http://www.forbes.com/2004/11/01/cz_sg_1101soapbox.html
California's Stem Cell Follies
Scott Gottlieb, Forbes/Gottlieb Medical Technology Investor, 11.01.04, 2:30 PM ET
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On Wall Street, investment bankers disdainfully refer to two types of investors, "smart money" and "dumb money." In their snooty lexicon, smart money belongs to elite investors that run hedge funds and venture capital catering to the wealthy. Smart money benefits from growing trade in pricey insider information that doesn't flow to regular people. Dumb money belongs to ordinary investors shut out of this elite trafficking. After Tuesday, all of the dumb money may belong to California voters.
Besides selecting a president on Tuesday, Californians will be voting on the celebrated Proposition 71, a state initiative to fund stem-cell research that would eventually cost Californians $6 billion--$3 billion in bonds and $3 billion in interest payments for 10 years. If the prop passes, cash-strapped California taxpayers will be spending their money on a handful of second-rate biotech companies that the smart venture capital money housed around San Francisco's famed Bay Area already passed on. To the smart money, these companies had poor prospects and, in many cases, shoddy or highly speculative science.
That's not to say Wall Street's elite investors didn't make their own investments in stem cell research. But after years of delays, disappointments, and dead ends, most of the venture capital that once flowed into these ventures is slowing down and awaiting better science to come out of institutions and academic research.
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Stem cells are the primordial goop of the human body, human cells that have not yet been differentiated into, say, bone, blood or brain cells. For medical researchers, stem cells represent a mother lode of possible new treatments for diabetes, heart disease, Parkinson's, Alzheimer's, and more. Capable of differentiating into the full spectrum of other cell types--from a new liver cell to a new neuron--they could be ideal for repairing or replacing diseased organs.
The current furor over stem-cell research is not over their eventual usefulness, but their source: Should researchers use federal money to harvest stem cells from aborted or discarded human embryos? Or should they be restricted to adult stem cells, found in fat, bone, and the brain? Foes of embryonic stem cell research object mostly to the specter of human fetuses becoming incubators to be aborted and harvested simply for their cell products.
In August of 2001, President Bush split the difference between the two political sides by limiting federal funding for stem cell research to lines of embryonic stem cells that already existed. Under the President's policy, no new fetuses would be harvested for their stem cells.
Of course, the limits on federal funding put no restrictions on what the private sector can do. All through the late 1990s investors cited uncertainty over what the government's policy would be as a principal reason for shunning investments in private companies doing stem cell research. They feared an outright government ban on private research. With that not in the cards, one would expect the pace of development to have quickened after the President's policy was unveiled.
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Yet private investment remains tepid, even three years after the President's policy took all political uncertainty off the table. In fact, from 1994 to 2004, only about $300 million in private venture capital money has flowed into the handful of established U.S. biotechnology companies doing research into embryonic and adult stem cells (see chart below). That's out of about $30 billion in venture capital money that flowed into biotechnology over that time. And most of the little money that made its way to these companies was spent on those that did research with adult, not embryonic, stem cells.
Enter the state of California. Now, amidst record state budget deficits, California is prepared to pump $8 billion into a handful of second-rate biotechnology companies on whose scientific fortunes private investors have already decided to largely pass. The persistent enthusiasm for stem cells has outpaced their scientific legitimacy because the issue has been caught up in electoral politics, with Democrats sensing a wedge issue with which to divide voters. Nobody doubts stem cells may one day yield useful medical treatments, it is just not apparent that messing around with embryonic stem cells and all their associated ethical baggage is all that necessary. Many scientists believe everything that can be done with embryonic stem cells can also be done with adult stem cells, harvested from peoples' blood and bone marrow and even their fat.
One place this can be seen is diabetes research. While some studies have claimed progress in getting embryonic stem cells to differentiate into insulin-producing cells in culture, those claims are called into doubt in a recent study in the journal Diabetologia. Researchers from the University of Calgary found that the insulin-producing cells derived from embryonic stem cells are not the "beta cells" needed to reverse diabetes. While the cells were coaxed to produce some insulin, they did not do so in response to changes in sugar levels, and when they were transplanted into mice they formed tumors.
