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California Stem Cell Report

Publisher/Editor, David Jensen Statement to IOM-CIRM review panel April 9, 2012 Ladies and gentlemen: I first visited the California stem cell agency offices in early 2005. They were then in temporary quarters in Emeryville on the east side of San Francisco Bay. Computers in cardboard cartons stood on the floor still unopened. The tiny stem cell band was wrestling with such issues as payroll processing, phone service and office furniture. At the time and to her credit, the top scientist at the agency was reading a business management book by the famous former CEO of General Electric, Jack Welch. She recognized that the California's fledgling stem cell venture was in many ways more akin to a fastmoving startup business than an academic research effort. Today, seven years later, that is even more the case. Yes, the agency has matured. It now has more than a dozen employees, although one could argue it remains thinly staffed. It has handed out $1.3 billion in grants and loans. But it is still looking for the payoff promised to California voters in 2004. The time frame for action is short. The California Institute for Regenerative Medicine will run out of cash for new grants in the next four or five years. Its future is uncertain, as a headline in the journal Nature recently pointed out. Much can be said about the agency's past and the impact of Proposition 71, the ballot measure that created CIRM. There is no doubt that the effort has added to science, helped to maintain support for stem cell research even beyond California and contributed somewhat to California's economy. The agency also has had its share of difficulties. Indeed, Proposition 71 is both a curse and a blessing for CIRM. Its 10,000 words some of which deal with management minutia are virtually impossible to change, locked into state law and the state constitution. The measure created an excessively large governing board, set up a troublesome dual executive arrangement and created a conflict of interest situation that has seen nearly all of CIRM's cash go to institutions that are represented on its governing board. These issues are worthy of some examination by the Institute of Medicine panel. Dealing with them effectively over the next few years is important. The hard reality, however, is that little can be done to alter them. No one is going to change the size or composition of the board in the next few years or alter the dual executive arrangement or change the other Proposition 71 requirements that have hampered the agency. To do so would require overcoming other provisions of Proposition 71 that require super, super majority votes in the legislature to change the law or running another ballot campaign with its associated tens of millions of dollars in costs. The best course at this time would seem to be to work around the difficulties and focus intensely on what needs to be done over the next two to three years. Already the 29 directors of the California Institute of Regenerative Medicine are heavily engaged in assessing changes that could redirect hundreds of millions of dollars as the agency moves in perhaps new directions. Action is expected by the governing board by the end of next month. The IOM should consider offering some interim

guidance, given that its full report is not expected until November. Underlying the directors' deliberations are billion-dollar questions about the continued existence of the agency. Can it successfully seek another multibillion dollar bond measure in what is an extremely harsh political environment for spending in California? Can it wangle other types of financing, such as venture philanthropy, and put together a nonprofit that would ensure that CIRM research is not orphaned? The success of either of these efforts depends greatly on whether the stem cell agency can show concrete evidence of potential cures that will resonate with either possible donors or the California public. As I said, the time is short actually shorter than the five years that CIRM has left to make grants. Timing of bond measures is extremely important. To be successful, they are mostly presented to voters in general election years because a large voter turnout is important in winning approval. Those next two occasions come in 2014 and 2016. Neither of those years is favorable to CIRM. The first 2014 allows only two years from today to produce stem cell research results that are persuasive to the public. According to economists, however, California will be still wallowing in severe financial difficulties that will make voters tight-fisted. The next election date 2016 is far too close to the end of bond funding. Waiting that long will create even more uncertainty about the agency and its funding reliability. That sort of delay could also lead to a brain drain at CIRM as employees begin --- quite legitimately to look after their own futures. Money is short as well. CIRM has something like $800 million left to hand out. That sounds like a lot, and it is a lot. But when the agency is offering $200 million rounds of grants, it won't go far. So it is imperative that CIRM focus on what it wants to have happen. As directors wrestle with priorities this spring, it seems to me that they have three basic choices. They can try to do a little of everything, which would be the easiest course and probably satisfy many researchers and others. They can back away from their push towards the clinic and take the position that the agency wants to lay the best possible foundation for future research, even if it does not hold promise of producing something that the public would easily understand. Or the directors can embrace what some in business call a BHAG a big, hairy, audacious goal and drive single-mindedly towards producing something that will resonate as a cure or as a significant, meaningful step to a therapy. None of these choices offers a clear path to success or public approval. Directors would have to be satisfied with saying that they gave it their best effort, even if spending $6 billion of taxpayer funds (including interest) did not produce the cures promised by the stem cell campaign of 2004. If I were making the choice, I would say go for the cure or, more realistically stated, go for a major and significant step towards a cure. One that the public can understand. It may well be the riskiest of the three choices. But if CIRM staff can say today that there is solid evidence for expecting good results in the next two to three years in certain areas, it would seem to be negligent not to try. Five years from now, no one wants to be sitting in CIRM headquarters on King Street in San Francisco and saying, "Gosh, we really missed the boat when we spread our money too thinly."

