Pluses and Minuses: The New Look at California's $12 Billion Stem Cell Program

The Proposition 14 "Christmas Tree" and its Implications

Editor’s Note: The following is an updated version of a chapter from my new book, “Inside California’s Great Stem Cell Experiment.” The excerpt lays out the vast, new scope of the California stem cell agency and includes information that is not available elsewhere.

On Thursday, directors of the stem cell agency will receive a briefing on their new responsibilities and discuss the direction of the agency, all part of an effort to devise a fresh plan on how to spend $5.5 billion.


Proposition 14, last fall’s ballot measure to save California’s stem cell agency from financial extinction, contains much, much more than the $5.5 billion it sought from the state’s voters.

Added to the agency’s charter is research involving mental health, “therapy delivery,” personalized medicine and “aging as a pathology.“ That is not to mention a greater emphasis on supporting “vital research opportunities” that are not stem cell-related.

The measure enlarged the board from 29 to 35 members — seats not yet filled as of this writing. But even at 29, the board has been much criticized for its large size, which creates more possibilities for conflicts of interest, a long-standing issue for the agency.

Proposition 14 bans royalties that are generated by state-backed stem cell inventions from being used for such things as prisons and schools, isolating the funds from tinkering by lawmakers.

The measure creates a building program for treatment centers that could total about $82.5 million. They would be located in areas not now well-served. And the measure locks up $1.5 billion for “diseases and conditions of the brain and central nervous system,” such as autism and schizophrenia. 

Created by voters in 2004, the agency is a prodigiously ambitious effort, seeking stem cell cures and treatment for afflictions that backers say burden half the families in California. It was originally funded with $3 billion, which dribbled to an end over the last couple of years. Without passage of Proposition 14, the agency — known officially as the California Institute for Regenerative Medicine (CIRM) — would have been shutting its doors this year instead of setting new priorities. 

While Proposition 14 is the cure for what currently financially ails the agency, the measure also sends CIRM into arenas that some would argue muddle its focus and distract from its original goals.

(Click here to see the state’s Legislative Analyst’s description of the measure.)

Details of the changes in CIRM’s mission are tucked away in the complex and murky, 17,000-word initiative sponsored by Robert Klein, a Palo Alto real estate developer and attorney. He oversaw the writing of the initiative as well as the 2004 stem cell measure that created the agency. Klein was the first chairman of the agency and led last year’s campaign.

The new playing field for CIRM encompasses particularly critical areas of costs for patients as well as profits for companies. Stem cell therapies are expected to be enormously expensive — $1 million or more in many cases. That’s a figure that makes health insurance companies balk and Medicare blanch.

Proposition 14  authorizes a hefty effort to make stem cell therapies more affordable and accessible. The cash behind that drive could run as high as $155 million. And that’s not necessarily going to patients.

The intent is to create and build support for financial models for health insurance companies. CIRM is also charged with helping to implement the proposals. CIRM’s new models would justify the cost of the theoretically one-time cures by demonstrating that they would actually save money — ending the need to treat patients in what currently seems to be an endless and expensive cycle.

Proposition 14 speaks of covering patients and, importantly,  their caregivers for medical expenses, lodging, meals and travel. That would help provide access to clinical trials that are located in prohibitively expensive urban areas, which pose financial barriers for persons who live some distance away. The added coverage would additionally help researchers and companies recruit enough trial participants, which can be a problem in some disease areas.

Proposition 14 creates a 17-member, CIRM affordability committee to drive all this. The panel, whose seats are still being filled, would work with industry and the federal government to win their support.  The committee could be backed by as many as 15 CIRM staffers. although the agency could choose not to hire that many. The ballot allows as much as $55 million for their compensation over 10 or so years. 

But if 15 is not enough, more employees could be hired beyond the new, nominal cap on the total number of CIRM employees of 70 — if they are compensated through the use of private cash.

