PROPOSED ACTION ON REGULATIONS

TITLE 17. CALIFORNIA INSTITUTE FOR REGENERATIVE MEDICINE

Amendments to Intellectual Property Regulations Sections 100600, 100601, 100602 and 100608

Date: October 5, 2012

Deadline for Submission of Written Comment: November 19, 2012 - 5:00 p.m.

Public Hearing Date: None Scheduled

Subject Matter of Proposed Amendments: Amendments to Intellectual Property Regulations

Sections Affected: The proposed regulatory action amends sections 100600, 100601, 100602 and 100608 of Title 17 of the California Code of Regulations.

Authority: Article XXXV of the California Constitution and Health and Safety Code Section 125290.40, subdivision (j).

Reference: Section 125290.30, Health and Safety Code.

INFORMATIVE DIGEST/POLICY STATEMENT OVERVIEW

The California Institute for Regenerative Medicine ("Institute" or "CIRM") was established in 2005 after the passage in 2004 of Proposition 71 (the "Act"), the California Stem Cell Research and Cures Initiative. The statewide ballot measure established a new state agency to make grants and provide loans for stem cell research, research facilities and other vital research opportunities. The Independent Citizens' Oversight Committee ("ICOC") is the 29-member governing board for the Institute. The ICOC members are public officials, appointed on the basis of their experience earned in California's leading public universities, non-profit academic and research institutions, patient advocacy groups and the biotechnology industry. The Act charges the ICOC with developing standards and criteria to make grant awards and to develop standards and criteria for proper oversight of awards. (§ 125290.50.) In addition, the Act requires the ICOC to:

…[e]stablish standards that require that all grants and loan awards be subject to intellectual property agreements 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." (§ 125290.30, subd. (h).)

To that end, CIRM has adopted rules regarding Intellectual Property that balance the needs described above.

Under CIRM's regulations, there are two revenue sharing provisions. Section 100608(a) requires Grantees and Collaborators to share 25% of their licensing revenue in excess of $500,000. This rate is reduced in accordance with the proportional share of CIRM funding which contributed to the licensed inventions and technology as compared to the total project costs incurred during the project period (the "Proportionality Reduction"). The other revenue sharing provision is set forth in section 100608(b). 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 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 one time payments triggered at $250 million and $500 million in annual revenues, create an uneven payment obligation which is characterized as being "lumpy" and could be a disincentive for the engagement of industry. In addition, the Proportionality Reduction provided for in Section 100608(a) creates administrative challenges and uncertainty. The following proposed amendments seek to address these issues while at the same time ensuring a comparable economic return to California.

SB 1064, which was enacted by the Legislature in 2010 with CIRM's support, codified the revenue sharing formulas into law. In recognition of the relatively early stage of the research and need to partner with industry in order to commercialize CIRM-funded discoveries, SB 1064 authorized CIRM's Governing Board to modify the formulas 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 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.

The proposed amendments:

• Smooth out payment obligations in order to facilitate industry investment and engagement in CIRM programs which, in turn, will leverage CIRM's funding and provide access to industry know how

• Extend the revenue sharing obligations to commercializing entities to ensure the State realizes revenues from successful therapy development

• Simplify the proportionality calculation relating to CIRM's existing licensing revenue sharing regulation

• Maintain the existing revenue sharing scheme as it pertains to non-profit grantees (except with respect to the simplification of the licensing revenue sharing proportionality calculation)

• Maximize the amount of funding that companies can re-invest in product development, by exempting pre-commercial revenues from CIRM's revenue sharing

• Maintain the requirement that funds generated from CIRM's revenue sharing regulations are deposited in the California's General Fund

Specific Benefits:

The proposed amendments simplify revenue sharing calculations, smooth out the payments made, and ensure the State realizes revenues from successful therapy development.

Impact on Existing State Regulations:

CIRM has determined that the proposed amendments have no effect on existing state regulations. Therefore, the proposed regulations are neither inconsistent nor incompatible with existing state regulations.

DISCLOSURES REGARDING THE PROPOSED AMENDMENTS

CIRM has made the following initial determinations:

Mandate on local agencies and school districts:

None.

Submittal of Comments:

Any interested party may present comments in writing about the proposed amendments to the agency contact person named in this notice. Written comments must be received no later than 5:00 p.m. on November 19, 2012. Comments regarding this proposed action may also be transmitted via e-mail to ipamendments@cirm.ca.gov or by facsimile transmission to (415) 396-9141.

Public Hearing:

At this time, no public hearing has been scheduled concerning the proposed regulations. If any interested person or the person's representative requests a public hearing, he or she must do so in writing no later than November 5, 2012.

