BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: SB 1064
S
AUTHOR: Alquist
B
AMENDED: April 12, 2010
HEARING DATE: April 14, 2010
1
CONSULTANT:
0
Chan-Sawin
6 4
SUBJECT
California Stem Cell Research and Cures Act
SUMMARY
Makes changes to the terms of the chair and vice-chair of
the Independent Citizens Oversight Committee (ICOC) of the
California Institute for Regenerative Medicine (CIRM), as
specified. Clarifies the roles and responsibilities of the
ICOC chair and CIRM president. Eliminates the 50-employee
limit for the institute and the 15-scientist limit on peer
review. Requires CIRM to establish a succession plan
addressing changes in leadership, and a transition plan
addressing the expiration of current bond funding, as
specified. Requires annual performance audits of CIRM and
ICOC, as specified. Codifies existing CIRM regulations on
intellectual property (IP) agreements requiring grantees to
submit plans to provide low-income Californians access to
drugs that are entirely or partly a result of
CIRM-supported research. Codifies existing IP regulations
requiring grantees to provide drugs to state and local
government-funded programs at one of the three benchmark
prices in the California Discount Prescription Drug
Program, as specified. Requires all revenues received from
the IP agreements by CIRM to be deposited in the state
General Fund.
CHANGES TO EXISTING LAW
Continued---
STAFF ANALYSIS OF SENATE BILL SB 1064 (Alquist)Page 2
Existing law:
Proposition 71: The California Stem Cell Research and
Cures Act
In November 2004, California voters passed Proposition 71,
which enacted the California Stem Cell Research and Cures
Act (the Act), establishing CIRM to make grants and loans
for stem cell research and research facilities. Existing
law authorizes the sale of $3 billion in general obligation
bonds over ten years for these purposes. Existing law
provides that the Legislature may amend the non-bond
statutory provisions of the Act, to enhance the ability of
CIRM to further their purposes of providing grant and loan
programs, with a 70 percent vote of each house and
compliance with specified procedural requirements.
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). The Act directs CIRM to give
priority to research that has the greatest potential for
therapies and cures and for research that cannot or is
unlikely to receive timely or sufficient federal funding.
The institute is responsible for supporting all stages of
the process of developing cures and establishing
appropriate regulatory standards and oversight bodies for
research and facilities development.
Governance of the California Institute for Regenerative
Medicine
The Act also creates and specifies the composition of the
29-member ICOC, a separate, independent governing body
vested with the full power, authority and jurisdiction over
CIRM. Existing law specifies the appointment process for
ICOC, including its chair and vice chair, and provides that
the chair and vice chair serve six-year terms. Existing
law defines the duties of the ICOC chair and the CIRM
president.
Public and Financial Accountability Standards
Among other things, existing law requires CIRM to
commission an annual independent financial audit. To
provide additional oversight, existing law also establishes
the Citizen's Financial Accountability and Oversight
STAFF ANALYSIS OF SENATE BILL SB 1064 (Alquist)Page 3
Committee (CFAOC), chaired by the Controller, to annually
review the financial practices and performance of CIRM,
including the annually commissioned independent financial
audit. Existing law requires ICOC to award all grants,
loans and contracts in public meetings and to adopt all
governance, scientific, medical, and regulatory standards
in public meetings.
Intellectual Property and Revenues Paid to the State of
California
Existing law requires 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.
Operations of the California Institute for Regenerative
Medicine
Existing law, among other things, limits the total number
of authorized CIRM employees to 50. Existing law specifies
that grants and loan applications are processed and scored
by the 15-scientist members of the Scientific and Medical
Research Funding Working Group.
This bill:
Governance of the California Institute for Regenerative
Medicine
This bill reduces the terms of the chair and vice-chair of
the ICOC to four-year terms, and requires the terms to be
staggered. This bill specifies that the chair and vice
chair shall be chosen from and elected by the ICOC board,
and removes the requirement for constitutional officers to
nominate candidates. The bill clarifies the roles and
responsibilities of the ICOC chair and CIRM president,
specifying that the chair's role is to provide leadership
to ICOC and does not include tasks associated with the
day-to-day management of the institute, which fall under
the purview of the CIRM president.
