Divvying Up The Stem Cell Bonanza

California's Proposition 71 has critics of conflicts and favoritism ready to pounce

Long before California voters passed Proposition 71 on Nov. 2, authorizing the state to pour $3 billion of taxpayers' money into stem cell research, the measure generated plenty of debate. And it wasn't just conservatives opposing the measure on religious grounds. Even supporters of the research, which one day could lead to cures for everything from diabetes to cancer, argued that the law gives vested interests too much say over who will get the funds.

So as officials move to appoint an oversight committee that will weigh funding requests, they are mindful that critics will be watching their every move. While architects of the law insist the appropriate checks and balances are built in, controversy continues to swirl around a decision-making process that some see as overly secretive. "Clearly the initiative is written to invite every conceivable form of corruption in the allocation of these funds," says Republican State Senator Tom McClintock, who opposed the law.

The controversy in California is broadly echoed at the federal level. Over the years the National Institutes of Health, which oversee federal research grants, have come under fire when pure research funded by the NIH ends up disproportionately benefiting private companies that license the technology.

In California, too, questions persist about who ultimately will profit from state-funded research. About half of the $25 million raised to pass Proposition 71 came from venture capitalists. For the price of a campaign contribution, say opponents, VCs helped persuade taxpayers to fund $3 billion of basic research. In 10 to 15 years, many of the same VCs will likely fund startups that license the fruits of that research -- and benefit richly if those startups succeed. While many critics concede the important role VCs play in getting research breakthroughs to market, in this case they say the firms have gotten too good a deal. "If it doesn't work, VCs don't lose anything," says Mitchell Kapor, a software entrepreneur in San Francisco. "But if it does work, they get all these fundable companies."

Critics also argue that the state legislature has too little say over how the newly established oversight committee will allocate grants. They note that Congress has budget authority over the NIH, including how much money goes to the various institutes. But the state assembly has no authority over the committee. "Here's a case where the authors did not want the legislature to meddle," says Fred Silva, a governmental relations expert at the Public Policy Institute of California think tank.

Then there's the composition of the committee itself. The law says the 29-member body be filled with experts from California universities, research institutions, and life-science companies -- the same organizations that will vie for grants, though most of the money likely will go to academia. What's more, the committee will have wide latitude in determining how private companies will pay to license technology derived from the publicly funded research. They face a difficult balance: While nonexclusive licenses are the best way to spread valuable technologies widely, companies often need exclusive licenses to make a profit.

Proposition 71's architects say they designed the law to avoid political interference but think the process is fair and transparent. "We have two different firewalls that protect against conflicts," says Robert Klein, the real estate developer who helped write the law. First, committee members must recuse themselves from decisions affecting their groups. Second, the working groups that make grant recommendations also must recuse themselves. In the end, success will be measured by whether $3 billion in public money has benefited society -- or only a handful of private companies.

By Justin Hibbard in San Mateo, Calif.

    Before it's here, it's on the Bloomberg Terminal.