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 -- END --