The Capitol Weekly Interview: Robert Klein, Prop. 71 author

Robert Klein is the face of stem cell research in California. He’s the
chairman of the Independent Citizens’ Oversight Committee for the California
Institute for Regenerative Medicine. And he was the driving source behind
Proposition 71, the 2004 ballot initiative the created the group he heads.
Passed with 59 percent of the vote, Prop. 71 will use $3 billion in state
bonds to fund stem cell research.

His role as the leader in both the campaign and the resulting state agencies
helped him make Time magazine’s “100 Most Influential People of the Year”
list for 2005. But it has also raised the eyebrows of some critics. He has
come under fire from good government groups and state legislators over
financial issues, particularly the ability to use tax-exempt bonds in order
for the state to receive some return on its investment. Particular attention
has been paid to a figure–quoted on the Yes on 71 campaign Web site–that the
state could get a return of up to $1 billion.

Klein originally made his name in affordable housing; he still serves as
president of the Klein Financial Corp., a real estate and investment bank
focused on housing development. Earlier this week, Klein sat down for an
hour-long telephone interview with Malcolm Maclachlan of the Capitol Weekly.

Capitol Weekly: Tell me about some of the personal experiences you’ve had
that led you to get really involved in this issue.

ROBERT KLEIN: My youngest son has juvenile diabetes. As a father, once you
realize that this inherited disease that skips generations can lead to
blindness and kidney loss and amputations, you become extraordinarily
engaged in trying to understand the progression of the disease and the
potential treatments that can mitigate this suffering. On the other end of
the age spectrum, my mother has Alzheimer’s, and is at the far end of that
progression.

CW: What would you say to critics who say that the setup of the CIRM and the
ICOC does not include enough oversight and holds potential conflicts of
interest?

RK: The president of the Salk Institute that gave us the polio vaccine, is
on this board, and Salk does stem cell research.

If Salk has a grant proposal up, it is very clear that the Salk president
cannot participate in the discussion and cannot participate in the vote.
Alameda County Superior Court Judge Bonnie Sabraw, in her decision of last
week makes it very clear, that this is well-established, clearly
communicated to the voters, and that it is clearly acceptable within
California law, and she threw out their asserted complaint on that basis.

CW: Did you anticipate the lawsuits before the campaign? Is there anything
that you would have done differently?

RK: While we anticipated that there would potentially be litigation, we
expected it to be in the area of standards. We did not expect a
constitutional lawsuit when the initiative included a constitutional
component where the major portions of the conceptual issue were put into the
state constitution. As Judge Sabraw said, and I believe you’ll find it on
page nine of her opinion, she said the Supreme Court said it is the Court’s
solemn duty to uphold an initiative, resolving all doubts in its favor,
unless its unconstitutionality clearly, positively and unmistakably appear.

The opposition is suggesting that they will file more lawsuits to stop our
funding. In fact, that’s not possible. The statute of limitations ran [out]
in July, and the for the next 35 years, during the period that these bonds
are outstanding, they cannot challenge this $3 billion constitutionally
because the existing suits were the only ones that were filed during the
allowable or permissible period. As you know, we’ve consolidated the
existing suits into one suit in Alameda. That suit is the one that will
decide our constitutionality. To date, Judge Sabraw has, as she says on page
12, because plaintiff CFBC [California Family Bioethics Council] has not met
its burden on demonstrating that the act is clearly, positively and
unmistakably unconstitutional on any–I’m emphasizing any–of the five grounds
asserted, the plaintiffs motion for judgment on the pleading is denied. So
we are entering this hearing in a very strong position.

I believe that we will be in the court process for 12 to 15 months, in order
to get through the trial hearings and the appeals in the Supreme Court. That
assumes we are consistently given expedited treatment, which Judge Sabraw
indicates that this case qualifies to receive. During that period of time,
we will need to do a number of bond anticipation note private placements
through the treasurer’s office, with a full litigation disclosure and a
requirement that anyone purchasing those have their own independent counsel,
and that the minimum purchase be a million dollars to make certain that the
purchasers are of a very strong financial foundation and can take a
financial risk.

CW: How realistic do you think it is that stem cell research could spark
something on the order of the dot-com boom?

RK: Coming from a patient advocacy background, I’m focused that the driving
mission of Proposition 71 is to advance medical research, with the potential
to enhance treatments across 70 different areas of chronic disease and
injury.

The economic projections that we commissioned during the campaign focused on
the fact that 92 to 98 percent of the benefits came primarily from a 1 to 2
percent minimum assumption reduction in health care costs to the state by an
improvement in just six out of 70 areas of chronic disease. So the job
growth was an important but very secondary benefit of that. It was not
primarily driven by outside economics.