This bill requires CIRM to establish, under the guidance of
ICOC: 1) a succession plan to address changes in leadership
in CIRM and ICOC as specified; and, 2) a transition plan to
address the expiration of current bond funding, and to
STAFF ANALYSIS OF SENATE BILL SB 1064 (Alquist)Page 4
submit that plan to the Governor, the Controller and the
Legislature by January 31, 2012.
Public and Financial Accountability Standards
The bill specifies that CIRM shall annually commission an
independent financial and performance audit by a certified
independent auditing firm, as specified. The bill also
requires the CFAOC to commission a performance audit of
ICOC's activities from a certified independent auditing
firm, as specified. The bill further specifies that audits
will give due deference to scientific judgments, and
directs performance audits towards operational policies and
procedures related the issuance of contracts, grants and
loans, and the protection or treatment of IP rights.
The bill codifies the requirement that all public meeting
minutes include a summary and disclosure of vote tallies
and recusals, and requires ICOC to amend all past minutes
to include this summary.
Intellectual Property and Revenues Paid to the State of
California
This bill codifies existing CIRM regulations regarding IP
standards that require grantees to submit plans to provide
low-income Californians access to drugs that are entirely
or partly a result of CIRM-supported research. The bill
would require these plans be submitted to CIRM 180 days
before commercialization. This bill also codifies existing
IP regulations that require grantees to provide drugs to
state and local government-funded programs at one of the
three benchmark prices in the California Discount
Prescription Drug Program, except as specified. The bill
further requires all revenues received from the
intellectual property agreements by CIRM to be deposited in
the state General Fund.
Operations of the California Institute for Regenerative
Medicine
The bill eliminates the 50-employee cap for CIRM. This
bill also eliminates the 15-scientist limit on the peer
review process, and requires that all grant applications
received shall be sent to peer review by the Scientific and
Medical Research Funding Working Group prior to any other
process, unless the process is only to determine
completeness of the application or to ensure that all
criteria for the grant program is met. The bill also
STAFF ANALYSIS OF SENATE BILL SB 1064 (Alquist)Page 5
requires individuals involved in such a pre-application
review process to meet the same accountability standards as
the Scientific and Medical Research Funding Working Group,
as established in the Act.
This bill also makes other clarifying and technical
changes.
FISCAL IMPACT
This bill has not been analyzed by a fiscal committee.
BACKGROUND AND DISCUSSION
According to the author, SB 1064 will clarify the processes
by which CIRM and ICOC will ensure transparency,
appropriate oversight, and the way that the state and
Californians benefit from the money they invested.
The author states that, while stem cell research is an
important and laudable goal, concerns about transparency,
accountability and oversight raised by the public, the
independent Citizen's Financial Accountability Oversight
Committee, the Little Hoover Commission, and the State
Controller detract from CIRM's ability to provide grants
and loans in the most efficient way. These concerns divert
resources and attention from CIRM's ability to maximize
voter's investment in stem cell sciences. In 2009 alone,
CIRM spent $1.5 million in external contracts for legal
services, lobbying, public relations and communications
costs to improve its public image, which is a duplication
of existing internal resources. Given that the debt from
the bonds is serviced from the General Fund, concern about
CIRM's lack of transparency and accountability gains
greater significance during these challenging fiscal times.
By addressing many of these public concerns, SB 1064
enhances CIRM's ability to make grants and loans, and the
removal of such barriers frees up resources that were
previously diverted from the grant and loan programs.
The author also states that, given CIRM and 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 between the scientific
community, CIRM, and ICOC, it should be thoroughly
scrutinized by an independent body to ensure the highest
STAFF ANALYSIS OF SENATE BILL SB 1064 (Alquist)Page 6
level of public trust and confidence.
In addition, the author states that Proposition 71 was
intended to both directly and indirectly benefit
Californians and the state. Without clarification, it is
unclear how that will be achieved permanently. Currently,
there is no mechanism that would allow revenues generated
to go back to the state permanently. Nor is there a
guarantee that a treatment developed with Prop 71 funds
will be affordable to low-income or uninsured Californians.
Existing law simply directs CIRM to develop intellectual
property standards to address this need. The author
believes that codifying the requirement for IP agreements
to contain such provisions in statute ensures that the
neediest Californians benefit from groundbreaking stem cell
research funded by taxpayer dollars.
