San Diego Business Journal

A taxpayer-funded program capable of lending money to cash-starved California biotechnology companies has caught the attention of local stem cell industry executives who say they're struggling to attract traditional investors and can't qualify for federal money.

For the first time in its three-year history, the San Francisco-based California Institute for Regenerative Medicine is considering lending a portion of its $3 billion in available state funds to biotechnology companies. The so-called "biotech bank" would provide low interest loans to companies that qualify.

The stem cell agency's governing board has approved 156 research grants totaling almost $260 million to universities, nonprofit agencies and individual scientists.

The agency, established in early 2005 after California voters passed Proposition 71 in November 2004, is the largest source of funding for human embryonic stem cell research in the world. The California Stem Cell Research and Cures Initiative allows the institute to grant or loan money for stem cell research and other biomedical research.

Local industry leaders, who met with members of the stem cell agency's oversight committee in San Diego last week as part of a biotech loan task force, expressed interest in obtaining loans through the program, but questioned the qualifications and restrictions involved.

Local representatives from the California Healthcare Institute, International Stem Cell Corp., Invitrogen Corp. and Novocell Inc. joined a panel also comprised of representatives from Los Angeles-based Advanced Cell Technology Inc., Menlo Park-based Geron Corp. and StemCells Inc. of Palo Alto.

Local Interest

"As a for-profit company, I believe the program makes a lot of sense," said William Adams, co-founder and chief financial officer of International Stem Cell Corp. in Oceanside. The company announced last year that it had developed cell lines capable of avoiding immune system rejection, a common dilemma facing stem cell researchers.

Joydeep Goswami, vice president of stem cells and regenerative medicine at Invitrogen, says the Carlsbad-based company is also interested in applying.

"As any large company or small company knows, we have more ideas that merit funding than we can fund internally," he said.

Multimillionaire real estate investment banker Robert Klein, who serves as the institute's unpaid chairman, has proposed the loan program as a means of filling the funding gap between scientific research and commercial development. Researchers refer to the gap as the "valley of death," or the area where funding dries up, leaving some scientific ideas dead.

Klein has suggested offering between $500 million and $750 million in loans to companies that qualify for the program, which he estimated could "recycle" $1.5 billion back to the state agency.

Some say the program could offer support during a time when investors have shied away from funding embryonic stem cell companies because of the risk involved.

"The investor community is definitely cool to what we're doing," said Alan Lewis, president and chief executive officer of San Diego-based Novocell, which recently announced that it had turned human embryonic stem cells into pancreatic cells capable of producing insulin in mice. He says the loans could help the company move its ideas forward in order to attract traditional investor interest.

Paybacks Might Never Come

Critics have questioned whether offering high-risk loans to biotechnology companies is a good idea. Paybacks, they say, might never come.

"We have to be certain we don't spend our money too broadly in high-risk activities," cautioned Alan Trounson, the newly elected president of the stem cell agency.

Ken Stratton, general counsel for StemCells Inc., a regenerative medicine company studying stem cell treatments for diseases and injuries to the central nervous system, liver and pancreas, said he hopes the loan program "won't be a program for the truly desperate."

Others questioned how the loans would differ from grants. Under the proposal, biotechnology companies could apply either as a company or for individual product loans.

Biotechnology companies that opt for a product-based loan would not be held liable for repaying any of the money if that product fails. For companies that successfully bring a therapy, tool or medical device to market, a percentage of their profits would return to the stem cell agency.

Too Much, Too Soon?

John Simpson, stem cell project director for the Santa Monica-based Foundation for Taxpayer and Consumers Rights, cautions the 26-member board against taking on too many responsibilities.

"There may be a danger of developing too much, too fast," he said.

Board members generally agree that they are limited in their capacity.

The committee voted unanimously to spend $50,000 on consulting services by PricewaterhouseCoopers. The firm is expected to report on loan programs in other states and suggest a model of how the California program might work, including what return rates can be expected.