CW: There was the number, $537 million to $1.1 billion in royalty returns to
the state from the Prop. 71 that was widely quoted during the campaign. Were
those numbers used out of context?

RK: Certainly. During the campaign and since the campaign, the opposition
has consistently tried to use those numbers out of context. As you can see
in the initiative itself, first of all I wrote the sections saying we need
to have an intellectual property agreement for every grant loan program
that’s approved. But it needs to balance the needs of medicine with the
desire to create intellectual property revenue. Realizing that 95 percent of
the return came from the potential to reduce the cost of illness and the new
tax revenues from new jobs, the 5 percent of revenues that would benefit the
state’s citizens from intellectual property, should not control the other 95
percent of benefits.

Secondly, you have to realize that people are using completely different
numbers in their comparisons. [Our] analysis shows that there is no
intellectual property for 14 years, and that the average intellectual
property revenue is received in about Year 24, a point that we emphasized in
many debates and radio interviews and newspaper interviews across the state.
Intellectual property revenue is not a short term phenomena. You have go
through basic research, applied research, translational research, go to
clinical trials, in order to get to that point.

But if you take $500 million, for example, in future revenues collected by
the year [20]35, which was reflected in his projection, if you take the
present value of that number, it’s about $100 million. Certainly no one
projected that on day one there would be $100 million in intellectual
property revenues. It’s widely understood by the journalistic community and
the scientific community, the chambers of commerce that studied this, and
with many of the chambers of commerce we went through three or four
committees, that it’s a long process, and there are years and years that go
by before you have this revenue. The fundamental point is you can’t take
$5
50 million collected over 35 years and treat is as though it’s a present
value number.

CW: So you still feel that these returns are possible in the long run?

RK: Yeah. For example, Stanford University in recent years received a $200
million payout just from one patent in recombinant DNA therapies. UC San
Francisco received a $200 million settlement on a single patent in
recombinant DNA research. The city of Hope received over $400 million in a
settlement.

With a research program that goes over 12 years and covers hundreds or
thousands of experiments that are partially or fully funded by this
research, there are very few of those that will lead to very significant
revenues. But as presented in the ballot arguments by the Legislative
Analyst Office, intellectual property revenues were stated to be “unknown,
but could be significant.” That’s their specific language in the ballot. And
this was not an area of focus in the campaign, although it was discussed, it
was recognized as being 5% of the total benefit, and in fact the legislative
analyst on the ballot pamphlets sent to every voter in California, did not
give it any quantifiable value at all.

The National Institutes of Health attempted to put out a grant program that
they funded, where individuals and physicians agreed up front that they had
to control the price of the drug on delivery. What they found is that no one
took the grants. After five to seven years they cancelled the whole program
because no one would use it. It is a medical and technical almost
impossibility to be able, when you take a grant, to know what it’s going to
cost to do the development phase and the trial phase for the drugs.

Orrick Herrington [state bond firm] and the states’ bond council and [deputy
state treasurer] Juan Fernandez were at a public meeting of the Intellectual
Property Task Force on November 22, where they very specifically stated that
there were numerous they felt they could structure the tax exempt and
intellectual property revenues so as not to interfere with the ability to
sell tax exempt debt. This is all subject, as is any developing area of bond
financing to IRS opinions.

CW: The International Stem Cell Consortium and researcher Woo Suk Hwang out
South Korea have been in the news with allegations they’ve paid and/or
coerced women into giving eggs. I know that it’s written very clearly into
Prop. 71 that this cannot be done in California. You went to a photo op in
South Korea. If you could just tell me about the goal of that trip?

RK: There are 12 nations that have sent diplomatic and scientific missions
to the California Institute of Regenerative Medicine and the board which I
chair: Sweden, England, Singapore, Israel, Australia, Korea.

I was at a meeting with the president of South Korea, President Roh, the
minister of health, the minister of science and technology, Ian Wilmut who
is working on embryonic stem cell research in Edinburgh, and Dr. Curie-Ahn
who developed the disease-specific stem cell lines in Korea along professor
Hwang, who you’ve just referenced. The discussion in the meeting with the
president was the level of commitment by South Korea as a country to this
effort. I also toured the Seoul National University Labs that are run by Dr.
Curie-Ahn.

So this is a general trip to look at the full range of research in Korea and
to have talks with the Korean government on their future commitments, which
they have expanded substantially. And in that context, I took part of an
international symposium the Korean government and the Korean international
trade association sponsored, which had the press conference that you’re
referencing.