BILL ANALYSIS                                                                                                                                                                                                    






                                 SENATE HEALTH
                               COMMITTEE ANALYSIS
                         Senator Sheila J. Kuehl, Chair


          BILL NO:       SB 771                                       
          S
          AUTHOR:        Kuehl and Runner                             
          B
          AMENDED:       As Introduced
          HEARING DATE:  April 11, 2007
          REFERRAL:      Health and Judiciary                         
          7
          FISCAL:        Appropriations                               
          7
                                                                      
          1
          CONSULTANT:                                                
          Hansel/cjt
                                        

                                     SUBJECT
                                         
                Stem cell research standards: licensing revenues

                                     SUMMARY  

          Requires stem cell research grant or loan recipients under  
          the California Stem Cell Research and Cures Act (Act) to  
          grant exclusive licenses only to organizations which have  
          presented plans which the California Institute for  
          Regenerative Medicine (CIRM) determines will provide  
          substantial access to resulting therapies, drugs, and  
          diagnostics for uninsured Californians, and will provide  
          the therapies, drugs, and diagnostics to publicly funded  
          programs in California at the federal Medicaid price.   
          Requires any recipient of a grant or loan award for  
          research who commercializes any product it develops using  
          state funds to agree, as a condition of accepting the  
          funds, to make royalty payments to the state equal to  
          between two and five percent of the revenues over the life  
          of the product, depending on the level of the funds which  
          have been provided and the contribution of institute-funded  
          patented inventions to the development of the product.   
          Declares that these provisions enhance the ability of the  
          California Institute for Regenerative Medicine to further  
                                                         Continued---



          STAFF ANALYSIS OF SENATE BILL 771 (Kuehl)             Page  
          2


          

          the purposes of the grant and loan programs created by the  
          Act.

                             CHANGES TO EXISTING LAW  

          Existing law:
          The California Stem Cell Research and Cures Act (Act),  
          enacted by voters as Proposition 71 in November, 2004,  
          establishes the California Institute for Regenerative  
          Medicine (CIRM) to make grants and loans for stem cell  
          research and  research facilities.  Existing law also  
          establishes the Independent Citizen's Oversight Committee  
          (ICOC) as the governing body for the CIRM.  Existing law  
          authorizes the sale of $3 billion in general obligation  
          bonds over 10 years for stem cell research and facilities  
          in California, with a focus on research that does not  
          qualify for federal funding.  

          Existing law, from Proposition 71, requires the ICOC to  
          establish standards that require all grants and loan awards  
          to be subject to intellectual property agreements that  
          balance the opportunity of the state to benefit from the  
          patents, royalties, and licenses that result from research  
          and therapy development, and clinical trials with the need  
          to assure that essential medical research is not  
          unreasonably hindered by the intellectual property  
          agreements.

          Existing law also provides that the Legislature may amend  
          the non-bond statutory provisions of the Act, to enhance  
          the ability of the California Institute for Regenerative  
          Medicine to further the purposes of the grant and loan  
          programs created by that Act, with a 70 percent vote of  
          each house and compliance with specified procedural  
          requirements.
          
          This bill:
          SB 771 would require every recipient of a grant or loan  
          award for research under the Act to grant exclusive  
          licenses involving institute-funded patented inventions  
          relevant to development of therapies, drugs, and  
          diagnostics only to organizations that have plans which the  
          institute determines will provide substantial access to the  
          resulting therapies, drugs, and diagnostics to uninsured  
          Californians.  In addition, the bill would require  




          STAFF ANALYSIS OF SENATE BILL 771 (Kuehl)             Page  
          3


          

          licensees to provide to patients whose therapies, drugs,  
          and diagnostics will be purchased in California with public  
          funds, the therapies, drugs, and diagnostics at the federal  
          Medicaid price.  

          The bill would require any recipient of a grant or loan  
          award for research that commercializes any product that it  
          develops using CIRM funds to agree, as a condition of  
          accepting the funds, to make royalty payments to the state  
          equal to two to five percent of the revenues over the life  
          of the product, depending on the level of funds provided  
          and the contribution of CIRM-funded patented inventions to  
          the development of the product.

          This bill would also require recipients of grant or loan  
          awards for research to provide to the state 25 percent of  
          the net revenues, as defined, received from licensing an  
          invention developed with CIRM funds, beyond a reasonable  
          revenue threshold that the ICOC may establish.

          The bill would declare that it enhances the ability of the  
          institute to further the purposes of the grant and loan  
          programs created by that Act, and would, therefore, require  
          a 70 percent vote for passage.

