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California Biotechs See Long-Term Payoff from State Court's Approval of $3B Stem Cell Bond

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Even after California’s highest court earlier this month allowed the state to start spending $3 billion over 10 years for embryonic stem-cell research approved by voters in 2004, the state’s for-profit biotechnology companies will still have to wait as much as a year to see money from Sacramento, while nonprofit and academic research institutes can expect faster funding.
 
Despite that dollar divide, a consensus of professionals interviewed by BioRegion News in recent weeks agrees that Proposition 71 will fulfill the goal expressed by Gov. Arnold Schwarzenegger and life sciences industry leaders of transforming California into a hub for stem-cell biotechnology by offering the largest research subsidies of any state.
 
“It will accelerate both the investment in the space and the attraction of people to be in the space,” said Stephen Burrill, CEO of Burrill & Co., in a May 24 interview. “People will be attracted both to the science, which is exciting, but also the funding that’s going to be behind it. … In a world where research funding drives a lot of what we’re trying to do, removing that uncertainty is going to be a big deal.”
 
California officials are weeks away from issuing the first general-obligation bond to fund embryonic stem-cell research. The state had been barred from doing so while a lawsuit challenging the legality of Proposition 71 worked its way through California’s court system. In mid-May, the state’s Supreme Court declined to hear a challenge to a prior decision by the state Court of Appeals that upheld the program's legality, effectively greenlighting the funds.
 
“We expect the treasurer’s office to issue the first bond for us some time this summer,” said Dale Carlson, a spokesman for the California Institute for Regenerative Medicine in San Francisco, the agency created to manage the state’s stem-cell funding effort.
 
Just how much money will be bonded has yet to be decided. That sum will include at least $158.8 million approved in grants for stem-cell projects while the lawsuit was pending. All of the $158.8 million was approved for nonprofit and academic institutions. Funds for stem-cell businesses have been held up while California officials ponder how much the state should receive for discoveries created through projects funded by Prop 71.
 
“We’re working on the policy now. It should be completed within the next six to 12 months,” Carlson said.
 
Commercial Benefits Down the Road
 
Policy notwithstanding, state subsidies will be concentrated short-term around strong academic and independent institutions — and thus in areas of the state where those institutions exist — since much stem-cell research remains to be carried out before anything can be commercialized, Burrill said: “I don’t think this will be a big boost for the biotech industry. That’s going to come later. You’ve got a lot of science to do before you’re going to build a lot of companies.”
 
Thomas Okarma, president of Geron in Menlo Park, Calif., said companies in the stem-cell field will find it harder than research institutes to tap into the California money because the state has sought to add conditions that businesses find objectionable such as rules forcing them to subsidize medicines for poorer patients, price caps on treatments, and royalty payments that some companies believe do not reflect research costs.
 
“I understand in sum or in part the purpose of the proposition is to get academic research moving, and it is beginning to do that, thankfully. But the stated mission was to fund translational medicine, and universities don’t make profits — companies do,” Okarma told BioRegion News following a May 7 panel discussion on stem-cell research held during the Biotechnology Industry Organization’s 2007 International Convention in Boston.
 
“So if it turns out to be a two-tiered system for how the money is spread out in California, with different bells and whistles depending on whether it’s academic or industry, it will run amok of its fundamental purpose that got the proposition passed in the first place.”
 
The divide between corporate and institutional funding should not impede the growth of California’s stem-cell research effort, said Tracy Lefteroff, global managing partner for life science industry services with PricewaterhouseCoopers.
 
“It’s a young enough area where you really don’t have enough turf wars yet. Over time, that could change, but right now I don’t see it as a problem,” Lefteroff said. Stem cell funds “will be used like NIH grants — they’ll be issued to further the advancement of the technology, regardless of whether it is private or public.”
 
He said much of the state’s stem-cell funding can be expected to flow into its top two biotech clusters: “The two areas that are going to garner the lion’s share are clearly the Bay Area and San Diego, because that’s where the majority of these companies are.”
 
San Francisco has one key advantage — namely the headquarters of CIRM. The state’s decision to base CIRM there stung San Diego biotech leaders, prompting them to form a public-private team called the San Diego Consortium for Regenerative Medicine, which promotes the San Diego area’s four research institutes — the University of California, San Diego, the Burnham Institute for Medical Research, the Scripps Research Institute, and the Salk Institute for Biological Studies in nearby La Jolla, Calif. — as well as local companies specializing in stem cell work.
 
“What we realized was, it’s not enough to be technically competent. You have to have the political clout to get what you want. It was a wakeup call for us,” said Joseph Panetta, president and CEO of BIOCOM, a San Diego-based life science industry group with 550 members in Southern California.
 
