Credit: Jessica Kolman

When Alan Lewis left Celgene, a publicly traded pharmaceutical company worth nearly $15 billion at the time, to become chief executive of Novocell, a struggling stem cell company based in San Diego, California, he had to make a few lifestyle adjustments. “Before it was like staying at the Four Seasons Hotel,” he says. “This is like the El Cheapo on the corner.”

Lewis had decided he wanted to work for a stem cell company in the excitement following the passage in 2004 of Proposition 71, the $3-billion California stem cell initiative. As soon as he arrived at Novocell in 2006, Lewis got to work raising money —and tightening the budget. He closed Novocell's Irvine, California site, and pared down the company's staff. Novocell narrowed its scientific goals, dropping several projects to focus on the aim of producing insulin-producing cells from human embryonic stem (ES) cells for use as a treatment for diabetes. “In the last year or so we've been really putting virtually all of our eggs in that basket,” he says.

Risky business

Early-stage biotechnology is always risky, and it has been a particularly tough road for stem cell companies. The industry has struggled under burdensome regulations, unreasonable expectations, and increasingly conservative venture capitalists, while trying to push forward an untested form of therapy that everyone knows will be expensive to implement. But some who started out in the early days of the stem cell industry say the financial climate is getting warmer. “The market is now starting to awaken,” says Johan Hyllner, who has worked for the Swedish stem cell company Cellartis in Gøteborg since 2001.

By industry standards, Novocell is doing well in many ways. Privately owned and venture-capital backed, about 30% of the company's funding comes from Johnson & Johnson Development Corporation, the venture-capital arm of New Jersey-based pharmaceutical giant Johnson & Johnson. Collaborations with the pharmaceutical industry have historically been rare for stem cell companies, but the industry has lately been investing in the field. Earlier this year, UK-based GlaxoSmithKline announced a $25-million investment in Harvard University's Stem Cell Institute with the aim of harnessing stem cell technology for drug screening and Roche teamed up with Wisconsin stem cell company Cellular Dynamics International to use cardiac cells derived from ES cells to test drug candidates for toxicity. In 2007, Merck licensed neural stem cell technology from Stem Cell Sciences in Cambridge, United Kingdom, also for drug screening.

Although these investments are tiny relative to the large research and development budgets of the pharmaceutical industry, the industry is warming to stem cells, says Ruth McKernan, chief scientific officer of Pfizer Regenerative Medicine in Cambridge, UK. When she attended a Keystone meeting on stem cells in 2005, almost no one else from the pharmaceutical industry was there, she says. “Now, every meeting I go to I see more of my colleagues from pharma than I saw at the meeting before.”

Pfizer is investing “a significant amount” of money to establish a regenerative medicine programme and intends to commit about 70 employees to the group, says McKernan. The programme will look for small molecules that alter cell fate and differentiation by, for example, screening for compounds that stimulate neurogenesis in the brain. Pfizer will stop short of using stem cells directly for therapy, but McKernan hopes the information her group will generate about how to control stem cells will help the company prepare for future work in that direction.

Therapy on hold

Developing therapies is far riskier and costly than developing research tools. Consequently, pharmaceutical companies and other investors remain hesitant to back such projects; Johnson & Johnson's investment in Novocell's therapeutic project is unusual. Some companies have opted out of the therapeutics business altogether. Cellular Dynamics, for example, has been focused from the start on drug screening and toxicity testing — two areas with immediate application and of significant interest to pharmaceutical companies — and also provides a profitable drug-testing service that is not based on stem cells. “We're starting with drug screening because we understand that market,” says Nicholas Seay, chief technology officer at the company. “We're not talking about therapeutics.” Other companies, like Cellartis, began with a focus on therapeutics and then became a stem cell provider when confronted with market realities. “Within a year we realized we had to focus,” says Hyllner. “We had to do all of these steps anyway to get a therapy. We figured we might as well try to get mid-term revenues as well.”

But some early clinical trials have looked promising. Osiris Therapeutics in Columbia, Maryland, is testing preparations of adult mesenchymal stem cells collected from the bone marrow of healthy volunteers and then purified and cultured. Its product, under the trade name Prochymal, has reached a phase III trial for use in acute graft-versus-host disease, and earlier-stage clinical trials are under way for its use in heart failure, lung disease, Crohn's disease and more.

Other companies pushing stem cells into therapy have suffered setbacks. Geron, in Menlo Park, California, wanted its treatment for spinal cord injury to be the first ES-cell-derived treatment to enter clinical trials, but the company has been in limbo since May this year, when the US Food and Drug Administration (FDA) placed the trial on 'clinical hold' while the agency grapples with how to handle a therapy unlike any it has dealt with before. (See Embryonic stem-cell trial put on hold.)

