SAN FRANCISCO - During the campaign for California's $3 billion stem cell initiative, supporters predicted as much as $1 billion would be returned to state coffers through royalties from stem cell therapies.
But now, some question whether the state will get a dime.
Federal tax laws may prevent California from requiring companies to share royalties if the state issues tax-exempt bonds to finance the program, experts testified Monday.
That leaves stem cell leaders in a quandary: Do they issue taxable bonds -- at an added cost to taxpayers of $420 million to $700 million because of higher interest rates -- in exchange for negotiated agreements on royalties that may or may not materialize?
Or do they abandon the royalties idea and risk alienating voters? Is there a third possibility -- some other way to ensure Californians reap benefits from their huge investment, maybe by getting reduced prices on treatments for low-income Californians?
"This really is, fundamentally, a debate around the accountability to taxpayers," said Jean Ross, executive director of the California Budget Project.
Taxpayers should not be asked to pay twice, Ross argued; once for the research and then again with hefty prices when therapies are developed.
State lawmakers explored these issues during a joint committee hearing in San Francisco on Monday led by Sen. Deborah Ortiz, D-Sacramento. Ortiz has been a strong backer of stem cell research, but she also has sought to ensure California maximizes its return on its investment.
She acknowledged Monday that there are hurdles that may make it unlikely the state will ever receive revenues through royalties or licensing agreements, but she urged stem cell leaders to explore other options for ensuring a public benefit.
Critics say the debate raises questions about when stem cell leaders learned about such potential problems and whether they adequately informed voters.
"This feels like something of a bait and switch," said Jesse Reynolds of the Center for Genetics and Society, a group that supports stem cell research but advocates strong ethical policies.
Stem cell leaders counter that no final decisions have been made. They note that state officials are exploring the feasibility of issuing a combination of taxable and tax-exempt bonds to get around the royalty restrictions.
They also are exploring other options for structuring the financing and will likely seek advice from the Internal Revenue Service before proceeding.
"I am here to listen," said Ed Penhoet, who leads the stem cell board's intellectual property tax force, during the committee hearing.
"We look forward to hearing many points of view about this," he said.
The IRS rules are complicated; in general, they ban states from issuing tax-exempt bonds if the bulk of the money is used for private business purposes, and if a substantial portion of the bonds are repaid with money from private sources.
California could fall into that category if it provides research grants to private institutions and receives royalties or licensing fees in return, experts said.
Taxable bonds have higher interest rates, which would increase the cost to taxpayers over the lifetime of the bonds.
In its analysis for the voters' guide, the state legislative analyst's office wrote that California would receive revenue from patents, royalties and licenses resulting from stem cell research. The amount of the revenue was unknown, it said, but could be significant.
During the campaign, stem cell leaders touted their own study predicting that the state could reap as much as $1.1 billion in royalty payments.
But doubt about such claims began to surface in August when the California Council on Science and Technology, an advisory body of scientific experts, issued a report recommending that the state waive its right for a share of royalties because it might discourage companies and investors from participating in the research.
The advisory panel recommended that California mirror its stem cell policies on the Bayh-Dole Act, which regulates patenting of federally funded research. Many experts have credited Bayh-Dole with helping to speed the transformation of university research, for example, into marketable products.
But critics argued Monday that it also has led to a "patent thicket" by encouraging universities and other institutions to obtain numerous patents. Companies that want to do something new often have to negotiate with numerous patent holders to proceed, they said.
Other options mentioned Monday for ensuring a public benefit to California's stem cell investment included requiring grant recipients to make their basic research findings and tools available to other researchers, or setting up a patent pool, in which companies would share their rights to inventions.
Yet another possibility would be requiring a tiered pricing arrangement, with the lowest prices made available to low-income residents.
In the midst of the debate, many patient advocates argue that they don't want to do anything that could jeopardize or slow research that could lead to groundbreaking cures or therapies.
The state has time to wrestle with such issues since it is blocked from issuing bonds until lawsuits challenging the constitutionality of the stem cell program are resolved.
Penhoet predicted the stem cell's intellectual property task force will make a recommendation to the full stem cell board on such matters in February.
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