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California Institute for Regenerative Medicine Readies Loan Program

California life science companies and research institutions seeking to commercialize new stem cell-based drugs may soon be able to borrow from the state in addition to applying for grants to pay for their research.
The California Institute for Regenerative Medicine, the state agency created in 2004 by voter-approved Proposition 71 to issue grants in support of public and private stem-cell research, has begun crafting terms for a loan program to help companies and institutions carry out that work.
The program, which would be seeded by state bonds, would also help pay for preclinical and clinical trials of new therapies based on that research and generate revenue for the state through interest payments.
CIRM’s nine-member Biotech Loan Task Force, created in October, held its first meeting on Dec. 11 during which it discussed steps for submitting a working plan for the loan program to the institute’s oversight board early next year.
CIRM is weeks away from the arrival of a permanent president, Australian stem-cell pioneer Alan Trounson, following about half a year of operating with interim leaders.
While CIRM has been praised for that hire, it has come under fire on other issues. As part of one issue, state Comptroller John Chiang is auditing the institute after a press report shed light on a potential conflict of interest created when a member of CIRM’s 29-member oversight board, the Independent Citizens Oversight Committee, John Reed, tried but failed to reverse a CRIM decision not to award a $638,000 grant to the Burnham Institute, where he is president and CEO [see related story, this issue]. 
BioRegion News spoke recently about the effort to create the loan program with task force chairman Duane Roth, who is chairman and CEO of Alliance Pharmaceutical, a San Diego maker of diagnostic imaging and medical products. Roth is also the CEO of Connect, a San Diego nonprofit group that links early-stage life sciences and high-tech entrepreneurs to financing, talent, and other resources.