Earlier this year, Advanced Cell Technology (ACT), headquartered in Los Angeles, California, was in talks with the FDA about clinical trials to test retinal pigment epithelium cells derived from ES cells as a treatment for age-related macular degeneration. Then in July the company announced that it was almost broke, research ground to a near standstill, and the company is scrambling to find new investors. ACT has had such problems before: “This is something that's probably happened five to six times,” says chief scientific officer Robert Lanza. “We hear all of this excitement about the promise of stem cells,” he says. “In reality, there's virtually no money.”

A few years ago, ACT opened a facility in Alameda, California, and announced that the company hoped to take advantage of Proposition 71 funds. “That never really panned out,” says Lanza. “The money was held up by court challenges and never went to companies.” ACT closed the site to save money in September, and consolidated its research programme in its original home of Worcester, Massachusetts. Since then, the California Institute of Regenerative Medicine — the administrator of Proposition 71 funds — has announced intentions to launch a loan programme for stem cell biotechnology companies that would distribute about $500 million over 8-10 years.

Venture capital cautious

“Regenerative medicine and cell-based therapy is not heavily supported by the venture community,” says Arnold Caplan

Since the technology bubble burst, venture capitalists have grown more cautious, investing almost exclusively in late-stage biotechnology companies that are already in clinical trials. Few stem cell companies can meet those standards, and the squeeze is expected to get even tighter as countries rush to ease the flow of funds and credit through banking systems. “Regenerative medicine and cell-based therapy is not heavily supported by the venture community,” says Arnold Caplan, a biology professor at Case Western Reserve University in Cleveland, Ohio, and a co-founder of Osiris Therapeutics.

A few boutique venture-capital firms, such as Toucan Capital based in Bethesda, Maryland, have opened with the explicit goal of funding stem cell and regenerative medicine technologies. California-based Proteus Venture Partners, headed by Gregory Bonfiglio, also has plans to raise a dedicated fund for investing in regenerative medicine companies. Bonfiglio says that some of his colleagues think he's “nuts” for targeting early-stage stem cell companies. “But I do think that attitude is changing,” he adds. Proteus Venture Partners is three years old, and, financial crisis notwithstanding, aims to build its fund to $300 million by the first half of 2009. That will not be enough cash to carry early-stage companies through to the end of their clinical trials, but Bonfiglio hopes other investors will eventually step in.

Jonathan Gertler, who heads investment banking in biotechnology for Leernik Swann in Boston, agrees that attitudes are changing, but says money isn't flowing yet. "There's increasing interest in monitoring the space by financial investors, but monitoring isn't investing." Reached a few days after several governments announced unprecedented steps to restore liquidity, Gertler said he expected to see a “groundswell of support” for stem-cell ventures within the next couple of years.

Some stem cell companies have already managed to tap into venture funding. Cellular Dynamics, which was co-founded by University of Wisconsin-Madison stem cell researcher James Thomson, founded the company with cash from a local venture-capital fund called Tactics II Ventures, which created a designated stem cell programme specifically to gather funds for the company.

While companies whose technology is based on ES cells struggle for cash, companies based on induced pluripotent stem (iPS) cells seem to be viewed more favourably by investors. Inevitable conflicts over intellectual property loom on the horizon and there are still technical hurdles to overcome. Nonetheless, investors are happy to be freed from the entanglements of work with embryos. iZumi Bio in Mountain View, California, a company founded to generate therapies from iPS cells, received venture funding from Kleiner Perkins Caufield & Byers, the firm that arguably launched the biotech industry by financing Genentech. And Fate Therapeutics, based in Seattle, Washington, has garnered backing from prominent firms including Arch Venture Partners, which has a branch in Seattle, and Polaris Venture Partners of Boston, Massachusetts, to fund its plan to stimulate and reprogramme adult stem cells using small molecules.

Pfizer's McKernan credits the advent of iPS cells for whetting the pharmaceutical industry's appetite for stem cell technology, since they can be made without embryos.

Nonetheless, iPS cells could fall victim to the same hype that plagued the early days of ES cell research. But regardless of where the stem cells come from, the industry is yearning for a therapeutic victory. “What we really, urgently need is a big success,” says Lanza. And for all the uncertainty, Lewis is glad he made the switch to Novocell. “You get used to sort of the rich life of being in a fat cat pharma, but it isn't so bad to slim down a little bit and use your money wisely. That doesn't mean that it's any less exciting.”