BILL ANALYSIS                                                                                                                                                                                                    

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          Date of Hearing:   June 17, 2008

                            ASSEMBLY COMMITTEE ON HEALTH
                              Mervyn M. Dymally, Chair
                     SB 1565 (Kuehl) - As Amended:  June 9, 2008

           SENATE VOTE :   40-0
          SUBJECT  :   California Stem Cell Research and Cures Act.

           SUMMARY  :   Requires the intellectual property (IP) standards of  
          the California Institute for Regenerative Medicine's (CIRM)  
          Independent Citizen's Oversight Committee (ICOC) to include a  
          requirement that each grantee and the licensee of the grantee  
          submit a plan for CIRM's approval that will afford uninsured  
          Californians access to any drug that is entirely or partly the  
          result of CIRM-funded research, as specified.  Revises the vote  
          threshold necessary for CIRM funding of certain research  
          proposals.  Requests the Little Hoover Commission (LHC) to study  
          the existing governance structure of the ICOC and CIRM, as  
          specified.  Specifically,  this bill  :   

          1)Requires the IP standards that the ICOC develops to include a  
            requirement that each grantee and licensee submit a plan to  
            CIRM that will afford uninsured Californians access to any  
            drug that is entirely or partly the result of CIRM-funded  

          2)Directs the ICOC to require the plan to be submitted before a  
            drug is placed into commerce and requires CIRM to approve the  
            plan after a public hearing and public comment period.

          3)Requires the plan to require each CIRM grantee and licensee to  
            sell drugs resulting from CIRM-funded research, and that are  
            purchased with public funds, at a price that does not exceed  
            any benchmark price in the California Discount Prescription  
            Drug Program (Cal-Rx).

          4)Provides that this bill does not preclude any public agency  
            from obtaining prices that are lower than those in Cal-Rx, as  

          5)Defines "drug" as any article recognized in the United States  
            Pharmacopeia, or the National Formulary, and any article  
            intended for the diagnosis, cure, mitigation, or prevention of  


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            disease in humans or animals, including therapeutic products,  
            such as blood, blood products, cells, and cell therapies.

          6)Changes the vote threshold necessary for CIRM funding of  
            certain research proposals from two-thirds to a simple  
            majority of a quorum of the members of CIRM's Scientific and  
            Medical Research Funding Working Group.

          7)Requests the LHC to study the governance structure of the  
            California Stem Cell Research and Cures Act (Act), including  
            the membership and relative roles of the ICOC and CIRM.

          8)Requires the LHC, if it conducts the study, to report to the  
            Legislature by July 1, 2009, on the results of the study and  
            recommend ways that the governance structure of ICOC could  
            better ensure public accountability and reduce conflicts of  
            interest, consistent with the purposes of the Act.

           EXISTING LAW  :

          1)Establishes the Act approved by voters as Proposition 71 in  
            November 2004.

          2)Establishes CIRM to award grants, loans or contracts for stem  
            cell research and research facilities.  Establishes the ICOC  
            to oversee operations of CIRM and includes within the  
            functions of the ICOC the responsibility to render final  
            decisions on research standards and grant awards.

          3)Requires CIRM to provide a public annual report disclosing  
            specified information relating to its activities, grants  
            awarded, grants in progress, research accomplishments, and  
            future program directions, including the number and dollar  
            amounts of research and facilities grants; the grantees from  
            the prior year; CIRM's administrative expenses; an assessment  
            of the funding for stem cell research from non-CIRM sources; a  
            summary of research findings; an evaluation of the  
            relationship between CIRM grants and the overall strategy of  
            its research program; and a report on CIRM's strategic  
            research and financial plans. 

          4)Requires the ICOC to establish standards to make all grants  
            and loans subject to intellectual property agreements  
            (agreements).  Requires the agreements to balance the  
            opportunity for the state to benefit from the patents,  


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            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  

          5)Establishes within CIRM three separate scientific and medical  
            working groups relating to research funding, accountability  
            standards, and medical facilities. 

