California’s taxpayer-funded stem cell institute wants to do
something a lot of banks won’t: make loans to biotechnology companies
with no cash flow, very little collateral and a high risk of failure.
The idea is that loans would not pay for basic scientific
research, but rather help fund the translation of research into
clinical therapies, helping to push therapies closer to market and
traditional investors, such as venture capital or public markets.
Meanwhile, the companies’ repayment of the loans and associated
interest payments would allow the institute to recycle the money and
help more companies.
"If we can do that, we can loan significantly larger amounts,
have a broader portfolio of distribution," said Robert Klein, chairman
of the California Institute for Regenerative Medicine (CIRM). "And over
a period of 15 years, $500 million in a program like this where you can
just recover capital… over 21 years would put out $1.5 billion
instead of $500 million in a grant program."
It is not known exactly how much money would be put into the
loan program, although it will likely involve a small chunk of the $3
billion that California voters agreed to spend on controversial stem
cell research by passing Proposition 71 in 2004.
Also unknown are the terms of the loans, and who would judge
the worthiness of the chronically cash-strapped companies and the
high-risk products they are trying to develop.
Some of that is being worked out by a task force comprised of
institute board members that has been holding public meetings around
the state to solicit input from more traditional biotechnology
financiers and the public.
The task force, headed by Duane Roth, who runs the San
Diego-based Connect organization for startup biotechnology and hi-tech
companies, is scheduled to hold its next meeting on Feb. 19 in San
Diego.
One thing is clear about the proposed program: Biotechnology companies are interested.
"In the biotech industry, if you’re an early-stage company and
not yet at the stage of commercialization, you’re always out there
trying to obtain money and looking for alternative funding sources,"
said William Caldwell, chief executive of Advanced Cell Technology in
Alameda.
That is tough for a company such as ACT, which uses human
embryonic stem cells, because the federal government will not fund it,
Caldwell said. That puts a crimp in the beginning of the funding
pipeline, at the basic research stage.
Meanwhile, some executives said venture capital investors have
been overly skeptical about investment in the field because it is still
so new and they’ve become more adverse to risk after being burned in
other technology investments.
"I’m not going to say that we get the scraps, but regenerative
medicine has not been a rich area for VC investment," said Alan Lewis,
chief executive of Novocell, a San Diego-based embryonic stem cell
company.
And pharmaceutical companies, which often partner with
biotechnology companies for late-stage clinical trials and
commercialization, have been slow to invest in regenerative medicine
because of its nascency and political problems, Lewis said.
That creates a dearth in mid-stage funding, creating what the
biotechnology industry has dubbed the "valley of death," where
interesting science goes to die before even reaching late stage, large
clinical trials in humans.
The institute’s loan program may offer a lifeline through that valley, Caldwell said.
To date, the institute has awarded $260 million in grants for
stem cell research, training of scientists and the construction of new
research facilities. None of that money has gone to biotechnology
companies, which are expected to be the conduit for bringing new stem
cell-based therapies, diagnostics and drug discovery tools to market.
Only recently was the grant process opened to companies.
"(The institute) is only going to make so many grants available,
and I think academia is probably going to do very well in that area,"
said William Adams, chief financial officer of International Stem Cells
in Oceanside.
"From our perspective, if we can pick up a loan for $2 million
to $5 million, that helps us get a product into (clinical trials) and
helps push us along to commercialization," Adams said.
The loans are also attractive because they only make a company
liable for repayment with interest, Caldwell said. Although grants do
not have to repaid, recipients are required to return a percentage of
the profits made with any therapy, diagnostic or tool that stem cell
institute money helped develop.
San Diego-based Stemagen would look into all possible funding
options from the institute, Chief Executive Samuel Wood said. But his
company admittedly is in the earlier stages, generally still scientific
research and not as close to the valley of death as others.
"Our first preference would be a grant, and we don’t have any
problem with sharing the benefit of our research with the people of
California, who entrusted companies like ours with a great deal of
money," Wood said.
One of the promises made by Proposition 71’s backers was that
the program would provide a return to the taxpayers through new drugs,
jobs and tax revenue. Roth said the loan program offers a return by
helping to get products to market, and by being a self-perpetuating
funding source.
But at least one taxpayer advocacy groups sees it differently.
John Simpson, of the nonprofit Foundation for Taxpayer and
Consumer Rights in Santa Monica, said the institute spent two years
hammering out a fair intellectual property policy that serves the
public’s interest.
"This is an end run around that carefully deliberated policy and that is outrageous," Simpson said.
He believes the institute should create grants to bridge the gaps in commercialization funding.
Some skeptics would question why loans would be offered to
biotechnology companies, which generally are not in a position to repay
them. Many companies fail without bringing a product to market.
So would they be taking the state loan and promising to repay it with a wink and a nod?
Novocell’s Lewis said every biotechnology company has optimism
that they will be successful and reach the next milestone. But Klein
said the loan terms should anticipate covering a 30 percent to 40
percent failure rate of payback.
Companies are concerned about the loan terms.
For instance, if they must be repaid in five years, that would
be difficult since the average development time for a product is 10 to
15 years.
The responsibility for the loan would likely follow the company
if it is sold, acquired or merges, Roth said. And the loans could be
structured with covenants that trigger repayment, such as sale,
acquisition or funding from venture capital or public markets, he said.
Another unanswered question is who would evaluate the loan applications, administer and maintain them.
The institute staff is limited by law to 50 people. And since
its inception, it has not had anywhere near that number of employees
and has had considerable turnover. Currently it employs 26 people.
"I don’t think we have the capacity to evaluate and manage
these kinds of things," said board member Jeff Sheehy, an advocate for
people with HIV and AIDS.
One possible model for underwriting the loans could be the the
affordable housing area, Klein said. The Federal National Mortgage
Association has delegated underwriters that it approves, said Klein,
who wrote California’s legislation that created the state Housing
Finance Agency.
"So we could do the scientific review, but have a delegated
underwriter who essentially can, in fact, be in a risk sharing
position," he said. "Under a risk sharing agreement, for example, that
delegated underwriter might get a part of the upside on the repayment
of the loan, including a part of the interest revenues."
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Contact the author Terri Somers: (619) 293-2028; [email protected]
