Stem Cell Firms Bet on Big Payoff

Times Staff Writer

Will last week's $3-billion California stem cell initiative one day grow new business?

The massive bond measure known as Proposition 71 is designed to allocate nearly $300 million a year to scientific work with stem cells, particularly those derived from human embryos. The money is intended to transform California into an incubator for stem cell research, offering support to academic institutions and companies toiling in an area shunned by private investors.

A few biotech companies already have said they plan to apply for funds. One of them, Stem Cells Inc. of Palo Alto, is working on treatments for nervous system disorders and other ailments. Another, Advanced Cell Technology Inc., a Massachusetts company that made a splash two years ago when it cloned a human embryo, said it would open a laboratory in California to qualify for funding.

Stem cell research is controversial because it requires the destruction of human embryos, which some people regard as the earliest form of human life.

At the same time, embryonic stem cells are highly valued by scientists because they can turn into any type of cell in the body. Many people believe that the cells will one day provide cures for such illnesses as diabetes and Parkinson's disease.

Some leaders of California's biotech industry are optimistic that Proposition 71 funds eventually will produce commercially successful stem cell companies as academics spin off their discoveries. After all, the business got started in California more than 25 years ago, when scientists turned their inventions into enterprises such as Genentech Inc. of South San Francisco.

That's why Asset Management Co., a venture capital firm in Palo Alto, has placed its bets on stem cells: It has an investment in tiny Novocell Inc. of Irvine. And Asset Management's founder, Franklin Johnson, sank $1 million into the Proposition 71 campaign, said Graham Crook, a partner in the firm.

"There is going to be a big upswing in the number of tech- nologies using stem cell approaches," Crook said. "That will further venture investment" in the field.

But others worry that stem cells could be just another over-hyped technology.

Venture capitalist Kurt von Emster, a partner with MPM Capital in San Francisco, said stem cell companies remained a risky investment, despite the massive funding source coming into the field from California taxpayers.

He likened the excitement over stem cells to the euphoria over the Human Genome Project, the federal effort to crack the human genetic code. As industry tried to capitalize on genetic discoveries, investor money flooded into so-called genomic companies.

But today, Von Emster said, "if you look at genomic companies, you have not seen the value creation that was expected." Onetime highfliers Incyte Corp. and Human Genome Sciences are now busy in other areas of research.

Some venture capitalists also questioned California's long-term commitment to research that could take decades or generations to bear fruit. Although work started more than a decade ago, there are no commercial products that use stem cells derived from embryos or fetuses.

Proposition 71 "is generally positive and puts the sentiment in the right place," said Stuart Collinson, a partner with Forward Ventures in San Diego. "But how much of the $3 billion actually comes to pass is a political question."

Biotech industry officials in Massachusetts -- second to California in terms of biotech employment -- suggested that the funds in California could dry up.

"We question how California can afford to do this. We think any scientist leaving now is leaving prematurely," said Vicki Greene, a spokeswoman for the Massachusetts Biotechnology Council.

For now, the expected westward movement of researchers hoping to tap into the vast pool of new research dollars may be the most immediate effect of Proposition 71. Just hours after voters approved the initiative, Irving L. Weissman, a prominent Stanford University professor who campaigned for the measure, said he would start recruiting top scientists to the state.

Daniel Perry, president of the Coalition for the Advancement of Medical Research, a group that advocates stem cell research, said states could witness a brain drain to California. Last year, he noted, 30 state legislatures considered bills that would have endorsed embryonic stem cell research, but none of the measures passed.

New Jersey is the only other state to have committed taxpayer dollars to stem cell research, and its contribution of $50 million over five years pales next to California's.

"What California has done is completely unprecedented," Perry said.

By some accounts, Proposition 71 already is making a difference. Robert Lanza, medical director of Advanced Cell Technology, said he had been approached by three different investors who expressed interest in backing the company's efforts to set up shop in California.

"I can only assume, if I am getting offers, other researchers are as well," he said.

For their part, California companies already in the stem cell field believe Proposition 71 can only help their efforts.

Martin McGlynn, chief executive of Stem Cells Inc., dismissed the concern raised by some that companies would find themselves in a bidding war for talent against well-funded universities.

"My sense is what is good for research is good for industry," he said. Academics "are not competitors but collaborative partners."

A good example of that is Geron Corp. of Menlo Park, which financed the research of scientists at the University of Wisconsin and Johns Hopkins University when almost no one else would. As a result, the company claims rights to patents on 20 fundamental stem cell discoveries arising from early research.

Thomas Okarma, chief executive of Geron, said he was pleased that there would be another source of funds aside "from Geron writing a check."

Okarma said Geron would benefit in many ways from Proposition 71's passage. The company could benefit directly from grant money. And "indirectly, there will be a massive influx of skilled, trained stem cell people who could be really valuable collaborators for us," Okarma said.

What's more, new stem cell companies would need to license Geron's intellectual property, Okarma asserted, providing the company with a royalty stream.

While that may be good for Geron, it could cause private investors to hesitate before backing new companies in the stem cell field.

Geron has a commercial license to discoveries made by University of Wisconsin researcher James Thomson. Thomson first derived human embryonic stem cells in the 1990s.

Geron holds an exclusive license in eight coveted therapeutic areas, including heart disease, diabetes and osteoporosis. The university, through its technology transfer arm, grants commercial licenses in other disease categories -- but only on a case-by-case basis.

Geron's patents haven't been widely tested because the field is so new. Some observers said they did not think a single company would be able to control commercial development of stem cells.

"There are so many basic discoveries to be made," said stem cell advocate Perry. "My thinking is that no one company will have an overarching position in the area."

For The Record Los Angeles Times Wednesday November 10, 2004 Home Edition Main News Part A Page 2 National Desk 1 inches; 54 words Type of Material: Correction Stem cell funds -- A photo caption with an article in Sunday's Business section about passage of Proposition 71, California's $3-billion stem cell bond measure, said StemCells Inc. already had applied for bond funds. The company has not yet applied for the funds. Also, the article misstated the company's name as Stem Cells Inc.
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