office.

In an email to directors June 30, Robert Klein said five of the recommendations by the Little Hoover Commission, the state's good government agency, would be unconstitutional if enacted through the normal legislative process.

Klein wrote,

"As members of the board, we took an oath to uphold Prop. 71 and could not support these changes."

CIRM Vice Chairman Art Torres, who co-authored the memo, scheduled a meeting July 16 of the directors' Legislative Subcommittee to discuss the Hoover report. The board has not taken an official position on the study, but CIRM issued a press release last month that threatened a lawsuit should the legislature and the governor enact many of the recommendations without a vote of the people.

In response to a question from the California Stem Cell Report, Stuart Drown, executive director of the Little Hoover Commission, said neither he nor his predecessor could recall a time when a state agency had threatened a lawsuit in connection with Hoover recommendations.

The five purportedly unconstitutional recommendations would:

• Reduce the size of the unwieldy board from 29 to 15
• Reduce board member terms to four years following expiration of current members' terms, which run from six to eight years
• Eliminate the current dual CEO structure that has proved divisive in the past
• Allow the board to select its own chairman and vice chairman instead of having to accept nominations from state politicians
• Give the governor authority to appoint 11 of the reconstituted board's 15 members. (Presumably Klein would also oppose as unconstitutional a plan to require that four independent persons be placed on the board, although he did not mention it in his June 30 email. The board is currently dominated by representatives of institutions that receive grants.)

In an interview earlier this week at CIRM headquarters, Torres, newly appointed chairman of the Legislative Subcommittee, declined to discuss the specific recommendations. He said he wanted to hear first from members of the CIRM board. He said whatever action the subcommittee takes would go before the full board, presumably in August.

Klein's contention that support of changes would violate directors' oath of office is based on two memos from attorneys. One came from the board's outside counsel. The other came from a Sacramento law firm hired by Klein's private stem cell lobbying group. That firm also has a $50,000 annual lobbying contract with CIRM.

The Hoover Commission took note of the memos from the two law firms, but said the question remains legally open.

Yesterday, Daniel Hancock, former president of Shapell Industries and chairman of the Little Hoover Commission, wrote an op-ed piece in The Sacramento Bee defending the recommendations.

He said,

"As CIRM exits its startup phase, it is unclear whether the founding leaders on the governing board can objectively evaluate the best course for CIRM's future, including the crucial question of whether it should exist beyond its initially intended 10 years. Given that the longer-than-normal terms on the governing board limit turnover, current board members – whose organizations have received 80 percent of the research and facilities grants – may lack the independent perspective required to determine when CIRM's contributions to stem cell science have peaked."

Hancock, however, also said the report is designed to "start discussion."

He cited an article by one CIRM director, published on the California Stem Cell Report, as "encouraging." Jeff Sheehy wrote that he would like the Hoover study to be perceived as "the beginning of a dialogue about governance structures that results in the strengthening and institutionalization of CIRM and sets it on a path toward a long and fruitful existence."

The Hoover Commission report has received little attention in the mainstream media, which has increasingly limited resources because of the news industry's financial problems. But Alex Philippidis of BioRegion News wrote a lengthy piece on the subject on Tuesday.

He quoted Don Gibbons, chief communications officer for CIRM, as saying that changes proposed by Hoover Commission could "waste" time. Philippidis wrote,

"He(Gibbons) cited the 2007 reorganization of California's Department of Public Health, which at least one local news report blamed for a delay in payments to area shelters for victims of domestic violence."

Philippidis reported that Gibbons said a court challenge to the Hoover proposals "would not come from the agency, but most likely from a board member set to lose his or her seat, or patient advocates who have defended CIRM and the ICOC(the CIRM board), saying their value in helping research institutions leverage private donations outweighed any concerns over conflicts of interest raised by Little Hoover."

Philippidis also quoted a state higher education official, Charles Reed, who warned that giving the governor more appointment power would politicize the agency. The president of the UC system currently appoints two members of the 29-person CIRM board. The UC system also has another five appointees on the panel. California politicans appoint the remaining 22.

The meeting of Legislative Subcommittee will be conducted via teleconference with locations throughout the state from which the public can participate. They include San Francisco, Healdsburg, La Jolla(2), Palo Alto and Elk Grove. Specific addresses can be found on the agenda.

(Editor's note: Based on incorrect information from the BioRegion News article, earlier versions this item erroneously connected Charles Reed to the UC system. )

The Bee on Hoover Report: Time for Candor

The Sacramento Bee on Sunday carried an editorial headlined "time for a change at stem cell institute."

The editorial, published also in other McClatchy newspapers including those in Fresno and Merced, was keyed to the report by the Little Hoover Commission. The Bee wrote,

"For far too long, this institute(CIRM) and its leadership have been secretive, defensive and unwilling to acknowledge a flawed management structure, the legacy of a flawed ballot initiative.

"Maturity involves being able to consider outside criticism and engage in self-evaluation. Sadly, the leaders of the stem cell institute have developed a bunker mentality that continues to hurt the agency's mission.

