BILL ANALYSIS SENATE HEALTH COMMITTEE ANALYSIS Senator Sheila J. Kuehl, Chair BILL NO: SB 1565 S AUTHOR: Kuehl & Runner B AMENDED: As introduced HEARING DATE: April 2, 2008 1 REFERRAL: Health and Judiciary 5 FISCAL: Appropriations 6 CONSULTANT: 5 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--- STAFF ANALYSIS OF SENATE BILL 1565 (Kuehl and Runner) Page 2 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 STAFF ANALYSIS OF SENATE BILL 1565 (Kuehl and Runner) Page 3 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. STAFF ANALYSIS OF SENATE BILL 1565 (Kuehl and Runner) Page 4 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, STAFF ANALYSIS OF SENATE BILL 1565 (Kuehl and Runner) Page 5 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 STAFF ANALYSIS OF SENATE BILL 1565 (Kuehl and Runner) Page 6 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 STAFF ANALYSIS OF SENATE BILL 1565 (Kuehl and Runner) Page 7 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 STAFF ANALYSIS OF SENATE BILL 1565 (Kuehl and Runner) Page 8 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 STAFF ANALYSIS OF SENATE BILL 1565 (Kuehl and Runner) Page 9 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 STAFF ANALYSIS OF SENATE BILL 1565 (Kuehl and Runner) Page 10 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 STAFF ANALYSIS OF SENATE BILL 1565 (Kuehl and Runner) Page 11 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 -- END --