Stem-Cell Stocks: Fact vs. Fancy
California voters' decision to fund research has lifted share prices.
Trouble is, not one of those outfits is close to a marketable
breakthrough
NEWS ANALYSIS
By Sarah Lacy

NOVEMBER 15, 2004

Forgive Tom Okarma if he's a bit testy these days. Sure, the passing
of California's Proposition 71 on Nov. 2 has created $3 billion
dollars of potential grants for Okarma's field, embryonic stem-cell
research. That dwarfs the $25 million now available each year through
the National Institutes of Health.

But the news has created a firestorm of press calls, misconceptions,
and confusion which the CEO of Silicon Valley-based Geron (GERN ) has
been navigating with increasing impatience. "The politicization of
this has created a whole field of overnight experts who have no clue
what they are talking about," he says. "Most of them have never seen
an embryonic stem cell."

INVESTOR EUPHORIA.  Stem cells have yet to morph into, say, brain or
skin cells. Taken from human embryos, they can become nearly any kind
of cell in the body, and they reproduce indefinitely. While adult
stem cells, usually extracted from bone marrow, are similar, their
ability to reproduce is limited reproduce, as is the kind and range
of cells they can become. Scientists hope embryonic stem cells hold
the key to remedies for now-untreatable diseases like Alzheimer's and
Parkinson's.

In addition to the debate about the benefits of stem-cell research,
there's a whole different controversy brewing: Who will benefit from
California's voter-mandated infusion of cash? The immediate answer
isn't Geron or other stem-cell outfits, such as StemCells (STEM ) in
Palo Alto or Aastrom Biosciences (ASTM ) in Ann Arbor (Mich.). Nor is
it the venture capitalists who donated a good portion of the $25
million used in the campaign to get the measure passed.

It's academic and research institutions like Stanford University, the
University of California, and the Salk Institute for Biological
Studies in San Diego. Between the, they're expected to receive the
lion's share of California's funding plan.

That hasn't stopped investors from getting carried away. Shares of
Geron, StemCells, and Aastrom soared in the weeks leading up to the
election. They got an extra bump on Oct. 25, after California's
Governor Arnold Schwarzenegger endorsed the proposition. StemCells's
stock consistently traded under $2 before October. By Nov. 1, it had
more than doubled, to $4.28.

MAKING HAY.  Bear in mind, of the three outfits, only Geron works
with embryonic stem cells. StemCells and Aastrom focus their research
on adult stem cells. Neither has any intention of getting into
embryonic stem-cell research, and since Aastrom has no employees in
California, it wouldn't be eligible for state funding.

Investors seem at least to have figured out that much. Aastrom shares
were going for $1 in late-day trading on Nov. 12, down from their
$1.44 peak on Oct. 25. As for the other two outfits, their Wall
Street joy ride continues. Geron was at $6.98 on Nov. 12, while
StemCells, hit by profit-taking in the days after the election,
commanded $2.82 -- down on the highs it hit at the start of the
month, but still well above the levels at which it had languished
through most of 2004.

All three have taken advantage of the hype to pad their coffers.
Aastrom raised $10 million in private funding Oct. 27 and StemCells
raised $22.5 million from similar sources Nov.1. Geron announced on
Nov. 11 that it is selling 6.5 million shares with a view to raising
$40 million. They were savvy business moves. For little companies in
the research-intensive biotech industry, plenty of money in the bank
means a much-improved chance of staying in business long enough to
get a product out the door.

WELCOME MAT.  Certainly, the companies may not be entirely shut out
of California's largesse. Geron and StemCells may apply for grants.
But their most realistic hope is that the money will help academic
researchers get new advances into the marketplace faster. Such
research could spin off increasingly novel drugs. The state-funded
researchers could also license some of the stem-cell know-how the
three companies have already developed. Aastrom, for example, gets
revenues from Stanford University and other research institutions,
thanks to a specially-built computer that models the replication of
adult stem cells faster and safer than old-fashioned, Petri-dish
methods in the lab

For startups, the benefits could come from a better workforce. Ralph
Snodgrass, chief executive of VistaGen Therapeutics, in Burlingame
(Calif.), is hopeful he'll be able to hire more scientists already
trained in the field. At the moment he has had to train them on the
job. VistaGen uses embryonic stem cells to research diseases like
diabetes.

Even the benefits to Geron, which many consider the leader in private
stem-cell research, will be indirect. Its first product, intended for
spinal cord injuries, will enter clinical trials in 2006.
Collaborating with researchers at the University of California,
Irvine, Geron already has spent some $90 million on embryonic stem-
cell research and has $130 million left in the bank. "We need help
from the outside," Okarma says. "We're hopeful the world's cadre of
stem-cell scientists migrates to California in the next 18 months."

NO TIMETABLE.  Public investors may do well to take note of venture
capitalists' hesitancy. In the last 10 years, venture capitalists
have invested only $300 million in stem-cell companies, the bulk of
which are working with adult stem cells. That's about 10% of the
venture investments in all of the biotech industry over the same
period, according to trade publication BioCentury. "Venture capital
has essentially abandoned this area," Snodgrass says. There's good
reason. Geron aside, experts don't expect many drugs to come out of
embryonic stem cell research for at least a decade.

Venture capitalists say these companies are still at such an early
stage in their research to bet on. "Any deals we see are embryonic,
pardon the pun," says Arnold Oronsky, general partner at InterWest
Partners in Menlo Park, Calif. MPM Capital, which has a $900 million
health-care venture fund, is taking a harder look. Among its venture
partners is George Daley, an associate professor at Harvard
University who has been researching stem cells for 20 years. But even
MPM has done just a handful of stem cell-related deals. "The science
is happening, but it's hard to say when any new medicines will
emerge," says Daley.

No doubt, an industry can change when voters pour $3 billion into it.
But smart investors would do well to wait before leaping into this
much-talked-about but unproven market.

SOURCE: BusinessWeek, NY
http://tinyurl.com/6fucr

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