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Taxpayers unlikely to get quick stem cell windfall

by Terri SomersSan Diego Union-Tribune
July 17th, 2005

Heart-wrenching TV ads featuring people afflicted with incurable diseases filled the airwaves last fall, touting the potential of stem cell research.

If taxpayers agreed to fund $3 billion of research and it resulted in a treatment for just one of the most common incurable diseases, Californians were told, the savings to the state health care system would more than cover the cost.

On top of that, the ad campaign suggested Californians might get discounts on new therapies and the state might get a cut of the profits from any new drugs.

Those pitches were part of a drive that helped persuade a majority of California voters to pass Proposition 71, a plan to fund stem cell research by establishing the California Institute for Regenerative Medicine.

But that money is unlikely to materialize, at least any time soon, according to those now charged with the task of creating policy for the institute.

Simply put, any new therapies are years, if not decades, away. Anti-trust laws prohibit Californians from receiving a unique price break on drugs that could result from stem cell research, according to legal experts. And it appears unlikely that the sale of discoveries resulting from the state-funded research would create a plentiful and direct funding stream for the state coffers.

"The idea that any new research today could result in rewards that provide an immediate benefit to California is misguided," said Ginger Graham, chief executive of Amylin Pharmaceuticals in San Diego.

Graham is a member of a task force with the California Council for Science and Technology, a group of academics, business executives and lawyers that the state Legislature has asked to make recommendations for handling the rights to any discoveries that result from research funded through Proposition 71. Members of the committee overseeing Proposition 71 are also working on the task force.

The task force has the option of tweaking or radically rewriting nationally accepted procedures under which the federal government and other institutions generally get little or no monetary return on grants they make.

Questions to answer

As it wrestles with whether to develop a new approach, the task force will have to address fundamental questions. Who should own any new discovery _ the scientist, the state or the institute where it was made? Who should be responsible for handling its sale? How much should be charged for it, and should it be sold exclusively to one buyer?
The California stem cell initiative is unique because it is the first time state taxpayers have directly funded specific scientific research to compensate for federal restrictions. In 2001, President Bush limited federal funding for human embryonic stem cell research because it requires the destruction of a days-old embryo, a collection of 100 to 200 cells, which some consider a life that should be preserved.

California's policy is expected to be viewed as a national model as other states join the rush to allocate taxpayer money for stem cell research to keep from losing gifted scientists.

In promoting Proposition 71, supporters pointed to a financial analysis they commissioned that said California could recoup $537 million to $1.1 billion if it were to get a cut of the licenses and royalties that companies would need to pay to use any Proposition 71-funded discovery in further research or drug production.

But this assumes either that private investors or companies would agree to pay additional money on top of what they traditionally pay research institutes to license technologies _ or that the research institutes would be willing to take less.

Under the current approach, public or private research institutions take ownership of any discoveries they have made with money from the federal National Institutes of Health.

Ownership gives the institution the right to patent a discovery and rent it out to others, through what is called a licensing fee, for use in continued research, said Anthony Insogna, an intellectual property lawyer with Jones Day in San Diego. The institutes can also charge the buyer lump-sum fees as the research meets pre-established milestones and can take a percentage of profits as a royalty on any resulting products.

The federal government adopted this approach more than 20 years ago through the Bayh-Dole Act of 1980, with the idea that research institutes would pump any revenue back into research. It has been adopted by many smaller philanthropic grant-making organizations, such as the National Diabetes Research Foundation, the National Parkinson's Foundation and the National Cancer Institute.

Some experts argue that the easiest course would be for California simply to adopt the same approach as the federal government. They argue that the established model has worked well and that grant recipients would resist a new system.

While Proposition 71 provides up to $300 million annually for stem cell research in California, the amount is dwarfed by the $14 billion the NIH will make in grants to California this year. Nationwide this year, the NIH will invest $45 billion in research that could lead to new drugs.

Federal regulators learned through the years that giving institutes a revenue incentive is necessary to motivate them to go through the hassle of the patenting and licensing process.

And forcing investors who buy intellectual property to negotiate licenses and royalties with both the research institute and the grant-making organization could make it too complicated and expensive, driving investors away, said Jose Garcia-Pedrosa, chief executive officer of the Parkinson's Foundation in Miami.

