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

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

CIRM's intellectual property (IP) regulations, which have received little public attention, are key to determining who gets what out of the arrangement. However, at this point, nobody knows how much or when any cash will come back to the state. 

The IP rules are currently aimed at financing more research and production of  therapies as opposed to generating the most income possible for the state. It is a balancing act, according to CIRM. 

At the request of the California Stem Cell Report, the agency last week answered a number of questions concerning some of the details that come into play in cases such as Forty Seven. The upshot is that a grant, which is what Forty Seven received, can be converted to a loan, paid off and thus end any obligation to pay royalties. 

Here is how the agency's intellectual property rules work, starting with the sale of Forty Seven. 

The per share price to be paid for Forty Seven is $95.50, up 1,600 percent since last October's low of $5.53. The agency does not share in that run-up. State agencies are barred by the State Constitution from owning stock. 

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

Any payout for the agency, known formally as the California Institute for Regenerative Medicine (CIRM), is down the road. If a profitable treatment ultimately emerges, the state -- not the agency -- might get some royalties through the company or Stanford.  In that case, state lawmakers could spend the funds for anything from salaries at the Department of Motor Vehicles to purchase of office furniture. 

Or Gilead Sciences, Inc., the new owner of Forty Seven, could convert the CIRM grant to a loan, which then could be paid off with interest, ending the possibility of extended royalties from the company. In that case, the payoff would go to CIRM for research purposes -- not the state's general fund. 

In 2015, when CIRM directors approved the loan conversion provision, Randy Mills, then president of the agency, said the mission of the agency is to produce therapies -- not to generate large profits. He said loan conversions would recycle CIRM cash with interest into more research faster than royalties. 

Here is the text of our questions and CIRM's responses concerning IP rules,  with more details on how it all works.  

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

CIRM: The interim loan conversion policy was implemented in May 2015. Our then President and CEO Randy Mills recommended the changes, and the CIRM Board approved them, to try and bring in more for-profit applications. He felt the existing policy added complications on the commercial development path for therapies, making it less attractive for for-profit companies to apply to us for funding. Engaging with for-profit companies is key to delivering on our mission so we made the changes, not because of pressure from existing grantees or anyone else. 

Transcript of Intellectual Property Subcommittee May 19, 2015

and

Transcript of CIRM governing board meeting May 21, 2015 
(The meetings involved approval of the current IP regulations.)

California Stem Cell Report: Is it accurate to say that a company can escape any obligation to pay royalties by unilaterally converting a grant to a loan? Can CIRM do anything to prevent the company from such a conversion? (See here for language from an federal document filed by Forty Seven.)

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

As these policies were discussed and approved by our Board it does not make sense for us to try and prevent a company from following our rules.

California Stem Cell Report: Does the proposed new initiative do anything to prevent that from occurring or affect it in any way? 

CIRM: The new initiative does not address this issue. Our Board has, as it always has had, the flexibility to change the IP policy if it so chooses.

California Stem Cell Report: Can you please clarify the language concerning the interest rate on the loan? Does the interest take effect retroactively beginning with the date of the award? In other words, let's say the award was made in 2016. The company converts to a loan in 2026. Does it have to pay interest for all of those 10 years? 

CIRM: Yes, the interest takes effect retroactively but only to the date of each individual payment. Since the grant is paid out over the life of the Award, each payment is treated individually in determining the compounded interest up the conversion date. The specific interest rates are determined by the stage of clinical development at the time of election.

California Stem Cell Report:  Can you also clarify the following language from the SEC document related to how the total interest amount is calculated. It raises a possibility that interest could be as much as 30 percent in year in some cases. The phrase I am referring is "plus zero to 30% per annum that varies depending on the stage of the research and the stage of development at the time the election is made."

CIRM: The election point at the time of conversion as well as the starting point of the CIRM-Funded Project affects the return. Please see page 29 of the CIRM GAP linked here for the chart.

California Stem Cell Report: If a unilateral conversion is allowed, doesn't that adversely affect the interests of the state of California by providing a relatively inexpensive way to avoid paying potentially many more millions to the state?

CIRM: There is a balancing act between the CIRM’s mission - accelerating stem cell therapies to patients with unmet medical needs - and a financial return back to the State. In the interests of funding for-profits, who are generally better prepared to advance clinical projects to cure patients, this loan conversion policy was adopted by the CIRM Board. Since it is a loan, the money returns to CIRM for further reinvestment in other projects. Indeed, without the adoption of the conversion option by our Board it is possible that companies like Forty Seven Inc. might not have applied to CIRM for funding. Before these new regulations were introduced CIRM had few for-profit companies applying for our funding.

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

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

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

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

Weissman was not immediately available for comment on the report.

The article by Devon Pendleton said,

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

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

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

Bloomberg said,

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

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

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

Trump, Fetal Tissue Restrictions and California's Stem Cell Agency

The $5.5 billion ballot proposal to save California's stem cell agency from financial extinction popped up this week in a discussion of the Trump administration's looming restrictions on the use of fetal tissue.  

The proposed ballot initiative surfaced in a lengthy piece in "The Scientist" magazine, which said, 

"The Trump administration’s changes to policy involving material donated from abortions have led scientists to adjust their research projects or seek alternative sources of funding."