"The institute's reaction to a recent report by the Little Hoover Commission is the latest demonstration."

The Bee continued,

“If adopted by CIRM and the Legislature, (the Hoover) recommendations and others could go a long way toward helping the stem cell institute operate more effectively, with greater accountability of taxpayer dollars. Yet instead of taking a few days to absorb the report and discuss it with his board, (CIRM Chairman Robert) Klein immediately dismissed it in a press release.

"The agency's spokesman dismissed the Little Hoover's process as 'ludicrous,' and Klein threatened a court challenge if the Legislature attempted to act on the recommendations.

“Fortunately, Klein is just one of 29 members of the institute's oversight board. Many others are distinguished academics and patient advocates who have greater candor, and less pride of parenthood, in acknowledging CIRM's flaws.

"Now is the time for their voices to be heard, in public meetings, as the institute approaches its five-year mark."

No IOUs for California stem cell researchers

The State of California began printing IOUs this afternoon to pay its bills because of a $26 billion budget crisis, but stem cell researchers funded by the state need not worry.

That's because the California stem cell agency is immune – for the time being – from fallout from the financial debacle.

The ballot measure, Prop. 71, that created CIRM gave the research effort special legal status. The governor and legislature cannot touch the agency's funding.

CIRM is not the only state agency that is isolated from all the effects of the budget mess. While most state employees are facing a nearly 5 percent pay cut from just last month on top of previous cuts, the the California Highway Patrol is likely to see a pay raise, according to Jon Ortiz of The Sacramento Bee.

Diana Lambert, also of The Bee, reported that the budget pain has not yet “trickled up” to leaders of the University of California system. She reported salaries of $295,000 to $450,000 for UC chancellors along with generous benefits.

Lambert continued,

“The salaries and perks continue despite cuts to freshman enrollment next year, fee increases at some professional schools of as much as 50 percent and student fee hikes of nearly 17 percent over two years.”

At a troubled California regional transit agency, some “foreworkers” are pulling down six figure salaries, including overtime, that run as high as $218,621, according to Daniel Borenstein of the San Mateo Times.

The inequities illustrate the difficulties in dealing with the California cash crisis, which extends into local and regional entities as well as state government. The governor and lawmakers cannot by law reach into all fiscal corners of the state in their efforts to make semi-rational cuts.

One of the reasons for that is government by ballot initiatives, such as Prop. 71, which hamstring legislators – for good reasons and bad – when they try to deal with both policy and budget matters.

CIRM's operational budget is tight overall, probably tighter than many state agencies, although some might quarrel with its priorities, documentation and justification. And scientists certainly should not see their multi-year projects shelved and research basically lost because of state financial vagaries. Midstream loss of funding would throw away much of the original investment.

But that doesn't mean that ballot initiatives such as Prop. 71 represent good government or good policy. Indeed, Prop. 71 itself is one of CIRM's worst enemies as it hampers the board and creates conflicts of interests that are all but impossible to resolve.

California Stem Cell Agency to Hit Staffing Cap

SAN FRANCISCO – The California stem cell agency has added two new positions to support its 29-member board in a move that is likely to push its staffing to its legal limit of 50 for the first time ever.

CIRM President Alan Trounson provided the additional staff after some members of the board complained at a meeting in June that they could not get adequate back-up from CIRM staff. The contentious session in San Diego also highlighted what several board members called “festering” issues dealing with governance and the limitations of Prop. 71, which created the stem cell agency and is virtually impossible to change.

One of those limitations is the 50-person cap on staff, which CIRM could reach this fiscal year. The agency was scheduled to hit 47 under the budget approved last month. However the spending plan did not include the two additional staffers for the board nor did it include a high level finance specialist that the agency is planning to hire.

CIRM Chairman Robert Klein told directors at a special teleconference meeting that the two new board staff positions will terminate at the end of 2010 because of the staff limit. He explained that the agency will then need to hire two additional scientific officers to help handle its burgeoning grant load. By the end of this year, the agency is expected to have approved $1 billion in grants.

Although Wednesday's meeting did not specifically discuss hitting the 50-person cap, Klein said the agency plans to come up with alternative means of financing the board positions after 2010.

Klein also raised the possibility of having the board vote on the move to add the two staffers. Several board members said that was not necessary because hiring the persons was entirely within Trounson's authority.

Board member Jeff Sheehy, who raised the board staffing issue at the June meeting, said adding the new staff still did not provide adequate support for CIRM's big board. Only one person has had primary responsibility for dealing with the board, although additional help is provided by others.

Sheehy, a communications manager for UCSF, alluded to criticism by some board members that the board was micro-managing by seeking additional support. He said,

“If the board can't suggest a minimal level of support for the board, the board is not in control of the agency.”

One of the two persons will be assigned to Vice Chairman Art Torres, who deals with bond financing and legislative issues. That position has been filled. The other position will be an administrative assistant for board executive director Melissa King. That job is expected to be posted shortly.

Following the brief public meeting, the board went into executive session to discuss personnel matters, including the recent resignation of Marie Csete as chief scientific officer.

