2

CIRM’s Initial Processes and Funding Model

As noted in Chapter 1, CIRM was founded in response to the uncertainty regarding the availability of federal funds for stem cell research, particularly research employing human embryonic stem (hES) cells, and with the aim of both moving stem cell research and its applications forward and establishing California as a leader within the broader field of regenerative medicine. This chapter reviews the origins of CIRM and the committee’s assessment of the implications of those origins for the Institute’s ongoing work. The chapter then examines the funding model that supports CIRM’s work, the impact of this economic investment, and the consequences of CIRM’s funding model for the broader scientific enterprise. Next is a comparison of CIRM’s funding model with comparable science funding programs in other states. The final section presents the committee’s conclusions and recommendation regarding the future of CIRM once the funds originally authorized for the Institute have been expended.

CIRM’S ORIGINS

CIRM is in many ways a bold social innovation. Its existence is the result of the work, initiative, commitment, and imagination of a broad, diverse, and evolving group of dedicated citizens, scientists, university leadership, disease advocacy organizations, and some members of the California Legislature. The various constituencies involved were united by their shared desire to promote additional efforts in an arena of the biomedical frontier that they believed to be especially promising and that was not expected to



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2 CIRM’s Initial Processes and Funding Model A s noted in Chapter 1, CIRM was founded in response to the uncer- tainty regarding the availability of federal funds for stem cell research, particularly research employing human embryonic stem (hES) cells, and with the aim of both moving stem cell research and its applications forward and establishing California as a leader within the broader field of regenerative medicine. This chapter reviews the origins of CIRM and the committee’s assessment of the implications of those origins for the Institute’s ongoing work. The chapter then examines the funding model that supports CIRM’s work, the impact of this economic investment, and the consequences of CIRM’s funding model for the broader scientific enterprise. Next is a comparison of CIRM’s funding model with compa- rable science funding programs in other states. The final section presents the committee’s conclusions and recommendation regarding the future of CIRM once the funds originally authorized for the Institute have been expended. CIRM’S ORIGINS CIRM is in many ways a bold social innovation. Its existence is the result of the work, initiative, commitment, and imagination of a broad, diverse, and evolving group of dedicated citizens, scientists, university lead- ership, disease advocacy organizations, and some members of the California Legislature. The various constituencies involved were united by their shared desire to promote additional efforts in an arena of the biomedical frontier that they believed to be especially promising and that was not expected to 29

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30 THE CALIFORNIA INSTITUTE FOR REGENERATIVE MEDICINE receive adequate support from the more traditional sources of funding in biomedicine. In addition, they believed that a state initiative in this arena would not only hasten the development of new disease treatments and/or cures but also strengthen California’s position as one of the world’s major centers of biotechnology.1 Assembling such a broad coalition of citizens and institutions that were united in their enthusiasm for stem cell research but had somewhat different agendas had implications not only for the design of Proposition 71 but also for the ongoing programs and operations of CIRM. The built- in allocation of ICOC board seats to university leadership, patient advo- cates, and members of the biotechnology industry, for example, ensured that a high percentage of those seats would be permanently occupied by persons with almost unavoidable, conflicts of interest, whether actual or perceived, between their roles as ICOC board members and their other, non-CIRM responsibilities. At the very least perceived conflicts are one fac- tor that have led some observers, perhaps unfairly, to continue to question the integrity and independence of some of CIRM’s decisions (Darnovsky, 2012; Hayden, 2008; Jensen, 2012). In addition, while the restrictions on amending the administrative structure of CIRM established in Proposition 71 had the advantage of protecting the Institute’s ongoing operations from outside interference in an ethically controversial arena, they also made it difficult to modify the organization’s structure in response to experience and/or changing circumstances (LHC, 2009). Moreover, these protections, whatever their benefits, appear to some to shield CIRM from the normal accountability mechanisms in place for state agencies (Darnovsky, 2012). The point the committee wishes to stress here is that the manner in which an organization is created and sustained and the understandable desire to protect its initial structure and objectives from being undermined have long- term consequences that may be difficult to anticipate and address. In adopting Proposition 71 in the 2004 general election, the voters of California approved an amendment to the state constitution making it a constitutional right for California residents to engage in stem cell research, including research using hES cells, and requiring the state to devote con- siderable resources to such efforts and to the field of regenerative medicine more generally. Once again, it is important to stress that this was accom- plished at a time in the nation’s history when, as outlined in Chapter 1, the ethics of research using hES cells was the focus of serious disagreement in Washington, DC, and elsewhere; when future federal funding for research in this arena was highly uncertain; and when additional methods of creating 1  California Stem Cell Research and Cures Initiative, Proposition 71 (2004) (codified at California Health and Safety Codes § 125291.10-125291.85). 