Why is CIRM looking to create a loan program in addition to its grant programs?
It was part of Proposition 71, but we decided to get the grant program up and running first. Most of the money that we’ll be handing out in the early years of CIRM, that we’re approving, will be to the research institutes because of the state that this technology is at. But we’re quickly advancing toward hopefully products that are going to emerge and enter the process of clinical evaluation.
Think of the loan program — at least that’s the way I’m thinking about it, and the way our task force is thinking about it — as an evergreen fund. That means we can provide early-stage funding that is not available or has very limited availability from other sources [in order to] allow these products to move forward. Eventually those companies or those institutions that are sponsoring would repay the loans with interest, which would allow us to fund somebody else six, seven, eight years down the road.
Would borrowers most likely be companies or institutions, or collaborations of both entities that apply for financing?
They can be both. They can be a research institute or other organization that is a nonprofit, for example, that is trying to advance research. And it could also be these collaborations, which clearly will be part of the overall CIRM grant and loan programs.
Why would an applicant seek out a loan as opposed to a grant?
That’s a very good question, and one that I think many of us thought a lot about. And what I’ve concluded is that with any grant program that we issue, there is a requirement under the intellectual property policy for the nonprofits — and one we just approved for the for-profits — to pay royalties and certain other financial requirements that come with that in the future. So … a company [can say], ’Given my choices, I’d rather repay the loan and not get involved with royalty payments and things like that down the road.’
Including licensing fees?
They have to pay a portion of those as well. So it’s based on royalties and/or revenues.
Your task force met for the first time last week. What got accomplished, and what are you looking to do down the road?
There was an awful lot of agreement about what things we should look at. We really came up with two or three key items we want to get in front of the task force to help us make decisions about what this policy should be.
Number one, and probably on top of everybody’s list, is let’s see what others have done. There are other states, other countries, other disease advocacy groups that have loan programs. We’re going to study those and see how they administer loans, how they function, and what their policies are. Second, we need to hear from the stakeholders, to learn how the potential recipients of these loans feel the policies should be structured. And then third, we want to hear form the capital providers who we want to come in and support these technologies as well. So we don’t want to put undue requirements on these loans that would make it a potential problem when the small company that develops something partners with a large company and inherits that loan.
[The panel’s deliberations will focus] not so much the financial aspects, but a question of what are the covenants that go with that loan? What are the requirements in terms of accessibility, in terms of any other of the rather intangible things — access, things like that — so we have to be careful with that as we were with the IP policy for for-profits that we just approved.
What sort of timeframe are you working on, in terms of crafting the loan program?
The other thing that came out of our first task force meeting [was agreement that] we want to lay out a work plan to have something to the ICOC board by March. And when I say, ‘have something to them,’ it may be a preliminary report on where we are and what our time frame is. But it also could be pretty well worked out by that time. After we meet with these constituencies and after we get this input, then we’ll have to determine how much more work we’ll really need to do, or can we move forward, lifting a lot of the criteria out of our previous work over the past two years on IP policies.
If your goal is to have something to present to ICOC in March, they will need time for review as well. Would it go back and forth between the board and your task force?
We’ll go back and forth, as we did with the IP policy. The only point I would make about that, in terms of the time frame, is that much of the work that was done on the IP policies is applicable to the loan policies. We can lift a lot of the things that are in that policy and put it in this — in addition to the financial requirements, there are requirements in the publication area and the reporting area. We don’t have to reinvent that. We can take some of those things and apply them to the loan policy. The mechanics of doing a loan [policy] are not that complicated.
What would be a realistic target to seeing the loan program up and running? Late in 2008? Early in 2009?
That’s hard to know right now, and I wouldn’t want to venture a guess. I think the task force and the ICOC and just the general interest in this program would indicate that we should move faster. We want to get this done. That’s my responsibility: to keep this thing moving along.
You spoke of assisting early-stage companies. What stages in particular will the program target for assistance?
If the program existed today, we’d be — and this is my opinion, and one I think is shared by the committee — that right now, the biggest gap in the funding is at the preclinical level, when somebody’s getting ready to say, ‘OK, I have preclinical evidence that this works. Now I have to do the toxicology and all the requirements for an investigational new drug application to the [US Food and Drug Administration].’ That is the toughest money to get. And that would be, if we put out [request for awards applications] today, that is likely what we would target.
But we don’t know where in the future the funding gaps are going to be, where the venture capitalists, or the angels, or Wall Street is not funding. And what we’re going to try to do is identify those gaps, and then put programs together to fill those gaps with funding from CIRM.
How much in funding would you have available? One published report cited a figure of $750 million.
That’s a number that has been put out there. There’s no evidence for that. And our task force will not decide that. That should be decided by the full ICOC, ‘How do we want to proportion the money?’ Certain things in Prop 71 were clearly delineated — for example, the amount of funds that go into facilities, the large-facility grants, 10 percent or about $300 million. The rest of it is up to the board and the staff of CIRM to determine where the needs are. If you look at the [grants] we’ve done, you’ll see that they’re very diversified, from seed grants to young investigator grants, to all kinds of laboratory facilities [including] now the big laboratory facilities.
How will the loan program dovetail with CIRM’s established grant programs?
The discussion in this committee was that, we may have an RFA that would be take-your-choice: If your science holds up, and you’re evaluated by the out-of-state people who evaluate our grant and loan programs, you may have a choice. You may be able to make that choice: I’ll take it as a loan. Or I’ll take it as a grant. We could do combinations like that, or we could do pure loans and pure grants.
My bias is to make it as flexible as possible. What we want here is to advance the mission of CIRM. And we have to be flexible so we don’t create unnecessary barriers where potential applicants might not want to participate because of certain strings attached, requirements that we impose on them for the money we grant them. At the same time, the state of California deserves a fair return from that. And coming up from the industry side, I don’t think industry is at all opposed to that.
Who would seed this fund?
This would all come from state bonds. Then the administration of the loan program would be done by the CIRM staff. We discussed that at the meeting, and talked about how we could make sure we don’t make that unduly burdensome for the staff. We are not going to be a bank, where we have to look at credit-worthiness and things like that. It’s just completely inappropriate for what we’re trying to do here.
How does the loan program avoid the problems of borrowers and lenders now seen in the subprime mortgage market?
That’s all controlled on the lending side by the RFA. There will be a range of the amount of money you can ask for. The other thing we would envision is that if there was an RFA that is, say, preclinical through phase 1, and you could apply for $1 million to $3 million, that would be staged. So if there’s a failure at the preclinical phase, and there’s an unexpected toxicity, and they never get to phase 1, then that money would never be sent out. If you win based on the review that’s done, the merits and science of your proposal, then you will tell us how much money you need for the first phase, the next phase and the next phase. And that’s what would be approved. Then CIRM would issue those amounts when they’ve got proof that that work had been accomplished.
How much might be lent out at those levels?
These are all hypotheticals, but a good preclinical package, if that’s what the RFA called for, might be up to $1 million. If it goes further into phase 1, that could be a $1 million to $2 million expenditure. The point I was trying to make is that once you give a loan, if it’s a $3 million loan that is granted to a company, it will be milestone-driven. It wont be, ‘Here’s $3 million; let us know how you do.’ It will be, ‘Here’s $1 million for your preclinical and here’s $1 million for your phase 1, and maybe there’s a second phase if you continue to progress.’
Will CIRM seek to steer companies and nonprofit institutions to specific products, loans vs. grants?
That’s an ICOC question. I do not believe that our task force has the responsibility to make those determinations. That should be done in the loan program in the same way as it is today in the grant program: What is the need? Where is the gap? How much money do we want to put out there? Then we make that decision at the full board level. I don’t envision that our committee will deal with ‘how much money?’ We’re going to deal with the process of the loans, just as we did the process of intellectual property on the grant programs.
The program has been likened to a bank that would assist early-stage biotech companies, but you disagree with that characterization. What would be a more accurate description?
It really would be a misnomer to only think that these loans would go to, quote, biotech companies. They may well go to other institutions that are also interested in advancing what we broadly categorize as products in this area.
With this type of technology, it’s probable that there’s going to be a lot more interaction between the research institutes and what we classically think of as the companies that move these therapies forward. Some of them, at least, will be [stem] cell-based, so it’s not unlikely that many of the research institutes will get involved through pre-clinical, clinical, early clinical trials.
Would borrowers most likely be companies or institutions, or collaborations of both entities that apply for financing?
They can be both. They can be a research institute or other organization that is a nonprofit, for example, that is trying to advance research perhaps. And it could also be these collaborations, which clearly will be part of the overall CIRM grant and loan programs.
How much of what would be lent would go to nonprofits, as opposed to for-profits?
That’s impossible to predict today. That’s why writing and coming up with a policy that is flexible and can live into the future is what we’re trying to do. We have grants policies now, and we’ve worked hard on those. We know how to do grants, how to administer them, do the process of calling for the grants, evaluating the grants, awarding the grants and then following them. We’ll lift a lot of what we’re doing in the loan program out of those policies. But there will be differences in terms of what the loan program will entail.

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