The hard cell
Thanks to politics, stem cell research in the United States is
suffering. But not so in Sweden, which is poised to capture what
could be the biggest new market to hit biotech in a decade.
By Stephan Herrera
February 13, 2003

New York, January 1, 2006: Sweden announces that one of its
biotechnology companies is the first in the world to enter clinical
trials with a new drug that could cure Alzheimer's disease. Four
years ago this type of research was all but stopped in the United
States by political and ethical questions--which is why Sweden now
seems in the best position to capture a $25 billion market.

Any day now, the U.S. Congress is expected to pass a sweeping new law
that could dramatically inhibit researchers from working with stem
cells taken from human embryos. Such cells, which can be used to grow
a whole host of new cells and organs, could fundamentally change the
way we treat heretofore intractable maladies like Alzheimer's
disease, Parkinson's disease, cancer, stroke, liver failure, and
heart disease. The only problem is that these cells by definition are
derived from human embryos, many of which are cloned or come from
unused fetuses collected at fertility clinics. The argument, from a
certain segment of the American political spectrum, is that both
methods are morally wrong. They are either a form of abortion or an
activity that could eventually lead to human cloning.

Those working in stem cell research say the short-term effect of the
legislation will be to further chill all forms of scientific inquiry
and commercialization efforts in the field. Entrepreneurs and
investors are already eschewing such research--in large part because
of the additional uncertainty and risk that politics introduce.

"It's not that American VCs don't understand stem cells," says one
European stem cell expert, "it's that the political climate in
America has scared them off."

A leading U.S. stem cell firm, Geron, has seen its stock price
plummet 62 percent in the last 12 months (Nasdaq: GERN). Executives
at firms like Geron maintain they are at their wits' end, and are
either quitting or being fired by frustrated boards. Large
pharmaceutical companies that have partnered with the stem cell firms
are canceling or simply not renewing research collaborations. Only
the firms working on stem cells from animals even bother to issue
progress reports or attend biotech conferences.

"What we should be discussing is whether stem cell research is a
viable area of research, regardless of politics," says Ron Cohen, CEO
of U.S.-based Acorda Therapeutics, which is working with stem cells
for spinal cord repair. He thinks it is, and so do a couple dozen
Nobel laureates, plus Orrin Hatch and several other prominent
conservative Republicans, including Nancy Reagan (Ronald Reagan
suffers from Alzheimer's). In 2002, California passed a law that
supports stem cell research and cuts against federal policy. New
Jersey is considering a similar law. Still, these developments
haven't helped matters much, because critics of stem cell research
have been successful in capturing the moral high ground.

Of the nearly 50 private stem cell companies in the United States,
only a handful are still viable. Meanwhile, across the Atlantic,
Sweden has avoided many of the political and ethical quagmires
surrounding this type of research. It currently has 40 private stem
cell companies, a number that's growing. Sweden's leading research
universities have 32 percent of the world's stem cell inventory,
close on the heels of the United States' 35 percent.

Sweden, say analysts, is now in the best position to capture a
worldwide market for drugs based on stem cell therapies that could
grow to $25 billion in the next three to five years--nearly equal to
the whole biotech industry at present. This estimate doesn't even
address the market for stem cells capable of repairing damaged vital
organs like the brain, heart, and kidneys. If the United States
offers an object lesson of what can happen when scientific inquiry
and investment capital fall victim to politics, Sweden and its
leading stem cell startup, NeuroNova (a Red Herring 100 company in
2002), offer the opposite example. How odd that the United States,
which for generations has been the envy of the world for its
progressive views of science and commercialization, should now have a
biomedical climate chillier than a Swedish winter.

Brain Power
Sweden's strong position is even more surprising given that it has a
population of only 8.9 million, roughly equal to that of Manhattan on
a business day. There are more universities in Massachusetts than in
this entire Scandinavian country. Yet Sweden has the highest per
capita output of patents and peer-reviewed scholarly articles year
in, year out. It also has more than 300 research groups devoted
exclusively to stem cell research, thanks to government-backed
funding incentives.

As minister for trade, Lief Pagrotsky has put stem cells at the
center of his country's pitch to attract foreign direct investment in
Sweden's biotechnology market. In an open letter to would-be
investors and corporate collaborators, he writes, "[C]onsidering the
potential for stem cells, I assure you our government is determined
to sustain and advance Sweden's lead in this field."

While the United States is still the leader in academic stem cell
research (in December, Stanford University announced that it would
clone human embryos to produce stem cells), Sweden is close behind.
Every major university in Sweden has a stem cell research program.
Some of the world's leading stem cell researchers--like Anders
Bjorklund of the University of Lund--call Sweden home. The Karolinska
Institute alone (Sweden's largest and best-known research institute
and the birthplace of the Nobel Prize) has more than 100 stem cell
researchers. Among them are Urban Lendahl, who discovered one of the
pivotal genes used to detect neural stem cells, and Jonas Frisén, a
neurobiologist who was the first to prove that adult stem cells in
the brain, contrary to conventional wisdom, can regenerate brain
cells. (Dr. Frisén also cofounded NeuroNova in 1998.)

Still, like the rest of Europe, Sweden has long envied the United
States. The vast majority of young European scientists want to come
to America. And why not? The U.S. academic and commercial
marketplaces for ideas are far more robust than in Europe. In fact,
the U.S. drug industry is about ten times larger than Europe's. So,
over the past few years, Europe's largest drug firms have relocated
to New Jersey--and not because they like the weather.