Effect on Small Business:

CIRM has determined that the proposed amendments will have no impact on small businesses. The regulation implements conditions on awarding and administering grants for stem cell research. This research is conducted almost exclusively by large public and private nonprofit institutions. As such, the amendments to the regulation are not expected to adversely impact small business as defined in Government Code Section 11342.610.

Impact on Local Agencies or School Districts:

CIRM has determined that the proposed amendments do not impose a mandate on local agencies or school districts, nor do they require reimbursement by the state pursuant to Part 7 (commencing with Section 17500) of Division 4 of the Government Code because the amendments do not constitute a "new program or higher level of service of an existing program" within the meaning of Section 6 of Article XIII of the California Constitution. CIRM has also determined that no nondiscretionary costs or savings to local agencies or school districts will result from the proposed amendments.

Costs or Savings to State Agencies:

CIRM has determined that no savings or increased costs to any agency will result from the proposed amendments.

Effect on Federal Funding to the State:

CIRM has determined that no costs or savings in federal funding to the state will result from the proposed amendments.

Effect on Housing Costs:

CIRM has determined that the proposed amendments will have no effect on housing costs.

Significant Statewide Adverse Economic Impact Directly Affecting Businesses:

CIRM has made an initial determination that the proposed amendments will not have a significant statewide adverse economic impact directly affecting businesses, including the ability of California Businesses to compete with businesses in other states.

Cost Impacts on Representative Private Persons or Businesses:

CIRM has made an initial determination that the adoption of these amendments will not have a significant cost impact on representative private persons or businesses. CIRM is not aware of any cost impacts that a representative private person or business would necessarily incur in reasonable compliance with the proposed amendments.

Results of Economic Impact Analysis:

The above analysis is based on that fact that the proposed amendments do not impose new requirements on existing business operations or functions of other agencies or individuals, but implement standards for seeking and using state grant funds for scientific research. In most cases, such grants include funds to cover overhead and other indirect costs of the research, including most compliance activities. CIRM has made an initial determination that it is unlikely the proposed amendments will impact the creation or elimination of jobs, the creation of new businesses or the elimination of existing businesses, or the expansion of businesses currently doing business within the State of California, nor directly impact the health and welfare of California residents, worker safety, and the state's environment.

Consideration of Alternatives:

In accordance with Government Code Section 11346.5, subdivision (a)(13), CIRM must determine that no reasonable alternative it considered, or that has otherwise been identified and brought to its attention, would be more effective in carrying out the purpose for which the action is proposed or would be as effective and less burdensome to affected private persons or would be more cost-effective to affected private persons and equally effective in implementing the statutory policy or other provision of the law than the proposal described in this Notice. CIRM invites interested persons to present statements or arguments with respect to alternatives to the proposed amendments at the scheduled hearing or during the written comment period.

Availability of Statement of Reasons and Text of Proposed Regulations:

CIRM has prepared an Initial Statement of Reasons, and has available the express terms of the proposed amendments, all of the information upon which the amendments are based, and a rulemaking file. A copy of the Initial Statement of Reasons and the proposed text of the regulation may be obtained from the agency contact person named in this notice. The information upon which CIRM relied in preparing this proposal and the rulemaking file are available for review at the address specified below.

Availability of Changed or Modified Text:

After holding the hearing and considering all timely and relevant comments, CIRM may adopt the proposed amendments substantially as described in this notice. If CIRM makes modifications that are sufficiently related to the originally proposed text of the amendments, it will make the modified text (with the changes clearly indicated) available to the pubic for at least 15 days before it adopts the regulations as amended. Requests for the modified text should be addressed to the agency contact person named in this notice. CIRM will accept written comments on any changes for 15 days after the modified text is made available.

Agency Contact:

Written comments about the proposed regulatory action; requests for a copy of the Initial Statements of Reasons, the proposed text of the amendments; and inquiries regarding the rulemaking file may be directed to:

Scott Tocher
Counsel to the Chairman, ICOC
California Institute for Regenerative Medicine
210 King Street
San Francisco, CA 94107
(415) 396-9100

Questions on the substance of the proposed regulatory action may be directed to:

Amy Cheung
California Institute for Regenerative Medicine
(415) 396-9110

The Notice of Proposed Regulatory Amendment, the Initial Statement of Reasons and any attachments, and the proposed text of the amendments and existing regulation are also available on CIRM's website, www.cirm.ca.gov.

Availability of Final Statement of Reasons:

Following its preparation, a copy of the Final Statement of Reasons mandated by Government Code Section 11346.9, subdivision (a), may be obtained from the contact person named above.