BILL ANALYSIS SB 1565 Page 1 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 research. 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 specified. 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 SB 1565 Page 2 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, SB 1565 Page 3 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 agreements. 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 opportunity. 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 SB 1565 Page 4 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 SB 1565 Page 5 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 SB 1565 Page 6 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 SB 1565 Page 7 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. SB 1565 Page 8 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 SB 1565 Page 9 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 warrants. 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 Committee. 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 SB 1565 Page 10 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. REGISTERED SUPPORT / OPPOSITION : Support American Association of University Women California American Federation of State, County and Municipal Employees, AFL-CIO 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 Opposition California Healthcare Institute One individual SB 1565 Page 11 Analysis Prepared by : Cassie Rafanan / HEALTH / (916) 319-2097