Csete Discloses Reasons for Resignation: Lack of Respect at CIRM

Nature magazine reported today that Marie Csete says she resigned as chief scientific officer of the $3 billion California stem cell agency because her advice was not respected.

Reporter Erika Check Hayden quoted Csete as saying,

"When it became clear to me that my considered clinical advice was not respected, I concluded that it made no sense for me to stay at CIRM."

Hayden also wrote,

“When Csete left Emory University in Atlanta, Georgia, to join CIRM in March 2008, she gave up her lab and divorced her husband John Doyle. He is a professor at the California Institute of Technology in Pasadena, an institution she would be inviting to apply for research funding and so needed to avoid contravening state conflict-of-interest laws. 'We were willing to sacrifice a lot for me to be in a position to make a positive impact at CIRM,' she says. 'I wanted to see it to the end.'

Hayden continued,

“Csete says she hopes her leaving will mark 'a new start' for the agency. 'I had tried everything I could to change what I think needed to change from the inside, and that was not going to happen,' she says. 'I felt I would have more impact by stepping away and advising the leadership of the board on my way out about ways to revise the structure and management of the agency to make it more optimal.'"

Csete's departure is likely to come up a teleconference meeting of the full CIRM board early tomorrow evening. The board is scheduled to consider a plan, posted this evening, to bolster support for the CIRM board. The meeting was called following a contentious session in San Diego earlier this month during which a number of “festering” issues surfaced.

In a reaction earlier to Csete's announcement, CIRM Chairman Robert Klein said he planned to contact each board member to discuss the matter, raising the possibility that he would be engaged in an illegal serial meeting.

We queried James Harrison, outside counsel to CIRM, about the plan. He replied last week,

“There will be no serial meeting -- the discussion will occur at our next meeting.”

Harrison referred to tomorrow's teleconference meeting.

We also asked Don Gibbons, chief communications officer for CIRM, whether Csete had a contract or was given severance from her $310,000-a-year job. He replied that she had neither. We asked Gibbons this evening whether CIRM has any comments on the Nature article today. He has not yet responded.

The public can take part in the tomorrow's meeting at teleconference locations in San Francisco (4), Los Angeles (4), Duarte, Sacramento, Elk Grove, La Jolla, Healdsburg, Irvine, Berkeley, Palo Alto, Stanford and Tucson, Ariz. See the agenda for specific addresses.

Three Handlers Clear First Round in $500 Million Biotech Lending Program

MENLO PARK -- Three financial firms today made the first cut in their bid to handle the California stem cell agency's $500 million biotech lending program.

The CIRM directors' Finance Subcommittee sent Square 1 Bank in East Palo Alto, Comerica Bank in San Diego and Silicon Valley Bank of Santa Clara into negotiations with the agency's staff.

The ultimate winners of the contracts will be selected by the full board of the $3 billion agency after its staff completes its negotiations.

Losing out in the bid were Adjuvant Capital Partners of San Francisco and Orix Venture Finance in Palo Alto.

The Finance Subcommittee, which had asked for the staff analysis five days ahead of today's meeting, was presented today with a five-page summary of the proposals.

The three winning firms had the best cost rankings. CIRM used the example of a $20 million loan serviced over a six-year period. The firms had a choice of using a fee for service or a loan origination model. Square 1 had the lowest cost – $71,000 for the sample loan on a fee for service basis. Additional expenses were shown for handling the warrants. No dollar amounts were presented in that case, only percentages. Additional fees are likely to be imposed on potential borrowers.

No potential borrowers were present for today's session. But it may well be appropriate for CIRM to consult with them prior to locking down terms and fees that be difficult for the borrowers, who are supposed to be coming from a financial "valley of death."

The Finance Subcommittee gave the following scores to the firms: Square 1, 978; Comerica, 928; Silicon Valley Bank, 878; Orix, 484, and Adjuvant, 466.

At least two and possibly three firms will ultimately take part in handling the loan program. CIRM needs more than one because of the likely possibility that conflicts of interest will arise at the financial firms.

CIRM expects to kick off its loan program with its $210 million disease team round, which is expected to be approved later this year. It will be the largest research round in CIRM's history.

Following the teleconference meeting, Michael Goldberg, chairman of the Finance Subcommittee and a partner in the Mohr-Davidow venture capital firm of Menlo Park, said links with CIRM will help to establish the financial firms as early leaders in the growth of the stem cell industry in California.

All of the proposals can be found via the agenda for today's meeting.

Candidates Bid to Handle CIRM's $500 Million Loan Program

Directors of the California stem cell agency tomorrow will examine proposals from five financial firms that appear to be seeking millions of dollars to basically run the agency's ambitious and unprecedented $500 million biotech lending program.

The proposals come from Comerica Bank in San Diego, Orix Venture Finance in Palo Alto, Square 1 bank in East Palo Alto, Adjuvant Capital Partners in San Francisco and Silicon Valley Bank of Santa Clara.

