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.