Stem Cell Product Still Eludes Research Firms


Thousands of white lab mice romp in germ-free containers at Stem Cells Inc. They look ordinary enough, but each of them has human stem cells growing in its brain. .

It took 13 years and losses of $130 million for the company to reach this point, yet its scientists are far from finding a treatment for disease. They are not even sure whether the human stem cells inside the mice work.

With luck, they'll have a chance to find out.

The furor over embryonic stem cells has focused attention on an industry in which failed ventures seem as numerous as the diseases they aimed to cure. Stem cells hold promise because they are self-generating and, in theory, can restore damaged tissue. But the cells can be notoriously difficult to find and nurture.

No company has yet marketed an approved product derived from the cells. And investors aren't convinced of Stem Cells Inc.'s chances, though it is among the industry's most visible players.

Two deep-pocketed pharmaceutical partners have backed out of collaborative deals. After soaring to $20 in early 2000, Stem Cell shares typically trade around $5, in penny stock territory. The company, unable to tap conventional financing sources, turned in May to a fund in the British Virgin Islands.

With its 35 employees working in an office park near Stanford University, Stem Cells Inc. is focused on cells of the liver, pancreas and nervous system. The mice are part of a test to see whether human nerve stem cells, once implanted, will migrate to areas of the brain that control movement, smell and other functions.

In experiments already completed, human cells indeed have marched along known pathways to their proper locations. The next step, said chief scientist Ann Tsukamoto, is to find out whether the cells function. Her team is eager to confirm that some cells have produced dopamine, a brain chemical lacking in patients with Parkinson's disease.

Stem Cells isn't the only company with its sights on diseases such as Parkinson's, diabetes and hepatitis. But its rivals are small, shunned by investors and far from the finish line.

"It is too early to say anyone is ahead," said John McCamant, editor of Medical Technology Stock Letter.

Stem Cells doesn't use cells from embryos, as does Geron Corp., which has access to cells developed by the University of Wisconsin. But Stem Cells is not trying to avoid the ethical quandary about their use--the company gets its cells from fetuses, a controversial source that President Bush's father considered limiting during his presidency. The current President Bush has placed limits on federal funds for embryonic research.

Stem Cells Chief Executive Martin McGlynn said fetuses are dead as a result of therapeutic abortions, unlike frozen embryos donated by clients of fertility clinics.

"There is no potential whatsoever for an aborted fetus to be resuscitated . . . which is a major factor in play in the embryonic stem cell field," McGlynn said.

The choice of fetal cells is rooted in science, Tsukamoto said. Embryonic stem cells can turn into any one of the 300 cell types in the body. But there is yet no foolproof way to do that in the laboratory.

Tsukamoto prefers fetal cells because they are hard-wired to become a specific type of cell. The company holds patents on the composition of its neural stem cells and their use.

However, fetal cells present their own challenges. Tsukamoto's team hasn't yet identified the stem cell that will regenerate liver tissue.

Stem Cells has informal links to Systemix Inc., a defunct company that rode a first wave of stem cell hype in the early 1990s. Stem Cells' chairman, general counsel and operations chief and chief scientist Tsukamoto are veterans of Systemix. The two firms have a common founder, Irving L. Weissman, a Stanford professor and pioneer in stem cell research.

Systemix illustrates the perils and rewards of the stem cell business. The company invented a method of isolating blood stem cells, which could be used to fortify patients' immune systems.

Sandoz, a Swiss pharmaceutical company that was a predecessor of life sciences firm Novartis, acquired 60% of Systemix for $392 million in 1991, a windfall for Systemix shareholders. Novartis purchased the remainder for $76 million in 1997.

A pre-merger analysis by Lehman Bros. in 1997 forecast that by 2003 Systemix would have nine approved cancer and AIDS therapies with total revenue of $1.9 billion. But none of those products ever reached market, a disappointment for Novartis shareholders.

Stem Cells' own corporate history is as complicated as its science. Until two years ago, it had a dual focus and a different name: CytoTherapeutics, which experimented with pain medication in Rhode Island. Its stem cell unit, acquired in 1997, was based in Sunnyvale, Calif.

In mid-1999, the company faced a crisis when drug maker AstraZeneca yanked its financial support of CytoTherapeutics' chronic pain therapy. The company shuttered its Rhode Island operations and shifted its headquarters to California, where it focused on stem cells. It also changed its corporate name.

The overhaul was costly. Stem Cells is on the hook for $2.2 million in annual payments on buildings in Rhode Island. It paid $1.2 million to settle a dispute with a Rhode Island business development agency that said CytoTherapeutics defaulted on a financing deal when it shut down.

Stem Cells avoided a second cash crisis last year when biotechnology company Genentech Inc. accepted stock in lieu of the $3.1 million Stem Cells owed it. The debt arose when Genentech ended a Parkinson's disease collaboration with the company. The setback shouldn't be viewed as a referendum on Stem Cells, said newsletter editor McCamant. Established drug makers, despite public excitement about stem cells, have backed away from such research.

Basel, Switzerland-based Novartis shut down Systemix in May 2000 in what appears to have been a financial disaster. One problem was that the company couldn't produce blood stem cells in enough quantity to develop a broad market. Novartis could have treated patients individually with their own stem cells, but "it is not in the service business," Weissman said. Novartis said it has redirected its efforts to gene therapy.

Another company no longer interested in stem cell research is Thousand Oaks-based Amgen Inc., though one of its vice presidents is a Stem Cells director. Amgen in the early 1990s invested in blood stem cell research.

"That is not where we see our opportunities," said Roger M. Perlmutter, Amgen executive vice president for research and development.

McGlynn, a former president of Abbott Laboratories in Canada with a knack for fund-raising, became chief executive of Stem Cells in January. He previously ran a drug research firm in Utah called Pharmadign Inc., for which he said he raised more than $50 million.

The recent offshore equity deal should provide Stem Cells, which lost $11.1 million in 2000, with enough cash for three years, McGlynn said. Stem Cells must tap the offshore fund in stages and, according to a regulatory filing, the amount it receives depends in part on its stock price, potentially limiting its access to capital. At the end of 2000, it had $6.1 million in cash.

McGlynn wouldn't comment on financing terms. "Quite a number of biotech companies resort to this," he said. "If they can."

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