BILL ANALYSIS                                                                                                                                                                                                    






                                 SENATE HEALTH
                               COMMITTEE ANALYSIS
                         Senator Sheila J. Kuehl, Chair


          BILL NO:       SB 1565                                      
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          AUTHOR:        Kuehl & Runner                               
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          AMENDED:       As introduced                               
          HEARING DATE:  April 2, 2008                                
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          REFERRAL:      Health and Judiciary                         
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          FISCAL:        Appropriations                               
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          CONSULTANT:                                                 
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          Park/sh                                                    
                                        

                                     SUBJECT
                                         
                  California Stem Cell Research and Cures Act

                                     SUMMARY  


          Requires the Independent Citizens Oversight Committee  
          (ICOC) of the California Institute for Regenerative  
          Medicine (CIRM) to include in its intellectual property  
          standards a requirement that each grantee and licensee  
          submit for CIRM's approval a plan that will afford  
          uninsured Californians access to any drug that is, in whole  
          or in part, the result of research funded by the CIRM.  
          Requires these plans to include a requirement that grantees  
          and licensees sell drugs that result from CIRM funding and  
          are purchased with public funds at a price that does not  
          exceed any benchmark price in the California Discount  
          Prescription Drug Program. Requires the Little Hoover  
          Commission to conduct a study of the governance structure  
          of the California Stem Cell Research and Cures Act by July  
          2, 2009. 

                             CHANGES TO EXISTING LAW  

                                                         Continued---



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          Existing law:
          The California Stem Cell Research and Cures Act (Act),  
          enacted by voters as Proposition 71 in November, 2004,  
          establishes the CIRM to make grants and loans for stem cell  
          research and  research facilities.  Existing law also  
          establishes the 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.
           
           Existing law establishes the California Discount  
          Prescription Drug Program (CalRx) within the Department of  
          Health Care Services, and requires the department to  
          attempt to negotiate, with each drug manufacturer,  
          discounts to offer single-source prescription drugs under  
          the program at a volume weighted average discount that is  
          equal to or below any one of the following benchmark  
          prices: (1) eighty-five percent of the average manufacturer  
          price for a drug, as published by the Centers for Medicare  
          and Medicaid Services; (2) the lowest price provided to any  
          nonpublic entity in the state by a manufacturer; or (3) the  
          Medicaid best price, to the extent that this price exists  
          under federal law. 

          Existing law establishes the Milton Marks "Little Hoover"  
          Commission on California State Government Organization and  




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          Economy, a multimember body appointed by the Governor and  
          the Legislature with various duties that include making  
          recommendations to the Governor and the Legislature to  
          promote efficiency in government operations. 
          
          This bill:
          This bill would require intellectual property standards  
          developed by the ICOC to include a requirement that each  
          grantee and licensee submit for CIRM's approval a plan that  
          will afford uninsured Californians access to any drug that  
          is, in whole or in part, the result of research funded by  
          the CIRM, and would require this submission prior to the  
          drug's commercialization.  This bill would also require  
          that the aforementioned plans require the grantees and  
          licensees to sell the resulting drugs that are purchased  
          with public funds at a price that does not exceed any  
          benchmark price in CalRx as it exists on January 1, 2008. 

          The bill would not preclude any public agency from  
          obtaining prices that are lower than the benchmark prices  
          described in CalRx.  The bill would also define "drug" as  
          any article recognized in the United States Pharmacopeia or  
          the National Formulary, or any article intended for the  
          diagnosis, cure, mitigation, or prevention of disease in  
          humans or animals, or any article intended for use as a  
          component of diagnosis, cure mitigation or prevention of  
          disease in humans or animals, and inclusive of therapeutic  
          products, including, but not limited to, blood, blood  
          products, cells, and cell therapies.

          This bill would require the Little Hoover Commission to  
          conduct a study of the governance structure of the  
          California Stem Cell Research and Cures Act, and submit, by  
          July 2, 2009, a report to the Legislature on the results of  
          the study and recommendations of ways the governance  
          structure of the ICOC could better ensure public  
          accountability and reduce conflicts of interest, consistent  
          with the purposes of Proposition 71. 

