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
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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---
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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
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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.
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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
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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
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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
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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
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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
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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
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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.
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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
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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)
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