|Sen. Deborah Ortiz|
Requiring royalties or returns to California on the
voter-approved $3 billion life sciences research bond act may lead to
higher costs and fewer willing partners, parties told a joint hearing
of several state legislative committees Oct. 31.
The funding program developed under Proposition 71, endorsed by 60
percent of voters last November, has awarded a few research grants as
its future and the state’s ability to sell bonds are tied up in
constitutional challenges in court.
Initiative supporters now are backing off claims in a study they
funded that concluded some $1 billion would be returned to the state
in royalties if therapies developed with Prop. 71 funds were
In addition, questions are being raised that requiring any returns
to the state could jeopardize the tax-exempt status of bonds sold,
meaning bonds issued to fund Prop. 71 research grants would have to
carry a higher interest rate to attract investors and thus cost the
state more money.
“My own position has been and continues to be that we need
very clear and strong standards to ensure that the state’s
interests are protected and that the state receives a meaningful
economic return on its investment,” said state Sen. Deborah
Ortiz (D). The testimony was received at a joint hearing of the state
Senate Health Committee and Subcommittee on Stem Cell Research
Oversight, both chaired by Ortiz, and the Assembly Health and Assembly
Requiring royalties may jeopardize the tax-exempt status of bonds
sold to fund 90 percent of the awards under Prop. 71 because of
federal tax code restrictions, said Juan Fernandez, public finance
director with the state Treasurer’s office, which acts as agent
for sale of state bonds.
Federal tax rules on bonds are “less than clear,”
according to Perry Israel, an Orrick, Herrington & Sutcliffe
partner and treasurer’s bond counsel. Prop. 71 raises novel
intellectual property tax issues “which have never been
addressed by the IRS.”
Further, Dan Carson, director of the health services section of the
independent Legislative Analyst’s Office (LAO), said if bonds
were taxable due to royalty arrangements, a 1 percent higher rate of
return would add $690 million in costs in the life of the bonds, or
about $23 million more in payments per year based on a 30-year time
The state has not yet requested a private letter ruling from the
IRS about the tax issues, Fernandez said.
Under Prop. 71, the Legislature cannot touch the initiative for
three years and any actions require a 70 percent majority. A
constitutional amendment (S.C.A. 13) proposed by Ortiz would set
specific standards regarding conflicts of interest for members of the
Prop. 71's Independent Citizen's Oversight Committee (ICOC) and
California Institute for Regenerative Medicine (CIRM) staff, as well
as members of working and advisory groups under CIRM. An initiative is
the only way lawmakers can tackle the constitutional amendment created
by Prop. 71, Ortiz said.
Lawmakers asked the California Council on Science and Technology
(CCST) to study statewide IP policies in general and specifically
Prop. 71. CCST’s draft report released in August concluded any
state IP policy must be consistent with the federal Bayh-Dole Act,
which leaves the royalties with the inventor and does not require
returns to the funder.
Rebecca Eisenberg, a University of Michigan law professor, in
testimony via telephone cautioned that the CCST report “reflects
the interest invested in the status quo” that is imposed under
Jesse Reynolds, Center for Genetics and Society biotechnology
accountability project director, agreed, calling the CCST report an
“echo chamber of enthusiasm for the status quo, that is the
CCST members include researchers, professors, attorneys, and
“This is not a report or council that’s accountable to
taxpayers” but to science and business constituents, “not
Californians as a whole,” said Jean Ross, executive director of
the nonprofit California Budget Project.
Bayh-Dole or Bust?
Yet conditions specific to California grants, such as favoring
California researchers, may scare off potential researchers or
investors, speakers told the joint hearing.
“I would worry about making your funding unattractive,”
Eisenberg said. “You’re not the only game in town, even
though you’re a very generous sponsor of stem cell
Bayh-Dole helped clarify IP ownership, a critical element
“because to effectively transfer intellectual property, there
has to be a high degree of clarity about who owns the invention and
who has authorizations to license,” said Allen Bennett,
associate vice chancellor for the University of California at
Bennett, co-chair of the CCST IP study group that produced the
report, noted that 40 percent of all patents UC Davis receives
generate revenues. LAO’s Carson said 70 percent of the $100
million in 2002 revenues UC received from its inventions were for life
Researchers are accustomed to Bayh-Dole, said Eisenberg.
“You’re fighting against powerful currents if you’re
trying to do something different,” she said.
While California is putting up $3 billion, industry is spending
hundreds of millions of dollars getting treatments to market, said
James Pooley, a partner with Milbank, Tweed, Hadley & McCloy in
Palo Alto, Calif., and a CCST member.
“And let me just put it this way--if industry does not find
competitive incentives to invest in CIRM research, it will simply
invest elsewhere. IP policy must be sensitive to this reality,”
ICOC, created by Prop. 71 to award grants and oversee CIRM, expects
its IP policy to be out by February, said Ed Penhoet, ICOC vice
“Today I am here to listen,” said Penhoet, who
co-founded Chiron Corp. “I am not here to offer any solutions to
IP problems. Our task is to listen to a broad constituency of the
public. We do not have a preformed opinion about which is the right
way for us to go.”
Outcomes promised Californians were the “foundational element
of public support” for Prop. 71, Ross said. A poorly crafted IP
policy could lead to erosion of public support. “Taxpayers
shouldn’t be asked to pay twice,” he said.
Center for Genetics and Society’s Reynolds said statements
after the election about Prop. 71 “feel like something of a bait
Jerry Flanagan, with the Foundation for Taxpayer and Consumer
Rights, argued that public control and oversight of IP is essential to
crafting an effective state policy.
Ortiz suggested conditioning grants on ensuring public agencies and
the poorest Californians receive a price cut on any therapies
developed with Prop. 71 funds.
But Eisenberg said that “it is much easier to use
intellectual property to increase prices than it is … to
“What’s really hard to do is simultaneously use
intellectual property to promote product development and reimburse the
state and lower prices,” she said, adding that it “is not
an easy fit in a business scheme.”
All the discussion may be academic depending on the outcome of
litigation pending in California Superior Court, Alameda County. A
Nov. 17 hearing is scheduled on a dismissal motion by California
Attorney General Bill Lockyer (D), research institutions, and patient
advocacy groups to a challenge of Prop. 71 (People’s Advocate
v. Independent Citizens’ Oversight Committee, Cal. Super.
Ct., No. HG05206766, motion filed 10/12/05; 4 MRLR 787,
Lockyer and the groups say the initiative has sufficient
safeguards. The California Family Bioethics Council’s amended
complaint challenges the funding of CIRM while the People’s
Advocate lawsuit argues that CIRM operates outside of state management
and control. The complaints have been consolidated.
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