A Penny on the Dollar

That, says a Cal economist, is more than we can expect from our billions spent on stem-cell research, yet the real issue is that Prop. 71 voters went to the ballot box with flawed information.

The more details emerge about Proposition 71, California’s $3 billion stem-cell research project, the more it all looks like a big lie that will cost us billions of dollars more than we were told.

Forget that the California Institute for Regenerative Medicine, the nonprofit set up to disburse the funds, has been disturbingly secretive about how it intends to spend the public’s money. Forget about the worries over whether grant committees will ignore scientific merit and just dole out cash to their cronies. Just look at the money for a second. Back in 2004, the initiative’s supporters repeatedly promised that the public subsidy estimated at the time as $6 billion, including interest would be substantially offset by a fortune in royalties from treatments that would inevitably spring from such research. One week before the election, Robert Klein, the real-estate mogul who spearheaded the campaign, went on The NewsHour with Jim Lehrer and promised, “The state of California will gain new jobs, new tax revenues, and intellectual property revenues to pay back the taxpayers.”

Or consider the official ballot arguments. “By making California a leader in stem-cell research and giving our state an opportunity to share in royalties from the research, 71 will generate thousands of new jobs and millions in new state revenues,” read the argument in favor of the measure. “That’s why California’s Chief Financial Officers, State Controller Steve Westly and State Treasurer Phil Angelides, endorse Prop. 71.” The rebuttal to the no-on-71 argument read in part, “Studies led by a Stanford University economist project that 71 will generate millions in new state revenues from royalties.”

The study in question is a 2004 “economic impact analysis” conducted by economists Lawrence Baker and Bruce Deal, and their results are indeed startling. By their calculation, Prop. 71 would net the state between $6 billion and $12 billion in revenues and health-care cost savings. The state’s new windfall, the study added, included “royalty revenues of from $537 million to $1.1 billion.” In short, stem-cell research would produce lucrative new therapies, and the state’s share of patent royalties and licensing income could come to more than $1 billion.

Now Richard Gilbert, a UC Berkeley economics professor and former chair of his department, is saying that claim is utterly wrong. Last summer, Gilbert submitted a new study of the revenue the stem-cell initiative could generate, and concluded that the state’s share of royalties would amount to virtually nothing.

According to Gilbert’s study, the Baker-Deal report estimated that new therapies inspired by stem-cell research would bring in $9 billion in revenue, of which the state’s cut would be at least $204 million. Since these therapies would take about ten years to develop, inflation would boost the value of the royalties to between $537 million and $1.1 billion, depending on the profit-sharing terms.

Gilbert claims that while Baker and Deal inflated the value of these procedures over time, they neglected to mention that all the associated costs would rise as well. “A dollar of revenue earned ten years in the future does not have the same value to the state as a dollar of revenue earned in the present,” Gilbert wrote. “The study accounts for inflation in health-care costs, but does not discount future revenue flows.”

Even assuming the Baker-Deal model is correct, the state would get no more than about 35 percent of what they estimated. But their model is wrong, Gilbert says. In its place, he compared the money spent on research and development by universities, hospitals, and research institutes with the cash they got back in licensing income. For every dollar spent, he estimates, these institutions received 6.6 cents in return. Ten years of inflation would reduce that considerably, and the state will have to share the windfall with its private partners.

Of the $3 billion California spends, Gilbert’s study estimates, the state will get back a paltry $18 million. “Most research and development does not make a lot of money,” he says. “In terms of royalties, it’s like producing a hit song. Every now and then you go platinum, but most of the time you don’t get a lot of return on your investment.”

Lawrence Baker, one of the Prop. 71 report coauthors, hasn’t read Gilbert’s study, but acknowledges that his numbers shouldn’t be taken as gospel. “I hope that what we did was helpful, but I think it’s fair to say that we’re open to other approaches about this,” he says. “There are many ways one can get a handle of what this will look like. Every one of them is filled with uncertainty. … We think ours is reasonable, but we’ll have to wait and see.”

We sure could have used a little such forthrightness when we were, you know, voting on this vast new experiment with public funds. When asked to comment, Dale Carlson, spokesperson for the California Institute for Regenerative Medicine, reacted with all the concern of someone who knows he’s already got the money. “That predates the founding of the institute,” he said. “I don’t know anything about it.”

This isn’t the only time voters have been burned on the stem-cell bond. In October 2005, the San Francisco Chronicle reported that while Prop. 71’s supporters repeatedly promised that the bonds would be tax-free, federal regulations prohibit the state from issuing nontaxable bonds to finance a for-profit venture. And if the bonds are taxed, the added interest would push the total cost to almost $1 billion more than voters were told. What’s more, the Chron reported. Robert Klein — the man who started the campaign and continues to run the California Institute to this day — knew this all along. Carlson said Klein was traveling and unavailable to comment for this story.

Even some of Klein’s most passionate supporters are quick to feel his wrath if they dare question how he’s handling the money. As chair of the state Senate Health Committee, Deborah Ortiz worked harder for the Prop. 71 campaign than any public official in the state. But when she introduced legislation tightening public oversight of the institute, Klein struck back. Last year, when Ortiz was running for secretary of state, he released an open letter just before the primary, in which he called her “an ongoing threat” to stem-cell science who was engaged in a “anti-research crusade.” “That certainly speaks to the integrity of Mr. Klein,” Ortiz now says. “I think it’s fearmongering. To allege that I’m now aligned with the right wing is just ridiculous. I think it’s a reflection of his character.”

When discussing his study, Richard Gilbert is careful to point out that the stem-cell research program has plenty of value beyond mere dollars and cents. “None of this means that the Institute for Regenerative Medicine, or the bond money that has been raised for the institute, is a bad investment,” he says. “If it saves lives and cures disease, that’s a wonderful thing.”

Yeah, well, so is democracy. But apparently, the people who asked us to finance one of the most ambitious projects in the history of science didn’t trust us to make an informed decision. The states of New York, New Jersey, and Connecticut are all about to embark upon their own stem-cell projects, each of which will involve millions in public cash. Perhaps they might treat their voters with a little more respect.

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