Making a profit from stem cells

The extraordinary cost of stem cell treatments involves something called “reimbursement,” a biomedical industry euphemism for how companies cover the high costs of the research and still make a profit. If money is not to be made, businesses are not likely to be motivated to turn CIRM research into cures.

The measure additionally allows the new affordability panel to hire consultants, capping that expense at about $105 million.

The affordability effort involves important public policy, industry and research issues that concern patient groups and industry. However, the affordability panel is permitted to operate behind closed doors as it considers the problems and weighs the solutions.

Votes by the committee, however, have to be taken in public.

Members of the panel are not required to disclose publicly their economic or professional interests. The committee is additionally exempt from the state public records act except for material specifically submitted to the CIRM board. Information gathered during their closed-door deliberations could be withheld from the public, although the CIRM board could choose to disclose it.

Proposition 14 locks up $1.5 billion for “diseases and conditions of the brain and central nervous system, such as Alzheimer’s disease, Parkinson’s disease, stroke, dementia, epilepsy, depression, brain cancer, schizophrenia (and) autism.”  The $1.5 billion is not available for research into the No. 1 killer in the United States, heart disease, or other excluded conditions. 

Beyond the affordability program, Proposition 14 gives CIRM new authority to finance research in several additional fields. The authorization is scattered throughout the initiative document. Mental health research first appears on page nine (depending on which PDF version you are examining). Depression appears on page 26. Therapy delivery, which is not defined in the measure, crops up in 10 locations. Personalized medicine and “aging as a pathology” surface on page 34.

On a much smaller scale, but important to researchers, the proposition sets aside up to $27.5 million for a shared labs program that was scrubbed a few years back when CIRM turned more towards clinical trials. And the initiative opens the door to even more programs that are not specifically mentioned. It gives a high priority to supporting pluripotent stem cell research that is unlikely to receive federal funding or where funding is “not timely or sufficient.”

Perhaps the biggest, but not entirely new opportunity for CIRM to expand beyond stem cell research involves “vital research opportunities.”  CIRM calls them VROs. And they are a loophole that allows CIRM to finance almost any kind of research if there are enough votes on the board to do so.

In both the original and current initiative, a  VRO is defined as “scientific and medical research and technologies” that provide “a substantially superior research opportunity, vital to advance medical science.”

Proposition 14 makes it easier for the CIRM board to declare a VRO. Currently, it takes a two-thirds vote of a quorum of the group that reviews applications. Under the 2020 ballot measure, CIRM does not need to meet those criteria. The governing board could invoke a VRO on its own. In some cases, it could require only 12 votes or less of the 35-member board, depending on the quorum and the number of board members present.

Proposition 14 specifically added the fields of  “genetics, personalized medicine, and aging as a patholoqy” to VROs. In the 2004 initiative, the phrase “vital research opportunities”  appeared only seven times. In the 2020 initiative, it appears 17 times as the possibility of its use has expanded. Significantly, experience involving vital research opportunities is now listed as part of the qualifications for the chair, two board members and 15 members of the group that reviews grant applications.

CIRM has invoked the original VRO clause only twice. A third attempt was rejected last May after directors expressed concern about mission creep. However, Klein’s new emphasis on it points to the likelihood of increased use, especially if he once again becomes chairman of CIRM.

Royalty flow to stem cell affordability

Under previous law, CIRM’s royalties went into the state’s general fund, the source of state expenditures for prisons, schools and health services. Under Proposition 14, the royalties still go into the general fund, but they are locked up for use in dealing with affordability. In 2004, the stem cell campaign financed studies that envisioned royalties of as much as $1.1 billion. As of last fall, they have totaled only $462,433. However, it can take years for a scientific discovery to work its way into an actual product. And a particular discovery may well amount to only a tiny contribution to a product, which would reduce the likelihood of major royalties.

In another major move, Proposition 14 could benefit some of the less-than-urban areas of the state in a new “geographic diversity” program. Rural or semi-rural areas suffer from a lack of physicians as well as the high tech facilities needed to make stem cell treatments available for participation in clinical trials. The measure earmarks as much as $82.5 million for new “community centers of excellence.” They would “support clinical trials and…serve as the foundation for the delivery of future treatments,” the proposition states, giving priority to “geographic distribution.”

