Stem-Cell Industry, Research Evolving
With Limits on Federal Funding for Stem Cells, Researchers Look for Private
and Business Backing
By ERIC NOE
Nov. 23, 2004 - Much has been made of President Bush's 2001 executive order
limiting the use of federal funds for human embryonic stem-cell research.
With Bush now slated for another four years in office, researchers and
stem-cell supporters are seeking private investment to drive the science and
the industry forward.
Some scientists believe embryonic stem cells, which can grow and assimilate
into any type of body tissue, could eventually provide a unique way to
repair damaged or diseased tissue and treat or cure ailments including
Parkinson's disease, Alzheimer's, diabetes and even spinal cord injuries.
Supporters say the laboratory creation and study of these lines, which could
number in the hundreds, is crucial to the advancement of the research.
But anti-abortion rights activists have balked because the process of
extracting stem cells from early human embryos, often leftovers from
fertility clinics after in-vitro fertilization procedures, kills the
embryos. The Bush policy provides federal funding only for stem-cell lines
created before August 2001. No federal money can be used to create new
lines.
Research advocates believe this is too restrictive, and investors have been
wary about sinking money into the science without the backing of federal
dollars.
"We're still in the early stages of research, and I don't think it's clear
how to make a lot of money off of stem cells yet," said Charles Jennings,
executive director of the Harvard Stem Cell Institute.
Donations vs. Investments
Private donations have spurred discovery of new stem-cell lines at Harvard,
which subsequently created the Stem Cell Institute, and the University of
Wisconsin, the University of California and Johns Hopkins have all made
advancements in stem-cell research.
But both scientists and investors say business investment is needed to push
the research forward, bridging the gap between the research phase and the
presentation of a marketable product or procedure. That transition is often
extremely expensive and can take years.
"We're probably 10 years out before there will be a product on the market
and profits can be realized. For investors, that's still a long way away
from the horizon," said David Williams, principal and co-founder of
MedPharma Partners LLC. Williams works with companies to transform medical
technologies into profitable businesses.
"Research is most often funded by the federal government at this early
stage, so stem-cell research is going to be different in a lot of ways," he
said.
One California company may be considerably closer to clinical trials than
the conventional wisdom suggests. Geron Corp., a biopharmaceutical company
based in Menlo Park, Calif., currently owns 20 U.S. stem cell patents and is
considered by most to be the U.S. leader in stem cell research. The company
plans to begin clinical trials on a spinal cord injury treatment as early as
2006, according to chief executive officer Tom Okarma.
"There's just so much misinformation about this issue. It is really
frustrating, and it shows what happens when you politicize this," he said.
But most research remains admittedly a long way from the human clinical
trials that tend to draw investors into the picture. What's more, despite
Geron's progress on spinal injury treatments, most investors are unsure of
exactly how stem cells will prove a marketable commodity.
The belief is that the science could produce a variety of customized
treatments or stem cell-implanting procedures to be tailored to individual
patients. It's revolutionary science, but the unique prognosis presents a
variety of market challenges in the near term.
The Role of Big Drug Companies
Big pharmaceutical companies, which often drive medical research toward the
consumer market, are more accustomed to profiting from selling medications,
often pills, administered to a wide range of people afflicted with
particular symptoms or illnesses. Those companies are not designed to profit
from individual, customized treatments.
"Pharmaceutical companies do mostly mass-marketed medicines. If stem cells
deliver on their promise they will be more individually administered, and
that's a completely different business model," said Harvard Business School
professor Debora Spar, who published an article on the business of stem
cells in the "New England Journal of Medicine" earlier this year.
This has left the concept of stem cells as a marketable industry in a state
of flux. The lifeblood of American capitalism, venture capitalist-funded
start-up companies, has yet to pinpoint a way to profit from stem cells'
promise. Spar estimated that only 10 private firms in the United States were
actively involved in embryonic stem-cell research in 2003.
For venture capitalists, the problem is defining a profitable exit strategy.
Biotech start-ups often cash out when they're bought out by large
pharmaceutical companies, returning money to their investors. But the
hesitancy of big pharmaceutical companies to embrace the science coupled
with stem cells' uncertain revenue streams make buyouts an iffy proposition.

"Early biotech companies get funded because there's a well-established path
to licenses and profits. Venture capitalists need to see opportunity in the
market, either an IPO or a buyout. Right now, those things aren't certain,"
said MedPharma's Williams.

The California Money
Enter California. On Election Day, California voters committed $3 billion of
state money over the next 10 years to stem-cell research. The initiative was
a break from the federal government's more restrictive stance, and could
give stem-cell research more than just a financial boost.
"I think this is a big deal," said Spar. "The money is maybe less important
than the idea. California is on record as supporting the science, and if
researchers do start going there it creates a critical mass of scientists
working together in close proximity. It could be similar to the type of
thing we saw with Silicon Valley."
The first round of money, to be doled out at about $300 million per year, is
expected to be directed toward the state's academic research institutions.
But that could indirectly benefit businesses, and many are planning to set
up operations in California to take advantage of the funding opportunities.
The belief is that research advances will train a better-educated base of
scientists, speed the march to clinical trials and marketable products, and
attract even more investment from private sources. Geron, as holder of
multiple patents, is in a unique position to benefit from any scientific
advances.
"When the academic research matures and the venture capitalists start
funding new start-ups, they're going to have to pay us for the licenses,"
Geron's Okarma said.
Okarma said Geron would not charge academic institutions to use licensed
Geron lines.
Some Concerns Remain
But the California initiative has not erased all doubts. Venture capitalists
remain hesitant to pour money into an industry that could be years away from
marketing a product. And still closely associated to abortion, embryonic
stem-cell research remains a political lightning rod. Anyone investing large
amounts of money is likely to want assurances on the future of the research.

"With investors, the fewer uncertainties the better. There are concerns they
could outlaw stem cell use altogether. That's certainly speculative, but
it's a possibility," said Williams.
The 2001 Bush executive order banned federal support for research involving
human embryo clones, which some scientists believe could be even more
beneficial than the embryos from fertility clinics. The ethical questions
and the apparent opposition of the Bush administration have left many
investors concerned the bans and restrictions could get even tougher.
"It's one thing to fund a science in its early stages that may not show a
profit soon. But it's quite another to invest in research that might be
outlawed altogether," said Harvard's Spar. "It's not surprising that we
haven't seen a huge amount of private funding yet."
Copyright C 2004 ABC News Internet Ventures

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