Their plans were received by CIRM on June 8 after the agency posted an RFP for underwriters for the loan effort. The responses from the five financial firms were not made public until 16 days later.

Their posting late Friday on the CIRM web site came only two business days before the teleconference meeting of the directors' Finance Subcommittee at which they are to be discussed. The directors had asked to receive the material at least five days before tomorrow's meeting. One director said he preferred 10.

The winning underwriters are likely to be No. 1 on CIRM's list of outside contractors – in terms of dollars from CIRM. Outside contracting – at more than $3 million annually – is the second largest item in CIRM's $13 million annual operational budget. (Salaries and benefits are first.)

CIRM is expected to select more than one underwriter because of conflict of interest problems. It is a small financial world in the biotech community.

The Finance Subcommittee discussed the process of selecting underwriters at its June 11 meeting. According to the transcript, the CIRM staff initially proposed that it select the underwriters, but directors said no.

Directors asked for a staff analysis of the proposals that would include thoughts from CIRM Chairman Robert Klein, who originated the concept for the biotech lending program, and CIRM Vice Chairman Duane Roth, who headed the biotech loan task force.

The staff analysis posted Saturday on the CIRM web site is six sentences long, which seems a bit paltry.

Perhaps someone at CIRM knows the cost of each of the competing proposals, but it was not presented in the staff analysis. Their cost is nearly impossible to calculate from the proposals themselves because of their complexity and the lack of a common basis.

One applicant, Adjuvant Capital Partners, declined to use the fee options proposed by CIRM. Peter Barton Fair of Adjuvant wrote,

“Both of the proposed fee structures compensate the delegated underwriter based on the number of closed transactions they underwrite. As we have seen recently in the mortgage industry, incentivizing an underwriter based on volume creates a conflict of interest and can result in the underwriting of poor quality loans. The fee structure we proposed eliminates this conflict of interest.”

Fair's reference was to the use of delegated underwriting by Fannie Mae, which many believe played an important role in its financial downfall.

The Finance Subcommittee directed the staff to invite representatives from all five companies to attend tomorrow's meeting to answer questions.

It is doubtful that potential borrowers will appear. Some of them, however, might have questions about the fee structures. One applicant, Orix, proposed an upfront, nonrefundable fee that could total $50,000 from a loan applicant on a $10 million loan. Based on the Orix proposal, it appears that the fee would have to be paid before the CIRM board approves the proposed research. Orix also proposed $950-a-day, per person fees for “out of pocket expenses.”

Such fees may be customary and justified for this sort of work. However, CIRM's loan program ostensibly targets firms facing a “financial valley of death.” They may be a bit strapped to handle such costs.

If you are interested in hearing or participating in tomorrow's meeting, you can find teleconference locations in San Francisco, Palo Alto, Menlo Park, Irvine, Berkeley, Tucson, Az., Los Angeles and Stanford. Specific addresses can be found on the agenda.

CIRM Director Responds to Hoover Commission Recommendations

Jeff Sheehy, who has served on the board of the California stem cell agency since its inception and as acting vice chair of its grant review group, prepared the following piece on the Little Hoover Commission's report on the agency. Sheehy is a communications manager at UC San Francisco and is a nationally known HIV/AIDs patient advocate. Here is Sheehy's article.

Last Thursday, the Little Hoover Commission issued a report, "Stem Cell Research: Strengthening Governance to Further the Voters’ Mandate," recommending changes to Proposition 71, the initiative establishing the state’s stem cell research funding agency, the California Institute of Regenerative Medicine (CIRM).

CIRM has already mounted a vigorous negative response, which I, as a member of CIRM’s governing board (the Independent Citizens’ Oversight Committee or ICOC), find disappointing.

So while my preferred method of responding would have been through processes of the ICOC, that avenue has not been made available. Therefore, I am taking this opportunity to express my views.

To begin, I should flesh out the three underlying principles implicit in the report. First, CIRM is a tremendous success. While it will take time for the cures to emerge, incredible, innovative science in the new field of regenerative medicine has been funded, a dozen state-of-the-art research facilities are being built around the state, scores of scientists have been recruited to California from around the world, and networks have formed around the state that are the seeds for new Silicon Valleys, but of biotech not chips. Having established itself as the world’s hub for regenerative medicine, California is already reaping the benefit from the initial investments.

Second, Robert Klein has earned the gratitude of California for his incredible leadership in passing Proposition 71 and in leading the establishment of CIRM. His unimaginable level of effort has been the single biggest ingredient in CIRM’s success. If it were up to me, I would honor his service by naming CIRM after him upon his retirement.

Third, given CIRM’s success and Mr. Klein’s announced retirement upon completion of his term, we need to institutionalize CIRM as we plan for a longer future, sustained either by the proceeds of its loan program, additional voter approved funds, or appropriations from the Legislature. By the time the initial tranche of funding is exhausted, CIRM will have moved several potential therapies far down the developmental pipeline, and the economic stimulus from placing California ahead of the world in regenerative medicine will be obvious to everyone. Eventually there will be cures for chronic and life-threatening diseases that will save healthcare dollars. California will reap the economic benefit of being the home of many of the companies that provide those cures.