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CIRM’S INITIAL PROCESSES AND FUNDING MODEL 31 pluripotent stem cells by reprogramming somatic cells (induced pluripotent stem cells) had not yet been demonstrated. In addition to work to accelerate stem cell science and its translation into effective new disease treatments and/or cures, another stated goal of the establishment of CIRM was to invigorate California’s biotechnology sector and produce a set of economic benefits for the state (Baker and Deal, 2004; Klein, 2011; Klein and Trounson, 2011). These potential economic benefits ranged from improving economic productivity, to generating new high-paying jobs in the biotechnology and related sectors, to lowering health care costs and thus improving the state’s budget situation. CIRM’s central mission, however, is to “support and advance stem cell research and regenerative medicine under the highest medical and ethical standards for the discovery and development of therapies and cures” (CIRM, 2010, p. 2). Those eligible for CIRM funds are California’s universities, hospitals, medical schools, and other research institutions, including for-profit orga- nizations doing research and development in this area. Implications of CIRM’s Origins The structure of the evolving coalition assembled to enact Proposition 71 and then reflected in its articulation ensured broad buy-in to the overall project by a diverse array of stakeholders that were able to convince the voters of California to support the initiative.2 Not surprisingly, the need to keep such a broad coalition together had direct implications for CIRM’s governance structure, for the claims made about the potential benefits of the initiative, and for the evolving nature of CIRM’s programs. While all stakeholders were motivated by the strong desire to find cures for certain currently intractable diseases, some members of the coalition and their supporters were especially interested in the prospect of stable long-term support for a significant and promising new area of biomedical research, others were most interested in the implications for access and social justice, and still others in the benefits to the California economy and the state’s taxpayers (YESon71, 2004). Needless to say, many supporters were inter- ested in all of these objectives. All stakeholders understood that achieving these objectives would require significant progress on the scientific frontier; nonetheless, as stem cell research developed rapidly in California and else- where, these varied interests conflicted at times, creating some friction in the process of deciding about the allocation of CIRM funds among various priorities or particular aspects of the frontier in this aspect of regenerative medicine (Adelson and Weinberg, 2010). In short, the challenges confronted 2  The energetic campaign for Proposition 71 included polling of the electorate to discern both their aspirations and their concerns.

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32 THE CALIFORNIA INSTITUTE FOR REGENERATIVE MEDICINE in dealing successfully with the political processes surrounding attempts to require the government to fund scientific projects of any kind can have consequences for the ongoing nature and integrity of the resulting scientific program. This is true for CIRM, but CIRM is not unique in this regard. The nature of the vigorous and expensive campaign mounted to pro- mote the passage of Proposition 71 also had implications for the initial development and operations of CIRM. On the one hand, the broad public mandate that resulted from the proposition’s passing easily (59 percent to 41 percent) with the support of more than 7 million California voters gave CIRM momentum to start rapidly and persevere through legal challenges that hindered the early implementation of its programs (Hayden, 2008). On the other hand, the competitive nature of the political campaign may have led some proponents of Proposition 71 to overpromise either clinical or economic benefits of its passage. If this was the case, as some critics allege, it may affect how voters evaluate CIRM and, equally important, how the Institute sets its funding priorities in the years immediately ahead (Hiltzik, 2009). As discussed in Chapter 4, although CIRM’s early emphasis was largely on funding investigators examining the fundamentals of stem cell biology, the development of special facilities, and a wide variety of training programs, the Institute is currently placing much greater emphasis on the translation of discoveries in the laboratory toward the effective treatment of a wide range of disease areas. CIRM’s Governance Proposition 71 outlined a detailed governance structure for CIRM. Most important, it provided for a 29-member Independent Citizens Over- sight Committee [ICOC] as the Institute’s governing authority. The ICOC was to be composed of representatives of specific disease advocacy groups, leaders of California’s research universities, and representatives of both California’s biotechnology industry and other nonprofit California-based research institutions. While this profile of the ICOC was understandably designed to include representatives of a broad range of stakeholders most concerned and most knowledgeable about the future of regenerative medi- cine, they were also the constituency expected to benefit most directly and immediately from CIRM’s grants. Detail on the Institute’s governance structure and the committee’s assessment of its effectiveness and challenges is presented in Chapter 3. As noted above, one consequence of the context surrounding CIRM’s origins was the desire to build into Proposition 71 an oversight structure that would be difficult to change and by its design would be characterized by inherent conflicts of interest. Proposition 71 permitted legislative modifi- cations to CIRM for 3 years after its adoption and instituted a supermajor-

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CIRM’S INITIAL PROCESSES AND FUNDING MODEL 33 ity requirement for legislative changes following this initial period. These restrictions offered CIRM some genuine and useful protections from politi- cal interference—a real risk given the ethical controversy surrounding hES cell research—but also created barriers to changes that might have helped the Institute optimize its operations in response to its accumulating experi- ence within a rapidly changing scientific field. CIRM’S FUNDING AND ECONOMIC IMPACT CIRM’s Funding Model One way in which CIRM differs from most other scientific research programs is its funding model. Proposition 71 specified a financing scheme to support CIRM’s programs whereby the state would issue general obli- gation bonds,3 effectively transferring the burden of financing CIRM’S programs from current to future taxpayers. These bonds were estimated to cost the state about $5.5-$6.0 billion in interest and principal (Baker and Deal, 2004) over their 30-year life.4 Proposition 71 also required the state to capitalize all interest expenses during the first 5 years, thus shielding the state’s general fund from any CIRM-related charges during this initial period.5 The critical underlying concepts of this funding model were twofold. First, as already noted, it would provide a relatively stable source of funds in an important and exciting arena of biomedical research where ongoing uncertainty regarding the availability of federal funding was especially acute. In this respect, however, it is important to note that CIRM funding is competitive for any particular institution or individual researcher or research group, and none is assured of continued funding throughout the 10-year period. Thus while the availability of funds for the field of regenera- tive medicine as a whole enjoyed a certain stability in California, there were no such guarantees for individual researchers or research teams. Moreover, 3  General obligation bonds are a form of long-term borrowing in which the state issues mu- nicipal securities and pledges its full faith and credit to their repayment. The bonds are repaid over many years through semiannual debt service payments. The California Constitution requires that general obligation bonds be approved by a majority vote of the public and sets repayment of general obligation debt above all other obligations of the state except those for K-14 education (Department of General Services of State of California, 2010). 4  This estimate reflects not only interest costs on the general obligation bonds but also a provision calling for all interest costs during the first 5 years to be capitalized. 5  This provision also allowed for the possibility that by the time any associated charges im- pacted the general fund, the fiscal benefits of CIRM’s activities might already be supplementing general fund revenues. Although not specifically provided for in Proposition 71, from time to time the state may choose to meet its obligations to CIRM by issuing commercial paper pending a large placement of general obligation debt by the state.

