BILL ANALYSIS Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair 1064 (Alquist) Hearing Date: 5/10/2010 Amended: 4/27/2010 Consultant: Katie Johnson Policy Vote: Health 6-0 _________________________________________________________________ ____ BILL SUMMARY: SB 1064 would make governance changes to the California Institute for Regenerative Medicine, require triennial performance audits of CIRM and its governing board, provide that drugs developed with CIRM grants be available at discounted prices to state and local agencies and the uninsured, and that revenues from CIRM licensing agreements be returned to the State General Fund. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2010-11 2011-12 2012-13 Fund Audit at least $400 $0 $0Bond* Additional employee salaries unknown, likely in the hundreds of Bond* thousands to low millions of dollars annually General Fund Revenues unknown, potentially in the millions of General dollars, likely not until at least 2020 * California Stem Cell Research and Cures Fund (Fund) _________________________________________________________________ ____ STAFF COMMENTS: This bill meets the criteria for referral to the Suspense File. Proposition 71 of 2004 created the California Institute for Regenerative Medicine (CIRM) and provided for $3 billion in bond authority, with the intent that it be spent at an average of $295 million annually over a period of 10 years, to fund stem cell research and dedicated facilities for California scientists. Since CIRM began awarding grants in 2006, it has awarded 345 grants in the amount of approximately $1 billion. Audits This bill would require CIRM to add a performance audit review every six years, commencing with FY 2010-2011, to its annually commissioned financial audit. The audit would examine the institute's programs, functions, operations, management systems, and policies and procedures to assess whether it is achieving economy, efficiency, and effectiveness in the employment of available resources. Additionally, every six years, commencing with FY 2013-2014, this bill would require the Citizen's Financial Accountability Oversight Committee (CFAOC), the entity chaired by the Controller that reviews CIRM's annual financial audit, to commission and define the scope of a performance audit of the Independent Citizen's Oversight Committee (ICOC), also known as CIRM's governing board. Page 2 SB 1064 (Alquist) The costs to the Fund for each of these audits could be at least $400,000 based on a 2006 Bureau of State Audits (BSA) audit of the way CIRM was implementing Proposition 71. It is likely that these audits would cost approximately the same given that they would also analyze CIRM and the ICOC's performance. Employees This bill would remove the 50 person cap on the number of employees that CIRM may employ. Although CIRM is currently under the cap with 43 employees, it is reasonable that as they make more grants and further develop the loan program, more staff would be needed. CIRM's administrative expenses, including salaries, are capped at 6 percent of bond funds: 3 percent for research and research facilities, including the development, administration, and oversight of the grant making process and the operations of the working groups and an additional 3 percent for the costs of CIRM general administration. CIRM is within their administrative cap, and while paying salaries for new employees would put expenses closer to the cap, it is unlikely to exceed it. General Fund Revenue This bill would require that all revenues derived from patents, royalties, and licenses generated as a result of intellectual property agreements be deposited into the General Fund. The ICOC adopted regulations that were approved by the Office of Administrative Law (OAL) that directs CIRM's share of revenues derived from royalties and licenses into the state General Fund. The regulations concerning patents direct funds to the State of California. It is unclear whether or not the existing regulations would comply with the "all revenues" requirement, since the regulations stipulate that the state would be entitled to only a specified portion of these revenues. This bill could be interpreted to mean all revenues as in the total revenues a commercialized drug would generate, or it could be construed to mean that all of the revenues to which the state is entitled pursuant to CIRM's regulations would be deposited into the General Fund. Although CIRM began awarding grants in 2006, due to the time it takes research to be done and a product to be commercialized, the General Fund would be unlikely to see significant revenue until about 2020. The amount of revenues is unknown and would depend on the number and types of drugs and technologies that are commercialized as well as their commercial success. For example, if a drug reached blockbuster status-over $250 million in any calendar year-an amount of three-times the grant would be paid to California. If the grant was $1 million, the payment to the General Fund would be $3 million in one year. Developed Drug Discount This bill would require CIRM intellectual property standards to include a requirement that each grantee and the licensee of the grantee submit a plan to CIRM that would afford uninsured Californians access to any drug that is in whole or in part funded by the institute. The plan would also require each grantee and licensee to sell drugs that are in whole or in part the result of CIRM research funds to the California state and local Page 3 SB 1064 (Alquist) government funded programs at one of the three benchmark prices in the California Discount Prescription Drug Program, as it exists December 31, 2010. The plan would be subject to CIRM approval after a public hearing. This bill would permit the ICOC to waive the requirement to provide discounted drugs to California publicly funded programs under specified conditions. These provisions are nearly identical to those in the CIRM regulations relating to access requirements for developed products. To the extent that California public programs access emerging treatments at discounted prices, the state could see cost avoidance on costs due to expensive therapies. Similar to the General Fund revenue discussed above, it could be nearly a decade before California programs would benefit from these developing drugs. Governance Changes This bill would also make several changes to CIRM's governance structure, based mainly on recommendations made by a June 2009 report on CIRM by the Little Hoover Commission (LHC), "Stem Cell Research: Strengthening Governance to Further the Voters' Mandate". Among other recommendations in this bill, which include the above mentioned performance audits and the elimination of the 50 employee cap, LHC recommended that there be: 1) a clear delineation between the duties of the President of CIRM and the Chairperson and the Vice Chairperson of the ICOC; 2) to lift the cap on 15 scientists on the Scientific and Medical Research Funding Working Group -to the extent that CIRM increases the number of scientists, which is unlikely based on their response to the LHC report, there could be increased per diem compensation costs; 3) decrease the term limits of the Chairperson and Vice Chairperson from six years to four years, to stagger them, and to choose them from the ICOC; 4) include in past and future meeting minutes vote tallies and each member's votes and recusals; 5) a succession plan for when the current Chairperson leaves office; 6) a transition plan for when the bond funding ends; and, 7) alter the pre-grant review process. There could be unknown, likely minor, costs from the Fund to implement these requirements.