Little Hoover Commission Report
In 2008, Senators Sheila Kuehl and George Runner asked the
commission to study CIRM and recommend ways to strengthen
its governance structure, improve accountability, and
reduce conflict of interest. In response, the Little
Hoover Commission (LHC) issued a report in June 2009.
Unlike fiscal or performance audits, the LHC reports look
beyond whether programs comply with existing requirements,
and instead explore how programs could and should function
more efficiently. The LHC report highlighted management
shortcomings and legislatives obstacles to CIRM's success.
In the 2009 report, the LHC found that CIRM's governance
structure is not adequate to protect taxpayers' interests
or serve its own ambitious goals, and urged the Legislature
to reform CIRM's governance structure to ensure that it can
deliver on its mission of developing cures for the benefit
of all, as well as provide transparency and accountability
for California's taxpayers who will be paying off the
bonds. The report also found that ICOC includes
representatives from institutions that have benefited from
grants the committee approved. This structure, along with
overly long terms and the inability to nominate its own
leaders or hold them accountable, fuels concerns that the
committee never can be entirely free of
conflict-of-interest or self-dealing, notwithstanding a
court ruling that establishes the legality of such a
structure. Furthermore, the report states that as long as
the ICOC board remains in its present form, its structure
STAFF ANALYSIS OF SENATE BILL SB 1064 (Alquist)Page 7
will draw scrutiny, diverting CIRM resources.
To enhance CIRM's ability to fulfill its mission, the
report made a number of recommendations, many which are in
SB 1064, including:
Reducing ICOC terms to four years for the chair and
vice-chair.
Realigning the roles of the chair and the president
to eliminate overlapping authority, improve clarity
and bolster accountability.
Allowing ICOC to nominate and elect its own chair
and vice-chair from within its membership.
Eliminating the 50-person cap on CIRM staffing and
the 15-person limit on outside scientific peer
reviewers.
Requiring all past and future meeting minutes to
specify votes and recusals.
Extending the authority of CFAOC to conduct
performance reviews.
Requiring CIRM and ICOC to begin formal planning
for leadership transition, and to develop a transition
plan for expiration of bond funds.
CIRM regulations on intellectual property and ensuring
access for all Californians
According to its 2009 annual report, since 2006, CIRM has
awarded 328 research and facility grants worth over $1
billion, including funding for 12 world class research
institutes and centers of excellence, and $106 million in
training grants. 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 those rights
themselves, to develop stem cell products and research
tools.
ICOC has adopted intellectual property and revenue-sharing
regulations for for-profit and non-profit grantees. These
regulations include:
An access requirement for grantees that
commercializes a drug to submit an access plan to CIRM
that affords uninsured Californians' access to the
drug that is consistent with "industry standards" (an
STAFF ANALYSIS OF SENATE BILL SB 1064 (Alquist)Page 8
undefined term).
An access requirement for grantees that
commercializes a drug to sell the drug at any
benchmark price described in the California Discount
Prescription Drug Program, or a successor statewide
prescription drug discount program.
Revenue sharing requirements that require grantees
to share a portion of revenues, as specified, with the
State of California without specifying a mechanism or
where those funds shall be deposited.
A requirement to pay royalties to the State of
California to be deposited in the General Fund.
SB 1064 proposes to codify these requirements without
limiting CIRM's authority to make changes in how these
requirements are carried out.
Past audit and evaluations
Besides the annually commissioned financial audit and the
Controller's evaluation of that audit, the California State
Auditor conducted a review of CIRM's implementation of the
Act in 2007, making, among other things, the following
findings:
CIRM had moved forward in identified long-term
research priorities and considered the industry's best
practices to create its strategic plan, but had yet to
implement a process to assess annual progress toward
attaining its strategic goals.
The ICOC approved IP policies that provided benefit
to the state from patents, royalties, and licenses
resulting from institute-funded activities without
reasonably hindering essential research, but those
policies lack adequate guidance to grantees to ensure
access to therapies for uninsured Californians.
Although ICOC has identified standards for discount
prices for drugs in its IP policies, it has yet to
identify the appropriate benchmarks to use as a
standard for establishing discount prices for non-drug
therapies.