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34 THE CALIFORNIA INSTITUTE FOR REGENERATIVE MEDICINE in both basic and clinical research, even a decade is not a long time for the full maturation of important research and development initiatives. Nev- ertheless, the availability of this substantial and relatively stable funding source for the field of regenerative medicine has been important in enabling CIRM to adopt strategic long-term goals; allowing grantees to attract more than $1 billion in matching funds from private sources, primarily for facili- ties; and helping to make California an attractive destination for both early- stage and established stem cell scientists (Levine, 2006, 2012). Second, this unique funding model was designed to spread the ultimate financial burden of supporting CIRM’s efforts over those future cohorts of patients and taxpayers expected to be the most likely beneficiaries of these efforts, who would also be the ones obligated to repay the bonds. While many studies have estimated very high economic returns on investments in science (e.g., Health Economics Research Group et al., 2008; Mansfield, 1991, 1998; Murphy and Topel, 2003; OTA, 1986), the economic impact of any particular scientific project or work in one small arena of the scien- tific enterprise is subject to much greater uncertainty. Moreover, scientific progress made in one particular locale, such as California, is dependent on complementary scientific developments elsewhere. Thus in the globalized world of biomedical research, it is always a challenge to isolate the actual dividends that can be attributed to any local efforts from those due to discoveries made elsewhere, or in the present context, even those resulting from efforts in California not funded by CIRM. In any case, if the best efforts in stem cell research in California and elsewhere were not to yield clinical or other benefits to the next generation, that generation would bear a cost burden not offset by any corresponding clinical benefit or any long- term economic benefits to the state.6 In many ways, investments in research and development appear to be analogous to more prosaic infrastructure investments in, for example, roads, bridges, and power networks, which often are financed through the issuance of long-term bonds. Perhaps the most significant difference, how- ever, is the uncertainty surrounding investments in the biomedical enterprise and the precise nature and timing of the benefits expected to accrue. This is especially true, as noted above, if the investments are focused in one particular arena of the biomedical frontier. In such cases, it is particularly difficult to decide whether the risks should be borne by current or future generations of taxpayers. It is, of course, attractive to be relieved of annual negotiations over the allocation of current tax revenues, but as a general approach to financing research and development, the CIRM model simply 6  Studies that estimate the economic returns on investments in science and technology have their critics, who focus on the methodologies used to estimate those returns. A concise sum- mary of such views is provided by Macilwain (2010).

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CIRM’S INITIAL PROCESSES AND FUNDING MODEL 35 replaces the annual discussion surrounding the allocation of current tax revenues with arguments over the allocation of future tax revenues. If, however, particular initiatives are viewed as a modest complement to the more standard “pay as you go” model of biomedical research funding, these matters are not of great concern. In summary, there are two principal differences between the CIRM funding model and the more conventional model used, for example by the National Institutes of Health (NIH) and private foundations: the use of long-term bond financing for contemporary research, and the stability of the state’s financial commitment to CIRM and the field of regenerative medicine over the 10-year period. It is also important to note that although CIRM’s funding as provided through the terms of Proposition 71 is assured for only 10 years, the Institute itself has no such time limit, and if addi- tional funds were to become available or if the bond proceeds were not fully allocated, CIRM’s activities could continue for a longer period. On the other hand, it is worth reemphasizing that the timeline for continued funding of particular scientists or scientific projects is much more limited than CIRM’s horizons, usually 3 to 4 years (CIRM, 2012a). This situation is in fact analogous to that of NIH, in which funding for the institutes tends not to shift dramatically from year to year, but the funding of particular researchers and research areas may shift relatively rapidly.7 Of course, continued funding is always much more uncertain in areas where there are serious ethical controversies. It is quite clear that the overall stability of CIRM funding facilitated a longer-term outlook and thus the prioritizing of crucial long-term invest- ments in both specialized facilities and human capital. These are substantial benefits. Although the relative stability CIRM offered the field of regenera- tive medicine in California was a notable improvement over the uncertain prospects for federal funding, especially for hES cell research, the roughly 10- to 15-year period for expending the agency’s initial bond funding, as noted above, is not a long time in which to realize the full benefits of basic or clinical biomedical research. Thus, the creation of CIRM and the development of its programs almost immediately raised questions about its long-term future and the impact of the expiration of its funding on the full career path of scientists recruited to the field or the state. CIRM has devel- oped an initial transition plan, but as the end of its bond funding draws closer, this uncertainty persists, creating challenges for both the Institute and scientists in the field. In essence, CIRM faced and continues to face the unusual challenge of ramping up a major new program in biomedical research and making the associated long-term investments while knowing 7  Itis useful at this point to note that annual NIH funding for biomedical research in Cali- fornia is roughly 10 times the CIRM annual budget.