                                         


                                 FISCAL IMPACT  

          Unknown.




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                            BACKGROUND AND DISCUSSION  

          Authors' statement
          The authors state that, although Californians were told  
          that therapies emerging from the state's research  
          investments would be available to uninsured Californians,  
          as well as to programs that serve low-income Californians,  
          at the best available prices, Proposition 71 lacks the  
          provisions necessary to ensure such a result. The authors  
          believe that in order to ensure that the neediest  
          Californians benefit from groundbreaking stem cell research  
          funded by taxpayer dollars, such provisions should be  
          placed in statute.  

          The authors believe that, requiring grantees and licensees  
          to submit a plan that will afford uninsured Californians  
          access to new drugs prior to commercialization, and  
          requiring these drugs to be sold to public programs at the  
          best available prices reflect the promise of Prop 71 and  
          the public's investment into stem cell research.  

           The authors also state that, given CIRM/ICOC's unique  
          formation as a public entity, the level of public  
          investment--$3 billion in bond funds that will amount to a  
          General Fund expenditure of $6 billion (including  
          interest), and the close-knit nature of the scientific  
          community, CIRM and the ICOC should be thoroughly  
          scrutinized by an independent body to ensure the highest  
          level of public trust and confidence. The authors believe  
          that the Little Hoover Commission is the best entity to  
          undertake a study of the existing governance structure and  
          that such a study would help maximize CIRM and the ICOC's  
          ability to achieve the goals of Prop 71 and protect the  
          integrity of the institution from real or perceived  
          conflicts of interest.  
          
          Intellectual property standards
          Stem cell research projects that 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,  




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          themselves, to develop stem cell products and research  
          tools. 

          The CIRM has promulgated intellectual property regulations  
          covering its grants to non-profit grantees, such as  
          universities and research institutions.  The regulations  
          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 CalRx,  
          established by AB 2911 (Nunez - Chapter 619, Statutes of  
          2006), to eligible persons under that program.  

          The ICOC's regulations for grants to for-profit entities  
          additionally require licensees who develop stem cell  
          therapies that are drugs to provide those drugs to publicly  
          funded programs in California at one of the specific  
          benchmark prices required in CalRx-the federal Medicaid  
          price, the lowest commercial price, or the Average  
          Manufacturer's Price less 15 percent.  The regulations also  
          require licensees' plans to provide access to therapies and  
          diagnostics for uninsured Californians to be consistent  
          with "industry standards" (an undefined term). 

          On March 12, 2008, the ICOC issued draft revised  
          regulations for grants to for-profit entities to include a  
          requirement that all plans must provide access for  
          uninsured Californians, must be submitted prior to  
          commercialization and must receive CIRM approval, similar  
          to the language in SB 1565.  The proposed revision also  
          states that, if CalRx is repealed, benchmark prices should  
          refer to those benchmark prices described in CalRx on the  
          last day it is in effect.
           
           Grant awards and recent conflicts of interest
          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. Although the  
          constitutionality of the initiative had been challenged  
          initially, in May 2007, the California Supreme Court  
          declined to review a lower court ruling that upheld the  
          constitutionality of the initiative, opening the door to  
          the issuance of bonds and  disbursement of those bond  




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          funds.

          According to its 2007 annual report, CIRM awarded almost  
          156 grants worth $260 million. This included "funding of  
          over $120 million for 103 research grants?$50 million in  
          funding was approved for shared laboratory facilities and  
          for training courses in stem cell biology, and $54 million  
          was awarded to new investigators launching their careers in  
          stem cell science." Initial funding was made possible  
          through a $150 million loan authorized by Governor  
          Schwarzenegger, and $45 million loaned from private  
          donors/philanthropic organizations. Since then, an  
          additional $262 million in funds for facility expansion and  
          construction, and $25 million for research to develop new  
          stem cell lines has been announced. 

