Klein Says He Knew about Federal Tax Problem Prior to Election

California stem cell Chairman Robert Klein has confirmed that he knew that Prop. 71 had a $700 million problem prior to last fall's election that created the agency he now heads.

Associate Editor Stu Leavenworth of The Sacramento Bee reported today that Klein confirmed in an interview "that one of the state's bond lawyers - Chas Cardall, of the firm Orrick, Herrington & Sutcliffe - briefed him during the campaign about the IRS complications. (That fact, without the lawyer's name, was reported by the San Francisco Chronicle last week.) Because of advice from Cardall and others, Klein says he purposely wrote Prop. 71 to allow use of both tax-exempt and taxable bonds."

Klein also told Leavenworth that he did not disclose the problem with tax-exempt bonds to analysts who prepared an economic study touting the economic benefits of Prop. 71.

"Why didn't he?" Leavenworth wrote in a column. "Klein equivocated when asked that question. 'I'd want to go back and review this area,' he said, unable to provide more information."

"Laurence Baker, a Stanford University professor who helped write the economic study, said he now wishes he had known that IRS rules could limit the receipt of royalties. Baker's study projected that stem cell research could bring in $537 million to $1.1 billion in royalties over 20 years.

"Now, says Baker, it appears that any royalties might be partly or completely offset by higher interest rate costs(which could run to $700 million).

"'Had we known, we would have factored it into our analysis,' said Baker. 'We worked hard to incorporate as much information as we could into our report.'"

Leavenworth continued:

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

Leavenworth described the conduct during the campaign at best misleading. "At worst, it was a cynical ruse," he wrote.
We should note that the interview with Leavenworth is the first time that Klein has publicly said he knew of the issue prior to the election. He would not comment on the question for the Chronicle.

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.