          6)Prohibits certain research proposals from being funded by CIRM  
            except when at least two-thirds of a quorum of the members of  
            the Scientific and Medical Research Funding Working Group  
            recommend to the ICOC that such a proposal is a vital research  

          7)Prohibits any amendment to Proposition 71 by the Legislature  
            unless approved by the voters or accomplished by a bill  
            introduced after the first two full calendar years and  
            approved by a vote of 70% of both houses.

          8)Establishes the LHC, a multi-member 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.

           FISCAL EFFECT  :   According to the Senate Appropriations  
          Committee, this bill would have costs up to $200,000 in fiscal  
          year 2008-09 from Proposition 71 bond proceeds for ICOC  
          staff/regulation costs related to the governance study, based on  
          a similar performance audit of CIRM conducted by the Bureau of  
          State Audits in 2006.

           COMMENTS  :   

           1)PURPOSE OF THIS BILL  .  The author believes that Proposition 71  
            lacks the provisions necessary to ensure that therapies  
            emerging from the state's stem cell research investments are  
            available to uninsured Californians, as well as to programs  
            that serve low-income Californians, at the best available  
            prices.  In order to ensure that the neediest Californians  
            benefit from groundbreaking stem cell research funded by  
            taxpayer dollars, the author contends that statutory  
            provisions are needed to require grantees and licensees to  
            submit a plan to afford uninsured Californians access to new  
            drugs prior to commercialization and require these drugs to be  


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            sold to public programs at the best available prices.   
            Additionally, the author asserts that changing the voting  
            requirements for funding of other stem cell-related research  
            from two-thirds to a simple majority of a quorum of CIRM's  
            working group members reflects growing scientific  
            breakthroughs involving non-embryonic stem cell research and  
            makes certain that the most promising research is funded,  
            regardless of the source of the stem cells.  Lastly, the  
            author asserts that, given the ICOC/CIRM's unique formation as  
            a public entity, the public's investment of $3 billion in bond  
            funds, and the close-knit nature of the scientific community,  
            the ICOC and CIRM warrant a high level of scrutiny by an  
            independent body, such as the LHC, to ensure public trust and  
            confidence and protect the integrity of the ICOC and CIRM from  
            real or perceived conflicts of interest.

           2)PROPOSITION 71  .  In November 2004, California voters approved  
            the Act, which authorizes the state to sell $3 billion in  
            general obligation bonds to provide funding for stem cell  
            research in California.  It establishes CIRM to award loans,  
            grants, and contracts to research facilities and makes CIRM  
            responsible for establishing regulatory standards for stem  
            cell research and stem cell research facilities.  The Act also  
            creates and specifies the composition of the 29-member ICOC to  
            govern CIRM.  The ICOC is required to award all grants, loans  
            and contracts in public meetings and to adopt all governance,  
            scientific, medical, and regulatory standards in public  
            meetings.  CIRM has three separate scientific and medical  
            working groups focused on research funding, accountability  
            standards, and medical facilities.  The Act requires members  
            of the working groups to be subject to the same  
            conflict-of-interest standards that are applicable to members  
            of scientific review committees of the National Institutes of  
            Health (NIH).

           3)IP STANDARDS  .  To date, CIRM has adopted regulations  
            pertaining to IP requirements for nonprofit organizations,  
            such as universities and research institutions, and for  
            for-profit organizations, such as biotechnology companies.   
            Grantee organizations are required to grant exclusive licenses  
            involving CIRM-funded inventions only to nonprofit  
            organizations that agree to have a plan in place at the time  
            of marketing to provide access to resultant therapies and  
            diagnostics for uninsured California patients.  In addition,  
            these licensees must agree to provide drugs to eligible  


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            Californians from resultant therapies at prices negotiated  
            pursuant to Cal-Rx. 