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36 THE CALIFORNIA INSTITUTE FOR REGENERATIVE MEDICINE that the generous state support enjoyed by the program might be limited to 10 years. Perhaps the best way to consider the role of CIRM, as well as its dis- tinctive funding model, is both as a creative supplement to the more tradi- tional sources of biomedical research funding in the United States and as an innovative initiative designed to strengthen California’s biotechnology efforts. Whenever an exciting portion of the biomedical research enterprise is operating under conditions of uncertainty and/or inadequate commit- ments by traditional funding sources, this model can provide a strategic opportunity for a state to make an investment aimed at both maximiz- ing the vitality of efforts in that state and giving the state’s biomedical enterprise a long-term competitive edge (Klein and Trounson, 2011). The appropriateness of the particular approach selected by California voters in approving Proposition 71 for other states likely varies, depending on the nature of the science to be supported, the health and vitality of the state’s other research institutions and their investments in research and develop- ment, the state’s financial situation, and the willingness of voters and/or legislatures to impose costs on future generations in exchange for potential but uncertain benefits. It is clear, however, that CIRM’s perceived success did not go unnoticed by other states, which responded in some cases with initiatives and models of their own in the area of regenerative medicine and/ or in the broader biomedical arena, some of which are discussed below. Economic Impact of the Investment in CIRM California’s substantial investment in CIRM quite naturally raises the question of the actual economic benefits generated by this investment and just how these benefits relate to the costs of the program.8 Although overall investments in science and technology have transformed society and yielded enormous economic dividends, this does not mean that all investments in science and technology produce substantial economic dividends (Maddison, 2007). Many potential economic dividends can flow from thoughtful invest- ments in biomedical research. These include enhancing economic produc- tivity, expanding employment opportunities, and possibly providing some relief to government budgets through increased tax revenues and declining health care costs. In estimating the economic impact of investments in bio- medical research, two broad tasks must be undertaken. First, the economic benefits of any health gains must be compared against the costs of provid- 8  The committee realizes that any health benefits generated by CIRM’s efforts not only may yield some economic dividends but also have value in their own right regardless of their economic benefit.

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CIRM’S INITIAL PROCESSES AND FUNDING MODEL 37 ing the new disease treatments and/or cures. At this early stage in CIRM’s programs this component cannot be adequately assessed because the final costs of developing any treatment are unknown as are both the benefits to be realized and the time lag between the research investments and the devel- opment of new treatments. The second task is to consider the direct and indirect gains in gross state domestic product (GSP) from CIRM’s invest- ments in the biomedical enterprise and any further economic activity these investments stimulate. In this regard, although CIRM’s expenditure of $300 million a year clearly supports additional employment within California’s research community, as would any thoughtful investment of this magnitude, reliable estimates of the overall long-term economic impact on the state’s economy must await the accumulation of more information and a better understanding of the dynamics of the state’s contemporary economy. In particular and as already noted, the economic rates of return are highly sensitive to the lag between research and development expenditures and the deployment of new clinical modalities. In the case of CIRM’s research and development portfolio, the length of this lag is presently unknown. How- ever, it is important to note that the same could be said of any investment in work in a new arena of the scientific frontier.9 In short, assessing the long-term economic impact of particular bio- medical research activities is a complex task that requires considerable time and experience with any treatments and/or cures that are developed. In addition, one must disentangle the dividends realized from scientific work conducted elsewhere and from the efforts of CIRM-sponsored investigators. Thus, CIRM’s long-term impact on such critical aspects of the California economy as employment, state tax revenues, and health care costs beyond the shorter-term and temporary impact of its direct expenditures cannot be reliably estimated at this point in CIRM’s history. In this respect, the estimate of Baker and Deal (2008) that the CIRM program alone would support about 3,400 jobs as long as it was allocating about $300 million per year in research and development grants appears quite reasonable to the committee. To put this estimate in context, however, total employment in California is roughly 16 million, and NIH alone provides more than $3.5 billion per year to California research institutions. In conclusion, measuring the economic impact of biomedical research, especially work in a specific arena such as regenerative medicine, remains a difficult and complex task. At this stage of CIRM’s program, one can know only that (1) money has been borrowed and thoughtfully spent on a highly promising arena of the biomedical frontier; (2) CIRM’s expendi- tures are supporting approximately 3,400 jobs; (3) CIRM’s resources have 9  The committee believes the decision to finance CIRM with future rather than current tax revenues has no discernible long-term impact on California’s economy.

