Economic Analysis ofProposition 71:California Stem Cell Research and Cures Initiative

Laurence BakerAssociate Professor, Stanford University

Bruce DealManaging Partner, Analysis Group, Inc.

22

Key FeaturesKey Features

Approximately $3 billion in funding for facilities and research on stem cells, committed over a 10 year period

Funded by bonds Payments deferred for 5 years Principal and interest paid back in years

6 through 35

33

Costs and BenefitsCosts and Benefits

Costs: expense to State budget of paying back the bond principal and interest

Potential benefits: Tax receipts from new funded activity Tax receipts from incremental growth in

biotech sector Savings from development of new

therapies Royalty revenue

44

Time StructureTime Structure

Year 1 5 10 15 20 25 30 35

FacilityCommitments1

$300m

Research Commitments1,2

$1.25b $1.4b

BondPayback

Int. Accum, No Principal Principal and Interest Repaid

Tax Rev from Institute funding

Tax Rev from new biotech

Health CareCost Reductions

Royalty Revenues

1. Amounts shown are approximate (and rounded)2. Includes administration and grant oversight costs of up to 6%

55

Project DisbursementsProject Disbursements

Total:$2,986million

($ Millions)

Period of New Commitments

0

50

100

150

200

250

300

350

1 2 3 4 5 6 7 8 9 10 11 12 13 14

66

Interest Rate AssumptionsInterest Rate Assumptions

Based on analysis of current market conditions, expert expectations, and adjustments for California-specific issues (e.g. lower bond rating)

Assume 3.0% interest rate in years 1-5 Assume 4.5% interest rate in years 6-35

77

Bond RepaymentBond Repayment

$0$20$40$60$80

$100$120$140$160$180$200

0 5 10 15 20 25 30 35

InterestPrincipal

I: $56P: $0

I: $862P: $427

I: $1,450P: $2,560

Total, yrs 1-35Interest:

$2,368Principal:

$2,986Int+Prin: $5,355

($ Millions)

Accrued

88

Tax Revenues From Initiative FundingTax Revenues From Initiative Funding

New funding will provide for expanded research and facility construction Initiative funds augmented by additional

matching funds, other research grants Some will be incremental, some not

Incremental activity has “multiplier effect” on overall economy

Total incremental economic activity produces new income and sales tax revenue for the State

99

Tax Revenue EstimatesTax Revenue Estimates

0

5

10

15

20

25

30

35

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Total:$240

million

($ Millions)

Note: No tax revenue assumed in years 15-35 after Institute disbursements end

1010

New Biotech ActivityNew Biotech Activity

California biotech industry already large 40% of U.S. biotech firms are in CA* 2003 “gross product” of $12 billion*

Proposition 71 could foster further growth Incremental growth would produce new

income and sales tax revenue for the state We investigate implications if California’s

life sciences sector were to be larger Scenario 1: 2.5% larger than baseline Scenario 2: 5% larger than baseline

* “California Life Sciences Action Plan: Taking Action for Tomorrow,” Bay Area Bioscience Center, BIOCOM, California Healthcare Institute,Southern California Biomedical Council, Bay Area Council, Larta Institute, Sacramento Regional Technology Alliance, and San Diego Area Regional Technology Alliance.

1111

Biotech Industry SizeBiotech Industry Size

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Baseline Scenario 1: 2.5% augment Scenario 2: 5% augment

($ Millions)

1212

New Biotech Activity – Tax RevenueNew Biotech Activity – Tax Revenue

($ Millions)

Period 1

(Yrs 1-5)

Period 2

(Yrs 6-14)

Period 3

(Yrs 15-35) Total

Scenario 1 $54 $355 $1,796 $2,206

Scenario 2 $108 $711 $3,592 $4,411

1313

Health Care Cost SavingsHealth Care Cost Savings

Stem cell therapies could reduce the costs of treating many health conditions

If successful therapies are developed (or even just developed sooner) under Proposition 71, health care costs could be reduced

The State pays health care costs for Medicaid, state employees, and others, so State costs could also be reduced

We investigate the implications of reductions in State government and overall costs for 6 conditions

1414

Six ConditionsSix Conditions

Type I Diabetes Heart Attack (AMI) Stroke Parkinson’s Disease Spinal Cord Injury Alzheimer’s Disease

1515

Three Types of CostsThree Types of Costs

Direct medical costs for the under 65 population Based on data from a large insured population

Lost work costs in the 19-65 population Based on data from large insured population

Nursing home costs (for all ages)

1616

Three Savings ScenariosThree Savings Scenarios

Scenario 1: Limited success Model as a 1% reduction in costs for the

6 conditions in years 5-15 through 35 Scenario 2: Increased success

2% reduction for 6 conditions in years 5-15 through 35

Scenario 3: Expanded Success 10% reduction for 6 conditions in years

5-15 through 35

1717

Annual Direct and Lost Work Cost Reductions, Annual Direct and Lost Work Cost Reductions, State BudgetState Budget

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1 3 5 7 9 11 1315 17 19 2123 25 27 2931 33 35

Scenario 1 Scenario 2 Scenario 3

($ Millions) Total, yr 1-35S1: $2,244S2: $4,487S3: $22,435

1818

Medicaid Nursing Home Cost Reductions, Medicaid Nursing Home Cost Reductions, State BudgetState Budget

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Scenario 1 Scenario 2 Scenario 3

Total, yr 1-35S1: $1,200S2: $2,400S3: $12,002

($ Millions)

1919

Total State Budget Health Care Cost ReductionsTotal State Budget Health Care Cost Reductions

Scenario 1 $3,444

Scenario 2 $6,887

Scenario 3 $34,437

($ Millions)

2020

Royalty RevenuesRoyalty Revenues

Proposition 71 includes provisions for the state to share in ownership of intellectual property developed with Initiative funds

New discoveries could be licensable, and bring in royalty revenues to the state

We investigate implications of the state receiving royalties from 3-4 new therapies, with 7 year patent lifetimes, using revenue projections based on current therapies Scenario 1: 2% royalty rate Scenario 2: 4% royalty rate

2121

Annual Royalty Revenues, 2% Royalty RateAnnual Royalty Revenues, 2% Royalty Rate

$0

$10

$20

$30

$40

$50

$60

1 3 5 7 9 11 1315 171921 2325 272931 3335

TotalYrs 1-35$537

($ Millions)

2222

Combined ResultsCombined Results

We combine results in 3 cases

Case 1

2.5% biotech increase 1% health care cost savings 2% royalty rate

Case 2

5% biotech increase 2% health care cost savings 4% royalty rate

Case 3

5% biotech increase 10% health care cost savings 4% royalty rate

2323

Combined ResultsCombined Results

Total, Year 1-35 % of State costs

Cost to State Budget $5,355 ---

Benefits to State Budget

Case 1 $6,426 120%

Case 2 $12,612 236%

Case 3 $40,161 750%

Additional HC Benefits to Californians

Case 1 $9,180 171%

Case 2 $18,359 343%

Case 3 $91,797 1714%

Summary