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The state of California has been working its way through a list of thorny issues surrounding its groundbreaking Proposition 71 – $3 billion in funding for embryonic stem cell research that voters approved in 2004.

Now, as the state prepares to distribute its first round of Prop 71 funding, it is facing a troubling prospect: a set of broad patents covering embryonic stem cells could substantially inhibit industry from investing and partnering in the research. The patents could also make it more difficult for the state to recoup its investment in stem cells if the research eventually leads to profitable technologies.

In 1998 and 2001, James Thomson, a scientist at the University of Wisconsin in Madison, who first isolated human embryonic stem cells, was granted two U.S. patents that cover both the cells themselves and a method for deriving them. These patents, which are now owned by the Wisconsin Alumni Research Foundation (WARF), apply to all current lines of embryonic stem cells – scientists who wish to do research on such cells, even if they derive their own lines, must acquire a license from the Wisconsin foundation.

Concern over these patents has popped up repeatedly as the field of embryonic stem cell research has grown. But the issue came to life again recently when a lawyer for WARF said at an industry meeting in March that the foundation could ask the state of California for a percentage of profits from Proposition 71 funded research.

“WARF could take a lot of money away from California companies,” says Bill Warren, a lawyer and expert in biotech patents at the Atlanta law firm Sutherland Asbill & Brennan. “Almost all companies need to rely on patent protection for commercialization. But the broad scope of WARF patents…has created this problem.”

It’s unclear how the California situation will unfold. Nicole Pagano, a spokeswoman for the California Institute for Regenerative Medicine, the agency overseeing Prop 71 funds, said talks are underway. Yet Andy Cohn, a spokesman for WARF, says it is not formally negotiating with California and does not have plans to in the near future.

Whatever the outcome, the controversy has drawn greater focus on how these patents could affect the development of this burgeoning field. “This is not unlike in the heyday of DNA, when Stanford had seminal foundational patents [on recombinant DNA] that interested parties needed to access to further the science,” says Todd Lorenz, chair of Life Sciences and Health Care, at the law firm Dorsey & Whitney LLP. Stanford allowed other universities to use the technology without special permission, but charged private companies a licensing fee. “That policy was effective but not prohibitive…I think the challenge for WARF is setting up a similar structure that does not inhibit research or product development.”

Experts say it’s too soon to tell how the WARF patents will affect the commercialization of stem cell technologies. The patents have not yet been tested in courts – that is unlikely to happen until someone develops a commercial product based on embryonic stem cells, an achievement probably years away in this nascent field. “How will [WARF] handle product development issues? That’s still a wild card,” says Lorenz.

The more immediate concern is how the patents will affect basic academic research, which, in turn, could affect the development of stem cell-based tools and therapies. “We’re trying to foster an open research atmosphere,” says Ed Penhoet, vice chairman of the California institute’s oversight committee, which recently announced that any researchers who develop patented discoveries using state funds must share their patents with other state researchers. “We hope WARF will reciprocate,” he says.

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