                                  FISCAL IMPACT  

          Unknown revenues associated with stem cell licensing and  
          patenting agreements required by the bill; unknown costs to  
          develop intellectual property agreements under the bill.

                            BACKGROUND AND DISCUSSION
                                         
          The authors state that, in approving Proposition 71, voters  
          were reflecting an expectation that research funded under  
          the Act could lead to breakthroughs in treatments for  
          currently incurable or debilitating diseases and conditions  
          for all Californians.  Voters were also told during the  
          campaign in favor of Proposition 71 that the significant  
          investment of state funds proposed by Proposition 71 would  
          eventually produce significant economic benefits for the  
          state - as much as $500 million to $1 billion in revenues,  
          from the patenting and licensing of therapies, drugs, and  
          new stem cell lines developed with Proposition 71 funds.  





          STAFF ANALYSIS OF SENATE BILL 771 (Kuehl)             Page  
          4


          

          The authors state that regulations and policies being  
          developed by the ICOC do not ensure low-income  
          Californians, as well as taxpayers, realize the benefits  
          promised by the initiative.  The authors cite recent  
          policies adopted or proposed by the ICOC that would have  
          restricted the ability of the state to receive discounts on  
          stem cell therapies that the state granted funds to develop  
          and would have also restricted the ability of uninsured  
          Californians to access stem cell therapies when they become  
          available.  The authors also argue that CIRM's proposed  
          policy for making grants to for-profit grantees would have  
          artificially capped the state's royalties from the sale of  
          successful stem cell therapies, rather than allowing the  
          state to collect its share over the life of the product.

          In particular, the authors state concerns that provisions  
          of the current regulations simply  requiring stem cell  
          licensees to provide access to stem cell therapies via  
          plans consistent with "industry standards" could result in  
          programs very similar to the patient assistance programs  
          now operated by most drug companies, which have been shown  
          to be cumbersome, difficult to access, and underutilized.   
          The authors also note that the pricing requirements in some  
          of the regulations do not ensure any particular level of  
          discount on stem cell therapies when they become available  
          and also do not extend any discounts whatsoever to most  
          publicly funded programs in California.  Finally, the  
          authors argue that provisions that impose caps on the  
          state's return from the commercialization of successful  
          stem cell products are inconsistent with the practices of  
          universities and research institutions that fund large  
          amounts of biomedical research. These provisions would  
          preclude the state from receiving a return commensurate  
          with what it has contributed to the development of a  
          product, in terms of funding or patented inventions.  
           
          The authors contend that legislation is needed to clarify  
          the intellectual property provisions of the initiative and  
          to ensure that the intent of the initiative, as contained  
          in its wording as well as in the information provided to  
          voters, that the state would benefit directly from stem  
          cell research patents, licenses, and royalties, is carried  
          out.
           
          Proposition 71 and Intellectual Property




          STAFF ANALYSIS OF SENATE BILL 771 (Kuehl)             Page  
          5


          


          Proposition 71 authorizes the issuance of up to $350  
          million a year in general obligation bonds over a 10-year  
          period for stem cell research and facilities.  The bonds  
          have, so far,  been held up due to court cases challenging  
          the constitutionality of the initiative.  In lieu of bond  
          funding, the CIRM has received $45 million in philanthropic  
          contributions and also received a $150 million General Fund  
          loan last year to enable it to begin making research  
          grants.  In February and March of this year, the ICOC  
          approved $130 million in research grants, and it expects to  
          approve additional projects using these interim financing  
          sources pending the resolution of the suits, as well as  
          bond funds if the suits are resolved in the state's favor.

          Stem cell research projects which receive Proposition 71  
          funding are expected to generate many kinds of intellectual  
          property, including new research tools, new stem cell  
          lines, new methods for isolating stem cells, and,  
          ultimately, stem cell therapies and drugs.  In many cases,  
          grantees will be able to license the rights to those  
          inventions to other entities or else to use them,  
          themselves, to develop stem cell products and research  
          tools.

          Most biomedical research does not lead to patentable  
          inventions or products with high commercial success.  Some  
          biomedical products and inventions, however, have been  
          extraordinarily successful and have produced significant  
          licensing and royalty revenues.  In 1999, Genentech was  
          ordered to pay the City of Hope National Medical Center  
          $300 million in compensatory damages and $200 million in  
          punitive damages for their failure to pay royalties on  
          patents involving manufactured polypeptides developed by  
          the City of Hope.  Under the licensing agreement, Genentech  
          had agreed to pay City of Hope a licensing royalty of two  
          percent of net sales of products using the polypeptide.   
          The value of the licensing agreement was estimated at $600  
          million.  In a separate lawsuit, Genentech was ordered to  
          pay the University of California $200 million related to  
          genetically engineered human growth hormones.

