Sep 1 2007 (Vol. 27, No. 15) 

Stem Cell Firms Struggle for Financing

Lack of Proper Information, Over-regulation, and Confusion over IP Incites VC Hesitance

Gail Dutton

Venture capitalists say that they are very interested in stem cells but not enough to start funding stem cell companies. Right now, the business case for investment isn’t there. “Great science doesn’t equal great business,” points out Gregory A. Bonfiglio, managing director at Proteus Venture Partners.

Financiers, just past the stinging losses of the dot-com heyday, need a stronger business case nowadays for investments. In fact, it’s not just stem cell companies that are suffering. Venture capital in general is down from more than $100 billion in 2000 to less than $20 billion in 2006, Bonfiglio points out. Investments in all forms of regenerative medicine accounted for about $190 million, or less than 2% of total healthcare funding in 2005.

Literature of Disinformation

There’s a certain bitterness expressed by stem cell company execs toward venture capitalists. The perception is that venture capitalists are risk averse, more so than even microcaps, institutional investors, or hedge funds, according to Richard Garr, J.D., CEO of Neuralstem (www.neuralstem.com). Another exec even went as far as to say that venture capitalists were “brain dead” for not embracing a technology that has the potential to become more important than recombinant therapy.

“Venture capitalists don’t understand the science at all, and they can’t go to their usual suspects for guidance, because they either are aligned with somebody’s technology,” Garr comments, or they are too far removed from the field to comment intelligently. “The private sector, in many areas, is way ahead of the academic sector in the stem cell world.”

Research has been conducted on embryonic stem cells for slightly more than a decade but has been sharply limited in many nations. “A lot more is known about adult stem cells,” Bonfiglio says, as they have been the object of research for the past 40 or more years. “But, they are limited in scope. Embryonic stem cells address any disease in the body. The problem is finding and isolating them.”

No Consensus on IP Status

The intellectual property position is yet another hurdle right now. “It is very much up in the air,” Garr says. “The EU has stopped issuing embryonic stem cell patents, and yet our core neural stem cell patent was just issued in Europe.” Last March, the U.S. PTO rejected three stem cell patents from the Wisconsin Alumni Research Foundation (See GEN’s August 2007 Legal Affairs article on the WARF patents). A subsequent challenge is ongoing.

Impact of U.S. Regulation

 “The key to attracting funding is to be close to the clinic with a good IP position,” Garr emphasizes, “and it would be very difficult now to come up with something close to the clinic that is not already in one of the existing companys’ areas.”

Financial Options

The financing plan for Neuralstem, according to Garr, has been very simple. “Avoid the VCs.” Founded in 1996, it has relied on private placements and grant work to advance its work in fetal-derived stem cells. Currently, Neuralstem is in the process of migrating from the OTC Bulletin Board to the American Stock Exchange and expects to begin its first human trial in 2008.

Garr says there’s an elitist attitude among VC firms. “If you are not hooked up with Harvard or Stanford, they don’t take you seriously.” That’s true for the NIH, too, Bonfiglio adds. “The NIH is focused more on stature within the academic community. DARPA, however, is more interested in the technology.”

Funding prospects may improve, although it will take some time. The prevailing sentiment is that the next U.S. presidential administration will lift the ban on stem cell research. “The political drive seems to be there,” Dr. Fambrough says. Garr predicts that the U.S. Senate has enough votes to overturn the ban, but the U.S. House of Representatives will hold firm. Yet, he says, “It’s a question of when, not if.” He also says that there is the strong possibility that a bill overturning the ban will be attached this year to must-sign legislation, like the Department of Health and Human Services funding bill.