The Little Hoover Commission offers some reasonable suggestions for improvements that could help the functioning of CIRM and further institutionalize the agency. The 29-member ICOC is too big and too cumbersome—that’s obvious to anyone who regularly attends our meetings and sees us struggle to attain a quorum. The report seems to suggest an organic transition to a smaller board as terms end in 2010 and 2012.

Twelve members’ terms expire in 2010—4 from non-UC research institutions, 4 from non-UC universities, and 4 from the life sciences industry. I would recommend halving that number in proportion, which would reduce the ICOC by 6. The chair and vice-chair terms also expire in 2010 and the Little Hoover commission recommends not reappointing someone to those positions. Rather, they recommend that the chair and vice-chair be nominated from the membership of the ICOC and then voted in by the members. Two-year rotating terms are recommended. This would reduce the size by 2.

In 2012, the 5 UC medical school appointments expire along with the 10 patient advocate terms. I would alter the Little Hoover recommendations by reducing the UC medical school number to 3 and the patient advocate slots to 6 seats with 6 designated alternates. My rationales are that UC is part of the state of California and should be well represented, and that patient advocates currently fill 12 slots since the chair and vice-chair must have patient advocate credentials, so 6 would be the appropriate proportional reduction. Creating 6 alternates addresses persistent complaints of patient advocates that they are not allowed to appoint proxies. In addition, the participation of patient advocates in the working groups has been an extremely positive innovation in Prop. 71 and the alternates would be available for the working groups.

This would give the ICOC, hopefully renamed the Board of Directors for CIRM, 15 members. I would set a quorum of 9, which should be more easily attainable, especially with proxies and alternates. If prospective members cannot commit to adequate attendance, they should decline appointment, and non-attendance should be grounds for removal. I would strongly urge maintaining the original diversity, which has been strength, not a hindrance.

In addition, I would define the pool of conditions and diseases from which the patient advocates are drawn more broadly and not specify which conditions or diseases an individual advocate must be drawn from, but merely state that each patient advocate must be drawn from a different disease or condition. Further, I would recommend that either the chair or vice-chair should be a patient advocate member. And to address the inequitable and immense economic burden of service for lower income ICOC members, I would increase the per diem by a reasonable multiple.

Little Hoover recommends 4-year terms. Again, this makes sense. The transition should occur organically as proposed above and that would give staggered terms so the entire Board does not turn over at once. I think the non-UC appointment process should be considered carefully. It should reflect a balance of power between Legislature and the Governor and/or other constitutional officers such that individuals are appointed for merit and desire to serve CIRM’s mission and not to fulfill any political agenda.

In eliminating the appointed chair and vice-chair, I agree with the Little Hoover commission on eliminating the operational aspects of those positions. The new Board should be focused exclusively on oversight and not day-to-day management, which belongs in the hands of a president hired by and accountable to the Board. This is not intended nor should it be construed as any criticism of Mr. Klein. I believe that if a successful restructuring is accomplished, his dual role will be properly perceived as a heroic sacrifice for CIRM’s mission and an essential feature of its success in initiating its operations. If we try to fill Mr. Klein’s shoes, I believe we risk the success of the entire enterprise.

The Little Hoover ccommission recommends expanding the size of the agency beyond 50 employees. I do not know anyone who does not think this is reasonable. I would suggest a cap, but that number should be determined after thorough analysis.

I also think most agree that the 15-member limit for scientist grant reviewers is too low. This should be expanded, again after thorough analysis. In addition, the current staff-led triage process should be eliminated in favor of a process within the structure of an expanded Grants Working Group. I must reject other changes to the peer review process. The operation of the Grants Working Group has been an outstanding success, and CIRM staff should be commended.

Finally, I heartily support a performance audit by the Citizens’ Financial Accountability Oversight Committee, an entity established by Prop. 71.

In short, I wish the report by the Little Hoover Commission could be perceived and advanced as the beginning of a dialogue about governance structures that results in the strengthening and institutionalization of CIRM and sets it on a path towards a long and fruitful existence.

Correction

The “tipping point” item incorrectly stated the Little Hoover Commission's final report included a recommendation for reduction of the super-majority quorum requirement for the stem cell agency board. The change was initially recommended in the commission's draft report, but was dropped in the final report, which said the quorum requirement was “problematic.”

Our thanks to Don Gibbons, CIRM's chief communications officer, for pointing this out.

A Tipping Point for CIRM? Reform Recommendations Coincide with Pressing Problems

California's Little Hoover Commission's sweeping report on the state's $3 billion stem cell agency comes at a time when the ambitious research enterprise could be facing a tipping point in its short life.

Recent weeks have seen several significant developments involving the California Institute for Regenerative Medicine (CIRM), which is less than five years old.

• Its chairman, Robert Klein, made it clear he is not going fill the job after 2010.
• Marie Csete, CIRM's chief scientific officer, said she is quitting Aug. 1 for unexplained reasons.
  
