Stem-Cell Industry, Research Evolving

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."

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