California & Stem Cells (CIRM)

The stem cell debate has had me fascinated for years now, and the related subject of stem cell economic and business development - as best embodied by California's initiative to raise and spend $3B has gotten a disproportionate share of my posting attention.

So, I can't resist linking to a very good Washington Post article discussing how CIRM is at a crossroads. (CIRM is the resulting California agency to nurture stem cell science.) 

(Nutshell: half-way into it's funding, there is debate about whether the initiative has been worthwhile, and if there should be a subsequent multi-billion dollar bond issuance to further support CIRM. Read the WaPo for a very even treatment of the issue.)

I think the CIRM initiative has generally been a dud - a product of real estate bubble-era thinking mixed with an urge by Californians to snap back at federal policy makers - but is it ever smart to go into debt for economic development in a scientific area? 

Whether CIRM winds down or is given new life (and funding), California has a lot of new lab space because of CIRM, and a lot of additional research PI's who will all be aggressively pursuing NIH and other grant funding. It hadn't occurred to me until now, but if you forget the promises of amazing stem cell developments perviously made by CIRM backers, you could attribute the merit of the $3B bond offering to pumping up California's academic community.

All California needs to do then, is to generate increased annual non-California research support by an modest figure to economically justify the CIRM initiative. Let's say the $3B raised resulted in $4B in new lab construction. (Much of the construction of CIRM-sponsored facilities required matching commitments from the sponsor institution.)

If the interest rate on the CIRM bonds is 5% (a reasonable assumption), annual interest payments are ~$150M. I'm simplifying the tax and economic dimensions, but if the $4B in new labs generate $800M in annual ex-California research support (i.e NIH, etc.), you could argue that between direct tax benefits to California's treasury and indirect employment, the annual return is break-even.

guess: 50% of annual research ultimately being salaries @ 10% avg payroll tax = $40M in direct taxes

Using E&Y's biotech job multiplier of 2.9x yields another $1.16B in annual California payroll, and another $116M in annual revenue to California's treasury. 

Total annual tax revenues: $156M. Annual bond interest: $150M. 

Not to suggest that the system is perfectly virtuous, with the biotech investment paying for itself on a jobs created basis - there are economic leakages at many levels, but the kicker here is that the research centers will be inventing new IP that will result in substantial capital gains over time, and therefore increased tax revenues for California.

Consider Pharma's average ratio of market value to annual R&D of 18X, which suggests that $800M in annual R&D in California institutions could generate $14.4B in market value, though that the spin-out process is less efficient at converting R&D to market value, and that smaller entities have lower ratios. (But…..pharma is arguably less efficient at R&D than biotech.) 

If taxable entities in California own 10% of the $14.4B in annual value generated, that's another $140M in annual capital gains tax revenue for California.

This analysis is all built on spurious assumptions, and there has always been a gigantic gap between economic development expectations and reality, but the point here is that CIRM - or any other biotech-focused economic development could be defensible strictly on an economic basis.


(postscript: it looks like California might do something like this again - there is a proposition to raise cigarette taxes to fund cancer research.)

What do you expect for $3B?

Five years ago California chartered CIRM - a state body to facilitate spending $3B on stem cell research over a 10 year period. The money for CIRM came from a CA bond issuance (i.e. a self-tax on Californians) and was intended to fund stem cell research to 1) keep California's bioscience competitive with or ahead of the rest of the world, and 2) fund embryonic stem cell research that the US federal government would not fund due to ethical restrictions.

(As context, at the time of the ballot initiative to fund CIRM, California was worried that South Korea, Singapore, and other locations would be more attractive for stem cell research. Also, my impression was that Cali voters were eager to flip Pres. Bush the bird on anything, particularly when his social policies impacted science.)

I commented a year ago on the return on stem cells investment , and now Nature has a good article summarizing CIRM at the five year (half way) mark (with better figures than my estimates.) Since Nature is tied to the science community (including CIRM researchers) they don't go out and say it directly, but there are few tangible results so far from ~$1.5B in spending. (Presumably some great papers (published in Nature) and some shiny new on-campus labs, but other than that, nothing.)

Ordinarily, I would not fault anyone for not dramatically improving human health in just 5 years (even with $1.5B to spend), but as I pointed out on my personal blog in 2005, the stem cell community has a terrible track record of overselling the benefits of its' efforts.

But the lessons here are less about how regenerative medicine is following the same growth curve of revolutionary new technologies before it, where hype runs ahead of reality, until a crash and subsequent rebirth with success (think gene therapy in the 90's).

The lessons here are instead related to business and economic strategy:

1) even in the case of outstanding science, local funding only produces marginal local benefits. Presumably CIRM proceeds have enabled research that has global benefits (through great papers, worker training, and new research tools and methods.) However, knowledge doesn't stay local. Good papers are read around the world, workers are recruited to other labs in other places, and tools are copied. Everyone should probably thank Californians for funding the research, but unless CIRM can claim a few million more tourists to California because of stem cell research, we probably aren't returning value to the state because of CIRM.

2) anyone touting near-term economic or other gains from long-term basic research is either dumb or dishonest. As the Nature article highlights, CIRM has funded only 1 clinical trial (which aborted), meaning that the impact on human health is still a long term proposition, and that aside from some advances in research tools, little tangible economic value has been created. I think much of the excitement of alternative energy ("Green jobs!") is similarly oversold regarding near-term impact.

3) It is an esoteric concept, but no analysis of CIRM or similar efforts is complete without asking "is/was there a better use of $3B instead of stem cells/CIRM, including just leaving the $$$ in voters' pockets?"

The status quo has strong gravity, so California should be praised for considering a bold move like CIRM (whereas with the exception of a few states that invested their tobacco settlement $$$ in life science research, most states never got beyond talking about making a difference), but the truth is, governments and the general populace are ill-equipped to consider alternatives beyond yes/no.

California is massively in debt ($361B as of Feb 1, 2012), so NOT starting CIRM could have been $3B less debt (which is still a lot of money to me), or a minuscule <1% of the problem, depending on your point of view.

In addition to the idea of just pocketing the $3B (which I would advocate, in retrospect), I'm sure that other interest groups could have contributed other higher-returning ideas for state investment - be it green energy, synthetic biology, infrastructure improvements, or whatever.

4) (personal biases showing here:) bioscience needs to admit that no matter which topic or which spin, if you have to rely on convincing the general public to fund your initiative, you should just stop.

I don't think that the California public has conducted a cost/benefit analysis on CIRM, but they (or the newspapers, or whatever) will do so eventually, and it won't be pretty.

Selling the public isn't the hard part. (I'm thinking of the Simpsons' Marge vs. the Monorail episode as a great illustration of this concept). Instead, delivering on the grand promises is what is difficult, and until research becomes predictable (oxymoron - predictable research is then a technology), science will continually over promise and under deliver, likely proving to be a longer term hindrance than a source of short term funding.

(Perhaps this is observable in today's funding climate for therapeutic development. The bioscience investing base is probably smaller today and in the long term than if reality had kept pace with hype, and not instead burnt a great many investors.)