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By contrast, the most promising new treatment for juvenile diabetes in recent years didn't involve stem cells but pancreas cells harvested from donors. It's called the Edmonton protocol. And of the roughly 250 patients who have received the newest version of the transplant, more than 80% have been free from insulin shots or insulin pumps for more than a year.
There have also been some recent advances using adult stem cells to treat diabetes. Researchers in Canada have shown that transplanted adult stem cells from bone marrow can cause pancreatic tissue to repair itself, restoring normal insulin production and reversing symptoms of diabetes. The team has reversed diabetes in mice and hopes to move to human trials. And researchers at Massachusetts General Hospital have used adult cells from the spleen to regenerate insulin-producing cells and cure diabetes in mice. Essentially the spleen cells "retrain" the body's immune system to stop attacking its own insulin-producing pancreas cells, and new cells then naturally regenerate.
But politicians, including California's Democratic State Legislature, sense a wedge. They are preying on peoples' desire for cures to debilitating diseases. They are willing to waste $6 billion of their taxpayers' money to make their point.
Don't expect the California money to change the fortunes of science. There's plenty of precedent for this kind of direct investment by a government authority. The trade publication BioCentury recently chronicled investments that Germany made in its homegrown biotechnology industry. The German government invested millions into dozens of second-tier biotechnology companies that ultimately shrank, folded or limped along as small research projects.
If the embryonic stem cells ever appear to have clear advantage over adult cells, there's plenty of money to fund their development. In addition to the federal funds that President Bush has already authorized, private foundations and especially "smart money" on Wall Street stand ready to chase the opportunity. The only question that remains is how much more "dumb money" will be wasted before we settle the issue. On Tuesday, California voters get a chance to decide.
Investments In US Companies Conducting Embryonic And Adult Stem Cell Research: Selected Venture Capital Rounds, 1994-2004
Company Amount of VC Invested (millions)
1994
Geron Corp (nasdaq: GERN - news - people ) $12.6
1995
Aastrom Biosciences Inc (nasdaq: ASTM - news - people ) $10.0
1996
Geron Corp $11.7
Osiris $10.0
BioTransplant Inc (nasdaq: BTRN - news - people ) $7.0
1999
BresaGen $7.6
ViaCell $6.0
2000
Geron $25.0
ViaCell $59.0
NeuralStem Biopharmaceuticals $5.5
NeuroNova AB $3.45
VistaGen Inc $1.0
Cythera Inc. $2.0
2001
ViaCell $15.0
Layton Biosciences $11.0
MorphoGen Pharmaceuticals $8.5
StemCells Inc (nasdaq: STEM - news - people ) $7.0
StemSource $2.5
Nephros Therapeutics Inc. $8.7
2002
ViaCell $1.5
StemCells Inc $1.1
Neuronyx Inc undisclosed
Nephros Therapeutics Inc. $17.0
2003
ViaCell $41.5
Geron $18.4
StemCells Inc $8.15
Cythera Inc. $2.0
Source: BioCentury, American Enterprise Institute. Companies listed may have merged or closed operations over the time period covered.
Total Venture Capital Investment In Biotech By Year
1994 $526,645,000
1995 $564,705,000
1996 $934,355,174
1997 $1,270,235,018
1998 $1,476,808,860
1999 $1,957,285,292
2000 $5,112,286,305
2001 $4,694,772,847
2002 $3,955,809,272
2003 $4,012,864,340
2004 $4,486,772,956
Source: BioCentury
Excerpted from the Oct. 18 issue of Dow Theory Forecasts. Click here for more information and to subscribe to Dow Theory Forecasts or click here for more information and to subscribe to Upside.
Scott Gottlieb is a physician and Fellow at the American Enterprise Institute. Until October, he was Senior Advisor to the head of the Medicare and Medicaid Program, Dr. Mark McClellan. Previously, Dr. Gottlieb was Director of Medical Policy Development at the Food and Drug Administration. For more information and to subscribe to the Forbes/Gottlieb Medical Technology Report, click here.
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