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Will the Stem Cell Ruling Affect Venture Capital Investing?

Last week’s federal district court ruling ordering an immediate halt in federal funding for stem cell research has thrown academic research circles into a state of confusion. This has caught the attention of the VC community, as the venture-backed biotech world is largely dependent on technology developed in academic institutions, and the cutting-edge research produced by universities is crucially dependent on federal grant funding.

“Frankly, I was stunned, as was virtually everyone else at the NIH yesterday, at the judicial decision,” NIH Director Francis Collins told the Washington Post (August 25, 2010). “This decision has the potential to do serious harm to one of the most promising areas of biomedical research.” The National Institutes of Health pumped $143 million into academic stem cell research last year and was on the verge of providing an additional $74 million in fresh R&D funding before the injunction. In addition, about $250 million in private funding has been injected into stem cell startups. The future of both types of funding is now in serious jeopardy.

What impact will the ruling have on biotech businesses in the stem cell area? Executives at established biotechnology companies and startups say that it won’t immediately affect them, as they do not depend on government funding. However, they uniformly see negative implications for growth in the stem-cell industry. This is because forward-looking venture capital firms closely follow government funding policies, the key driver of early-stage academic research, as an important early indicator for new scientific developments.

Stem cells are the precursors of all of the cells in the body’s tissues and organs. Those derived from in vitro fertilized embryos can be manipulated in the laboratory to develop into any type of tissue, and are considered especially promising for research into diseases such as diabetes, heart disease and Alzheimer’s disease. However, some citizens believe that destroying an embryo to obtain stem cells is tantamount to murder; Congress passed a law in 1996 forbidding the government from funding research in which human embryos are destroyed.

President George W. Bush carved out an exception for research on 21 lines of stem cells that had been created before the funding ban, and last year President Obama expanded the types of research that could be funded under this exception. But last week’s ruling invalidated both administrations’ policies, saying they violated the intent of the 1996 law.

Even if the changed climate for federal funding doesn’t have any near-term effects on venture-funded companies, it will foster uncertainty among investors, likely leading to a decline in the number of university spinouts in the stem cell area.

It seems clear that NIH was attempting to operate within the bounds of the Bush and Obama administration exceptions, but stem cell research opponents claimed the government was willfully ignoring the 1996 law. The legal system and historians will have to decide. But the episode illustrates that the federal government continues to be an engine of unintended consequences. In this case, depending on NIH funding turned out to be a risky financing strategy for university research departments. This fact will surely alter the calculations of venture firms and biotech industry executives, for whom risk assessment is a constant chore. Investors hate uncertainty—and the questions created by the constantly shifting legal landscape surrounding stem cell research pervade the medical technology industries today.

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  • Robert Hahn

    What is the point of misleading people by continually referring to the court decision as affecting “stem cell research”? The decision affects -embryonic- stem cell research, which is and has been a small fraction of the total. It is as if Mr. Webb feels that unless the research provides a political argument to support the destruction of embryos, it’s no fun, or doesn’t really count as research. This in spite of the fact that several very promising cures are on the way as a result of research using adult or umbilical cord stem cells.

    Must we pollute even science journalism with the politics of the left?Besides, what venture capitalist wants government research pouring into areas where the startups are operating?

  • http://www.claremontcreek.com Brad Webb

    Thank you for the comments, Robert.

    Please be assured that there was no intention to mislead XConomy readers about the nature of the court ruling. You are right Robert that the injunction applies only to Embryonic Stem Cell research, not Induced Pluripotent Stem Cell research. (for details on these differing technologies, please refer to Wikipedia: http://en.wikipedia.org/wiki/Embryonic_Stem_Cells and

    Although the political controversy about the destruction of human embryos has not been, and may never be, settled, the point of the article is that government actions can have unintended consequences. In this case, government funded university research is the major generator of new scientific discovery in the stem cell area. The Venture Capital industry is very sensitive to risk assessment, and so I predict a more cautious investment strategy in stem cell startups, regardless of the outcome of the legal processes now underway.

    As another example of how such uncertainty may influence VC risk assessment, Claremont Creek Ventures, as an early stage, capital efficient investor, is very cautious about life sciences investments that may encounter regulatory barriers in their product life cycle. For instance, the FDA is now in the process of reviewing and will probably change a regulatory path often used by medical device startups to get devices on the market. This so-called 510(k) process is going to be more restrictive in the future, so VC investments in these types of companies will be delayed, postponed, or cancelled. Uncertainty is the enemy of investment decisions.

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  • Katherine Steele