          According to UC's 2005 Technology Transfer report, UC  
          derived $92.9 million in royalty and fee income in 2005  
          from 1,238 inventions.  Income from the top five  




          STAFF ANALYSIS OF SENATE BILL 771 (Kuehl)             Page  
          6


          

          commercialized inventions accounted for $42.4 million of  
          the revenues.  UC incurred net legal expenses of $17.7  
          million associated with drafting and maintaining patents  
          and another $15 million in administrative expenses related  
          to its technology transfer activities.

          Based on an analysis of  biotechnology licenses involving  
          universities and research institutes, an economic analysis  
          prepared by Stanford economist Laurence Baker and a  
          colleague, in September, 2004, estimated that the state  
          could receive between $537 million and $1.1 billion in  
          royalty revenues over a 30-year period under Proposition  
          71.  

          Regulations Dealing with Intellectual Property

          The CIRM has promulgated intellectual property regulations  
          covering its grants to non-profit grantees, such as  
          universities and research institutions.  The regulations  
          allow grantees to own the intellectual property they  
          develop, but provide that grantees may only license their  
          inventions to entities that have plans to provide access to  
          any resulting therapies to uninsured Californians.  The  
          regulations further provide that grantees may only enter  
          into licensing agreements with entities who agree to  
          provide therapies that are drugs at the prices negotiated  
          under the California Prescription Drug Discount program  
          established by AB 2911 (Nunez - Chapter 619, Statutes of  
          2006).  

          The regulations also require grantees to share 25 percent  
          of net revenues they receive in excess of $500,000 from the  
          licensing of any inventions they develop using CIRM funds.

          The ICOC's proposed regulations for grants to for-profit  
          entities require grantees to agree to share 17 percent of  
          net licensing revenues beyond $500,000 (the lower  
          percentage reflects an assumption that for-profit entities  
          do not pay a share of licensing revenues to inventors).   
          The proposed regulations also require licensees' plans to  
          provide access to therapies and diagnostics for uninsured  
          Californians to be "consistent with industry standards."  

          The proposed regulations would also require licensees who  
          develop stem cell therapies that are drugs to provide those  




          STAFF ANALYSIS OF SENATE BILL 771 (Kuehl)             Page  
          7


          

          drugs to publicly funded programs in California at one of  
          the specific benchmark prices required by the California  
          Prescription Drug Discount program-the federal Medicaid  
          price, the lowest commercial price, or the Average  
          Manufacturer's Price less 15 percent.  The proposed  
          regulations additionally provide that if a for-profit  
          grantee receives revenues from the commercialization of a  
          product developed using CIRM funds, the grantee must pay  
          certain fixed amounts, depending on the success of the  
          product.  Under the proposed regulations, upon  
          commercialization, the grantee must pay the state three  
          times the grant amount.  Grantees must make another  
          one-time payment equal to three times the grant amount if  
          annual revenues reach $250 million.  Another one-time  
          payment equal to three times the grant amount is due if  
          annual revenues reach $500 million, plus one percent of  
          revenues in excess of $500 million per year for the life of  
          the patent, if CIRM invested more than $5 million and a  
          CIRM-funded patented invention was involved.  

          Other approaches to Intellectual Property 
          
          Revenue sharing requirements for biomedical research  
          programs vary considerably.  The states of Connecticut and  
          New Jersey, which conduct stem cell research programs  
          similar to California's, both require for-profit grantees  
          and licensees to share an uncapped percentage of revenues  
          from commercial products developed using state funded  
          research, five percent in the case of Connecticut and one  
          percent in the case of New Jersey.  By contrast, federal  
          grants issued by the National Institutes of Health are  
          governed by the Bayh-Dole Act.  The Act requires grantees  
          to seek patents and make practical application of  
          inventions they develop using federal funds, to pay  
          inventors a portion of any licensing revenues they receive,  
          and to invest any net revenues in further research, but  
          does not require any revenues to be paid to the federal  
          government.

          Universities and research institutions typically receive  
          licensing fees from the licensing of inventions they  
          develop, as well as running royalties expressed as a  
          percent of the sales of commercialized products using or  
          relying on the inventions, without caps.  The economic  
          analysis of Proposition 71, by Stanford economist, Laurence  




          STAFF ANALYSIS OF SENATE BILL 771 (Kuehl)             Page  
          8


          

          Baker, cited above, included a review of 105 licensing  
          agreements of universities and research institutes and  
          found that the royalty percentages in such agreements range  
          from one to ten percent, with an average around four  
          percent.  

