BILL ANALYSIS Senate Appropriations Committee Fiscal Summary Senator Tom Torlakson, Chairman 771 (Kuehl) Hearing Date: 5/21/07 Amended: 5/1/07 Consultant: John Miller Policy Vote: Judiciary 5 - 0 _________________________________________________________________ ____ BILL SUMMARY: SB 771 would revise the California Stem Cell Research and Cures Act to specify the program's intellectual property rights agreements require all grant and loan recipients to provide the state with 25 percent of licensing revenues, that therapies resulting from public research be available to uninsured individuals and that royalty payments be made to the state from commercialized products. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2007-08 2008-09 2009-10 Fund Licensing revenue undetermined but potentially substantial new revenues GF Royalty revenue Treatment discount _________________________________________________________________ ____ STAFF COMMENTS: This bill may meet the criteria for Suspense. In 2004 voters approved the California Stem Cell Research and Cures Act, Proposition 71, which authorized the issuance of $3 billion in general obligation bonds over a ten year period to fund stem cell research. One of several goals of the proposition was to provide an opportunity for the state to benefit from royalties and patents resulting from publicly funded research. The California Institute for Regenerative Medicine, which manages grant making for the program, promulgated intellectual property regulations for both non-profit and commercial entities. The proposed commercial regulations require that 17 percent of licensing fees in excess of $500,000 be paid to the state, that three times the grant amount be paid for patented products supported by CIRM, and that the state be entitled to 1% of all revenues in excess of $500,000 for the life of a patent if CIRM provided support over $5 million. This bill would, instead, require the CIRM regulations provide the state 25% of net licensing revenues resulting from supported research; grant exclusive licenses to firms intending to provide access to resulting therapies to uninsured Californians; and make royalty payments equal to 2 to 5% of revenues over the life of a product. Based on a direct comparison of state revenues generated under SB 771 and under the CIRM regulations, SB 771 would produce more revenue than the CIRM regulations. In a ten year projection of a sample project modeled under three scenarios (a licensed invention, a low success royalty, and a high success royalty) with an $8 billion public investment, SB 771 would have produced $183.5 million compared to $127.7 million under the CIRM proposed regulations. The California Institute for Regenerative Medicine believes that the sample comparison above is misleading, that financial market forces, the interests of private research SB 771 (Kuehl) Page 2 companies, and the unique nature of cellular therapies will produce disincentives which will substantially reduce the projected returns of 771. BIOCOM, an association of biomedical research companies, notes that SB 771's structure does not allow flexibility in assessing compound products or products that involve multiple patented technologies (e.g. systems with software, systems with software and reagents and/or drug device combinations). Researchers noted that as new capital becomes available from private investors, other states and, potentially, from the federal government, research with the greatest likelihood of successful commercialization will opt for lower cost financing. California's public funding, if expensive relative to these other sources, would be used by companies with lower prospects of financial success, such as those companies in the fiscal "valley of death" between a promising concept and private funding. These higher risk companies have a lower likelihood of profit and thus will return less in revenue to the state than would more successful companies assessed at a lower rate. Industry representatives also felt the requirements of SB 771 requiring below market access to any CIRM supported product or medicine would discourage forward integration and development of biotech. The Committee reviewed four economic studies which estimated the potential benefits and royalty/licensing revenues which could result from Proposition 71. The studies projected very diverse results, but all the researchers agreed on several points: Investment in stem cell projects had immense scientific promise; that capitalization or a return on investments was at least a decade in the future; that the greatest financial return to the state would be from improved therapies and reduced health care costs; and that the potential economic and tax benefits to the state from stem cell investment would annually reach several billion dollars. The four studies projected royalty/revenues to the state of between $160 million and $1.1 billion or a return of between .6% and 4.5%. By comparison, licensing income averaged about 2.5 % of research expenditures on an annual basis among universities, but licensing in hospitals and research institutes was 7.9%. Universities and nonprofit companies in California spent $6.9 billion on R&D in 2003. CIRM's investment of $300 million annually represents about five percent of annual R&D expenditures at California basic research institutions.