          Against this backdrop, in December 2007, ten promising  
          grant applications were disqualified because governing  
          board members from the institutions making the applications  
          wrote letters of recommendation in support of the grants,  
          in violation of conflict of interest rules that apply to  
          governing board members.  One member of the governing body  
          is currently being investigated by the FPPC for a potential  
          conflict of interest violation that occurred when he  
          intervened to appeal the rejection of an application from  
          his research institution.  

           Since then, two major newspapers (Los Angeles Times and  
          Sacramento Bee) have editorialized on the incidents and  
          have urged the Legislature to address these problems by  
          reconfiguring the ICOC, reducing the number of appointees  
          who come from organizations that have direct interests in  
          stem cell research grants.  Currently, 18 of 29 members of  
          the ICOC come from universities, research institutions, and  
          life science companies that have direct or indirect  
          interests in stem cell research.  
           
           Outgoing CIRM President Richard Murphy addressed these  
          incidents in a February 14, 2008, letter to the author:

               The conflict of interest cases that involved ICOC  
               members arose innocently and inadvertently and reflect  
               the growing pains of a new organization, not  
               intentional misdeeds. In one case, an ICOC member  
               contacted CIRM to question a technical decision that  




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               had resulted in the turning down of a grant to his  
               organization, which was a course of action suggested  
               to him innocently by Bob Klein [chairman of the ICOC],  
               who was himself unaware of the details of the  
               technical issue. In the other cases, four Deans of  
               Medical Schools and one institute president, all on  
               the ICOC, signed letters of support for new  
               investigator applicants to CIRM. Singing [sic] support  
               letters is a normal part of their jobs and also  
               appeared to be permitted by ICOC's own conflict of  
               interest policies, which, only later, we realized  
               conflicted with State Law 1090 [sic]. CIRM was the  
               first to recognize and resolve these conflicts, and no  
               grants affected by the conflicts were funded. In  
               short, CIRM policed itself aggressively and  
               appropriately, even before these issues became public.
               
          Little Hoover Commission ("Commission")
          An independent state oversight agency established in 1962,  
          the Commission's role differs in three distinct ways from  
          other state and private-sector bodies that analyze state  
          programs. Unlike fiscal or performance audits, the  
          Commission's studies look beyond whether programs comply  
          with existing requirements, instead exploring how programs  
          could and should function in today's world.  The Commission  
          produces reports that serve as a factual basis for crafting  
          effective reform legislation and follows through with  
          legislation or administrative changes to implement its  
          recommendations. In addition to the public hearings the  
          Commission holds to develop findings and recommendations,   
          hearings are held and progress reports are issued in the  
          years following the initial report until the Commission's  
          recommendations have been enacted or its concerns have been  
          addressed. 
          
          Prior legislation
          SB 771 (Kuehl and Runner) of 2007 would have required stem  
          cell research grant or loan recipients to grant exclusive  
          licenses only to organizations that have presented plans  
          that CIRM determines will provide substantial access to  
          resulting therapies, drugs, and diagnostics for uninsured  
          Californians, and provide the therapies, drugs, and  
          diagnostics to publicly funded programs in California at  
          the federal Medicaid price.  The bill would have also  
          required recipients of research grants or loans to agree to  




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          make royalty payments to the state, as specified.  These  
          provisions were amended out of the bill. 

          SB 401 (Ortiz and Runner) of 2005 - 06  would have made  
          changes to the public meeting, public record, grant and  
          loan licensing conditions, and conflict-of-interest  
          provisions of Proposition 71.  The bill 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  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.  The bill 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.

          AB 2911 (Nunez), Chapter 619, Statutes of 2006, establishes  
          the California Discount Prescription Drug Program (CalRx)  
          within the Department of Health Care Services, and requires  
          DHCS to attempt to negotiate, with each drug manufacturer,  
          discounts to offer single-source prescription drugs under  
          the program at a volume weighted average discount that is  
          equal to or below any one of the following benchmark  
          prices: (1) eighty-five percent of the average manufacturer  
          price for a drug, as published by the Centers for Medicare  
          and Medicaid Services; (2) the lowest price provided to any  
          nonpublic entity in the state by a manufacturer; or (3) the  
          Medicaid best price, to the extent that this price exists  
          under federal law. 

