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Onward, Christian Lawyers

San Francisco Weekly
July 27th, 2005

Nearly nine months after losing at the ballot box, the conservative groups that opposed the California stem cell institute haven't given up. Early this month, the California Family Bioethics Council filed a lawsuit, the third aimed at stopping the California Institute for Regenerative Medicine in its tracks. Though motivated by moral concerns, the suits focus on oversight of the institute's funds. With the three civil cases pending, the state Attorney General's Office is wary of signing off on the first of the $3 billion in bonds for the institute, which plans to move from Emeryville to Mission Bay by year's end.
Actually, however, by impeding progress on the stem cell institute, the lawsuits could be a godsend to California taxpayers. In its first eight months of operation, the institute and its 29-member Independent Citizens Oversight Committee (ICOC) -- an unwieldy sort of board of directors -- have burned through more than $2 million in cash and signed contracts promising $1 million more. And all this spending occurred without an approved operating budget or an organizational structure that defines who does what at the institute -- even as it passes out big money.

"It seems a little bit strange," says Christine Letts, a lecturer on nonprofit management at Harvard's Kennedy School of Government. "They may have a perfectly competent staff, but they have to be accountable for what is done before the official apparatus is constructed. There's no expectation or excuse for sloppiness in the name of hurrying the thing up."

On top of basic governance, the stem cell institute and its oversight committee haven't resolved other key issues that could cost -- or save -- California millions of dollars. Among other things, the institute hasn't adopted policies on who would own the interests in any marketable products its grants help create, or on what constitutes a conflict of interest for employees and oversight committee members.

The institute was established by the ballot measure Proposition 71 last November to fund stem cell research, the promising, nascent science that proponents believe will cure everything from cancer to spinal cord injuries. Institute grants -- funded by the proposed sale of $3 billion in state-backed bonds -- will go to California universities, nonprofits, and corporations.

When confronted with the lack of organization at the institute, supporters cite the enormity of their task: establishing an organization that will make billions of dollars in grants over the course of a decade. "I've been surprised at how complex it is. We're not only getting a big new scientific enterprise started, we're also building a state agency from the ground up," says interim institute President Dr. Zach Hall. Oversight board members compare the project to the establishment of a mini-National Institutes of Health, which took years and produced an agency with a national mandate to give out $22 billion in grants.

During the campaign for Proposition 71, Robert Klein, now ICOC chairman, projected that the institute's first grants would be made by summer. In March, when he joined the institute, Hall knew that timeline was unrealistic. "I think a lot of those projections were an expression of the enthusiasm and eagerness to get going. There's a tension between that and, 'Wait a minute, we've got to do this well,'" says Hall, a former biochemistry researcher and administrator at UCSF and NIH who served a short stint as CEO of a biotech start-up.

Indeed, stem cell institute proponents have repeatedly insisted that the apparent disorganization is a result of a desire to fund vital stem cell research quickly. With so many unanswered questions about the organization's finances, however, the institute should probably be thanking the Christian right for buying it time to get its very scrambled act together.


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When it comes to spending money, the California Institute for Regenerative Medicine has not erred on the side of caution. According to financial data from institute interim Chief Administrative Officer Walter Barnes, who joined the institute in July after months on loan from the state Controller's Office, expenses will total $2.5 million this year, in addition to the commitment of at least another $1.2 million in contracts for the coming fiscal year. The money being spent comes from a $3 million loan from the state and a $5 million donation from audio entrepreneur Ray Dolby.

The spending has been authorized even though the institute has no formal budget and no formal organizational chart. The institute spent $737,000 on salaries and benefits during fiscal 2005, which ended in June, spread among 14 employees. Half of its current employees make six-figure salaries, including $389,004 for Hall, according to data provided by the institute. The institute also inked a $165,000 contract with executive search firm Spencer Stuart to find a permanent president. Based on standard executive search fees, the president's salary could reach as much as $500,000 -- roughly triple what the governor makes, and more than double the NIH director's salary. This would place the new institute president among state government's highest-paid employees. Prop. 71 doesn't mention caps on institute salaries, and the oversight committee hasn't instituted a salary-cap regulation.

