Passage of Proposition 71, the $3 billion California Stem Cell Research and Cures Initiative, was a sure thing: Offered up to voters in a solidly Blue state and backed by the best, most heart-felt advertising that Hollywood money can buy. But spending all that money effectively and transparently, and meeting the campaign's promises and timetables, will be more challenging.

By passing Prop. 71, California voters have launched a unique experiment in large-scale state funding of biomedical research. The scale of the endeavor is intended to do nothing less than sculpt the shape of healthcare worldwide and to cement the preeminence of California's biotech sector.

The project's bold goals, and the state's eagerness to promote scientific techniques that President Bush has largely placed off limits to federally funded researchers, have attracted favorable attention from patient and medical groups, Nobel laureates, biotech companies and trade associations, and investors - all of whom can be expected to want a piece of the action.

Indeed, apart from the fact that the initiative will add $6 billion of debt to a state that is already deep in the hole, the law implementing the plan creates at least the appearance of conflicts of interest between those who allocate funds and those who benefit, because it entrusts oversight to recipients of state stem cell funding and organizations that hope to bring benefits of the new science to their constituents.

And at the end of the day, the plan's governors and those seeking the money arguably will be hard-pressed to live up to the two broad promises made during the campaign: that taxpayers will get a quick return on their investment and that cures will be coming soon.

CIRM & ICOC

Prop. 71 establishes the California Institute for Regenerative Medicine (CIRM) and provides it with an average of $295 million per year for a decade, derived from bond sales. It defers repayment of bonds for the first five years. State government estimates assume the bonds would be repaid over a 30-year period.

But CIRM's objective will be far more aggressive, according to the law, with a remit to "be revenue-positive for the State of California during its first five years of operation."

The law also creates an Independent Citizen's Oversight Committee (ICOC) with full authority over CIRM. With the possible exception of industry representatives, every member of the committee with final authority over the $3 billion will come from an organization that has a financial interest in stem cell research, or represents patients who hope to benefit from the technology,

The ICOC will consist of 27 members by the governor and several executive branch officials, the state Assembly and Senate, and universities inside the state. Ten members will represent disease advocacy groups; five will the chancellors of five University of California campuses; three will be executive officers or board members of life sciences companies that are not "actively engaged in researching or developing therapies with pluripotent or progenitor stem cells"; and others will be drawn from academic and research institutions (see "Pluripotent Patronage").

ICOC is required to meet a minimum of twice per year and to "award all grants, loans, and contracts in public meetings." The members are prohibited from voting on grants or loans to institutions that are their employers. But representatives of universities and research organizations will unavoidably be voting on funding for the employers of other ICOC members, which could create at least the appearance of cronyism.

ICOC will be permitted to hold closed sessions to consider or discuss matters relating to IP or trade secrets and confidential scientific research or data, and to protect the privacy of patients and research subjects.

The law also requires ICOC to establish IP policies "that balance the opportunity of the State of California to benefit from the patents, royalties, and licenses that result from basic research, therapy development, and clinical trials with the need to assure that essential medical research is not unreasonably hindered by the intellectual property agreements."

ICOC members will elect a chairman and vice chairman who will be full- or part-time employees of CIRM. The law spells out very specific criteria for the chairman that few individuals could fulfill, such as a "documented history in successful stem cell research advocacy," as well as "experience with state and federal legislative processes that must include some experience with medical legislative approvals of standards and/or funding" and "direct knowledge in bond financing."

The description of the ICOC chairman appears to be tailored to fit Robert Klein, the California businessman who led efforts to draft and gain public support for Prop. 71. Klein, president of Klein Financial Corp., a company that structures tax-exempt bond financing for affordable housing projects, donated more than $3 million to the stem cell initiative campaign. Klein's 14 year-old son has juvenile diabetes.

In addition to Klein, major contributions to the campaign came from venture capitalists with investments in life sciences companies, patient advocacy organizations, wealthy philanthropists and biotech CEOs (see "Prop. 71 Angels").

Klein worked closely with entertainment industry executives and celebrities on the campaign. Hollywood director and producer Jerry Zucker and his wife, Janet, contributed over $50,000 and a great deal of time to the effort. A constellation of stars, including Dustin Hoffman, Michael J. Fox and Brad Pitt, campaigned for the proposition.

Vast promises

Supporters promised voters in highly emotional terms that stunning medical cures and vast commercial opportunities from stem cells are close at hand. According to groups that urged voters to support the initiative, treatments for some of the most devastating and complex diseases will be on the market in a decade, in time to help people who are suffering today, and to defray the state's financial obligation.

One typical ad featured twin brothers, one with cerebral palsy. "His life is different. With stem cells it doesn't have to be that way," the healthy brother said.

