Investing In Embryonic Stem Cell Research

When President Bush declared in 2001 that the federal government would place strict limits on embryonic stem-cell research, privately funded companies were free to continue work using the controversial cells.

Still, in the nearly four years since the executive order, the embryonic stem-cell business has not boomed. But brace yourself.

California's Proposition 71 earmarks $3 billion for such research over the next decade, and its passage last November spurred several other states to draft similar legislation. While Prop 71 has been mired in administrative problems, the legislation's mere existence provides excellent PR for stem-cell companies. The law has also led to an infusion of investor money, according to one of the leading embryonic stem-cell companies in the United States.

"With the passage of Proposition 71 there's been an influx of interest in stem cells," said Robert Lanza, vice president of medical and scientific development at Advanced Cell Technology in Worcester, Massachusetts. "We're in a whole new world. We're flush with cash, and just months ago we were struggling as a private company to even make payroll and to keep the phones on."

ACT went public by way of reverse merger in January. The company will soon announce an $8 million investment from private and venture investors, with more on the way, Lanza said, and the company has nearly tripled in size.

In the past six months, however, investors' enthusiasm for ACT has fizzled somewhat. Shares, which soared to $9 in February, are currently trading around $3.

Until recently, U.S. venture capitalists haven't been keen on investing in the fledgling field, and it's not hard to understand why. Regulation and legislation surrounding embryonic stem-cell research are still evolving. Moreover, while the science is promising, no one has proven yet that embryonic stem cells will lead to blockbuster therapies.

"Some of this stuff still looks like science experiments," said Ken Haas of Abingworth Management, a venture capital firm specializing in life science biomedical companies.

Haas gave a bleak outlook for stem-cell companies hopes for venture funding at the International Society for Stem Cell Research annual meeting last month in San Francisco.

Big pharmaceutical companies aren't funding early research, he said. And VCs have higher expectations in general from biotech firms because they perceive the industry as having graduated from its freshman status. The investment necessary to bring a company public has doubled, Haas said, and the returns have diminished.

All of these factors combined create a chilly climate for embryonic stem-cell companies, Haas said.

That has certainly been the case in recent years, Lanza said, but the landscape is rapidly changing.

So-called adult stem-cell companies like Aastrom Bioscience and Osiris Therapeutics have an easier sell. They use stem cells derived from adult donors, exempting them from the ethical and political issues surrounding the destruction of embryos for cells.

The National Institutes of Health, which historically has funded promising basic research in the United States, spent $24.3 million on embryonic stem-cell research in 2004, and $203.3 million on adult stem-cell research, according to R&D Magazine. Both figures pale when compared to the $4.7 billion spent by the National Cancer Institute (part of the NIH) on cancer research in 2004, and the nearly $3 billion spent on HIV/AIDS research.

Geron, of Menlo Park, California, is Advanced Cell's arch nemesis (ACT's chief scientific officer, Michael West, founded Geron in 1992) and another of the handful of American companies trying to make embryonic stem cells into therapies.

Geron funded the University of Wisconsin lab where James Thomson isolated the first human embryonic stem cells. And Geron's president, Tom Okarma, said the company will fund the first human clinical trial using embryonic stem cells to treat spinal cord injuries by 2006.

Geron (GERN) did not return phone calls regarding the company's most recent finances. While the company has weathered layoffs and cutbacks, it has a reputation for skillful fund raising.

"I think you would have to say Geron has been successful in raising public funds," said Hugh Ilyine, chief operating officer of Stem Cell Sciences in Edinburgh, Scotland. "In that respect the U.S. market is very significant for investment and in that sense it's potentially a very good market to be in. We certainly look forward to the time we'll be able to set up in the United States."

That's quite a vote of confidence coming from a company in the United Kingdom, where federal regulations allow funding for embryonic stem-cell research and therapeutic cloning.

Stem-cell entrepreneurs in the United Kingdom say despite the favorable regulatory climate, venture capitalists are not beating down their doors.

Simon Best, CEO of Ardana Bioscience in Edinburgh, Scotland, said he's having trouble raising funds, and he blames the United States, at least in part.

"The political and ethical environment in the United States is dampening down the VC community globally in terms of their willingness to invest in this," Best said.

Others blame a hangover from the early '90s biotech bubble and the over-hyped genomics craze of 1999 and 2002, added to the fact that the science is in early stages.

"I think what we should look for are the first clinical trials hopefully being successful, and then I will be very disappointed if venture capital doesn't join in," said Ian Wilmut, head of gene expression and development at the Roslin Institute in Edinburgh, Scotland, and famous for cloning Dolly the sheep. "The cost of all of this will be so great that I don't think it will be right to rely on either the government or the private capital. I think we need both."

Less risk-averse investors like Roger Ashby, who came to the International Society for Stem Cell Research meeting looking for potential investments, will be more likely to fund stem-cell business than VCs. Ashby recently started Stem Cell Ventures, a sister company to Bioaccelerate.

"Venture money's gone now," Ashby said. "It's going to banks and unless you've got gold bars at half price they're not interested."

Ashby, who was an early investor in fiber optics and satellite TV in the U.K., was optimistic about the quality of stem-cell science in the United States. But he said he'd bring any companies he invests in to the U.K. to avoid the regulations and volatile political climate in the United States.

"In America you have a strange government setup where the president can actually call the shots," Ashby said. "That is not democracy. That can't happen in Britain."

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