CIRM awarded multiple contracts without a
competitive-bidding process and did not maintain
documents that demonstrated it received reasonable
prices on the goods and services it purchased.
CIRM's travel reimbursement policy did not provide
sufficient control over travel expenses. Policy
revisions were made in December 2006 to address
STAFF ANALYSIS OF SENATE BILL SB 1064 (Alquist)Page 9
concerns regarding contracting and travel
reimbursements.
CIRM's salary survey and compilation of the data
contained enough errors, omissions, and
inconsistencies that the committee and the institute
cannot ensure the salaries for certain positions
comply with the requirements of the Act.
The 2007 report made 12 recommendations, and in January
2009, the State Auditor released a follow-up report that
evaluated how many of the recommendations were undertaken
by CIRM. Out of twelve recommendations, three had not been
implemented:
CIRM had not fully implemented its plans to develop
a process to track management information reported
annually by grantees to ensure accountability and to
enable CIRM to be able to assess annual progress in
meeting its strategic goals and initiatives.
CIRM had not fully followed through with its plans
to identify appropriate standards to provide uninsured
Californians' access to therapies developed with CIRM
funding or identified practical benchmarks to use as a
standard for discount prices for therapies.
CIRM had not fully implemented its grants
monitoring process.
In January 2010, the State Auditor released another
follow-up report and found that these three recommendations
were implemented.
In 2008, the State Controller conducted a review of
conflict-of-interest policies, grant administration,
administrative expenses and expenditures, and found that,
except for an issue concerning specialists' failure to sign
post-review conflict-of-interest certification forms, that
CIRM's conflict-of-interest policies were adequate and
properly followed.
Other concerns
In 2007-2008, public concerns were raised because ICOC
board members from various research institutions wrote
letters of recommendation in support of the grants, in
violation of conflict-of-interest rules that apply to
governing board members. Currently, 18 of 29 members of
ICOC come from universities, research institutions, and
life science companies that have direct or indirect
STAFF ANALYSIS OF SENATE BILL SB 1064 (Alquist)Page 10
interests in stem cell research.
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 ICOC, and reducing the number of appointees
who come from organizations that have direct interests in
stem cell research grants. CIRM resolved these conflicts
in 2008, and no grants affected by the conflicts were
funded.
Other public concerns and criticisms continue to be raised,
including overstating CIRM's role in funding key research,
inordinately high salaries compared to other research
grant-making institutions, such as the NIH and the Centers
of Disease Control and Prevention, which manage
significantly larger grant programs, which are out of touch
with the realities of a state mired in a financial crisis,
and spending over $1 million in public relations, with
plans to spend even more.
As recent as this February, Pulitzer Prize-winning
columnist, Michael Hiltzik, wrote in an Los Angeles Times
article that CIRM, which has "self-righteously" opposed
better public oversight of its activities, should be
altered to create a research program that "exemplifies not
only good science, but good government." The article was
posted in response to the latest CFAOC meeting, during
which CFAOC endorsed many of the findings of the LHC
report, and unanimously called for more openness and
transparency of CIRM. In the article, Hiltzik states that
there's no question that CIRM has funded important work and
bolstered the state's research profile, nor is there reason
to doubt that CIRM needs more staff scientists to make sure
grant recipients are spending our money properly,
especially since the program is about to start doling out
loans to commercial companies, not just grants to
academics.
Related legislation
SB 343 (Alquist) of 2009 would have required intellectual
property standards developed by ICOC to include a
requirement that each grantee, and the licensees of the
grantee, submit to CIRM for 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
STAFF ANALYSIS OF SENATE BILL SB 1064 (Alquist)Page 11
institute. This bill would have specified that the plan
must require grantees and licensees to provide drugs to
California state and local government-funded programs at
one of the three benchmark prices in the California
Discount Prescription Drug Program, except when the
institute adopts a waiver. Failed passage in Senate Health
Committee.
SB 471 (Romero and Steinberg), Chapter 185, Statutes of
2009, creates the California Stem Cell and Biotechnology
Education and Workforce Development Act of 2009 to
establish stem cell and biotechnology education and
workforce development as a state priority and to promote
stronger links among industry sectors, the California
Institute for Regenerative Medicine, and California public
schools, as specified.