The author of the article, Diana Kwon, interviewed researchers around the country, who spoke of how they were dealing with the new reality. One of them was Andrew McMahon of the University of Southern California, who was recruited to the Golden State with the help of a $5.5 million award from the California Institute for Regenerative Medicine (CIRM), as the stem cell agency is known. 

Kwon said that McMahon "still has about a year left before he needs to apply for more funding, and he’s started looking into potential alternatives to NIH." 

She noted that the NIH restrictions are yet to be fleshed out and continued with comments from McMahon,

"'My understanding is that it’s not entirely clear at the moment what that process is going to be,' McMahon says. 'I’ve been using the time to obtain non-NIH funding to support aspects of the research that I would have tried to get NIH funding [for] in the future.'"

Also quoted was Larry Goldstein, director of the UC San Diego stem cell program. Kwon wrote, 

"In California, the state’s stem cell agency, the California Institute for Regenerative Medicine (CIRM) has provided funding for stem cell studies using fetal tissue since it was founded in 2004. That fund is about to run out, but (a proposed ballot initiative) that would provide $5.5 billion in funding to CIRM (is expected to) come before voters in November.

"'That will hopefully provide funding for areas of fetal tissue research that involves stem cells,' Goldstein says. 'But . . . it’s ridiculous to rely on one or two states to self-fund, because we don’t have all of the best and brightest [scientists], and it means lots of students and postdocs will train in areas where federal training support will be unavailable to them.'"

Need More on Gilead/Forty Seven? See Xconomy's Piece

If you are looking for the most complete story on the $4.9 billion, Forty Seven/Gilead deal, take a look at the article on the news service, Xconomy. 

Frank Vinluan put together a dandy piece that covers a lot of business, ranging from the science to finance. Here is one tidbit that I have not seen elsewhere:

"Forty Seven has agreed to a “no shop” provision that bars the company from pursuing another offer, according to a securities filing. But under certain circumstances, Forty Seven may provide information to and speak with another party that has submitted an acquisition proposal that its board deems a superior offer, according to the merger agreement. These steps would be taken to comply with the board’s fiduciary duty to shareholders. If Forty Seven accepts a better offer, the merger agreement with Gilead requires it pay the larger company a $160 million termination fee."

Whoopee Time at the California Stem Cell Agency: Celebrating a $4.9 Billion Deal

The California stem cell agency this afternoon burst out with an exuberant cheer, declaring that a huge financial deal announced just yesterday gave its research program a $4.9 billion seal of approval. 

If you missed it, the deal involves the $4.9 billion purchase of Forty Seven, Inc., by Gilead Sciences, Inc., two companies nestled only 20 minutes apart on the San Francisco Bay peninsula. 

Writing on its blog, The Stem Cellar, the agency all but said, "WHOOPEE!"  Not that that would have been inappropriate. The agency declared, 

"It’s not every day that a company and a concept that you helped support from the very beginning gets snapped up for $4.9 billion...CIRM has supported this program from its very earliest stages, back in 2013, when it was a promising idea in need of funding."

CIRM, of course, is the official name of agency, the California Institute for Regenerative Medicine. 

Maria Millan, CIRM photo

The blog item continued with this from Maria Millan, CEO of CIRM:

“To say this is incredible would be an understatement! Words cannot describe how excited we are that this novel approach to battling currently untreatable malignancies has the prospect of making it to patients in need and this is a major step. Speaking on behalf of CIRM, we are very honored to have been a partner with Forty Seven, Inc., from the very beginning."

The Forty Seven tale originated in the Stanford University lab of Irv Weissman. CIRM quoted him as saying,

Irv Weissman, Stanford photo

"The story of the funding of this work all of the way to its commercialization and the clinical trials reported in the New England Journal of Medicine is simply this: CIRM funding of a competitive grant took a mouse discovery of the CD47 ‘don’t eat me’ signal through all preclinical work to and through a phase 1 IND with the FDA (Food and Drug Administration). Our National Institutes of Health (NIH) did not fund any part of the clinical trial or preclinical run up to the trial, so it is fortunate for those patients and those that will follow, if the treatment continues its success in larger trials, that California voters took the state’s right action to fund research not funded by the federal government.”

Ingrid Caras, CIRM photo

Ingrid Caras, CIRM senior science officer, who was on the agency team that provided assistance to the academic researchers, said,

“I had the pleasure of working with and helping the Stanford team since CIRM provided the initial funding to translate the idea of developing CD47 blockade as a therapeutic approach. This was a team of superb scientists who we were fortunate to work closely with them to navigate the Regulatory environment and develop a therapeutic product. We were able to provide guidance as well as funding and assist in the ultimate success of this project.”

McCormack concluded, 

"Forty Seven Inc. is far from the only example of this kind of support and collaboration. We have always seen ourselves as far more than just a funding agency. Money is important, absolutely. But so too is bringing the experience and expertise of our team to help academic scientists take a promising idea and turn it into a successful therapy."

CIRM did not mention the amount of money provided to support the research. But it has awarded $15 million directly to Forty Seven. Weissman has received $30 million, much of which has played a role in Forty Seven's products.