One of them could well be in Fresno where the University of California, San Francisco (UCSF), has established an outpost. One of the new members on the CIRM board would be from the UCSF operation in Fresno, making it the only institution that has two representatives on the board.

The increase in the size of the board to 35 flies in the face of recommendations by the prestigious Institute of Medicine (IOM), now called the National Academy of Medicine. Among other things, it said in 2012 that the current 29 board members are more than sufficient for the agency. CIRM paid $700,000 for the IOM study, which it hoped would help generate voter support for more funding.

The measure also created a relatively quick way to begin to overhaul the board. Under the measure, a number of current members of the board could lose their seats if they have served at least half of their terms.

It is not clear whether the CIRM governing board was aware of the removal provisions when they endorsed Proposition 14 on June 26 last year on a 21-1 vote. The discussion lasted only 30 minutes. “It’s a no-brainer,” said George Blumenthal, chancellor of the UC Santa Cruz campus and a member of the CIRM board.

The lone “no” vote came from Jeff Sheehy, an HIV/AIDS patient advocate member of the board. Sheehy served on the board from its inception until last fall.

In an op-ed piece in the San Diego Union-Tribune last fall, he wrote,

“Proposition 14 fails to fix severe flaws in the measure that created CIRM. It does nothing about the absurd requirement that any changes to the agency require a 70 percent super-majority vote of the Legislature. Nor does it address the widely criticized conflicts of interest among board members, the majority of them representing institutions that have received the bulk of CIRM’s spending. In fact, Proposition 14 makes this worse by adding more board members from these institutions.

“Another serious issue is Proposition 14’s failure to enable a key promise made in the 2004 ballot measure: that CIRM funding will “benefit the California budget by … providing an opportunity for the state to benefit from royalties, patents and licensing fees that result from the research.” In 2004, the backers of the campaign said they anticipated returns to the state of up to $1.1 billion; to date, CIRM has returned $350,000.

“But there’s another problem: The returns are limited because by law, the state cannot hold equity like a venture capitalist would do. Amending that rule should have been included in the new measure so that California could realize a meaningful return on its huge investment in stem-cell research. Failing to do that, especially when the investment is paid for with debt financing, is fiduciary malpractice.”

Sheehy last fall told the California Stem Cell Report that his article was requested by the newspaper. His concerns about the failings of Proposition 14 have also been carried at greater length by the California Stem Cell Report and can be found verbatim here and here.

Can Proposition 14 be changed?

CIRM can make an effort to change Proposition 14 if it wishes. But the state law concerning CIRM, which is what Proposition 14 now is, can be altered only in two difficult ways. One is another ballot initiative. The second, as Sheehy points out, is via a 70 percent vote of both houses of the state legislature and the signature of the governor. State law concerning the agency has been amended only once via the legislative process. The vice-chairman of the agency, Art Torres, who had a long career as a state lawmaker, has strongly advised against going the legislative route because of the political difficulties.

Proposition 14 is something of a “Christmas Tree” measure — a term used to describe legislation that has something for everyone. Many ballot initiatives are like that. They must run the gauntlet of a ballot campaign, luring millions of voters into voting for them. Backers of initiatives need to satisfy potential donors and potential beneficiaries, all the while not alienating anybody enough to generate well-funded, powerful opposition.   

The 2004 measure fulfilled those needs nicely. Nearly every institution that stood to benefit from CIRM funding gained a seat at the table where the decisions were made — for better or worse. 

Proposition 14 carries on in that tradition and expands it. Plus the initiative attempts to deal with the tough challenges of costs and profits in what many expect to be a revolution in medicine. Removing those obstacles and luring in businesses are keys to convincing voters once again that CIRM is a resounding success — a task that CIRM will face in less than a decade when state funds once again start to dribble to an end.