BILL ANALYSIS SB 1064 Page 1 Date of Hearing: June 29, 2010 ASSEMBLY COMMITTEE ON HEALTH William W. Monning, Chair SB 1064 (Alquist) - As Amended: June 17, 2010 SENATE VOTE : 33-0 SUBJECT : California Stem Cell Research and Cures Act. SUMMARY : Imposes additional oversight and transparency requirements on the California Institute for Regenerative Medicine (CIRM), revises CIRM's intellectual property (IP) standards with regard to licensing revenue and drug discount access plans for low income and uninsured Californians, and requires revenues from CIRM's IP agreements to be deposited in the state General Fund, as specified. Specifically, this bill : 1)Requires CIRM to commission a performance audit every three years, as specified. Requires the initial audit to include: a) policies and procedures for the issuance of contracts and grants and a review of a representative sample of contracts, grants, and loans executed by CIRM; and, b) policies and procedures relating to the protection or treatment of IP rights associated with CIRM-funded or commissioned research. 2)Specifies that all administrative costs associated with the triennial audits must be paid by CIRM. 3)Requires all meeting minutes of CIRM's Independent Citizen's Oversight Committee (ICOC) to include a summary of vote tallies and disclosure of each board member's votes and recusals on all action items. 4)Requires the existing IP agreements developed by the ICOC to at least include a requirement that CIRM grantees, other than loan recipients and facilities grant recipients, share a fraction of the revenue they receive from licensing or self-commercializing an invention or technology that arises from CIRM-funded research, according to specific formulas prescribed in this bill. 5)Confers authority upon the ICOC to adopt regulations to implement and modify the formulas specified in 4) above and SB 1064 Page 2 requires the ICOC to notify the Legislature as specified before exercising its authority to vote on the modification of these formulas. 6)Requires all revenues received through the IP agreements to be deposited into the General Fund. 7)Requires the ICOC's existing IP standards to include a requirement that each grantee or exclusive licensee submit a plan to CIRM to afford uninsured Californians access to any drug that is entirely or partly the result of CIRM-funded research, as specified. 8)Requires the grantee or exclusive licensee, with regard to the drug discount access plan required by 7) above, to either submit the plan to CIRM, seek an extension from CIRM, or notify CIRM of its intention to seek a waiver, within 10 business days following final approval of the drug by the federal Food and Drug Administration (FDA). Specifies that, if the grantee seeks an extension, the plan must be submitted within 30 business days following the drug's final FDA approval. 9)Requires the plan in 7) above to be subject to the approval of CIRM but permits the ICOC to waive the requirement in 7) above, under specified conditions, after a public hearing and opportunity for public comment. 10)Requires a request for a waiver to be posted on CIRM's Internet Web site for at least 10 business days in advance of the public hearing and directs CIRM to notify the Legislature if the ICOC grants a waiver request, including the reasons justifying the request. 11)Requires the ICOC to develop procedures to protect proprietary information submitted by grantees and exclusive licensees pursuant to 7) above from public disclosure. 12)Directs CIRM, under the guidance of the ICOC, to establish a succession plan with regard to changes in leadership of both CIRM and the ICOC that includes specified information, and, by January 31, 2010, a transition plan addressing the expiration of current bond funding. Requires a copy of both of these plans to be transmitted to the Governor, Controller, and the Legislature within 30 days of completion. SB 1064 Page 3 13)Deletes the existing cap of 50 authorized CIRM employees and eliminates the existing cap of 15 scientist members of CIRM's Scientific and Medical Research Funding Group that is responsible for processing grant and local applications. 14)Requires the competitive evaluation process used in the awarding of grants and loans to include a peer review panel of both scientists and patient advocates. Limits the number of scientists on a peer review panel to 15. Clarifies that only the scientist members of the Scientific and Medical Research Funding Group must score grant and loan award applications for scientific merit. EXISTING LAW : 1)Establishes the California Stem Cell Research and Cures 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 that includes, among other things, grants awarded, grants in progress, research accomplishments, the number and dollar amounts of research and facilities grants; the grantees from the prior year; its administrative expenses; and, its strategic financial plans. 4)Establishes the Citizen's Financial Accountability and Oversight Committee (CFAOC), chaired by the State Controller, to annually review the financial practices and performance of CIRM. 5)Requires the ICOC to establish standards to make all grants and loans subject to IP agreements. Requires the IP agreements to balance the opportunity for the state to benefit from the patents, royalties, and licenses that result from research and therapy development and clinical trials, with the need to ensure that essential medical research is not unreasonably hindered by the agreements. 6)Establishes within CIRM three separate scientific and medical SB 1064 Page 4 working groups: Research Funding; Accountability Standards; and, Medical Facilities. 7)Restricts the total number of authorized CIRM employees to 50. Specifies that grants and loan applications are processed and scored by the 15 scientist members of the Scientific and Medical Research Funding Group. 