          Arguments in support
          The Foundation for Taxpayer and Consumer Rights states that  




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          this measure will help ensure that the taxpayers of  
          California, who are paying $6 billion for stem cell  
          research, will have affordable access to the fruits of the  
          research they are funding, and will help make CIRM and the  
          ICOC more responsive and accountable to the public. The  
          California Nurses Association writes that California  
          residents should be the primary beneficiaries of the  
          research and therapies developed through the expenditure of  
          state funds. 

          The Center for Genetics and Society adds that this bill  
          takes a much-needed first step to reforming the governing  
          structure of the CIRM, which under the current statute is  
          inherently conflicted.  The Pro-Choice Alliance for  
          Responsible Research points out that at a recent ICOC  
          meeting, all but nine members of the board had to recuse  
          themselves because of conflicts of interest and believes  
          that structure does not serve the people of California  
          well.  

          Additionally, the Alliance states that too often public  
          funds are used to develop medical treatments that are then  
          unaffordable to the most vulnerable people in our society.  
          The alliance believes that since every taxpayer in  
          California is paying for research funding by CIRM, every  
          taxpayer should be able to access any medical care that is  
          developed.

          The Greenlining Institute (GI) writes that while the  
          four-year history of the governing board of CIRM has been  
          marked by an exciting promise, it has likewise been marred  
          by a lack of accountability. GI highlights goals and issues  
          identified by a CIRM-hosted focus group on diversity in  
          August 2006, which have since received little attention. GI  
          states that at a year when the state's budget deficit  
          amounts to over $15 billion, the state cannot afford any  
          inappropriate use of taxpayer dollars. 
          
          Concerns
          The University of California (UC) writes that CIRM's IP  
          [intellectual property] policy should be given the chance  
          to be tested and the flexibility to be modified if it turns  
          out that they are not adequately serving the public  
          interest before either codifying it in statute or making  
          significant changes. UC points out that CIRM's IP policy  




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          was the result of broad consultation with the public and  
          various stakeholders, and carefully balanced the need to  
          foster university-industry partnership with the important  
          goal of ensuring public benefit. UC believes that, while  
          the bill similarly takes both goals into account, codifying  
          these new or other groundbreaking approaches into statute  
          at this time is premature and potentially hazardous to the  
          important goal of ensuring that state-of-the-art  
          technologies are available to the public. UC asserts that  
          it is critical CIRM be permitted to establish a track  
          record to assure prospective industry partners that CIRM's  
          policies support commercialization of products and  
          encourage success in these risky endeavors.

                                     COMMENTS
           
             1.   Bill codifies and clarifies access requirements for  
               grantees. Since Prop 71 was enacted, CIRM's  
               intellectual property regulations have evolved over  
               time. The CIRM has somewhat different requirement for  
               grants to non-profits grantees versus for-profit  
               grantees with regard to access to new drugs and  
               therapies that result from the research. The bill  
               would codify access requirements for both nonprofit  
               and for-profit and clarify the requirements of Prop 71  
               as they apply to access requirements.

             2.   Suggested technical amendments:

               -      Page 3, line 22, strike "to"

               -      Page 3, lines 33-34, change "California Council  
                 for Regenerative Medicine" to " California Institute  
                 for Regenerative Medicine"

               -      Page 3, line 35, change date from July 2, 2009,  
                 to July 1, 2009.



                                    POSITIONS  

          Support:  American Federation of State, County and  
          Municipal Employees (AFSCME)
                 California Alliance for Retired Americans




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                 California Nurses Association
                 Center for Genetics and Society
                 Foundation for Taxpayer and Consumer Rights
                 Gray Panthers
                 Greenlining Institute
                 Pro-Choice Alliance for Responsible Research

          Concerns:  University of California






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