"Our main goal is to help research happen," said Garcia-Pedrosa, whose organization made $6.5 million in research grants last year and is not concerned with creating its own revenue stream from its investment.

Risk for investors
Venture capitalists, who play a crucial role in funding the development of technologies once an initial discovery is made, have similar concerns. Private investors often put up $10 for every $1 the government has invested by the time a technology turns into a marketable product.
Drew Senyei of the firm Enterprise Partners said that if California or the stem cell institute seek to receive licensing and royalty fees in addition to what is paid to the research institute, the combined fees could drive away investors by taking too large a chunk out of potential profits.

Investors also usually have to buy more than one discovery to work on a single project. This "stacking" of patents is highly likely in the stem cell field, in which the University of Wisconsin Alumni Research Foundation has already patented some of the essential technology.

"There are already 400 to 500 patents filed in the stem cell area, and we are still at the beginning of the beginning," Senyei said.

He explained the potential for stacking to hinder investment: What if 10 patents are needed to work on one project and everyone involved wanted to charge a 10 percent royalty on potential profits? The investor would be left with nothing, Senyei said.

For that reason, many research institutes agree to cap the overall royalties, a practice that he said the stem cell committee should also adopt.

Investors typically will sink hundreds of millions of dollars into a potential drug or therapy to bring it to market. Often the product fails.

That's a large risk for investors, which is why they demand a significant return on investment in the drug discovery industry, said Senyei, whose firm invests heavily in startup biotechnology companies in San Diego County.

California legislators are at least somewhat mindful of this risk. But they are also concerned with ensuring that the taxpayers' investment is somehow returned, at least in part.

The Legislature has asked the California Council for Science and Technology task force and the committee overseeing Proposition 71 to create some mechanism by which Californians will be guaranteed access to therapies should they result from this stem cell research.

One way to do that is to designate a percentage of the licensing and royalty fees on Proposition 71 intellectual property to be put aside to reimburse Medi-Cal for therapies provided to Californians who can least afford them, said Robert Klein, chairman of the stem cell oversight committee.

But task force member Roger Noll, an economist at Stanford University, thinks funnelling some or all of the Proposition 71 intellectual property revenue back to the state is unrealistic and bad policy.

It would eliminate the institutes' incentive for bothering with the patenting and licensing process, he said. It is also somewhat of a disincentive for the institutes to apply for grants if their discoveries will not become their own.

Noll pointed to a paper he wrote about California's intellectual property issues as an example of the challenge the state faces. In 2000, the University of California system spent almost $2 billion on research but received only $74 million in licensing, Noll found.

"These facts should give pause to state officials who see a potential financial bonanza in the (intellectual property) arising from state-sponsored (embryonic stem cell) research," Noll wrote in the paper.

Early concern
The California Council for Science and Technology policy recommendations for Proposition 71's intellectual property are expected to be presented to the stem cell oversight committee and the Legislature this month.
Already, there is concern that the recommendations will be too favorable to the life sciences industry, whose insiders populate the task force. As a result, last week the legislature directed a panel of patient and consumer advocates, bond counsel and the treasurer's office to participate in making the recommendations.

The Proposition 71 oversight committee must adopt its intellectual property policy before it can start awarding its first research grants later this year.

If the Legislature decides that Proposition 71 policy fails to adequately address its commitment to taxpayers, a number of lawmakers have said they will go to the ballot to seek to change the policy.

Graham said all the concerns outlined by Senyei and others were discussed and that the report will outline the pros and cons of various policies.

Although she would not reveal what the CCST plans to recommend, she said taxpayers should not lose sight of the indirect ways in which their $3 billion investment will be returned.

Proposition 71 is luring scientists to California, where they will participate in groundbreaking research that improves the quality and reputation of the state's academic institutions, Graham said. This research will spawn more startup companies, which create high-paying jobs that create more income tax, sales tax and corporate tax, she said.

The paper by Noll, reportedly one of the more vocal members of the CCST on this policy issue, may offer some insights into the upcoming recommendations.

"The best advice . . . is not to try to be very innovative in creating agencies and policies to make grants and oversee intellectual property rights," he said. "These programs will not succeed if they ask grant recipients to behave a great deal differently than they are required to behave from other, much larger sources of funds."

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