Prior legislation
SB 1565 (Kuehl and Runner) of 2008 would have requested,
among other things, the LHC to conduct a study of the
governance structure of Proposition 71 and provide
recommendations on ways the governance structure of ICOC
could better ensure public accountability and reduce
conflicts-of-interest, consistent with the purposes of
Proposition 71. Vetoed by the Governor.
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
make royalty payments to the state, as specified. These
provisions were amended out of the bill.
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. Held in the Assembly Health
Committee.
SB 401 (Ortiz and Runner) of 2005 would have made changes
STAFF ANALYSIS OF SENATE BILL SB 1064 (Alquist)Page 12
to the public meeting, public record, grant and loan
licensing conditions, and conflict-of-interest provisions
of Proposition 71. The bill would have required 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 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 ICOC, CIRM, and its working groups with
exceptions. The bill would have required 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) 85 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.
ACR 24 (Mullin), Resolution Chapter 111, Statutes of 2005,
requests that the California Council on Science and
Technology expand its study group on how the state should
treat intellectual property made under state contracts,
grants, and agreements to include contracts, grants, and
agreements under Proposition 71 and that it expand the
membership of the study group to include representatives
STAFF ANALYSIS OF SENATE BILL SB 1064 (Alquist)Page 13
from ICOC.
ACR 1 (Negrete McLeod), Resolution Chapter 128, Statutes of
2005, urges the ICOC to 1) adopt robust
conflict-of-interest standards, 2) adopt policies requiring
CIRM to comply with existing state open meeting and public
records laws, and 3) to commit itself to seeking to ensure
therapies are available to low-income residents. It also
urges CIRM to report to the Legislature by January 1, 2006.
Arguments in support
The State Controller writes in strong support of the bill,
stating that SB 1064 implements the most relevant findings
of the Little Hoover Commission report that would make
practical changes to the operation of the institute to
ensure optimal performance by CIRM and ICOC, by requiring
recurring performance audits, and ensuring that
Californians will have access to drugs created by
CIRM-funded research. The Controller further states that,
in January 2010, CFAOC unanimously endorsed the LHC
recommendations for greater transparency and accountability
included in this bill.
The Little Hoover Commission writes in support of the bill,
stating that SB 1064 would improve transparency and
accountability of CIRM by addressing structural
deficiencies, such as the long terms served by ICOC board
members, which limit turnover and fresh perspectives, or
the inherent conflict-of-interest by board members who are
tasked by the Act to play an oversight role while
simultaneously carrying out day-to-day administrative
duties. LHC states that these structural deficiencies
continue to invite criticism and distract CIRM's leaders
from their critical task of finding cures.
Arguments in opposition
The California Heathcare Institute (CHI), an advocacy
organization of biotechnology companies and academic
research institutions, writes in opposition to the bill,
stating that provisions requiring grantees to submit a plan
to afford uninsured Californians access to any drug
developed as a result of CIRM-funded research, and to
provide drugs to state and local government-funded programs
at one of the three benchmark prices in the California
Discount Prescription Drug Program would create a
disincentive for firms to commercialize drugs whose
STAFF ANALYSIS OF SENATE BILL SB 1064 (Alquist)Page 14
research was funded with CIRM funding. CHI further states
that the basic goal of IP policies should be to minimize
barriers to transferring technologies from basic research
laboratories to the private sector, and that CIRM needs
flexibility to change its IP policies.
COMMENTS
1. Annual performance audits may be overly burdensome.
Although finances are tied to performance, audit findings
and recommendations take time to implement, and the results
may not be immediately apparent year to year. Extending
the time interval between audits to once every three years
would give ICOC and CIRM opportunity to review and
implement audit findings, and for the results to be
reflected in the next performance audit. Staggering the
separate audits of CIRM and ICOC would also be appropriate,
given that the ICOC has governance authority over the CIRM.
2. Suggested technical amendments:
- Page 8, lines 8-9, change "certified
independent auditing firm" to "public accounting
firm"
- Page 8, line 29, change "certified independent
auditing firm" to "public accounting firm"
POSITIONS
Support: State Controller's Office
Little Hoover Commission
Oppose: California Health Institute
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