Stem cell institute wants to make loans

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Aim is to turn research into clinical therapies

The San Diego Union-Tribune

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.”
Contact the author Terri Somers: (619) 293-2028; [email protected]

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