That said, a good case can also be made for the second option answering hard questions about stem cells, filling in the blanks and providing a strong base for those who will carry the research into the clinic. Such an effort would be widely recognized in science, but it may not sit well with voters. Based on discussions at the last two board meetings, it seems that a goodly number of directors are sidling up to a decision to push somewhat harder for cures and cut back somewhat on other endeavors. But half-hearted measures may not be enough. There will be pain when some activities are no longer funded, but that is suffering that CIRM can work through. As CIRM directors consider their strategy, the agency is already moving towards closer ties with industry, a necessary step in bringing therapies to patients. The effort is long overdue. For several years now, some board members have expressed concern that CIRM's processes reflect a lack of understanding of business and of what is needed to develop a product. The agency has also been slow to find reviewers with appropriate business background and expertise, something its own "external review" panel identified two years ago as a deficiency. Some businesses have complained publicly others privately, because no one wants to irritate those who control the strings to a $3 billion purse. Ample material exists in the public record to begin to evaluate the grant-making process as it relates to business applications and to begin to determine whether institutional flaws exist. But it would useful for this panel to dig a little deeper and perform what might be termed case studies of several business applications that were denied. A starting point could be the public appeals made by businesses to CIRM directors to overturn reviewers' decisions. But it could also be useful to look into material that has not been aired publicly. That could be coupled with private conversations with some of the unhappy firms. Another area for consideration is the nature of the grant round offerings. Interestingly, CIRM has never offered a round of grants that is open only to businesses. Earlier this year, however, Maryland's tiny stem cell research program announced that it was offering a business-only, $10.4 million round. Such an offering would seem to an obvious possibility in California as well. Closer engagement with industry is not without its pitfalls. The history of California is littered with examples of government agencies that were captured by businesses that they were supposed to regulate. (We should remember that CIRM is a regulator as well as a funding organization.) Once industry understands what is at stake it can become very effective in ensuring that its interests are paramount within a governmental agency. Obviously, this is not a new subject. The IOM published a study in 2009 that explored at length the perils and benefits of research relationships involving industry. Bernie Lo of UC San Francisco was one of the editors of the final report. He also has served for a number of years as co-chairman of the standards group of the California stem cell agency. Writing in the New England Journal of Medicine, Lo warned about "irreconcilable differences" involving medical research and the private sector because of sharply divergent priorities. The IOM study said, "Despite their benefits, relationships with industry create conflicts of interest that can undermine the primary goals of medical research. Where there are conflicts, legitimate and serious concerns can be raised about the openness of research and potential bias in the design, conduct, and reporting of research " The California stem cell agency has a special burden in connection with conflicts of interest.

Proposition 71 built in conflicts when it specified that the CIRM governing board include substantial numbers of executives from institutions that stood to benefit. The upshot is that by far most of the CIRM cash has gone to enterprises that have representation on the CIRM board. CIRM has worked hard to be sure that no director votes on a grant to his or her institution. That effort included creation of an awkward voting process that is unusual, to say the least. Despite that, it is exceedingly difficult to say, yes, this is the way good government should operate. Some other interesting business exists that is the result of using an election campaign to create a generously funded research effort. Principals at one of the top California venture capital firms contributed nearly $6 million to the Proposition 71 campaign, which amounted to 25 percent of the total campaign contributions. They also helped to raise additional millions. The firm later became a major investor in a new stem cell firm. Subsequently the firm received $7.1 million in CIRM grants and is likely to apply for more. Add to that the case of an internationally known researcher who served on the CIRM board for two years before resigning. Two years after his resignation, a company he co-founded shared in a $20 million CIRM grant. No one has suggested anything illegal has occurred in either of those cases. But they do raise questions about conflicts of interest. The incidents are also subject to ungenerous interpretations or worse, especially when they are likely to surface during another election campaign for a stem cell bond measure. All this goes to say that the California agency needs to keep its skirts squeaky clean. Public transparency and openness should be more than watchwords. That means public disclosure of the statements of economic and other interests of grant reviewers. The agency, however, has resisted this since the very first. In 2007, the California state auditor spent months examining the stem cell agency. One of her recommendations said that the agency should ask the state attorney general for an opinion about whether grant reviewers are required by law to file the statements of economic interests that are commonly required throughout state government. The agency refused to even ask for the opinion. It said that the actions of its working groups are not routinely or regularly adopted by the governing board. In fact, however, the board has almost never overturned a recommendation for funding a grant. The agency should also lay out publicly, in an easily accessible manner, exactly how it is engaging with industry. This not only would help to meet the need for transparency but also help explain to industry how CIRM is working to meet business concerns. Finally we come to a very basic question. What sort of enterprise is the California stem cell agency? Is it only an organization that funds research? Is it an industrial development effort, whose main purpose is to provide jobs, as CIRM sometimes seems to argue? Or is it a product development enterprise? Can it be all three and perform any of those tasks really well? At this stage in its life, I suggest it is a product development business, at least if it wants to do what voters expect. A few years ago CIRM's external review panel made a recommendation that the agency could profit from: Seek out the most promising stem cell research wherever it occurs in the nation and bring it into California in one fashion or another. The panel suggested that CIRM need not be constrained by the usual, NIH grant-funding models. That could start at the agency's board meeting next month with CIRM staff presenting an evaluation of

the 10 most promising stem cell product possibilities in California and the nation, along with recommendations on which to pursue with more vigor. Directors could then target three or four with a deadline of advancing them in a major way by the beginning of next year. Some of the targets might be outside of California right now, but the lure of hundreds of millions of dollars can be a powerful incentive. Difficult to do, yes, and a plan that would have its detractors. But it certainly would be a big, hairy, audacious goal that would resonate with industry, policy makers and public. And it could lead more directly, quickly and economically to satisfying CIRM's promise of turning stem cells into cures.