8)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. FISCAL EFFECT : According to the Senate Appropriations Committee: Fiscal Impact (in thousands) Major Provisions 2010-11 2011-12 2012-13 Fund Triennial audit at least $400$0 $0 Bond* Additional employee salaries likely in the hundreds of thousands Bond* to low millions of dollars annually General Fund Revenues potentially in the millions of General dollars, likely not until at least 2020 * California Stem Cell Research and Cures Fund COMMENTS : 1)PURPOSE OF THIS BILL . According to the author, when California voters approved Proposition 71 in 2004 to create CIRM, they opted to invest $3 billion of general obligation bond funds in stem cell research. The author argues that in the six years since Proposition 71 passed, it has become clear that additional oversight and transparency is needed to ensure that Proposition 71 is operating as intended. The author maintains that this bill will clarify the processes by which CIRM and the ICOC will ensure transparency, provide appropriate oversight, and guarantee a return on the public's investment by providing a payback to the General Fund and equal access to any of the stem cell treatments developed by SB 1064 Page 5 CIRM. 2)LITTLE HOOVER COMMISSION REPORT . In June 2009, the Little Hoover Commission (LHC) issued a report identifying several recommendations to more adequately guide the state's unique investment in stem cell science and improve CIRM's efficiency in meeting the goals of Proposition 71. According to the report, the LHC noted that CIRM's governance structure is insufficient to protect taxpayers' interests or further its own ambitious goals, and urged the Legislature to reform CIRM's governance 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. To enhance CIRM's ability to fulfill its mission, LHC made a number of recommendations, many of which are incorporated in this bill, including 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 the CFAOC to conduct performance reviews; and, requiring CIRM and ICOC to begin formal planning for leadership transition, and to develop a transition plan for expiration of bond funds. 3)PRIOR AUDITS AND EVALUATIONS . In January 2009, the Bureau of State Audits released a report that made several findings with regard to CIRM including that it had not fully implemented its plans to develop a process to track management information reported annually by grantees to ensure accountability and to enable it to assess annual progress in meeting its strategic goals and initiatives; 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; and, had not fully implemented its grants monitoring process. However, CIRM reports that, as of January 2010, remedies to correct these three deficiencies have since been implemented. Additionally, in 2008, the State Controller conducted a review of CIRM's conflict-of-interest policies, grants administration, administrative expenses and expenditures, and concluded that these policies were adequate and properly followed. 4)CURRENT IP STANDARDS . Stem cell research projects funded with Proposition 71 monies are expected to generate many types of SB 1064 Page 6 IP, such as new research tools, new stem cell lines, and, ultimately, stem cell treatments and drugs. In many cases, grantees will be able to use the rights to these inventions or license them to other entities in order to develop other stem cell products and research tools. To date, the ICOC has adopted IP and revenue-sharing regulations for for-profit and non-profit grantees. These regulations incorporate requirements that would be codified in this bill, including: a requirement for grantees that commercialize a drug to submit a plan to CIRM that affords uninsured Californians' access to the drug in accordance with industry standards; a requirement for grantees that commercialize a drug to sell the drug at specified benchmark prices; revenue sharing requirements that require grantees to share a portion of revenues with the State of California without specifying how or where those funds will be deposited; and, a requirement to pay royalties to the State of California to be deposited in the General Fund. 5)PRIOR LEGISLATION . a) SB 343 (Alquist) of 2009 would have, among other things, required IP standards developed by the ICOC to include a requirement providing for drug discount access plans to afford uninsured Californians access to any drug that is, in whole or in part, the result of research funded by CIRM. SB 343 failed passage in the Senate Health Committee. b) SB 1565 (Kuehl and Runner) of 2008 would have imposed requirements providing for drug discount access plans similar to the provisions of this bill and would have requested, among other things, the LHC to study the existing governance structure of the ICOC and CIRM. SB 1565 was vetoed by Governor Schwarzenegger who stated in his veto message that it did nothing to advance the will of the voters. c) 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. SB 1064 Page 7 d) 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. e) 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 who indicated in his veto message that it was in direct conflict with the text of Proposition 71 as approved by the voters. f) 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 record laws. SCA 13 was placed on the Senate inactive file at the request of the author. 6)SUPPORT . CIRM writes in support of this bill, stating that it would ensure that the State of California has the opportunity to benefit from voters' investment in stem cell research while providing CIRM with the operational flexibility it needs to carry out its mission of providing therapies to California patients. The State Controller supports this bill because it would make practical changes to the operation of CIRM, including succession planning for its 2014 dismantling date and flexibility in staffing, and ensure optimal performance by requiring recurring performance audits. The LHC notes in support that CIRM is a frequently studied agency that has been responsive to many suggestions for improvement from outside entities. Consumer Watchdog adds that this bill is a thoughtful measure that makes necessary adjustments to help ensure that the promises of Proposition 71 are kept. REGISTERED SUPPORT / OPPOSITION : Support California State Controller John Chiang California Institute for Regenerative Medicine Consumer Watchdog SB 1064 Page 8 Little Hoover Commission Opposition None on file. Analysis Prepared by : Cassie Rafanan / HEALTH / (916) 319-2097