The most controversial spending made public to date involves public relations. The stem cell institute is racking up $27,000 per month in bills from Edelman Public Relations, which counts more than a dozen large pharmaceutical and biotech companies, including Pfizer and Chiron, among its clients. On the institute Web site, Adam Silber, vice president of Edelman's Sacramento office, is listed as a press contact, with a CIRM e-mail address, a CIRM phone number, and no mention of Edelman.

The institute also has a $320,000 legal services contract with the Sacramento law firm of Remcho, Johansen & Purcell. While the attorney general will make arguments in the courtroom, Remcho partner James Harrison is acting as a fill-in for a yet-to-be-hired general counsel, advising on issues such as compliance with state rule-making procedures and open-government laws.

According to Prop. 71, the institute can retain outside counsel only when the "scientific, medical, and technical nature of the issues" requires services not provided by the AG's Office. Harrison describes himself as an experienced California ballot measure litigator, having worked with Klein to help craft Proposition 71. "[Ballot measure litigation] is not a legal issue that would flummox our office," a spokesman for the attorney general says.

Institute interim President Hall says the PR and legal contracts exist only because the institute hasn't hired full-time staff. Until two months ago, when the decision to put the institute in San Francisco was made, recruiting was challenging, Hall contends. The large Edelman contract is the only way to deal with the tremendous media scrutiny of the agency, he says.

Susan Fogel, coordinator for the watchdog group Pro-Choice Alliance for Responsible Research, begs to differ: "This money should be going into research. The people of California didn't vote for us to spend $300,000 on a law firm."

At a meeting of the institute's oversight committee earlier this month in Irvine, many of the aforementioned costs and payments came as news to some oversight committee members; the committee promptly established a rule requiring that it approve all contracts over $100,000. "The message sent loud and clear at the Irvine meeting is that ICOC members take our responsibility for overseeing how tax dollars are spent very seriously," says Dr. Claire Pomeroy, dean of the UC Davis School of Medicine and a member of the committee.

That may be true, but it took eight months for the oversight committee to establish the subcommittee that will finalize a budget and an organizational structure for the stem cell institute. "Frankly, we put [the structure issue] on the back burner and kept going. We didn't stop to worry about the theoretical things; we just worked on how we were going to get our tasks done every day," says Hall, who first proposed a structure in March. Barnes and his staff are still preparing the final budget, which Barnes hopes to submit to the governance committee at the end of this month.


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While it's waiting for the bond money to come through, the institute's oversight committee will have time to tackle the complex intellectual-property issues surrounding the billions of dollars in grants the agency hopes to make. Last fall, Prop. 71 advocates promised that the therapies arising from institute-sponsored research would save Californians billions in health care costs. But the research to back up that claim came from a study by the Analysis Group consulting firm, whose clients include many major pharmacological companies and biotech firms -- including Eli Lilly and Genentech -- that stand to reap huge profits by commercializing future stem cell therapies.

If California wants a piece of whatever action the institute's grants create, it will need to seek some sort of royalties in return for funding stem cell research. Prop. 71 gave the state little leverage on such intellectual-property issues, requiring the oversight committee to balance general benefits of stem cell discoveries against the threat that "essential medical research" would be hindered if grants weren't made. In other words, the state can't take such a large stake in the profits of therapies produced by stem cell research that companies are spooked away from investing in the research.

This month, the ICOC finally established a task force to negotiate with the Legislature over who will own the therapies arising from the grants. State Sen. Deborah Ortiz (D-Sacramento) has pushed for a compromise on intellectual property: Instead of guaranteeing the state royalties, she's advocating assurances of low-priced stem cell therapies, such as price controls for Medi-Cal patients, to save California money. To do that, the institute would probably still need to hold some intellectual-property interest in stem cell discoveries, and Hall believes tracking those interests would be too time-consuming for the institute's small staff, which Prop. 71 capped at 50.

