Where They Stand on Stem Cells: VCs for Kerry –

Californians soon will be asked to vote on Proposition 71, which would issue up to $3 billion in state bonds to fund stem cell research. Polls show a divided electorate, but donation logs indicate that venture capitalists support the measure by an overwhelming margin.

Brook Byers, John Doerr and Joe Lacob of Kleiner, Perkins, Caufield & Byers have contributed over $1.2 million to Californians for Stem Cell Research and Cures (as of press time), while other VCs-like Bill Unger of Mayfield and Steve Krausz of U.S. Venture Partners-also have come aboard. Not a single venture capitalist had contributed to the “No on 71” effort as of press time, and a leading opposition group’s website specifically blames VCs for getting the initiative on November’s ballot.

Such lopsided VC sentiment in California also is reflected on the national level, where federal funding for stem cell research-and for embryonic stem cell research, in particular-has become a key issue in the presidential campaign. VCs generally favor Sen. Kerry’s position over that of President Bush.

“We look at the difference between basic research and applied research,” explains Mark Heesen, president of the National Venture Capital Association. “VCs willingly take on applied research, but we feel that it’s the federal government’s role to fund the basic R&D. That’s the way it has been traditionally, and it’s one of the things that makes our country so strong in terms of health care and innovation.”

Stem cells are unspecialized cells that can renew themselves in labs without differentiation, and which potentially could be manipulated to grow into all types of human tissue.

There are three major classes of stem cells, but scientists generally believe embryonic stem (ES) cells to offer the most promise because they can multiply without differentiation for longer periods of time than can either adult stem cells or cord blood (i.e. umbilical) stem cells.

ES cells first were isolated and cultured by privately funded University of Wisconsin researchers in 1998, which was hailed by proponents as the first step toward curing such conditions as Alzheimer’s disease, Parkinson’s disease and diabetes.

Today, most ES cell lines are isolated from excess embryos that originally were created for the purpose of in vitro fertilization. Approximately 84% of U.S. clinics currently discard such embryos, according to a recent Rutgers University study.

The political challenge, however, is that the manipulation of human embryos is extremely unpopular in many pro-life and religious circles. Opponents say that the process is tantamount to killing life in order to save it, and that adult stem cells or cord blood are sufficient for research.

Both presidential candidates support federal funding for embryonic stem cell research, but they differ sharply on where the money should go.

Bush Says

Bush supports the maintenance of a policy he first presented to a prime time audience on Aug. 9, 2001. It allows researchers working with embryonic stem cells to receive federal grants, so long as they work with ES cell lines originated on or before Aug. 9, 2001. He originally put the number of approved lines at a surprisingly high 78, although it turned out that many were owned by foreign corporations or governments that weren’t interested in sharing with U.S. researchers. Three years later, the National Institute of Health reports that 22 ES cell lines are available for purchase by U.S. researchers, and that 16 of the original 78 are no longer useful for research.

Bush believes that his policy presents a middle ground whereby scientific research can flourish without any additional embryo destruction. He also points out that he was the first president to oversee any federal funding of embryonic stem cell research. (President Clinton’s funding guidelines had been enacted too late in his second term to be put into practice.)

Bush also notes that researchers may solicit state funds or private funds to work on ES cell lines created after Aug. 9, 2001. That is the impetus behind Prop 71 in California.

Kerry Says

Kerry, on the other hand, has pledged to overturn the Bush policy, which would presumably allow as many ES cell lines to be created as the market can bear. He has not indicated that he would put a limit on the number. Kerry says that there is a need for ethical oversight-particularly when it comes to full human cloning-but he argues that Bush’s policy is based on the faulty premise of 78 ES cell lines. Kerry also echoes scientific complaints that the pre-Aug. 9 lines were cultured on feeder layers of mouse fetus cells, which calls their entire therapeutic value into question.

“I appreciate the efforts that the Bush Administration has made, but he should make more [embryonic] stem cell lines available for federally funded research,” says Pat Latterell, founding partner of Latterell Venture Partners. “The lines allowed by Bush include a number of lines that aren’t really useful, although they sounded good at the time.”

What’s At Stake

Venture capitalists have played a supporting role in this debate, just one notch below scientists and politicians. Not only have they supplied money to efforts like Prop 71, but they also have been outspoken in their belief that expanded federal funding guidelines are needed. Even the NVCA has said that it supports Kerry’s call to overturn President Bush’s policy, although it does not use the issue as a litmus test when contributing to congressional candidates via VenturePAC, its political action committee.

The venture community’s support of expanded stem cell research has caused some ES cell funding opponents to portray VCs as profiteering poster boys for all that is wrong with using tax dollars to support exploratory scientific research. In this scenario, private investors are asking the public to subsidize research that, ultimately, could generate profits for VC-backed companies. If private investors are so confident in ES cell research, critics ask, why don’t they simply pay for the research themselves?

The answer, VCs say, is that the lifecycle for their investments is simply not long enough to foot the bill. VC funds typically last 10 years, but ES cell research could last 15 years or more from conception through maturation. In 1994, for example, Sanderling Ventures and Brentwood Venture Capital provided seed funding for a San Diego biotech company named CyThera Inc. The company was based on the concept of using stem cell therapies to treat degenerative diseases, with a focus on pancreatic islet transplantation to cure diabetes. CyThera first worked with adult stem cells, then moved on to embryonic stem cells after they were isolated by privately funded University of Wisconsin researchers in 1998. Ten years and $20 million in venture funding later, CyThera still doesn’t have a finished product. For perspective, the federal government spent just $24.8 million on all ES cell research in fiscal 2003.

Too Expensive for VCs

“VCs need to return money to investors, and embryonic stem cell research isn’t necessarily the best way to do that, particularly within 10 years,” says Lutz Giebel, founder of CyThera, and currently a venture partner with Schroder Ventures Life Sciences. “Most of CyThera’s early research should have been done at a university, had that been allowed.”

CyThera developed nine of the ES cell lines touted by Bush in 2001, although they all since have collapsed (i.e. failed to continue multiplying). It also recently acquired four more of those lines via a merger with Australia-based BresaGen Ltd., but Giebel says that its current research is focused on ES cell lines created more recently.

Fuel for Startups

What VCs say they need now is a broadened federal funding policy that can lay the groundwork for successful startup companies based on ES cell research. In addition, they want legal guarantees that this new course would remain in place, no matter who moves into 1600 Pennsylvania Avenue.

For example, legislators could rescind or modify the Dickey Amendment, which prevents “research in which a human embryo or human embryos are destroyed or discarded, or knowingly subjected to risk of injury or death greater than that allows for research on fetuses in utero.”

Bush has interpreted this rule to mean that no new ES cell lines can be created, whereas President Clinton-and presumably Kerry-believe that it only restricts the creation of human embryos for the express purpose of ES cell research, and that embryos created for in vitro fertilization may be used with donor consent.

“There definitely are people interested from a research perspective, but my guess is that they are concerned about possibly offending the powers that be,” Latterell says. “That also affects the venture capital market. Stem cell companies would receive more VC dollars if it were less risky.