          Additionally, CIRM IP regulations for for-profit grantees  
            require licensees who develop drugs from resultant therapies  
            to furnish those drugs to publicly funded programs in  
            California at one of the following benchmark prices specified  
            in Cal-Rx: the federal Medicaid price; the lowest commercial  
            price; or, the average manufacturer's price minus 15%.  The  
            regulations also require licensees' plans to provide access to  
            therapies and diagnostics for uninsured Californians in  
            accordance with industry standards at the time of  
            commercialization, accounting for the size of the market for  
            the drug and the resources of the licensee.

          At the March 12, 2008, meeting of the ICOC, revised IP draft  
            regulations were issued for grants to for-profit organizations  
            to include language similar to this bill by requiring grantees  
            to submit plans to afford uninsured Californians access to a  
            drug resulting from CIRM-funded research, prior to the time  
            the drug is brought to market, and requiring the plans to be  
            subject to CIRM approval after a public hearing and  
            opportunity for public comment is held.  The proposed  
            revisions also indicate that if Cal-Rx is repealed, benchmark  
            prices must be based on the Cal-Rx benchmark prices on the  
            last day the program is in effect.

           4)CAL-RX  .  Cal-Rx was created pursuant to AB 2911 (Nunez),  
            Chapter 619, Statutes of 2006, to require the Department of  
            Health Care Services (DHCS) to use manufacturer rebates and  
            pharmacy discounts in order to reduce prescription drug prices  
            and improve the quality of health care for eligible  
            Californians.  DHCS is required to consider three different  
            benchmarks in negotiations with drug manufacturers: the lowest  
            price offered to private payers; the Medicaid best price; or,  
            the average manufacturers' price minus 15%.  DHCS reports that  
            the Cal-Rx program has not been implemented yet but proposed  
            funding for the program is contained in the Governor's 2008-09  
            Budget, and, if approved by the Legislature, implementation is  
            targeted for February 2009.  

           5)RESEARCH FUNDING  .  Current federal funding for human embryonic  
            stem cell research is restricted to research involving stem  
            cell lines created prior to 2001.  Current state law, pursuant  
            to Proposition 71, establishes a high priority for CIRM  


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            funding for embryonic stem cell research that cannot or is  
            unlikely to receive timely or sufficient federal funding, such  
            as research using stem cells created after 2001, and prohibits  
            other research categories funded by NIH from being funded by  
            CIRM.  Current law also specifies that CIRM may fund other  
            stem cell-related research proposals if two-thirds of a quorum  
            of the members of its Scientific and Medical Research Funding  
            Working Group recommend to the ICOC that the proposal is vital  
            to advancing medical science.  This bill changes the  
            two-thirds voting threshold to a simple majority.  The author  
            indicates that the change in the voting requirement is  
            intended to make certain that the most promising research is  
            funded, regardless of whether embryonic or non-embryonic stem  
            cells are used.  According to CIRM, the current two-thirds  
            threshold has not prevented it from funding a research  
            proposal to date.     

           6)CONFLICT OF INTEREST ISSUES  .  Recent actions involving ICOC  
            members have underscored the need for strict conflict of  
            interest policies governing CIRM.  Currently 18 of the 29  
            members of the ICOC come from universities, research  
            institutions, and biomedical science companies with a direct  
            or indirect interest in stem cell research.  One ICOC member  
            is currently under investigation by the Fair Political  
            Practices Commission because he may have violated CIRM's  
            conflict of interest rules prohibiting board members from  
            using their official position to influence a funding request  
            from institutions they represent.  The ICOC member sent a  
            letter to CIRM disputing the rejection of a grant application  
            from his institution that was initially approved by the  
            institute.  CIRM intervened before the letter was reviewed by  
            its grant-making committee and acknowledged that it needed to  
            clearly communicate that the conflict rules also apply to the  
            post grant-review process.  In another incident, CIRM  
            disqualified applications from ten potential grantees because  
            of confusion arising from instructions in the grant  
            applications that required letters of support from deans or  
            department chairs of the applicant institutions and CIRM's own  
            conflict of interest policies that prohibit governing board  
            members, many of whom are deans of institutions that seek CIRM  
            funds, from influencing funding requests from the institutions  
            they represent.  Applications from institutions not  
            represented on the ICOC or that had department chairs rather  
            than deans write the support letters were approved while those  
            applications with letters of support written by deans serving  


