Economic Analysis of Proposition 71: California Stem Cell Research and Cures Initiative

1. Economic Analysis ofProposition 71:California Stem Cell Research and Cures Initiative Laurence Baker Associate Professor, Stanford University Bruce Deal Managing Partner, Analysis Group, Inc.

2. Key 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

3. Costs 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

4. Time Structure Year 1 5 10 15 20 25 30 35 Facility Commitments1 $300m Research Commitments1,2 $1.25b $1.4b Bond Payback Int. Accum, No Principal Principal and Interest Repaid Tax Rev from Institute funding Tax Rev from new biotech Health Care Cost Reductions Royalty Revenues 1. Amounts shown are approximate (and rounded) 2. Includes administration and grant oversight costs of up to 6%

5. Project Disbursements ($ Millions) Period of New Commitments Total: $2,986 million

6. Interest 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

7. Bond Repayment ($ Millions) Total, yrs 1-35 Interest: $2,368 Principal: $2,986 Int+Prin: $5,355 I: $56 P: $0 I: $1,450 P: $2,560 I: $862 P: $427 Accrued

8. Tax 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

9. Tax Revenue Estimates ($ Millions) Total: $240 million Note: No tax revenue assumed in years 15-35 after Institute disbursements end

10. New 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.

11. Biotech Industry Size ($ Millions)

12. New Biotech Activity – Tax Revenue ($ Millions)

13. Health 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

14. Six Conditions • Type I Diabetes • Heart Attack (AMI) • Stroke • Parkinson’s Disease • Spinal Cord Injury • Alzheimer’s Disease

15. Three 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)

16. Three 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

17. Annual Direct and Lost Work Cost Reductions, State Budget ($ Millions) Total, yr 1-35 S1: $2,244 S2: $4,487 S3: $22,435

18. Medicaid Nursing Home Cost Reductions, State Budget ($ Millions) Total, yr 1-35 S1: $1,200 S2: $2,400 S3: $12,002

19. Total State Budget Health Care Cost Reductions ($ Millions)

20. Royalty 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

21. Annual Royalty Revenues, 2% Royalty Rate ($ Millions) Total Yrs 1-35 $537

22. Combined Results • We combine results in 3 cases

23. Combined Results • Summary