• The agency is about to embark on its largest and most ambitious round of research grants, a $210 million effort that Klein has identified as critical.
  
• At the same time, it will launch a related, risky and unprecedented $500 million lending program for the biotech industry.
• Festering questions involving structural and governance issues surfaced in a contentious CIRM board meeting earlier this month.
  
• Revision of CIRM's strategic plan, which has guided it successfully so far, has been moldering for months.
  
• Funding problems – solved for the time being – will arise once again in 2010.
  
• And CIRM staff has identified both the potential loss of key staff and community support as two risks the agency faces.
  

That said, CIRM will have approved $1 billion in grants by the end of this year. It is already the largest source of funding in the world for human embryonic stem cell research. “California has made an investment in innovation that is the envy of the world,” said Daniel Hancock, chairman of the Little Hoover Commission and former president of Shapell Industries.

Nonetheless, said the commission, CIRM can and should do better if some of the niggling and not-so-niggling impediments embedded in state law by Prop. 71 are removed or altered. They include: reducing the size of the unwieldy, 29-member board, adding independent voices to the panel, eliminating the overlapping roles of the chairman and president and beginning the all-important planning for leadership transition. (A list of the recommendations can be found here, excerpts here and the complete report here.)

The commission's report is fair-minded, thoughtful and well-researched. It pointed several times to CIRM's accomplishments and the contributions of Chairman Klein. The commission's recommendations stopped short of seeking another ballot measure, which would be unrealistic and stimulate acrimony from CIRM and its supporters. The good government agency said changes should “be prospective and strategic and minimize disruption that might slow CIRM's ambitious and creative agenda.”

CIRM's reaction was adversarial and defensive, a CIRM tendency that the commission discussed in its study.

The agency reaction came in the form of a news release from CIRM in which Klein said,

“To disrupt and delay the agency’s critical work for a year, or even six months, because of what the commission’s staff has called ‘perception’ issues is unacceptable. Let them talk perception to patients who miss out on a therapeutic breakthrough that would have saved their lives because the agency has been paralyzed by a sweeping reorganization.”

CIRM challenged the legality of legislative enactment of the recommendations and basically threatened a lawsuit, raising the rather bizarre picture of a state agency suing the governor and the legislature. More likely, Klein would find a friendly group to act as a legal surrogate, perhaps his own private stem cell lobbying group, Americans for Cures.

The CIRM press release triggered a less than pleased response today from Jeff Sheehy, a member of the CIRM board.

In a comment posted on the California Stem Cell Report, he said,

“On whose authority are thousands of dollars of lobbying, communications, and legal resources being spent opposing this report? The legislature requested this report and to oppose in this knee jerk fashion could properly and reasonably offend those legislators who supported the engagement of the Little Hoover Commission.”

He said that most CIRM board members would likely agree with recommendations to remove the 50-person cap on CIRM staff and the 15-person limit on outside scientists on the grant review panel.

Sheehy said the board – not the agency – should take a position on the report after thoroughly analyzing it.

From outside the agency came a nod of approval for the commission's work. John M. Simpson, stem cell project director for Consumer Watchdog of Santa Monica, Ca., said,

“This is a thoughtful and thorough analysis from a bipartisan group with no ax to grind. CIRM’s management and board should listen to its advice.”

Klein's longstanding involvement with CIRM was touched on by the commission. It said that much was owed to Klein's hard work, beginning with overseeing the campaign for Prop. 71 in 2004. But it said that his actions and personal style “have been at the core of many of the criticisms of the stem-cell agency, and have made him a lightning rod for calls for more accountability.”

The commission continued,

“An agency governance structure that features key positions built around specific individuals does not serve the best interests of the mission of the agency or the state of California, however well-qualified the individuals may be.”

The commission stressed that succession planning should be a top priority of the CIRM board considering Klein's plans to leave his post in 18 months. The commission raised other questions about CIRM's future.

“How will CIRM know when its job is done?
“What happens when CIRM runs out of money?
“Is the mission of Prop. 71 best served by transforming CIRM into a self-sustaining operation?"

Nearly five years ago, voters approved Prop. 71 with the understanding that it was a 10-year effort. While it does lose its ability to sell bonds after that period, the agency will continue to have some sort of life, perhaps only as a vestige in state law books.

CIRM directors should give the commission's report serious consideration as they look at their own plans for the agency's future and life without Robert Klein.

(Editor's note: An earlier version of this item incorrectly stated the Little Hoover Commission's final report included a recommendation for reduction of the super-majority quorum requirement for the stem cell agency board. The change was initially recommended in the commission's draft report, but was dropped in the final report, which said the quorum requirement was “problematic.”)

CIRM Mishandles Reaction to Hoover Commission

The California stem cell agency this week fed right into a Little Hoover Commission finding that is prone to defensive and adversarial reaction to outside criticism.

CIRM's response to the commission's report basically threatened a lawsuit if the Hoover Commission recommendations were adopted by the legislature. CIRM said,

“...(A)ny attempt to enact the changes through legislation rather than by a vote of the people would likely result in a court challenge, which would be costly and time consuming.”