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            as members of the ICOC were disqualified and ordered to  
            reapply after six months.  In response to these issues, CIRM  
            states that it was the first to recognize and resolve these  
            conflicts and did not fund any affected applications.  The  
            institute insists that it policed itself properly and  
            aggressively even before these incidences became public.   

           7)CONCERNS  .  The University of California (UC) is concerned that  
            any effort to codify in statute IP provisions related to  
            Proposition 71 is premature at this time.  As a major research  
            university engaged in stem cell research and a recipient of  
            Proposition 71 funding, UC points out that CIRM's IP policy  
            was the result of broad consultation with the public and  
            various stakeholders, and carefully balanced the need to  
            foster university-industry partnerships with the important  
            goal of ensuring that scientific advances in stem cell  
            diagnostics and therapies benefit the public.  UC states that  
            CIRM's approach to IP includes novel treatments of IP that  
            have not yet been tested on the state or national level and,  
            therefore, the policy should be given the chance to be tested  
            and the flexibility to be modified if it turns out that it is  
            not adequately serving the public interest before it is  
            codified in statute or significant changes are made.  UC  
            asserts that CIRM should 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 research endeavors.  

          While CIRM does not have an official position on this bill, it  
            is concerned that requiring commercial product pricing to be  
            the lowest among specified benchmarks in Cal-Rx establishes a  
            one-size-fits-all standard that precludes CIRM from exercising  
            any flexibility to negotiate with grantees in order to  
            maximize the number of therapeutic products brought to market.  
             CIRM contends that not all products are equally marketable  
            and notes, for example, that a therapeutic product for an  
            "orphan disease," or one that is relatively rare with a small  
            patient population, is a vastly different economic  
            circumstance than one that treats a large patient population  
            with a chronic disease like diabetes. CIRM states that the  
            provision governing commercial product pricing in this bill  
            could have the unintended consequence of preventing  
            therapeutic products resulting from CIRM-funded research from  
            reaching the market altogether.   


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           8)SUPPORT  .  Consumer Watchdog (formerly the Foundation for  
            Taxpayer and Consumer Rights) states in support that this bill  
            will help ensure that the taxpayers of California 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.  California Common Cause states  
            that this bill is a good first step towards promoting proper  
            stewardship of the public's investment in CIRM and will help  
            to provide more transparency and accountability of the  
            institute.  Health Access points out that Californians saw  
            great promise when Proposition 71 was adopted that they would  
            have access to drugs and products that could cure or slow the  
            progression of numerous diseases and conditions and,  
            therefore, they should have access to this promise whether  
            they are insured or uninsured.  The California Nurses  
            Association adds that California residents should be the  
            primary beneficiaries of the research and therapies developed  
            through the expenditure of state funds.  The American  
            Association of University Women California asserts that is  
            both good and humane public policy to ensure that uninsured  
            citizens have access to important drugs and medications  
            developed as a result of stem cell research.  The California  
            Alliance for Retired Americans writes that many seniors are  
            excited about the groundbreaking work that can be done by CIRM  
            but, as underwriters of much of the research, taxpayers must  
            be assured access to the therapies and drugs and know that  
            monies are being used in an equitable and just fashion.  The  
            Greenlining Institute points out that while the four-year  
            history of the governing board of CIRM has been marked by an  
            excited promise, it has likewise been marred by lack of  
            accountability and this bill has the potential to improve the  
            governance structure of CIRM using recommendations from the  
            LHC study, including possible recommendations to better keep  
            CIRM accountable to California's diverse communities.  Lastly,  
            the Pro-Choice Alliance for Responsible Research notes that  
            too often public funds are used to develop medical treatments  
            that are then unaffordable to the most vulnerable people in  
            our society and this bill ensures that every taxpayer in  
            California paying for research funding by CIRM has access to  
            any medical care that is developed.