Since last year, the consortium has been awarded the largest share of the stem-cell funding authorized by CIRM, 29 grants totaling more than $37.3 million. “We clearly have our act together more down here than Northern California does in terms of the amount of stem-cell research that’s going on,” Panetta added.
 
In addition to funds for research, the consortium is pursuing a share of the $300 million set aside statewide for facilities under Proposition 71. The consortium has begun planning a stem-cell research building to be located at UCSD, but its size and projected number of jobs have yet to be determined.
 
“Our priorities are to ensure that our faculty investigators and their colleagues are well positioned to apply for grants, and then to provide the facilities they need to pursue that research. In the longer term, we need to construct new facilities to house investigators that we will recruit, both individually and in collaboration with neighboring institutions,” said Lawrence Goldstein, director of UCSD’s Stem Cell Program said in an interview.
 
Panetta estimated that fewer than 10 companies are involved in stem-cell research in the San Diego region. One of them, Novocell, announced last October that it had developed a process to efficiently convert human embryonic stem cells into insulin-producing pancreatic endocrine cells. Last March it raised $20 million in a later-stage financing round led by Sanderling Ventures, and the company has also drawn investor support from Asset Management and Johnson & Johnson.
 
In the San Francisco suburb of Alameda, Calif., Advanced Cell Technology announced May 7 the results of research with collaborators, concluding that precursor cells generated from human embryonic stem cells had repaired blood vessel damage in animals.
 

“People will be attracted both to the science, which is exciting, but also the funding that’s going to be behind it. … In a world where research funding drives a lot of what we’re trying to do, removing that uncertainty is going to be a big deal.”

Advanced Cell Therapies is one of the state’s stem-cell successes. It was initially headquartered in Worcester, Mass., and retains some research there. But the company moved its home base more than a year ago after California voters passed Proposition 71 while Massachusetts moved to restrict embryonic stem-cell research under then-Gov. Mitt Romney.
 
And on May 17, Geron announcedits scientists and collaborators at the University of Alberta had demonstrated the feasibility of producing therapeutic cell types from human embryonic stem cells for the treatment of diabetes by differentiating the stem cells into islet-like clusters that secrete insulin in response to elevated glucose levels.
 
Also watching how Proposition 71 unfolds are companies specializing in adult stem-cell research, which has not been restricted and which was not at issue in the litigation.
 
“The direct benefit in the near term for us will be very negligible,” said Tom Baker, a spokesman for Cytori Therapeutics in San Diego. “There’s a potential long-term benefit that we’re interested in learning more about. Presumably, there’s such overlap between the two fields that what might be learned in certain aspects of embryonic stem-cell research could be applied to adult stem cells.”
 
The company is in clinical trials in Spain for using adult stem cells to treat cardiovascular disease, and is studying use of the cells to reconstruct breast tissue following a partial mastectomy.
 
Opposition on Constitutional, Not Moral, Grounds
 
Goldstein and Burrill said the ability of companies and institutes to obtain state subsidies for further research was enhanced when California’s Supreme Court on May 16 declined to hear the appeal by three groups opposed to Proposition 71 — two taxpayer groups, People's Advocate and the National Tax Limitation Foundation; and the California Family Bioethics Council.
 
Dana Cody, the lawyer who represented the Proposition 71 opponents, said her clients deliberately avoided raising the moral argument long cited against embryonic stem-cell research — that embryos should be considered human lives and thus not be destroyed.
 
“We would have been laughed out of court, especially in California,” said Cody, executive director of the Life Legal Defense Foundation in Napa, Calif.
 
The groups instead framed their objections on constitutional and economic grounds — that the board overseeing the CIRM, the Independent Citizen’s Oversight Committee, would have control of state funds beyond the exclusive state control required by the state constitution since its decisions would be based on reviews by unelected grant reviewers; that ICOC’s approval of grants to institutions with representation on its board represented a conflict of interest; and that the actual cost of the subsidies would be $6 billion when interest on state bonds was factored in.
 
ICOC and the state countered that there was sufficient oversight by Sacramento because state officials appointed the board members, that the members would recuse themselves from votes on grants benefiting their institutions, and that the potential to save lives offered by the embryonic stem-cell research outweighed its cost.
 
Cody told BioRegion News her clients will not ask the US Supreme Court to review the case. The state’s highest court let stand a decision rendered by Alameda County Superior Court Judge Bonnie Lewman Sabraw last October, and upheld in February by the Appellate Court.
 
The outcome was all but inevitable, she said, given the state’s political consensus in favor of embryonic research.
 
“Even the proponents say, ‘We may or may not have cures. We can’t tell you for sure.’ But everybody’s on the bandwagon for whatever reason that may be,” Cody said. “It’s so politically expedient in California to be in favor of embryonic stem cell research. It doesn’t matter what the reasoning is. It doesn’t matter if it was the Legislature or the courts. Eventually it would have been funded.”

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