          The University of California's Licensing Guidelines state  
          that the value that UC receives from licensing the rights  
          to inventions its faculty and staff have developed should  
          be based on the expected profitability of the product or  
          service the invention will be part of, as well as the  
          significance of the invention to the product or service.   
          The guidelines further call for licensees to pay  
          consideration to UC in the form of running royalties which  
          are typically calculated as a percentage of sales of the  
          product utilizing or relying on the invention.  The  
          guidelines state that such royalties should not be capped  
          at a predetermined amount, to allow UC to share fully in  
          the success of any commercial exploitation of the invention  
          that public funds have paid for.

          


          Bureau of State Audits Report

          In February of this year, the Bureau of State Audits  
          released a performance audit of the CIRM which examined the  
          CIRM's practices, including its intellectual property and  
          revenue-sharing policies.  While not questioning the  
          policies directly, the audit found that CIRM officials  
          could neither document how they evaluated information they  
          received in the course of developing their policies nor how  
          they determined what was appropriate for the formulation of  
          the policies.  The audit also found that CIRM was unable to  
          document why they felt a capped royalty policy was  
          necessary as well as a number of conflicting statements on  
          this subject in CIRMs records.  Finally, the audit noted  
          that CIRM has not yet adopted appropriate language to  
          define its expectations regarding access to therapies  
          developed with state funds for uninsured Californians and  
          has not identified standards for discount prices for non  
          drug therapies.

          Prior legislation




          STAFF ANALYSIS OF SENATE BILL 771 (Kuehl)             Page  
          9


          

          SB 401 (Ortiz and Runner) of 2005 - 06 Session - Would have  
          made changes to the public meeting, public record, grant  
          and loan licensing conditions, and conflict-of-interest  
          provisions of Proposition 71.  Would have required the ICOC  
          to establish and apply minimum licensing conditions to its  
          grants and loans for research, including that grantees  
          provide to the state a portion of net licensing revenue or  
          royalties and sell any product, drug, or therapy that they  
          develop using grant or loan funds to state and county  
          health programs at a cost not to exceed the federal  
          Medicaid price.  Held on Assembly Appropriations Committee  
          suspense file.

          SCA 13 (Ortiz and Runner) of 2005 - 06 Session - Would have  
          modified provisions of Proposition 71 dealing with  
          reporting of economic interests and conflicts of interest  
          and applied open meeting and public records laws to  
          meetings and records of the ICOC, the CIRM, and its working  
          groups with exceptions.  Would have required the ICOC to  
          ensure that treatments, therapies, products, and services  
          resulting from technologies and inventions derived from  
          grants awarded are accessible and affordable to low-income  
          residents, including those residents eligible for  
          state-and-county-funded health care programs.  Died on the  
          Senate floor.

          Arguments in support
          The California Public Interest Research Group (CALPIRG)  
          states that the regulations and policies being developed by  
          CIRM regarding the $3 billion in bond funds available for  
          stem cell research are not living up to the stated intent  
          of Proposition 71, which is to "fund scientific and medical  
          research that will significantly reduce state health care  
          costs in the future; and provide an opportunity for the  
          state to benefit from royalties, patents, and licensing  
          fees that result from the research."  Current policies  
          threaten to undermine voters' intention that public funds  
          not be abused by private interests, by capping revenues  
          that would be paid to the state from successful stem cell  
          products and by failing to ensure that health assistance  
          programs and uninsured Californians receive treatments  
          developed with Proposition 71 funds at affordable prices.   
          CALPIRG states that SB 771 will ensure that the intent of  
          Proposition 71 is met and that taxpayers share the benefits  
          of successful health care treatments and drugs developed  




          STAFF ANALYSIS OF SENATE BILL 771 (Kuehl)             Page  
          10


          

          with public funding. 

          The California Nurses Association (CNA) states that without  
          the changes proposed by SB 771, Proposition 71 has the  
          potential to become a giveaway of $3 - 6 billion in public  
          funds to large biotechnology and pharmaceutical companies.   
          Current regulations do not ensure that uninsured residents,  
          who have few resources to pay for expensive stem cell  
          therapies, will be able to access those therapies when they  
          become available.  Current regulations also restrict the  
          ability of publicly funded programs to receive discounts on  
          therapies the state has helped pay to develop, and cap the  
          state's share of revenues from products developed with  
          Proposition 71 funds, instead of allowing the state to  
          receive a return commensurate with its contribution to the  
          research.   SB 771 will ensure that the state benefits from  
          its investment in stem cell research as intended by  
          Proposition 71.
          