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38 THE CALIFORNIA INSTITUTE FOR REGENERATIVE MEDICINE attracted substantial additional private and institutional resources to this research arena in California; (4) CIRM’s training programs have made a direct contribution to the training of stem cell researchers and research technicians; (5) CIRM’s funding has led to the publication of more than 1,168 articles, the submission of 92 disclosures and 40 patent applications, and the finalization of three license agreements (as of July 2012); and (6) CIRM has initiated energetic efforts to translate the scientific results of its programs to the bedside. These are substantial achievements, but assessing their longer-term economic impact is simply not possible with the informa- tion currently available. Consequences of CIRM’s Funding Model for the Broader Scientific Enterprise Although Proposition 71 clearly increased significantly the total national and international level of resources devoted to this area of regen- erative medicine, any prior constraints on how local resources can be allocated entail at least some modest costs for the global enterprise. In this case, the constraint is that the resources must be spent in California. While California has a large and excellent biomedical research community, CIRM must operate under this constraint, and the intellectual property regulations adopted by the Institute, for example, could impose transaction costs on working with other groups outside of California. This constraint is under- standable given the direct burden of funding CIRM on future California’s taxpayers, but as already noted, it is also true that CIRM’s programs benefit substantially from work carried on elsewhere and financed by others. The committee does not believe this is currently a serious problem for CIRM and the field of regenerative medicine. If many states were to adopt similar programs, however, then it would be important to consider the impact on the vitality of the overall national effort if harmonization of policies and regulations were not achieved. This would be a particularly important con- sideration as progress on the research frontier induced movement toward commercialization, which is, for the most part, a national and international enterprise. Over time there would be a national benefit in the harmoniza- tion of regulations. Because CIRM-financed researchers benefit, often for free, from research being conducted elsewhere and the commercialization of any discoveries, it might be easier to attract business partners if one set of national rules were understood and followed by all.

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CIRM’S INITIAL PROCESSES AND FUNDING MODEL 39 CIRM IN THE CONTEXT OF OTHER STATE-BASED SCIENCE AND TECHNOLOGY INITIATIVES Historically, the states took little direct interest in stimulating the vital- ity of the scientific enterprise within their borders, although their support for state colleges and universities certainly advanced their scientific enter- prise indirectly. In the initial post–World War II decades, the states greatly expanded their support for postsecondary education, but for the most part left science policy to initiatives of the federal government. Subsequently, however, the states began to assume a more independent role in science and technology policy as a means of enhancing their economic prospects through improvements to their research and development base, as well as providing new opportunities for their citizens. Indeed, many states began to notice that states with a tradition of support for research within their systems of higher education attracted technology-intense industries, which were growing in importance. Although CIRM is unique among state programs in many respects, it reflects this pattern of state efforts over the past few decades to support initiatives in science and technology. Although there is substantial hetero- geneity among such state programs, reflecting in part the role of states as policy laboratories, several trends have been observed in the development of these programs over time (Plosila, 2004). Often, a key element in this dynamic has been greater recognition by state policy makers of the potential role of particular components of university research programs in state and regional economic development. Over time, the result has been a number of initiatives to support targeted university-based research. These research funding policies represent a shift from earlier state policies that tended to focus on recruiting existing firms or large-scale scientific projects, such as the Microelectronics Computer Consortium and the Superconducting Super Collider (Plosila, 2004). The creation of CIRM by California voters and the agency’s focus on advancing stem cell science and the field of regenerative medicine fall squarely within these larger trends. As states focused their targeted science and technology policy initiatives more on certain university-based efforts in the 1980s and 1990s, a wide variety of programs were developed (Berglund and Coburn, 1995). A recent examination of the development of state science policies has identified three major classes of programs intended to build state scientific capacity: uni- versity research grant programs, eminent scholars programs, and centers of excellence programs (Feldman et al., in press). Of these, CIRM most closely parallels university research grant programs, the oldest of which date to the early 1980s, which have been adopted in some form by nearly 30 states. Initially, most of these programs supported a broad range of science, but states have increasingly narrowed their focus so as to develop expertise

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40 THE CALIFORNIA INSTITUTE FOR REGENERATIVE MEDICINE and competitive advantage in a specific area (e.g., information technology or biosciences). A focus on life sciences or health-related research has been particularly common over the past decade, as at least 17 states have chosen to contribute at least a portion of their tobacco settlement funds to sup- port such research (NGA, 2001). At the same time, it should be noted that, while specialization and focus can have substantial benefits, they must be balanced by the realization that scientific progress in specific areas usually depends on complementary developments in other arenas of the scientific frontier and in other geographic areas. Other common state programs include those designed to attract highly productive researchers to a state. These programs—often termed eminent scholars programs—date to the 1960s, when Virginia adopted its program, and have gained in popularity in recent decades. CIRM’s research leadership grants, which provide funding to recruit leading stem cell scientists to California, fall within the tradition of these programs. The value and impact of these state programs designed to fund research grants or to recruit scientists should be assessed in the broader context of a state’s support for its overall research and development enterprise, includ- ing, for example, its research universities. If these programs come at the expense of other key aspects of the state’s investments in the vitality of its research and development enterprise, then they may represent at best little more than a reallocation of existing funds and may have little if any net effect on either the enterprise or its economic prospects. Even as these supportive policies have been adopted, numerous states have taken action to restrict scientific inquiry in morally contentious areas. Many of these state policies have focused on fetal and embryonic research. These policies take several forms, including an outright ban on research using aborted fetal tissue or human embryos created in vitro; a ban on specific techniques, such as somatic cell nuclear transfer; or a restriction on the use of state funding for certain research. Befitting the ethically conten- tious nature of these fields, some states have adopted essentially opposite policies, indicating that specific types of research are legal in the state. In some cases, including California’s, these rules have accompanied or been followed by state funding, while in other cases, they are stand-alone poli- cies. States adopting these sorts of supportive policies have pursued two main strategies: (1) identifying and establishing the legality of specific research techniques or (2) adopting laws indicating that any research legal under federal law is legal under state law.10 10  More information on these state laws can be found in Andrews (2004) and in a National Conference of State Legislatures (NCSL) database updated through 2008 (NCSL, 2008).