So it's likely that the intellectual property, and future revenues, would go to the grant recipients themselves. A grant to UCSF that turns into a lifesaving drug could bring some revenue back to the university, indirectly cutting state costs. But a grant to a corporation -- nonprofit or profit-making -- would not.


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Much of the negative publicity about the California Institute for Regenerative Medicine has centered on perceived or potential conflicts of interest involving members of the oversight committee. Several committee members have direct ties to biotech firms that could be applicants for institute funding. Committee member Dr. Ted Love is president and CEO of the biopharmaceutical company Nuvelo, and member Ed Penhoet, former CEO of Chiron, sits on the board of the neurological treatment biotech firm known as Renovis, which he co-founded.

Even though there have been several changes -- or, in ICOC lingo, "policy enhancements" -- to the institute's conflict-of-interest rules, concerns remain over potential conflicts involving the grants review working group, a body advising the oversight committee on grant selection. Appointed by an oversight committee subgroup in May, the 22-member grants working group is rife with its own conflicts of interest. For instance, as first reported by the Sacramento Bee, reviewers Drs. Andrew Feinberg and Jeffrey Rothstein are both researchers at Johns Hopkins University, which owns stock in Geron, a California biotech likely to benefit from institute grants.

The number of applications for grants will likely be in the hundreds, and the institute is staffed by deans of medical schools and biotech executives -- that is, the kind of people who don't have time to parse every single application. It's likely, therefore, that working group recommendations will play a huge role in deciding who receives institute money.

The institute plans to self-police the grant reviewers, preventing them from making decisions on grants in which they have a personal, professional, or financial interest of more than $5,000. Yet members are required to disclose financial interests only to the institute, not to the public.

For the most part, the institute is subject to the same public records and open meetings laws as other state agencies, but Proposition 71 gives the oversight committee an out in some cases, including those involving member privacy. "They're so close to a decision-making body, with so much influence over such a large amount of money, we should know what these [grant] reviewers' personal financial interests are," says Jesse Reynolds, a program director at the biomedical advocacy group the Center for Genetics and Society.

The stem cell institute has been in discussions for months with legislators about conflicts of interest and open-government concerns. Hall is confident they're close to a deal, but legislators have little bargaining power. Prop. 71 bars legislative action on the stem cell institute for three years, and even then a 70 percent supermajority is required to pass laws regulating the institute.


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The California Institute for Regenerative Medicine has portrayed plaintiffs who are suing the agency as out-of-state-funded, right-wing extremists bent on destroying the institute. To an extent, the contention is true. The California Family Bioethics Council, for example, is an affiliate of Colorado Springs-based evangelical group Focus on the Family. Both groups make clear that their concern about stem cell research focuses, first and foremost, on ethics and the so-called right to life.

Those motivations don't take away from the fact that they make some good financial-management points.

The criticism with the most weight, common to all three suits, rests on Article XVI, Section 3, of the state constitution, which states that money from the California treasury can only go to institutions under the exclusive management and control of the state. The stem cell institute and its oversight committee, the argument goes, don't qualify as state control. The Legislature has no power over the institute's budget, and no control over its policies for the next three years. Oversight committee working group members, who have considerable power over where the money goes, are appointed to six-year terms and can't be hired or fired by voters or the Legislature.

The pro-choice groups criticizing the stem cell institute on good governance and accountability grounds have stayed out of the courtroom for several reasons: Some don't have the money to sue; some don't have the legal expertise; most don't want to ally with an anti-abortion group.

All the same, they're cheering from the sidelines for their conservative counterparts.

"It's a serious constitutional question," says Berkeley public interest lawyer Charles Halpern. "When you look closely at ICOC procedures, it's hard to think of it as an organization under the exclusive management and control of the state of California. CIRM is like a free actor."



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