Could California’s Stem Cell Agency Spin Out Its Best Projects To A Benture-Backed Startup?

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A startup company could cherry pick some of the best stem cell projects bankrolled by California taxpayers as part of an ambitious — and risky — plan from the state's stem cell research funding agency.

The California Institute for Regenerative Medicine would put as much as $75 million into the venture, matched dollar-for-dollar by a yet-to-be-selected winner of a competition that could feature venture capital firms, established drug developers or teams of rich investors. Then the startup would pick from a wide-ranging menu of ongoing CIRM-funded projects in cancer, HIV, diabetes and other diseases.

Spinning out the projects commercially is part of an overall CIRM strategy aggressively aimed at engaging private industry, streamlining CIRM's grant system and working with the Food and Drug Administration to redo its approval process to make it faster, easier and cheaper to move stem cell therapies from lab benches to patients' bedsides.

CIRM's oversight board will vote on the plan Dec. 17. If approved, the Oakland-based agency could request proposals in first-quarter 2016 and select a winner from maybe a half-dozen applicants by the end of next year.

The strategy offers a potential high return for CIRM and the stem cell field in general, and it's not without the classic scientific risk of biotech investing. But it holds a larger, potentially more damaging and embarrassing risk as well if applicants peruse CIRM's shelves but find nothing to buy after the agency has invested hundreds of millions of taxpayer cash.

"The plan is not without risk, no doubt about that," said CIRM President and CEO Randy Mills. "Nothing about this plan is attempting to do something easy or easily achievable. This is hard and requires a lot of effort, but if we're successful the outcome of it should be transformative to CIRM and regenerative medicine."

CIRM, in fact, could create the cure for its own voter-programmed death. The agency, formed after California voters in 2004 approved the sale of $3 billion in bonds for stem cell research, is expected to dole out the last of its remaining $900 million in 2022. But if the spinout company is successful, CIRM would collect royalties that it could funnel into additional research.

"We weren't going for safe with this," Mills said. "We have $900 million and five years: How do we have the biggest impact possible without bending the time-space continuum?"

If nothing else, the plan reflects CIRM's new direction under Mills, who led Osiris Therapeutics in Maryland as it became the first to commercialize a stem cell drug. Until Mills' appointment at CIRM in April 2014, the agency had been led by academic scientists with little experience in pushing drugs through the development and commercialization process.

In theory, the startup spinout part of CIRM's plan — called ATP3, or Accelerating Therapies through Public-Private Partnership — would hand off several projects that don't have a commercial partner and speed the process of a for-profit company picking a winner. It's a classic venture capital model: By filling its basket with a half-dozen or more projects, the spinout could return multiples on its investment by scoring a single blockbuster breakthrough.

CIRM's commitment of up to $75 million would take the portfolio through preordained milestones.

"Normally, a company at that stage could never afford to have a pipeline of programs as big as what we're contemplating here. You could have 20 programs aggregated," Mills said. "The cost of carrying those programs is prohibitively expensive. But our programs come in funded from us through inflection points, and the company can decide whether to carry it forward."

Eight percent of CIRM's 71 active therapeutic programs had industry partners as of Nov. 15, the agency said in a presentation last month. But the agency has put an emphasis over the past couple of years on pushing therapies into human clinical trials.

Indeed, there would seem to be no shortage of CIRM-funded projects, ranging from eye and heart diseases to HIV and cancer. The lab of the Gladstone Institutes' Deepak Srivastava, for example, has received $13.4 million from CIRM mostly to look at human embryonic stem cells or induced pluripotent stem cells to reprogram cells into beating heart tissue, and Paula Cannon at the University of Southern California won a $1.5 million grant to edit genes in a specific kind of stem cell as a possible HIV therapy.

But there's a potential downside as well if nobody shows up to window shop at CIRM, much less to buy, because stem cell therapies are largely unproven, said Andy Schwab, a managing partner at Menlo Park venture capital firm 5AM Ventures.

"The mechanism of action still is unknown. It's not like gene editing and gene therapy, where it's very specific," said Schwab, mentioning two of the hottest areas of medical science and investment action. "It's tough when you don't know the mechanism of action."

CIRM also hasn't invested in areas around white-hot CAR-T therapies, where chimeric antigen receptors on the surface of immune system T cells are genetically engineered to amp up their recognition and ability to kill cancer cells.

"CIRM has really missed it," Schwab said. "They haven't been leaders in the right space."

Still, Schwab said, CIRM does have plenty of "really interesting research" in its portfolio that could interest an investor. The issue, he added, is whether science projects can be commercially viable in a short timeframe.

What Mills and CIRM are betting on is that an investor will be interested in the synergy created by a block of projects, centered either on a type of disease or, more broadly, a technology. It is working with the technology-transfer offices of universities to create a standardized master agreement for licensing the stem cell projects in order to speed up the process.

Tech transfer office officials, according to Mills, have had a tough time licensing their institutions' stem cell discoveries as one-off projects.

"The thing that we need for the plan to work is enough high-quality candidates to move through the system," Mills said. "We are volume-dependent on that. The one variable we can't change to hit those numbers is quality, because ultimately this stuff needs to work in patients."

It's not the only question for an agency that for years was beset by conflict of interest questions and legal challenges to its early emphasis on controversial embryonic stem cell research.

"It's an innovative solution to what they've been trying to do — to rush basic research concepts into actual treatments that meet people's medical needs," said John Simpson, an advocate and former stem cell project director with Consumer Watchdog, a Santa Monica nonprofit that for years tracked CIRM policies and spending.

"There are potential pitfalls if (the spinout) goes to somebody's buddies," Simpson said. "But as long as the board does its job and closely vets the awards, this could have some real payback."

Ron covers biotech and sports business.

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