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CIRM’S INITIAL PROCESSES AND FUNDING MODEL 41 Comparison of CIRM and Analogous State Science Funding Programs While CIRM fits into some of the broader patterns seen in state sci- ence and technology policy, it differs from other state-based efforts on several important dimensions. To provide an additional perspective on CIRM and better understand how it is similar to and different from other state science funding programs, the committee reviewed a small number of other state programs that are comparable in some ways to CIRM. It is important to note that the committee is not evaluating these programs, but reviewing some of their key characteristics to provide additional perspec- tive on CIRM. Given CIRM’s focus on stem cell research and regenerative medicine, the committee’s comparison concentrated on other state programs specific to these fields. In addition to California, five other states have adopted programs that provide funding specifically for stem cell research, including research on hES cells (Karmali et al., 2010). These state programs vary in scale, but none are as large as CIRM. New York’s program, the New York State Stem Cell Science Research Fund (NYSTEM), is closest in size, with a $600 million, 11-year commitment. Connecticut, a much smaller state than either California or New York, also has a long-term program, with a $100 million, 10-year commitment. Other states have chosen to provide fund- ing for stem cell research without a specific long-term commitment. These states include Maryland, which has provided approximately $91 million in funding since 2006, and New Jersey and Illinois, both of which provided stem cell–specific funding in the past decade. These latter two programs were on a smaller scale than those of the other states (approximately $15 million each) and are not awarding new grants, and thus are not considered further here. CIRM’s challenge—creating and thoughtfully administering a much larger-scale funding program—distinguishes it in important ways from these smaller state stem cell programs. For this reason, the committee also included the Cancer Prevention Research Institute of Texas (CPRIT) in its comparison. While the focus of this program differs from that of CIRM, the two have numerous similarities, including the use of bond funding, a $3 billion total budget, and an approximately 10-year time frame. These pro- grams are described briefly below and also discussed in Chapters 3 and 5. NYSTEM: New York’s Stem Cell Program NYSTEM dates to early 2007, when, as part of the state’s 2007-2008 budget, the Legislature and Governor Eliot Spitzer committed to provid- ing $600 million in funding for stem cell research over 11 years. With the adoption of this law, New York became the second-largest state funder of stem cell research, behind California. Although the program is scheduled

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42 THE CALIFORNIA INSTITUTE FOR REGENERATIVE MEDICINE to continue for 11 years, its funding is subject to the annual appropriations process and, because of budget pressures, has lagged slightly behind the $50 million annual appropriation that was anticipated. At one point, finan- cial concerns led to a delay in issuing new requests for applications (RFAs) and to an approximately year-long gap in funding of new awards, illustrat- ing the benefits of the more secure bond funding model used by CIRM. The program has a broad funding portfolio, supporting various types of research grants and education and training efforts, as well as renovation or improvement of shared laboratories. NYSTEM awards grants both in response to broad investigator-initiated RFAs and for more targeted pro- grams. One recent award focuses on the use of somatic cell nuclear transfer to create hES cell lines. This research takes advantage of NYSTEM’s deci- sion to allow the compensation of oocyte donors for biomedical research (Roxland, 2012) and would be unlikely to be undertaken by a CIRM- funded scientist given CIRM’s rules against compensating egg donors and the difficulties scientists have experienced in recruiting uncompensated donors (Egli et al., 2011). In late 2011, NYSTEM issued an RFA (Consortia to Accelerate Therapeutic Applications of Stem Cells) intended specifically to move stem cell research toward the clinic. Connecticut’s Stem Cell Research Program Connecticut’s stem cell research program was signed into law by then- Governor Jodi Rell on June 5, 2005, making Connecticut the third state (after New Jersey and California) to develop a program focused specifically on funding stem cell research. Through July 2012, the state had awarded approximately $69 million in stem cell grants to Connecticut researchers. The initial act creating the program appropriated $20 million for grants supporting embryonic or adult stem cell research and specified that an addi- tional $10 million should be dispersed from the state’s Tobacco Settlement Fund for the following 8 fiscal years (through the fiscal year ending June 30, 2015). Connecticut’s stem cell research program typically offers one grant cycle per year. This annual funding cycle includes investigator-initiated grants for established investigators as well as smaller seed grants. Con- necticut also funds larger group projects involving collaborations among multiple laboratories. In the two most recent RFAs, the state explicitly indicated that it would give priority to group projects that bring together academic and industry partners to focus on the development of stem cell therapies for specific diseases. This program shares some similarities with CIRM’s disease teams and represents Connecticut’s most direct effort to move its funding toward translational research. Connecticut also provides funding for core facilities to support stem cell research by multiple investi-

