Royalty Rules at the California Stem Cell Agency: Business Friendly Changes Proposed

By Dr. Matthew Watson

If you are looking to follow the money
trail at the $3 billion California stem cell agency, next Thursday's meeting of its 29-member board of directors is a good place to start.

On the agenda are revisions in its
intellectual property rules, which are all about who gets paid and how much and when – should an agency-financed product generate
significant cash.
The key question about the proposed changes is whether they will generate an appropriate return for the state, given its $6 billion investment, including interest on the bonds that finance CIRM. The impact of the changes is not crystal clear. And the staff memo does not mention two important definition changes that appear to be quite business friendly.

During the 2004 ballot campaign that
created the stem cell agency, California voters were told that the
state would share as much as $1 billion or more in royalties. Eight
years later, no royalties have materialized since CIRM research has
not yet resulted in a commercial therapy.

At next week's meeting in Burlingame,
directors will be asked to modify CIRM rules for royalties that CIRM
staff said "could be a disincentive" for business. A staff memo said the proposals would alter provisions that create "administrative challenges and uncertainty." The memo asserted
the proposed changes would ensure "a comparable economic
return to California" equal to the existing provisions.
However, the memo provided no explanation or evidence for how that
result would come about. The proposed changes could also be applied
retroactively with the agreement of CIRM and the grantee.

Currently CIRM grantees and
collaborators must share as much as 25 percent of their licensing
revenue in excess of $500,000, depending on the proportion of agency
funding for the product. The IP rules also contain a provision for
payments in the event of development of a "blockbuster" therapy.
The staff memo described how that would work.

“It provides that grantees and
collaborators must share revenues resulting from CIRM funded research
as follows: after revenues exceed $500,000, three times the grant
award, paid at a rate of 3% per year, plus upon earning
$250M(million) in a single calendar year, a onetime payment of three
times the award, plus upon earning revenues of $500M in a single
calendar year, an additional onetime payment of three times the award
and, finally, in the instance where a patented CIRM funded invention
or CIRM funded technology contributed to the creation of net
commercial revenue greater than $500M in a single calendar year, and
where CIRM awarded $5 million or more, an additional 1% royalty on
revenues in excess of $500 million annually over the life of the
patents.”

The proposed changes would exempt "pre-commercial revenues" from the state's revenue sharing, the
memo said, in order to maximize the amount businesses can "re-invest
in product development." The proportionality payment provision
would be changed to require only 15 percent of licensing revenues if
CIRM's investment is less than 50 percent and 25 percent if it is
more than 50 percent. Revenue sharing would be extended to "commercializing entities." No definition of "commercializing entities" was provided in the board agenda material, but a June version of the changes defined them as "A For-Profit Grantee and its Collaborator or Licensee that sells, offers for sale or transfers a Drug, product(s) or services resulting in whole or in part from CIRM-Funded Research."

Not mentioned in the CIRM staff memo were two new provisions in the rules involving the definition of licensing revenue and the sale of a therapy. Both could be construed as quite favorable to businesses. According to the June version of the changes, licensing revenues are defined as a figure minus "a proportion of expenses reasonably incurred in prosecuting, defending and enforcing related patent rights equal to CIRM’s percentage of support for development." The sale provision says that royalties on "net commercial revenue" are not due until received from sales in the United States or Europe. That provision would appear to exclude California from receiving royalties on product sales in most of the world, where it is easier to receive regulatory approval for sale of new therapies and drugs. (See here -- page 2 -- for royalty provision and here for definition of "first commercial sale"-- page 3.)

The existing IP regulations are
enshrined in a 2011 state law. However, the law also provided that
they can be altered by the agency, the CIRM memo said, “if it
determined that it was necessary to do so either to ensure that
research and therapy development are not unreasonably hindered as a
result of CIRM’s regulations or to ensure that the State of
California has an opportunity to share in the revenues derived from
such research and therapy development.”

The memo continued,

"The proposed amendments re-strike
the balance both to ensure that industry will partner with CIRM and
to ensure that the State has the opportunity to benefit from
successful therapy development."

Board action next week will give the
go-ahead for posting the proposals as part of the official state
administrative rules process. They are subject to additional changes
in that process.

The agenda originally contained the full text of the changes. However, that material has been dropped from the board agenda. An earlier version can be found here and here. We have queried the agency about the reason for dropping the text in the board agenda.

(Editor's note: The agency has now reposted the version of the text of the changes that was on the agenda earlier, saying that it was having problems with its web site. For the definitions of terms, however, it is still necessary to refer to the June documents.)

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