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 diagnosticsany 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 --