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CIRM’S INITIAL PROCESSES AND FUNDING MODEL 43 gators, akin in principle to the infrastructure awards made by CIRM early in its existence (see Chapter 4). The Maryland Stem Cell Research Fund Maryland’s stem cell research program was established through legisla- tive action in 2006, following a contentious multiyear debate. Specifically, then-Governor Bob Ehrlich signed the Maryland Stem Cell Research Act of 2006 on April 6, 2006, creating the Maryland Stem Cell Research Fund (MSCRF), designed to promote state-funded stem cell research through grants and loans to both public and private entities in the state. Funding lev- els for the MSCRF are determined each year by the General Assembly and have ranged from $10.4 million in 2011 to $23 million in 2008. Through June 2012, Maryland had completed six rounds of funding, awarding more than 250 grants totaling approximately $91 million. Maryland’s program typically offers one funding cycle each year. This cycle includes a broad investigator-initiated program designed for faculty with preliminary data, a smaller exploratory grant program, and funding for postdoctoral fellow- ships. The MSCRF requires that funded grants include human stem cell research but imposes no requirements on the specific type of human stem cells studied. In early 2012, Maryland issued a new RFA focused on pre- clinical and clinical research, which specifically targets for-profit companies conducting stem cell research in the state. The Cancer Prevention Research Institute of Texas CPRIT was established following passage of a constitutional amend- ment by Texas voters in 2007 that authorized the state to issue $3 billion in bonds to support cancer research and prevention programs. CPRIT’s authorizing legislation was modeled, at least in part, on CIRM, but with a focus on a less controversial research field (Ackerman, 2007). CPRIT’s tasks include implementing the Texas Cancer Plan, increasing the research capac- ity of the state’s institutions of higher education, and expediting innovation in cancer research. CPRIT funds awards for both basic and translational cancer-related research; commercialization awards, designed to help bring cancer-fighting drugs and appropriate medical devices to market; and can- cer prevention awards, designed to support evidence-based screening and prevention projects and, ultimately, increase cancer survival rates. CPRIT research grants must be supported by matching funds from another source equal to one-half of the CPRIT award. These matching funds must be spent in the same general area of cancer research as the CPRIT-funded project and can come from a range of sources, including federal sources such as NIH, state sources, and unencumbered university funds, as well as nongov-

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44 TABLE 2-1  Characteristics of CIRM and Comparable Funding Programs California New York Connecticut Maryland Texas Origin Voter initiative Legislature Legislature Legislature Voter initiative Financial commitment $3 billion $600 million $100 million Not specified $3 billion Funding mechanism Bonds Annual appropriations Annual appropriations Annual appropriations Bonds (tobacco settlement funds) Awards announced to ~$1.6 billion ~$221 million ~$69 million ~$91 million ~$760 million date Approximate duration 10 years 11 years 10 years Open-ended 10 years First awards 2006 2008 2006 2007 2009 NOTE: Funding totals as of August 2012. SOURCES: California Program: http://www.cirm.ca.gov; New York Program: http://stemcell.ny.gov; Connecticut Program: http://www.ct.gov/dph/ cwp/view.asp?a=3142&q=389702&dphNav_GID=1825; Maryland Program: http://www.mscrf.org; Texas Program: http://www.cprit.state.tx.us.

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CIRM’S INITIAL PROCESSES AND FUNDING MODEL 45 ernmental funds (e.g., private funds, venture capital investors, foundation grants). Through August 2012, CPRIT had awarded 429 grants totaling approximately $760 million. CPRIT encountered controversy in May 2012 when its chief scientific officer resigned, citing concerns about the Institute’s scientific review process (Weber, 2012). Summary of Comparable State Programs The above brief review of comparable state programs illustrates that state policy makers have a range of options to consider when attempting to support biomedical research and encourage biotechnology-related eco- nomic development. These programs differ substantially in their origins, their scale, their duration, and their financing mechanisms, among other characteristics (as discussed in greater detail in Chapters 3 and 5). As was the case with CIRM, each of these policy designs and implementation choices can affect how the program operates and how well it fulfills its goals and the goals of the taxpayers who provide it with financial support. A high-level summary of CIRM and the comparable programs discussed in this section is shown in Table 2-1. CONCLUSIONS AND RECOMMENDATION In many ways, CIRM represents an extraordinary experiment result- ing from the dedication, interest, drive, and imagination of its sponsors. Its initial efforts to establish human and physical capital certainly are necessary steps toward the development of a scientific environment for regenerative medicine in California that is conducive to establishing and sustaining leadership in this area of medical research and to eventual clinical success. Moreover, the work of CIRM-sponsored researchers continues to enrich regenerative medicine everywhere, just as CIRM’s efforts continue to benefit from and be inspired by many exciting new developments in regenerative medicine taking place both within and outside of California. The CIRM funding model, like all investments on the scientific frontier, represents a wager on the future, but the distinctive aspect of this model is the imposi- tion of current research costs on future generations. If all goes well, the costs and benefits will be experienced by the same cohort of taxpayers. Given the uncertainty of progress in any specific arena of the biomedical frontier, however, the costs could be shouldered by a generation that neither approved nor benefited from this investment. Regarding the origins of and funding model used by CIRM, the com- mittee reached the following conclusions:

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46 THE CALIFORNIA INSTITUTE FOR REGENERATIVE MEDICINE • The creation of CIRM was the result of the efforts of a broad-based coalition of California citizens that was successful in mobilizing a significant state investment in a particular arena of the biomedical frontier. At the time of its establishment CIRM was an imaginative social innovation. • To support both an initial set of investments in facilities and an initial and ongoing stream of research in this arena, Proposition 71 included a financing mechanism that, although no longer unique in the area of scientific research, was a funding innovation at the time. Instead of being financed by current tax revenues, these investments have been financed by future tax revenues through the issuance of long-term general obligation bonds of the State of California. As a result, the costs of these contemporary investments in the science of regenerative medicine have been transferred to future cohorts of taxpayers, who were presumed to be the principal beneficiaries of CIRM’s programs. • The stability offered by the terms of Proposition 71 to critical aspects of the field of regenerative medicine in California has allowed CIRM to engage in long-term planning; develop a compre- hensive long-term funding strategy, including support for training, infrastructure, and research; attract significant private funding to its capital projects; and recruit scientists to the state. At the very least, this should enable California to sustain an enhanced presence in this arena over the longer term. • The CIRM initiative, although unusual in its size and with many distinctive features, falls into a long-term pattern of initiatives by individual states that promote the vitality of particular aspects of their research and development sectors. • It is not possible at this stage of CIRM’s work to provide any reli- able estimate of its long-term economic impact, particularly with respect to initial projections of cost savings to the state’s health care budget. For other states and countries that may look to CIRM’s funding paradigm for their own initiatives, the committee offers the following observations: • The development of a broad coalition of supporters facilitated both the passage and implementation of CIRM. Such coalition building and substantial financial resources are probably a neces- sary condition for other states or countries developing targeted research funding programs dependent on the support of a broad constituency.

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CIRM’S INITIAL PROCESSES AND FUNDING MODEL 47 • States vary in their use and availability of a public initiative mecha- nism that can require state government to undertake particular initiatives independently of the state legislature and/or administra- tion. Where such a mechanism is available, it offers the benefits of wide public engagement, but also entails the danger that regardless of how well intentioned these initiatives are, they may produce an overall portfolio of state research and development efforts that is suboptimal. This is also a danger of any action by state government that pursues particular interests at the expense of a broader set of needs. As with all efforts to promote science, moreover, whether by voter initiative, research proposal, or legislative initiative, it is necessary to guard against the risk of overselling the program’s potential benefits in an effort to win the necessary support. • The appropriateness of the CIRM model for other states depends greatly on various contextual factors. In particular, it depends on the health and vitality of the state’s existing research institutions, its financial situation, and its willingness to transfer the risks and costs as well as the potential benefits to the next generation. CIRM is a dynamic organization that continues to be in a constant state of transition. Given the time frame established by Proposition 71, the committee believes it is important for CIRM to continue to develop its plans for taking fullest advantage of its achievements in order to help sup- port a sustainable future in which its funding circumstances could be quite different. The committee believes that in this process, it will be important for CIRM to give increased attention to industry inputs since the latter are crucial to a fuller understanding of what it will take to attract the much larger sums required to take laboratory findings to the “bedside.” As part of its 2012 Strategic Plan, CIRM set forth plans to establish a platform to enable grantees, and industry, among others, to continue their pursuit of CIRM’s mission after the Institute’s bond funding expires (CIRM, 2012b). The committee agrees with this goal. In addition, CIRM should share with the public any plans to obtain private-sector support for its ongoing activi- ties and how any such arrangements may affect continuing public obliga- tions, including those related to CIRM-funded intellectual property and its access plans (see the discussion in Chapter 5). CIRM and those it has funded have set in motion a significant scientific enterprise. Whether or not the state of California will choose to continue its support beyond the $3 billion already committed, there is an obligation to both the resulting scientific enterprise and the citizens of California to try to sustain the most promising initiatives. In principle a wide variety of initia- tives might at least in part substitute for the initial decade of support from the state. These might include new and novel partnerships with industry, or

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48 THE CALIFORNIA INSTITUTE FOR REGENERATIVE MEDICINE other funders of biomedical research and/or the expansion of efforts with CIRM’s existing partners both of which could attract new funding sources. If developments emanating from CIRM-supported research projects suggest promising clinical possibilities very large sums will be required to take these developments to the bedside and the closer the partnership with CIRM and California’s venture capital and biotechnology industry the more likely that real dividends will ensue. Indeed, such relationships might be a key to realizing the initial expectations of substantial dividends flowing from the entire effort. In support of CIRM’s strategic planning goal with respect to enabling grantees and others to carry on CIRM’s work, the committee makes the following recommendation. Recommendation 2-1.11 Develop a Sustainability Platform. CIRM should work with its current and future partners and those who have been substantial recipients of CIRM support to develop and present to the public its plans for sustaining the momentum of its achievements as it moves beyond its first decade of operations. Any such plan should address the following key strategic areas: •  ow, if at all, CIRM intends to obtain funding after the bond H proceeds have been spent, including the continuing role, if any, of additional state support and plans to obtain private-sector funding (e.g., from private foundations, industry, venture capitalists, other institutions), in anticipation of declining state support and/or in recognition of the need for a much larger investment of funds to take research findings through clinical trials. Particularly important is understanding how such developments might affect CIRM’s abil- ity to meet its obligations to the public, including (1) how manage- ment intends to ensure oversight of the ongoing responsibilities of grantees to the state and (2) how intellectual property, access plans, licensing of intellectual property, and revenue sharing will be managed. •  more detailed description of the nonprofit venture philanthropy A fund proposed in CIRM’s 2012 Strategic Plan and how this orga- nization would interface with the Institute. •  ow any new funding models would impact the role and structure H of the ICOC. The next three chapters contain the committee’s principal findings, conclusions, and recommendations on the implementation and operations 11  In the committee’s view, this recommendation can be carried out by CIRM without leg- islative action.

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