           9)OPPOSITION  .  The California Healthcare Institute (CHI), which  
            represents life science companies and academic research  
            institutions, opposes this bill because it believes it would  
            discourage commercial collaboration, technology transfer, and  


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            licensing by a) reducing the rate of return on CIRM-related  
            deals in comparison to other academic-industry transactions,  
            and b) increasing investors' financial risk by imposing state  
            price regulation on products resulting from CIRM-funded  
            research.  CHI adds that considering biotechnology's long  
            product lead times, future price regulation makes it all the  
            more difficult to project return on investment.  Furthermore,  
            CHI notes that CIRM has just begun to issue research grants  
            and it will likely be several years before any discoveries  
            from this research move to the commercialization stage;  
            therefore, the ICOC may not know for some time whether the IP  
            policies it has adopted are effective and will need  
            flexibility to change those policies as the situation  

           10)PREVIOUS LEGISLATION  .  

             a)   SB 401 (Ortiz) of 2006 would have modified the public  
               hearing and conflict-of-interest procedures of members of  
               the ICOC, the Citizen's Financial Accountability Oversight  
               Committee and the advisory and working group established to  
               assist these bodies and would have prescribed minimum  
               intellectual property licensing conditions applicable to  
               ICOC standards for research and facilities grants and  
               loans.  SB 401 was held in the Assembly Appropriations  

             b)   SB 340 (Battin) of 2005 would have required all revenues  
               derived from patents, royalties, and licenses paid to the  
               state as a result of intellectual property agreements  
               entered into pursuant to Proposition 71 to be deposited  
               into the state General Fund.  SB 340 was scheduled for a  
               hearing in the Assembly Health Committee but the hearing  
               was cancelled at the request of the author.

             c)   SB 18 (Ortiz) of 2005 would have required the State  
               Auditor to conduct a performance audit of the ICOC and  
               CIRM.  SB 18 was vetoed by Governor Schwarzenegger.  In his  
               veto message, the Governor indicated that SB 18 "is in  
               direct conflict with the text of Proposition 71 as approved  
               by the voters." 

             d)   SCA 13 (Ortiz) of 2005 would have modified provisions of  
               Proposition 71 relating to reporting of economic interests,  
               conflict-of-interest standards, open meetings and public  


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               record laws.  SCA 13 was placed on the inactive file at the  
               request of the author.

             e)   AB 2911 (Nunez), Chapter 619, Statutes of 2006,  
               establishes Cal-Rx within DHCS and requires DHCS to attempt  
               to negotiate discount prices with manufacturers of  
               single-source prescription drugs that are equal to, or  
               below, one of the following benchmark prices: 85% of the  
               average manufacturer price; the lowest price provided to  
               any non-public entity in California by a manufacturer, as  
               specified; or, the Medicaid best price.

           11)POLICY QUESTION  .  Given that CIRM is currently circulating  
            draft IP regulations for for-profit grantees that have been  
            revised to incorporate language that is similar to this bill,  
            is it premature to codify similar language in this bill?   

           12)DOUBLE-REFERRAL  .  This bill is double-referred.  Should it  
            pass out of this committee, it will be referred to the  
            Assembly Judiciary Committee.


          American Association of University Women California
          American Federation of State, County and Municipal Employees,  
          California Alliance for Retired Americans
          California Common Cause
          California Faculty Association
          California Nurses Association
          California State Controller John Chiang
          Congress of California Seniors
          Foundation for Taxpayer and Consumer Rights
          Gray Panthers
          Greenlining Institute
          Health Access California
          Pro-Choice Alliance for Responsible Research
          California Healthcare Institute
          One individual


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           Analysis Prepared by  :    Cassie Rafanan / HEALTH / (916)