          Arguments in opposition:
          The California Healthcare Institute (CHI), taking an oppose  
          unless amended position, states that the revenue sharing,  
          pricing, and access provisions in SB 771 create significant  
          disincentives for firms to commercialize inventions funded  
          with CIRM money and that without commercial participation,  
          basic stem cell science cannot be developed into treatments  
          for patients.  CHI states that the measure would reverse  
          and impose more stringent requirements than those adopted  
          by the ICOC during several public meetings.  CHI maintains  
          that the provisions of SB 771 would discourage commercial  
          collaboration, technology transfer, and licensing by  
          reducing the rate of return on CIRM-related deals in  
          comparison to other academic-industry transactions.  In  
          particular, CHI states that the Medicaid price requirement  
          could expose manufacturers to rebate liability by driving a  
          new Medicaid best price and that "federal Medicaid price"  
          is not defined in federal statute, making it unclear how  
          the requirement would be applied.  CHI also says that  
          extending pricing discounts to residents whose therapies  
                                            are purchased with "public funds" is ambiguous and could  
          refer to programs and drugs purchased by both state and  
          federal funds.  CHI maintains that the bill's requirement  
          that grantees share licensing revenues with the state could  
          potentially place a grantee who mingles state and federal  
          funding in violation of federal law.




          STAFF ANALYSIS OF SENATE BILL 771 (Kuehl)             Page  
          11


          

          

                              COMMENTS AND QUESTIONS
           
          1.  Federal Medicaid price may not be a workable benchmark  
          for therapies that are not drugs.  Under existing law, the  
          federal Medicaid price for a brand name drug is the lower  
          of the Average Manufacturer's Price (AMP) for the drug  
          (generally the cost at which drug wholesalers acquire the  
          drug) minus 15.1 percent, or the "best price" at which they  
          provide the drugs to any commercial purchaser.  There is no  
          federal Medicaid price for therapies or products that are  
          not prescription drugs, although the bill would require all  
          therapies to be sold at the federal Medicaid price.  A  
          suggested amendment would be to clarify that the federal  
          Medicaid price applies to therapies that are prescription  
          drugs, and to require that therapies that are not  
          prescription drugs be sold to publicly funded programs at  
          the best price they are provided to any other purchaser. 

          2.  Technical changes may be needed to make federal  
          Medicaid price workable for stem cell drugs.  The bill's  
          provision requiring stem cell therapies that are drugs to  
          be sold to publicly funded programs at the federal Medicaid  
          price could inadvertently establish a new "best price" that  
          the manufacturer would then be required under federal law  
          to offer to all states' Medicaid programs.  A suggested  
          amendment would be to clarify that the bill's provision  
          does not require a manufacturer to establish a new best  
          price in order to meet the requirements of the bill.

          Suggested language to address points 1 and 2:
          
          Page 6, lines 25 - 34:

          B) Require every recipient of a grant or loan award for  
          research to grant exclusive licenses involving  
          institute-funded patented inventions relevant to  
          development of therapies, drugs, and diagnostics only to  
          organizations that have plans which the institute
          determines will provide substantial access to the resultant  
          therapies, drugs, and diagnostics to uninsured  
          Californians.  In addition, the licensees shall agree to  
          provide to patients whose therapies, drugs, and diagnostics  
          will be purchased in California




          STAFF ANALYSIS OF SENATE BILL 771 (Kuehl)             Page  
          12


          

          with public funds,  the therapies, drugs, and diagnostics    
          any drugs at the federal Medicaid price, and any therapies  
          or diagnostics that are not drugs at the best price they  
          provide them to any purchaser.  A licensee shall not be  
          required to establish a new best price for any drugs they  
          develop with institute funds in order to comply with this  
          subdivision.

          3.  Suggested technical amendment:
          
          On page 7, lines 8 - 12 of the bill:

          SEC. 2.  The Legislature finds and declares that this act  
          enhances the ability of the California Institute for  
          Regenerative Medicine to further the purposes of the grant  
          and loan programs created by the California Stem Cell  
          Research and Cures Act within the meaning of Section 8 of  
          that act.


                                    POSITIONS  

          Support: California Alliance For Consumer Protection
                 California Nurses Association
                 CALPIRG
                 Senior Action Network
                 Center for Genetics and Society (if amended)


          Oppose:  BIOCOM (unless amended)
                 California Healthcare Institute (CHI) (unless  
                 amended)









                                   -- END --