CIRM's Biotech Loan Terms and Policy To Be Aired

The California stem cell agency is edging closer to creation of a roughly $500 million biotech loan program that promises to help stem cell firms survive the financial "valley of death" and prolong CIRM's life.

The Biotech Loan Task Force will meet next Tuesday in Los Angeles to hammer out loan terms and policy, aided by a $50,000 study from PricewaterhouseCoopers(here and here). The task force is scheduled to report to CIRM directors at their meeting, also next week.

The biotech loan proposal is aimed at helping enterprises bridge a funding gap known as the "valley of death" -- so called because it is a time in a company's life when conventional funding is extremely difficult to find because of the financial risk involved.

Results from the PricewaterhouseCoopers sketch out more details of the possible scope of the program, which is the brainchild of CIRM Chairman Robert Klein, a multimillionaire real estate investment banker who understands the power of leveraging cash.

The document seems to indicate that the size of the program has been scaled down to $500 million from the $750 million figure that Klein gave us months ago. It also appears to project a "profit" of about $162 million, although it is not clear whether that figure is before or after expenses for running the loan program are accounted for.

The additional funds could provide for a longer life for CIRM, which was sold to voters in 2004 as a 10-year program. However, following the election, it became clear that the program has no sunset date. It is only limited by its 10-year bond authorization.

The PricewaterhouseCoopers report projects default rates in the loan program ranging from 20 percent on certain types of loans to as high as 50 percent on loans involving preclinical programs. A footnote says that based on comments by venture capitalists and venture capitalist lenders, those default rates seem "reasonable."

The size of loans would range from $1 to $5 million and have an interest rate based on the prime interest rate plus two to four percent. Twenty to 25 loans would be funded annually for a total each year of about $70 million. Awards would be based on the project's "contribution to medicine" as determined by the closed-door CIRM grant review process. Both businesses and nonprofits would eligible, according to previous task force discussions.

The PricewaterhouseCoopers study also mentioned objections from some of the businesses surveyed. They include proposed loan sizes (too small) and problems with aggressive repayment triggers("highly contested").

Not discussed in the study was just exactly how CIRM would run the program. The agency has no expertise in such an endeavor, aside from possibly Klein, whose professional resume includes real estate investment but not much in biotech venture capital endeavors. He has suggested much of the program could be outsourced.

A March draft policy for the program says that the loan applications would evaluated by CIRM staff (presumably new hires under Klein's direction), "supported by appropriate outside consultants."

However in January, former interim CIRM President Richard Murphy told the task force,

"I think the notion that all of this would be evaluated by CIRM staff is really overshooting. As you know, we're limited to 50 people in the organization. We would need to have real partnerships somewhere to be able to do this in a way that these guys would buy into as partners. I suspect that cannot be done in-house, at least with our present structure."

Hiring outside consultants also raises questions involving their compensation, selection and conflicts of interests. Currently CIRM rules do not necessarily require public disclosure of the financial interests of consultants.

A caveat to our readers: The PricewaterhouseCoopers study is fairly technical and opaque to readers not versed in business finance. It would have served the agency well to have provided an analysis or more context to provide greater accessibility.

In addition to the Los Angeles meeting location, you can participate in the meeting at teleconference locations in Menlo Park and Pleasanton. The addresses are on the agenda.