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No Stemming the Tide

President Barack Obama has added to the momentum building behind the stem cell industry.

The president last month lifted federal restrictions on funding research that uses embryonic stem cells. The move could eventually spur the U.S. Congress to allocate money for scientists in the field, industry followers say.

That’s great news for U.S. venture capitalists, who invested a record $280 million in 22 stem cell-related companies last year, according to Thomson Reuters (publisher of VCJ). Last year was the biggest out of the past 10 years for stem cell fundings (see chart). U.S. VCs invested $179 million in 13 such companies in 2007.

The momentum has continued this year, with seven stem cell companies backed to the tune of $69 million by U.S. venture firms as of March 12 (see table).

Notably, the number of venture firms participating in stem cell deals is also growing. Fifty-three U.S. firms backed stem cell companies last year, investing an average of $5.3 million each, up from 36 firms that invested an average of $4.4 million each the prior year, according to Thomson Reuters. BD Ventures of Franklin Lakes, N.J., Morgenthaler Ventures of Menlo Park, Calif., and Toucan Capital of Bethesda, Md., were the most active investors, each backing two stem cell-related companies last year.

There are other signs of growing interest among VCs. Proteus Venture Partners, based in Palo Alto, Calif., has assembled a team that will make investments in the area of regenerative medicine, with a heavy focus on stem cell therapies. And last month OVP Venture Partners added stem cell guru Irving Weissman to its technical advisory group. Weissman is the director of the Stanford Institute for Cancer/Stem Cell Biology and Medicine and founder of three stem-cell companies: Cellerant, StemCells Inc. and SyStemix.

Targeting Researchers

The most recent stem cell company to receive funding was Cambridge, Mass.-based Stemgent Inc., which closed a $14 million Series A round in March from HealthCare Ventures and Morgenthaler Ventures. The company plans to use the money to build up a business selling supplies to stem cell researchers.

Stemgent CEO Ian Ratcliffe says he’s “cautiously optimistic” that the Obama administration’s policy directive will boost research budgets. However, it’s unclear when federal funding will make its way to labs, he says, noting: “There was no accompanying, ‘Oh, by the way, we’re putting $1 billion or $5 billion into stem cell research.’”

Stem cell sector-focused startups aren’t waiting for government funding to ramp up. In Stemgent’s case, Ratcliffe says, the strategy is to roll out a range of products used in labs, in hopes that they may become standard supplies for the industry. Products listed on the company’s website include antibodies (from mice and humans), cell lines and small molecules used by researchers to track cell behavior.

The 38-person company licenses many of its offerings from university labs, but also develops some in-house. In the fast-growing stem cell research field, Ratcliffe says, the key is to get products to market quickly and generate industry uptake.

“It’s like infant formula,” he says. “You want people to start using your product as early as possible, so there is a big advantage in early adoption.”

I think it was an important policy change and statement by Obama. But the significant dollar increase for research will come when and if Congress allows the National Institutes of Health to finance stem cell research.

Ralph “Chris” Christoffersen

Stemgent’s latest investment round isn’t the largest venture round in recent months for a stem cell startup.

Redwood City, Calif.-based OncoMed Pharmaceuticals, a developer of treatments to destroy cancer stem cells, raised $46 million late last year, bringing its total funding to date to more than $170 million. Backers of the Redwood City, Calif.-based company include Morgenthaler, Adams Street Partners, Bay Partners, De Novo Ventures, GSK Ventures, Latterell Venture Partners, Morgenthaler Ventures, U.S. Venture Partners and The Vertical Group.

Also late last year, Madison, Wis.-based Cellular Dynamics International, a developer of stem cell technologies for drug development and personalized medicines, raised $18 million in a round led by Tactics II Stem Cell Ventures with participation from the Wisconsin Alumni Research Foundation.

Several other stem cell research startups have raised smaller rounds. Linkage Biosciences, based in San Francisco, raised $2 million in February from Greenhouse Capital Partners to develop diagnostic products for solid organ and marrow-derived stem cell transplantation. Malvern, Penn.-based Neoronyx, which develops medicines using adult bone marrow-derived stem cells, raised $3.74 million in January from Alliance Technology Ventures, Safeguard Scientifics and SCP Private Equity Partners.

On the Lookout

Venture capitalists, meanwhile, are actively scouting new deals.

Ralph “Chris” Christoffersen, a Boulder, Colo.-based partner in the health care practice of Morgenthaler and who sits on the boards of Stemgent and OncoMed, says that he expects the lifting of restrictions on federal funding for embryonic stem cell research will have less of an impact on OncoMed than on other stem cell companies, because OncoMed deals with a specific subset of stem cells involved in cancer.

But he’s anticipating an overall significant increase in research in the area of stem cell applications. That will likely happen with or without federal funding, though the Obama Administration’s policy shift should accelerate the pace of research, he says.

“I think it was an important policy change and statement by Obama,” Christoffersen says. “But the significant dollar increase for research will come when and if Congress allows the National Institutes of Health to finance stem cell research.”

Christoffersen adds that even though the ability to conduct stem cell research will accelerate as a result of the Obama Administration’s policy change, the fruits of those efforts may not mature for years to come.

“From a researcher’s perspective, this is big,” he says. “From a product perspective, it’s going to take a while.”

Constance Loizos and Lawrence Aragon contributed to this report