In another ad, a woman recently diagnosed with multiple sclerosis says that stem cell research should be supported because, "I believe it is something that can cure spinal cord injuries."

The campaign also broadcast television ads featuring the late Christopher Reeve.

Although some of the advertising included disclaimers noting that it may take a long time for the technology to product results, many did not.

"Vote YES on 71 - IT COULD SAVE THE LIFE OF SOMEONE YOU LOVE," the presidents of national diabetes, cancer and Parkinson's disease groups stated in an argument in favor of the proposition posted on the California Secretary of State's website.

The assertion that "about half of California's families have a child or adult who has suffered or will suffer" from a disease "that could potentially be treated or cured with stem cell therapies" is written into the California Stem Cell Research and Cures Act that codifies Prop. 7 I.

In fact, the modest amount of private investment in the stem cell developers suggests that investors believe the prospect of these kinds of breakthroughs lies outside the window mandated by Prop. 71, which is brief by any conventional measure of the drug development timeline (see "Stem Cell Money").

Nevertheless, there is little prospect that lack of progress will generate public disappointment in stem cell research, according to Daniel Perry, executive director of the Alliance for Aging Research.

"The American public has poured billions and billions of dollars into biomedical research in the decades since World War II ri the hope and belief that it will lead to therapies and interventions and cures for a whole host of diseases. By and large, that faith has been rewarded," he told BioCentury. "California voters took that leap of faith a step further by endorsing the proposition and putting the state in a position to raise up to $3 billion for stem cell research and related regenerative technologies."

The economics

Perry also predicted the money will attract new biotech companies to start up in or relocate to California.

"That bolus of money will be a huge shot in the arm for the state's biotech sector and for related industry," he argued. "It will put the state on an equal footing with some of the high tech nations in the world that have chosen to pursue stem cell research, like the U. K., Israel, Singapore and Australia."

Within five years, CIRM funding will have "generated a rich scientific literature, and there will be products in the pipeline," Perry predicted.

Indeed, the stem cell act itself states that CIRM's investments will "benefit the California economy by creating projects, jobs, and therapies that will generate millions of dollars in new tax revenues in our state." It also promises that the institute's investments will "advance the biotech industry in California to world leadership, as an economic engine for California's future."

Language in the act reflects the conclusions of an economic impact analysis commissioned by Prop. 71 proponents. The analysis was prepared by Laurence Baker, associate professor of health research and policy at Stanford University, and Bruce Deal, managing principal at the Analysis Group Inc.

Baker and Deal state that they based assumptions about the scientific and commercial viability of stem cell technology on interviews with experts, most of whom would be candidates to receive funding from CIRM (see "Prop. 71 Experts").

Baker and Deal's most conservative estimate assumes that stem cell products will be discovered, tested, approved and reach the market starting six years after the first grants are awarded. They assume the state will receive a 2% royalty on revenues from products developed as a result of CIRM funding, and that this will generate at least $537 million for the state over 30 years.

Proponents' predictions of 313,000 new job-years over 14 years is based in part on an assumption that each $1 of public funding will stimulate $1 -$2 in additional private sector activity.

The economic analysis also assumes that stem cell technology will generate at least a 1% reduction in California's healthcare costs. The combination of royalties and savings from reduced costs to treat chronic diseases will more than offset the $6 billion state taxpayers will be obligated to spend to repay the Prop. 71 bonds, according to the report.

While some skeptics have voiced concerns that Prop. 71 is based on a shaky premise that stem cell research will be successful, the ability of the state to make course corrections is limited by the fact that the provisions of Prop. 71 will be added toCalifornia's Constitution. Thus, absent another plebiscite, it will be difficult to modify the act if scientific, political or fiscal circumstances change.

Indeed, the proposition prohibits the state legislature or governor from appropriating or transferring any funds raised under the law for purposes other than stem cell and regenerative medicine research. There also is no provision for reprogramming funds if restrictions on NIH funding of embryonic stem cells are lifted.

Industry's stake

Some California biotech companies expect to receive grants from CIRM and to increase sales to CIRM-funded research institutions.

Gregory Lucier, chairman and CEO of Invitrogen Corp. (IVGN, Carlsbad, Calif.), said Prop. 71 will have a direct, positive impact on the company's sales of products for cell growth and gene delivery. "We sell a lot of cell culture media today for survivability and acculturation of stem cells. I expect that to grow even faster" as a result of the initiative passed last week, he told BioCentury. Anticipation that it would pass "has caused us to focus our product development efforts more than we would have in the stem cell arena," he added.