The assertion raised the specter of a California state department possibly suing the state's own governor and legislature. More likely, a CIRM-friendly group would be recruited to file the litigation.

CIRM's statement, aside from the rhetoric, was largely based on a legal memo by its outside counsel. CIRM's chief communications officer, Don Gibbons, said the release was distributed to reporters who requested it, but it was not posted on the CIRM web site. We asked Gibbons why. He replied,

"I see no reason for drawing attention to something for which the process was a farce. When, at the last minute they voted to change our quorum requirements, the one item on their original list that made a modicum of sense, there was not a single commissioner who knew what our current requirement was. Only one of many ludicrous moments in the process."

In an email, he also cited the “hypocrisy” of the Hoover Commission recommendation for more openness for CIRM while the commission withheld its draft recommendations from the public and CIRM until the full report was approved this week by the commission. Gibbons has a point there, which we have written about.

CIRM's statement on the report, however, was another bit of evidence supporting the commission's position that the agency has been unnecessarily adversarial and defensiveness at times.

The report quoted Donna Gerardi Riordan, former director of programs at the California Council on Science and Technology, as saying that “framers” of Prop. 71 were “short-sightedly taunting” state lawmakers. The result was “rancorous public attention” that stood in the way of constructive solutions.

More immediately, however, the CIRM statement ired CIRM board member Jeff Sheehy, who aired his concerns publicly in an unsolicited comment here on the California Stem Cell Report. It is reasonably certain that other board members were less than pleased as well.

The CIRM statement also triggered a negative response from a reader who must remain anonymous. Foolish was the term he used. The reader said CIRM should have sent the following comment to the commission regarding its work.

“Thank you very much for your thorough report and recommendations. It’s clear the staff and commission devoted considerable effort to this important project. We appreciate the constructive spirit in which the recommendations were offered and will give them appropriate consideration as we move forward.”

It would be easy to assign responsibility for the CIRM statement to Gibbons, since he is in charge of CIRM public relations. However, it was clearly released under Klein's authorization and is not the only occasion that Klein has demonstrated seriously flawed judgment about public relations matters. (See here, here and here.)

Hoover Commission Recommendations

Here is the text of the recommendations for CIRM from California's Little Hoover Commission:

Recommendation 1: The Legislature should restructure the CIRM governing board around principles of efficiency and transparency.

• The Legislature should amend the Health and Safety Code to reduce the board size, shorten terms and restructure membership.
• Decrease board size to 15 from 29. Keep diversity of membership but add independent voices to the board: five patient advocates from unspecified disease groups, two independent business leaders and two independent scientists with no ties to CIRM-funded institutions; two University of California officials, one university official (non UC); two private sector biotechnology executives, and one leader of a California research institution.
• Reduce terms to four years for all members.
• The Legislature should amend the Health and Safety Code to streamline the appointment process for CIRM board members.
• Allow the governor to appoint 11 of 15 board members, subject to Senate confirmation. Legislative leaders should continue to appoint two members. The UC system presidentshould appoint two UC representatives.
• The Legislature and CIRM should realign the roles of chair and president to eliminate overlapping authority and to enhance clarity and accountability.
• The Legislature should modify all statutory references inthe Health and Safety Code to the nominating process, job duties and qualifications for the chair and vice chair to invest this authority with the board.
• The CIRM board should elect a chair and a vice chair from within the existing board, subject to set terms and conditions for re-election/removal.
• The CIRM board should clarify that the president manages all day-to-day operations.
• The Legislature should amend the Health and Safety Code to rename the board to more accurately reflect its composition. The Independent Citizens Oversight Committee should be called the Board of Directors.
  

Recommendation 2: The Legislature and CIRM should improve efficiency and transparency for distributing grant and loan funds.

• The Legislature should amend the Health and Safety Code to remove the 50-employee cap on staffing.
• The Legislature should amend the Health and Safety Code to remove the 15-person limit on peer reviewers. CIRM should modify its triage plan to review grants internally.
• CIRM should explore options for greater disclosure of the peer review process.
• CIRM should poll CIRM’s peer reviewers anonymously about their willingness to participate in the review process if their financial disclosure statements are made available
• to the public. The results of this poll should be made public.
• CIRM should conduct a trial grant application round that identifies all applicants.
• CIRM should provide full grant evaluations to applicants.
• CIRM should amend all meeting minutes to specify individual board members’ votes and recusals, and continue the practice moving forward.

Recommendation 3: The CFAOC and the CIRM governing board should use their authority to enhance oversight.

• The Citizen’s Financial Accountability Oversight Committee (CFAOC), chaired by the State Controller, should exercise its existing authority, or be statutorily authorized if necessary, to conduct performance audits and hold regular meetings to review CIRM’s programmatic and strategic performance, in addition to overseeing CIRM’s annual financial audits.
• The governing board should hold its members accountable by adopting removal provisions in its bylaws.
  

Recommendation 4: The CIRM governing board should begin planning for CIRM’s future through an open process.

