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Stem-Cell Stocks: Fact vs. Fancy

By Sarah Lacy Forgive Tom Okarma if he's a bit testy these days. Sure, the passing of California's Proposition 71 on Nov. 2 has created $3 billion dollars of potential grants for Okarma's field, embryonic stem-cell research. That dwarfs the $25 million now available each year through the National Institutes of Health.

But the news has created a firestorm of press calls, misconceptions, and confusion which the CEO of Silicon Valley-based Geron (GERN) has been navigating with increasing impatience. "The politicization of this has created a whole field of overnight experts who have no clue what they are talking about," he says. "Most of them have never seen an embryonic stem cell."

INVESTOR EUPHORIA. Stem cells have yet to morph into, say, brain or skin cells. Taken from human embryos, they can become nearly any kind of cell in the body, and they reproduce indefinitely. While adult stem cells, usually extracted from bone marrow, are similar, their ability to reproduce is limited reproduce, as is the kind and range of cells they can become. Scientists hope embryonic stem cells hold the key to remedies for now-untreatable diseases like Alzheimer's and Parkinson's.

In addition to the debate about the benefits of stem-cell research, there's a whole different controversy brewing: Who will benefit from California's voter-mandated infusion of cash? The immediate answer isn't Geron or other stem-cell outfits, such as StemCells (STEM) in Palo Alto or Aastrom Biosciences (ASTM) in Ann Arbor (Mich.). Nor is it the venture capitalists who donated a good portion of the $25 million used in the campaign to get the measure passed.

It's academic and research institutions like Stanford University, the University of California, and the Salk Institute for Biological Studies in San Diego. Between the, they're expected to receive the lion's share of California's funding plan.

That hasn't stopped investors from getting carried away. Shares of Geron, StemCells, and Aastrom soared in the weeks leading up to the election. They got an extra bump on Oct. 25, after California's Governor Arnold Schwarzenegger endorsed the proposition. StemCells's stock consistently traded under $2 before October. By Nov. 1, it had more than doubled, to $4.28.

MAKING HAY. Bear in mind, of the three outfits, only Geron works with embryonic stem cells. StemCells and Aastrom focus their research on adult stem cells. Neither has any intention of getting into embryonic stem-cell research, and since Aastrom has no employees in California, it wouldn't be eligible for state funding.

Investors seem at least to have figured out that much. Aastrom shares were going for $1 in late-day trading on Nov. 12, down from their $1.44 peak on Oct. 25. As for the other two outfits, their Wall Street joy ride continues. Geron was at $6.98 on Nov. 12, while StemCells, hit by profit-taking in the days after the election, commanded $2.82 -- down on the highs it hit at the start of the month, but still well above the levels at which it had languished through most of 2004.

All three have taken advantage of the hype to pad their coffers. Aastrom raised $10 million in private funding Oct. 27 and StemCells raised $22.5 million from similar sources Nov.1. Geron announced on Nov. 11 that it is selling 6.5 million shares with a view to raising $40 million. They were savvy business moves. For little companies in the research-intensive biotech industry, plenty of money in the bank means a much-improved chance of staying in business long enough to get a product out the door.

WELCOME MAT. Certainly, the companies may not be entirely shut out of California's largesse. Geron and StemCells may apply for grants. But their most realistic hope is that the money will help academic researchers get new advances into the marketplace faster. Such research could spin off increasingly novel drugs. The state-funded researchers could also license some of the stem-cell know-how the three companies have already developed. Aastrom, for example, gets revenues from Stanford University and other research institutions, thanks to a specially-built computer that models the replication of adult stem cells faster and safer than old-fashioned, Petri-dish methods in the lab.

For startups, the benefits could come from a better workforce. Ralph Snodgrass, chief executive of VistaGen Therapeutics, in Burlingame (Calif.), is hopeful he'll be able to hire more scientists already trained in the field. At the moment he has had to train them on the job. VistaGen uses embryonic stem cells to research diseases like diabetes.

Even the benefits to Geron, which many consider the leader in private stem-cell research, will be indirect. Its first product, intended for spinal cord injuries, will enter clinical trials in 2006. Collaborating with researchers at the University of California, Irvine, Geron already has spent some $90 million on embryonic stem-cell research and has $130 million left in the bank. "We need help from the outside," Okarma says. "We're hopeful the world's cadre of stem-cell scientists migrates to California in the next 18 months."

NO TIMETABLE. Public investors may do well to take note of venture capitalists' hesitancy. In the last 10 years, venture capitalists have invested only $300 million in stem-cell companies, the bulk of which are working with adult stem cells. That's about 10% of the venture investments in all of the biotech industry over the same period, according to trade publication BioCentury. "Venture capital has essentially abandoned this area," Snodgrass says. There's good reason. Geron aside, experts don't expect many drugs to come out of embryonic stem cell research for at least a decade.

Venture capitalists say these companies are still at such an early stage in their research to bet on. "Any deals we see are embryonic, pardon the pun," says Arnold Oronsky, general partner at InterWest Partners in Menlo Park, Calif. MPM Capital, which has a $900 million health-care venture fund, is taking a harder look. Among its venture partners is George Daley, an associate professor at Harvard University who has been researching stem cells for 20 years. But even MPM has done just a handful of stem cell-related deals. "The science is happening, but it's hard to say when any new medicines will emerge," says Daley.

No doubt, an industry can change when voters pour $3 billion into it. But smart investors would do well to wait before leaping into this much-talked-about but unproven market. Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau

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