Stem cell research turns this situation on its head. If the United
States wants to be a part of the future of stem cells, say industry
watchers, it might soon be forced to look abroad. The internationally
recognized stem cell expert Irving Weissman of Stanford University
Medical School is widely quoted as saying, "I wouldn't be surprised
if the first clinical trials using stem cell therapy for
neurodegenerative diseases [like Alzheimer's or Parkinson's] are
performed in Lund [Sweden]."

Stemming the Flow
At one time, all of the largest pharmaceutical firms, including
Pharmacia (originally a Swedish firm, soon to merge with Pfizer),
Novartis, Eli Lilly, and Merck, had stem cell programs. Some still
do, but they are kept under wraps so as not to attract attention.
None of these firms would discuss their programs on the record. Most
are working on stem cells that come from mice (which are a good
research tool, but no substitute for human stem cells). They have
long since abandoned any notion that this field is the next big
thing. That's bad news for biotech startups, which normally thrive on
contracts and partnership deals with the large firms.

One company feeling a lot of pain is StemCells, which at first glance
seems to have it all: founding scientists include Stanford's Dr.
Weissman and Fred Gage of the Salk Institute in La Jolla, California.
An equally well-regarded expert in the treatment of Alzheimer's, Dr.
Gage spent five years in Sweden as a researcher and now sits on a
national committee on stem cell research there. The firm's chairman
is Roger Perlmutter, Amgen's head of research.

Yet over the past two years, none of management's efforts to help
investors and even critics reconsider the stem cell field have
worked. At press time, the stock was thinly traded and sitting in the
neighborhood of 50 cents (Nasdaq: STEM). With less than $15 million
in cash, the company likely won't exist at this time next year. (CEO
Martin McGlynn, who joined the firm in January 2001, would not talk
to Red Herring, despite repeated efforts.)

Some observers on Wall Street are asking, If StemCells can't make it,
who can? Geron, the only other publicly held stem cell firm to speak
of, is in a fix, too. The company's stock price is also moribund, at
$3.85 per share. Thanks to some capital infusions a few years ago,
when money came easy, Geron still has $40 million on hand, but by the
end of next year, that too will likely be gone. Once a media darling,
Geron focuses on diagnostic tests and drugs derived from stem cells,
a strategy that's not going well. For the nine months ended last
September, revenue fell 68 percent to $955,000 and net loss widened
18 percent to $26.7 million. The company's financials were also hit
hard after it terminated an agreement with Pharmacia and acquired
research technology from Lynx Therapeutics, which Geron bought in a
desperate attempt to be seen as something more than just a stem cell
company.

Stockholm Market
The situation is quite different, however, for Sweden's NeuroNova,
founded by Dr. Frisén and Ann Marie Janson, also a neuroscientist at
the Karolinska Institute. NeuroNova, which has 30 academic partners
and a staff of 20, is working on ways to inject stem cells into the
human brain to trigger a process called neurogenesis (the growth of
new neural cells), which could combat diseases like Parkinson's,
Alzheimer's, and even schizophrenia.

"All of big pharma will have a neurogenesis program within four
years," predicts NeuroNova's CEO, Anders Haegerstrand. "We hope to be
entering clinical trials by then." If either prediction comes true,
NeuroNova will be in a good position to attract a large
pharmaceutical company, perhaps one based in Europe, as a partner to
help shoulder the cost of clinical trials.

To date, the firm has raised $3 million from venture firms and the
largest pension fund in Sweden, and hopes to close on another $10
million by this spring. Compared with their U.S. counterparts,
NeuroNova--and most of the other 39 stem cell companies in Sweden--is
not well funded. But then, the cost of conducting research in Sweden
is much lower, because it typically costs from 30 to 40 percent less
to employ doctors, nurses, and technicians than in the United States.

In its quest for investors, NeuroNova may get help from American VCs
like Elliott Davis of Next Wave Funds, which recently made an
investment in Cell Therapeutics Scandinavia. Mr. Davis sees near-term
prospects for stem cells as a diagnostic tool and long-term
advantages to having access to embryonic stem cells. Although it's
uncertain how much U.S. venture capital will flow to stem cell
companies, it's a safe bet that many VCs will focus on Swedish firms
like Cell Therapeutics, NeuroNova, and Vitrolife.

Whether these companies can win the drug-development race against
their U.S. counterparts remains to be seen, says the Salk Institute's
Dr. Gage. "Sweden and its stem cell companies are small, so they've
got to be unique. Success is all predicated on getting the smartest
people," he says. "Unless you can recruit the winners, you won't get
anywhere."

If NeuroNova is the first to develop a drug capable of treating one
of several central nervous system disorders--by far the most
lucrative after heart disease products--it will have done so not
because it raised more money or got more media buzz than the rest. It
will have succeeded because the science is solid, and academe,
government, and the investment community are supportive. Meanwhile,
the United States will look on with envy and wonder how it, a country
known for its entrepreneurial innovation, ever got so short-sighted.

Stephan Herrera is a contributing editor to Red Herring.

Write to Stephan Herrera.
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SOURCE: The Red Herring Investor
http://www.redherring.com/investor/2003/02/biotech021303.html

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