• The CIRM governing board should create succession plans for board leadership.
• CIRM’s strategic plan should provide clear transparent
• CIRM should develop a transition plan for the eventual expiration of bond funding.

Excerpts Hoover Commission Investigation of CIRM

Here are some excerpts from the report by California's Little Hoover Commission, the state's good government agency, on the California stem cell agency. First, from the cover letter by Daniel W. Hancock, chairman of the bipartisan commission.

“In the California Institute for Regenerative Medicine, California has made an investment in innovation that is envy of the world. Known as CIRM, the institute is the product of Proposition 71, which promised voters they could turn California into the global epicenter of biotechnology. The institute since has directed more than $700 million toward scientific exploration, in the process, leveraging an additional $900 million in private and institutional money that has built new facilities, lured scientists to California and spurred growth in the state’s life-sciences industry.”

“The Commission found that CIRM’s governance structure is not adequate to protect taxpayers’ interests or serve its own ambitious goals. The Legislature must take this opportunity to reform CIRM’s governance structure to ensure that it can deliver on its mission of developing cures for the benefit of all, as well as provide transparency and accountability for California’s taxpayers who will be paying off the bonds.”

He continued:

“The 10,000-word proposition (that created CIRM) laid out highly specific qualifications and detailed operational duties for its chairperson. Its very specificity prevents CIRM from evolving, institutionalizes inefficiencies and hobbles its ability to transition to new leadership.”

“CIRM’s 29-member oversight committee includes representatives from institutions that have benefitted from grants the committee approved. This structure, along with overly long terms and the inability to nominate its own leaders or hold them accountable, fuels concerns that the committee never can be entirely free of conflict of interest or self-dealing, notwithstanding a court ruling that established the legality of such a structure. Legal is not necessarily optimal,”

Here are excerpts from the body of the report:

On conflicts of interest
“Criticism that CIRM’s governing board remains an insiders’ club undermines the legitimacy of the agency. Some 80 percent of the funds to date have been awarded to institutions with representatives on the ICOC...(T)he frequent occurrence of members recusing themselves because of conflicts of interest shows a structural defect in the governing board.”

Accountability
“The detailed provisions of the ballot initiative, which placed the governing board outside of the normal scope of accountability compared to other state agencies and boards, provided stability, diversity and the political protection to get the agency up and running. But today, only five years later, Proposition 71 already looks like a relic of another era.”

Personality Driven
“The actions and personal style of ICOC chair Robert Klein have been at
the core of many of the criticisms of the stem-cell agency, and have made
him a lightning rod for calls for more accountability. That he is a
component of much of the discussion is unavoidable as he drafted,
championed and donated money for Proposition 71 and now serves as
the paid, part-time chairman of the governing board. His passion and
leadership made Proposition 71 a reality, and his financial and political
skills helped CIRM survive its early challenges. At the same time, the
media have chronicled how Mr. Klein has alienated members of the
Legislature and at least one newspaper has called on Mr. Klein to
resign.”

“An agency governance structure that features key positions built around
specific individuals does not serve the best interests of the mission of the
agency or the state of California, however well-qualified the individuals
may be. Such a situation distorts accountability and succession
planning and could, in the event of an abrupt departure of the
individual, leave the agency leaderless for an extended period. A more
efficient and balanced board is possible and more appropriate as CIRM
matures. For CIRM to prosper and sustain itself, such changes are
essential.”

CIRM's Adversarial Defensiveness
From Donna Gerardi Riordan, former director of programs at the California Council on Science and Technology, “By excluding legislators from participating in the creation and design of CIRM, the framers of Proposition 71 were short-sightedly taunting the state’s most powerful
and skillful political players,”

Management
“CIRM has adopted a co-CEO leadership structure between the board chair and the agency president. The board chair oversees several daily administrative duties at CIRM, which gives the chair a dominant role over other members, creates potential conflict with the CIRM president and blurs the lines of accountability.”

More Open Grant Review Process
“CIRM leadership has argued that fewer institutions would apply for
funding if their identities became known and they were not successful.
CIRM, however, should continually strive to improve the openness of its
process. Based on Connecticut’s experience of disclosing all applicants
without negative consequence, CIRM should conduct a pilot project to
evaluate if a more open process would inhibit researchers from coming
forward and applying for CIRM funds. In an upcoming grant round, all
applicants should be identified retrospectively. Disclosing names of
unsuccessful applicants as well as individual reviewers will allow the
public to better track CIRM’s funding processes for fairness and bias.
Judging by the apparent willingness of rejected applicants to identify
themselves and their organizations in public appeals to CIRM, it is
questionable whether the current lockout of applicant identities poses a
real concern. The burden is on CIRM to demonstrate otherwise.”

CIRM's Future
“The rapidly changing political and scientific environment raises questions about whether the organization is flexible enough to adapt to the field it is supposed to lead....

• “How will CIRM know when its job is done?
• “What happens when CIRM runs out of money?
• "Is the mission of Proposition 71 best served by transforming CIRM into a self-sustaining operation?"