Prop. 71 also presents opportunities for VistaGen Inc. (Mountain View, Calif.), which uses stem cells to develop screening assays and drug discovery tools, according to CEO Ralph Snodgrass. As a result of grants from CIRM, he said, "we expect to be able to hire two to four new scientists and dramatically expand the stem cell tools and services we can offer."

Still, Lucier discounted suggestions that the new law will entice companies to relocate to California.

"California is a wonderful place to live, and the San Diego community is a wonderful place to do biotech, but this is probably one of the most expensive places in the world to live and work," he noted. "The fact that this is going to be an underlying support for the biotech industry helps the industry remain in California, but it doesn't solve the fact that this is a very expensive place to do business."

Reminiscent of gene therapy

The scientific and public excitement over the potential benefits of stem cell therapy echoes the confident assertions of imminent cures that were made a decade ago about gene therapy. Like stem cells, gene therapy generated a heated ethical and moral debate, as well as extravagant predictions of cures for cancer, Parkinson's disease and other conditions.

"It is almost certain that within the decade, several diseases will be either cured or significantly palliated with the use of gene therapy of bone marrow," Frederick Appelbaum, director of the clinical research division at the Fred Hutchinson Cancer Research Center, told a congressional committee in 1995. His comments were typical of those made in the mid1990s by NIH scientists, patient advocates and biotech companies.

Gene therapy hype prompted then-NIH Director Haroid Varmus to commission a report about the technology. The report, issued in December 1995, warned that "overselling" of clinical results by investigators and their sponsors threatened to "undermine confidence in the integrity of the field."

NIH has invested more than $4 billion in gene therapy research since 1990, an amount that, adjusted for inflation, is far more than California plans to spend on stem cell research. Institute directors are still sufficiently confident in the technology's promise to continue funding the gene therapy field, but they rarely mention it in congressional testimony.

In 1999, the field of gene therapy was tainted by allegations that investigators in charge of a trial in which a patient died, as well other gene therapy trials, failed to disclose financial conflicts of interest to participants.

Public confidence was further eroded by suggestions that commercial considerations prevented some NI H-funded academic institutions from robustly enforcing safety regulations.

In implementing the law, CIRM and its ICOC overseers may find it useful to learn from the gene therapy experience, if only to avoid the risks of re-living it.

Stem cell money

Since 1998, when scientists at the University of Wisconsin announced the first isolation of human embryonic stem cells, companies focusing on some aspect of stem cells have raised at least $690.2 million. This amount includes funding of both private and public companies. Source: BioCentuty Financial Center; $M

Prop. 71 angels

Maior contributions to the Proposition 71 campaign amounted to almost $2l.2M of the total of $21.6M donated to the campaign. Occupation and employer as filed with the state. Source: California Secretary of State

The Prop. 71 experts

An economic analysis commissioned to support Proposition 71 relied on scientific and business assumptions based on interviews with sources described as experts. Many of these sources have personal or institutional interests in state funding of embryonic stem cell research.

Pluripotent patronage

Although Washington is under the gun to eradicate conflict of interest among its researchers and employees at NIH and FDA. California's Proposition 71 appears to have minimal safeguards against self-interested decision making, along with an elaborate political patronage system that puts the state's top office holders and disease advocacy groups in partnership to oversee how the money is spent.

Indeed, the final authority for decisions made by the California Institute for Regenerative Medicine (CIRM) will be in the hands of those who stand to benefit from the funding, as the so-called Independent Citizen's Oversight Committee (ICOC) will be packed with representatives of recipients at universities, medical research institutions, and specified disease advocacy groups. While an ICOC member would have to recuse him or herself from specific decisions to award funds to their employer, the potential for back scratching among ICOC members is obvious.

Six- and eight-year terms are expected to insulate ICOC members from political influence. But there will be an unavoidable political flavor at the outset, as, for example, Prop. 71 sets up a system whereby patients with Type I diabetes will be lobbying the state treasurer for representation, while patients with Type II diabetes will be looking to the lieutenant governor to address their interests.

Moreover, in addition to their disease group alliances, the governor, the lieutenant governor, the treasurer and the controller each get to appoint a representative from each of three groups, including the corporate sector. Although Prop. 71 does preclude stem cell companies from sitting on the committee, the other two groups have a direct interest in the decisions of the ICOC:

A California university that has "demonstrated success and leadership in stem cell research" and is not one of the five University of California campuses that has its own representation on the committee.

A California nonprofit academic and research institution that is not a part of the UC system and also "has demonstrated success and leadership in stem cell research."

A California life science company not actively engaged in researching or developing therapies with pluripotent or progenitor stem cells and that has neither been awarded, nor applied for funding from CIRM at the time of the appointment.