Stemming the tide?

28 February 2006

The UK is gaining an edge in stem cell research as legal, ethical and political concerns hold back the US. But how much money is the venture capital community prepared to put in?

You don't often find distinguished academics at Cambridge University answering questions about why they actually work there, but Professor Roger Pedersen, director of the Centre for Stem Cell Biology and Medicine, is something of an exception. One of the leading lights in US embryonic stem cell research, he caused some dismay when he left the University of California to continue his work across the Atlantic. Speaking via videoconference at this month's International Symposium on Stem Cell Commercialisation, he politely responded to a question from the audience about why he'd left the country, pointing out that he'd been in the precarious position of having just one source of funding for his work in the US. More worryingly for the audience, he also made it fairly clear that he's in no real hurry to return.

With President George Bush imposing severe restrictions on federal funding for embryonic stem cell research and lawsuits delaying a multi-billion dollar initiative in California, Pedersen's move is indicative of how legal, political and ethical obstacles in the US are giving the UK and other countries a valuable edge in this area of research. Given its potential to transform healthcare through potential treatments for Parkinson's disease, spinal injuries such as the one suffered by the late Christopher Reeve, diabetes and other conditions, stem cell research is generating huge interest around the world. And at the San Francisco symposium, organised by the Women's Technology Cluster, it was clear that frustration about the constraints on US research efforts is building.

The problem is reflected not just in the fact that experts such as Pedersen have emigrated to more stem cell-friendly climates, but also in an apparent fall in some aspects of academic research. Christopher Scott, Executive Director of the Stanford Program on Stem Cells and Society, pointed to research showing that the rate of new papers coming out of US labs on embryonic stem cell research is declining, one indicator of how much research is actually taking place. Meanwhile, in California itself, where voters approved a measure for $3bn of funding for the sector in November 2004, experts reckon it will be another 15 months before legal challenges to the initiative are resolved and funds released. So sensitive is the situation that academic institutions are building separate laboratories with private funds for their stem cell work so they can prove that not a single penny of federal funds is being used - a scenario that hardly contributes to scientific efficiency.

This isn't to say that Europe or the Asia-Pacific region has got everything wrapped up - far from it. While countries such as the UK, Sweden, Germany, Australia, and Singapore have made significant advances, the sector has been hit hard by the recent faked data scandal that tore South Korea's research programme apart. In many respects, it's also a relatively immature environment. Emmie van Halder-Eicher, the co-founder of TaskForce Europe in the Netherlands, pointed out that while the UK is one of three European countries with a well-defined regulatory framework - a more restrictive environment than people might imagine, according to Pedersen - three others permit no research at all. More alarmingly, seven EU states have failed to establish a meaningful legal framework of any kind.

All of this makes for a challenging investment climate, and organisations that are looking for funding will have to fight hard to convince the venture capitalists. Dr Anula Jayasuriya, founder of Draper Fisher Jurvetson Life Sciences India, pointed out that VCs consider seven factors when they invest:

1. Whether it's a disruptive technology that addresses a great medical need

2. Proof of concept

3. Intellectual property

4. The time and cost to develop

5. The business model

6. The risk

7. The exit strategy

There's no question that stem cell science qualifies as a disruptive technology - but from there, the issues get murkier. The risks, for example, are high in a sector where the rules are still changing, and where legal and ethical issues add to traditional considerations about the technology, IP and financial picture. After all, she points out, VCs are not risk-takers - it's the academics who make the real gambles. Another big concern is the time and cost of development - in general, meaningful stem cell development is viewed in a ten-year timeframe, but VCs typically have a five to seven year investment horizon.

What this means in practice is that organisations seeking funds may well be reliant on angel investors and other funding sources for the next few years until the investment climate becomes more stable. It also means that companies looking to commercialise stem cell work may need to box clever. As Jayasuriya points out, developing stem cell therapies is just one business model. Companies that develop tools to aid drug testing, for example, may be more attractive to investors in the short-term - although the returns are potentially lower, so too are the risks and ethical issues.

By Keith Rodgers, Webster Buchanan Research