StreetTalk: Will Venture Capital Firms Turn Their Backs on Stem-Cell Research?

Like a snowball rolling down Mt. Everest, stem- cell research was gaining momentum, not only in political and medical arenas, but on Wall Street, too.

Brian O'Connell

Don't get me wrong. Few people in finance have humanitarian motives when it comes to riding potentially profitable trends, even if those trends offer the hope of saving lives and freeing people from crippling pain.

The only pain Wall Street knows is the kind that occurs when a sure winner turns out to be a big loser.

I'm not saying that's the case for stem-cell research — yet. But the news last December that South Korean stem cell researcher Hwang Woo Suk committed fraud when he claimed that he created 11 tailor-made stem-cell colonies — he later admitted they never existed — doesn't bode well for stem-cell investment. Before Suk was exposed, the life sciences world touted his work as history-making — the first creation of human embryonic stem cells matched to patients who might benefit from them.

Korea-gate has proven to be a huge scandal, not only in science, but in finance, where investors who thought Suk was on to something potentially significant in stem-cell research were left with nothing but empty promises and no solid research.

Investors, like many cultural observers, saw stem-cell research as a possible cure for serious illnesses like Parkinson's disease, diabetes, and spinal cord conditions. Researchers have been working to create tissues from stem cells that can be transplanted into people with ailing organs. Without cells that are genetically matched to a patient, the odds that stem cells will be rejected by the patient's immune system rise significantly.

Venture capital investors were particularly stunned by Hwang's admission. Many had pinned their hopes — and their dollars — on the research he was conducting on custom-made stem cells. But when Science, the highly respected journal, retracted Suk's article — the scientific equivalent of a US army officer having his stripes ripped off on the field of battle — venture capitalists became, understandably, a bit skittish about funding stem-cell research.

"Unfortunately, the damage Hwang did can't be undone," said Robert Lanza of Advanced Cell Technology in Worcester, MA, a life sciences firm that was at the head of the pack in stem-cell study, but saw its venture funding eliminated when Dr. Suk's article retraction was made public. "It can't be undone for us, and it can't be undone for the thousands of people who may die in the future because this research has been unnecessarily held up while Hwang played his games and traveled around the world like a rock star."

Obviously, that's the most significant fallout from the Korea scandal. The time lost in getting real, proven research done that could save lives is paramount — and now that time is lost forever.

A DRY LANDSCAPE

Now stem-cell researchers may see their funding dry up, which is hardly good news to a scientific community that gets its life blood, so to speak, from venture capital money (although the federal government is a big contributor, as well.)

When scandals like this one flare up, they threaten the confidence investors need in order to pony up the money necessary to bring laboratory research to commercial fruition, and save lives in the process.

Thus. any hint of fraud has a price attached to it, not just in the stem-cell world, but in the entire biopharm industry as a whole. According to the June, 2005 issue of Nature, a study of 3,247 scientists showed that over one-third of respondents said they had participated in research "tampering" by either changing the results of a study to accommodate the funding organization's presumably slanted point of view, or by withholding evidence that might prove to contradict the results shown in a study. The good news is that only three percent of the respondents admitted to intentionally publishing fraudulent and inaccurate research data. That is fairly astonishing when considering that 33% of the respondents admitted to engaging in fraudulent research behavior.

A cynic — or someone who is considering plowing $10 million into the next big stem-cell research project — may well wonder how many more are operating in the shadows, who are falsifying research data but not admitting it.

The stem-cell field can't afford any scent of scandal. It can't afford to send skewed messages to the investment community that their work is tainted or untrustworthy. That's especially so at a time when stem-cell research was having to go hat in hand to find the little money it was getting from the private venture capital sector. Even before the Hwang debacle, venture money decision makers were skeptical about an unproven field of research that is, by most accounts, years, if not decades, away from achieving legitimate commercial viability.

"Some of this stuff still looks like science experiments," said Ken Haas of venture capital company Abingworth Management, in a recent issue of Wired News. The publication reports that Haas, in a speech to the International Society for Stem-Cell Research in San Francisco last year, told audience members that the outlook for stem- cell funding was "bleak."

"Big pharmaceutical companies aren't funding early research," Wired News also reported. "And VCs have higher expectations in general from biotech firms because they perceive the industry as having graduated from its freshman status. The investment necessary to bring a company public has doubled, Haas said, and the returns have diminished."

According to the June 2005 issue of Red Herring, Venture capitalists have invested $441 million in 16 stem-cell-related businesses over the past five years. Sure, $441 million is a lot of money to you and me, but it is peanuts to venture capitalists. Cancer and heart disease research earn that kind of funding in a month.

Consider too, these numbers. The National Institutes of Health, the primary US government benefactor of stem-cell research — as well as all medical research, for that matter — earmarked $24.3 million on embryonic stem-cell research in 2004, and $203.3 million on adult stem-cell research. But the National Cancer Institute, an agency arm of the NIH, spent $4.7 billion on cancer research. Or consider the fact that the NIH spent $3 billion on AIDs research and you begin to see how low stem-cell outlays are on the totem pole.

NO MOMENTUM

While stem-cell research firms can count on larger sums of money from state and federal governments, like the $3 billion that California has earmarked for stem cell research over the next eight years or so, it won't gain any real momentum until the private sector begins to ante up in a big way.

Ask Advanced Cell Technologies. The Worcester, MA-based stem-cell research company was living high on the hog a year ago, with Robert Lanza, vice president of scientific development, bragging to the press how cash was rolling in and would continue to do so. "There's been an influx of interest in stem cells," said Lanza. "We're in a whole new world. We're flush with cash, and just months ago we were struggling as a private company to even make payroll and to keep the phones on."

That was then and this is now. While the company did hit the ground running in 2005 with an $8 million cash infusion from venture funders, the bloom fell off the rose fairly fast. In the last half of 2005, company stock went south, falling from $9 per share to $3 per share.

Now, in an environment clouded by the Korean stem-cell scandal, how will a company that just saw its stock share value decrease by 66% manage to convince venture capitalists to fork over more money?

It won't be easy. While it's true that the federal government is usually the prime financial contributor to emerging medical technologies, the stem-cell environment still has an uphill battle.

With the scandal in Korea and a lack of quantifiable research available, venture capitalists are understandably skittish.

I doubt that's going to change anytime soon.

Celebrity author and business/finance commentator for CNN and Fox News, Brian O'Connell has written for The Wall Street Journal and Newsweek, 79 Radcliffe Drive,Doylestown, PA 18901, 267.880.3144, fax 267.880.1939 brian.oco@verizon.net