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  

          General Fund Revenues    unknown, potentially in the millions of  
                                   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.

          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. 

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          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.

          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  
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          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.