Friday, April 01, 2016

$150 Million 'Powerhouse:' California Discloses Financing Details on New Stem Cell Company

CIRM graphic
A California first
De-risking therapy development
Selling off the notes
Possible IPO

California's stem cell agency this week unveiled details of a far-reaching and unique proposal to create a $150 million, public-private company to speed commercialization of stem cell therapies and bring them into widespread use.

The proposal by the California Institute for Regenerative Medicine(CIRM), as the $3 billion agency is formally known, is believed to be a first in California history in terms of its size and scientific scope. It goes well beyond any such stem cell efforts involving other states.

The agency hopes to lure business into its stem cell game with a $75 million loan with invitingly lenient terms. CIRM's private partner would have to repay only 50 cents on each dollar of the loan. However, the partner would be required to match the loan with its own $75 million contribution.

Randy Mills, president of the agency, says the goal is to create a "powerhouse" company that would step up development of stem cell therapies that have been slow to emerge. It would "de-risk" the effort because of the state contribution.  The CIRM proposal also envisions the possibility of the enterprise issuing publicly traded stock, which could mean huge profits for initial investors, such as CIRM would be.

The project -- dubbed ATP3 -- comes before a special panel of CIRM's governing board directors next Friday at a meeting in Oakland. The panel is expected to review and approve a proposed term sheet for the financing so that the agency can post a request for applications very soon.

The meeting is public. The agency normally also has teleconference locations elsewhere in the state available for public participation along with a listen-only, toll-free audiocast.

In a memo to the committee, Neil Littman, the agency's business development officer, said,
"The overarching objective of ATP3 is to encourage industry involvement in cell therapy through the creation of public-private partnership that advances existing high quality CIRM-funded stem cell technologies toward commercialization. 
"Our main objective in structuring the terms of the award was to strike a balance between ensuring a financial return to CIRM and thus the citizens of California while at the same time ensuring the attractiveness of the award to encourage industry participation.... Although CIRM is not a venture capital firm or a traditional investor and is willing to bear significantly higher levels risk, the risk should be commensurate with the potential reward. Thus, if we are successful in creating a valuable stem cell enterprise in the State of California, it is appropriate that CIRM and the citizens of California participate in the financial upside."
The loan would be issued in the form of convertible notes that the agency could convert to stock if that seems more profitable than a loan. Littman wrote,
"This award is unique, and provides for the establishment of a new, for-profit California-based entity, which if successful, may command a significant future valuation."
Littman continued,
"A convertible note financing is commonplace in the biotechnology and venture capital community, and allows the note holder to participate in the upside should the issuer become a valuable entity. On the downside, the note holder is protected by the debt portion of the instrument, and could choose not to convert should the issuer perform poorly."
Structuring the investment as a convertible loan prevents the agency from violating a law that prohibits the state from owning stock in a private company.  The agency could sell the note to another investor that could be willing to pay more than the amount owed on the note because it can be converted to stock.

The proposed terms also stipulate that the loan would be issued in three separate notes. Each note could be transferred or sold separately, providing more opportunities for the state to profit.

The plan to create the new company also strikes at another issue that CIRM's Mills has spoken about repeatedly -- the reluctance of private companies and investors to engage in stem cell therapy development. In December, he told directors that only about 6 percent of the CIRM-financed research programs (totaling roughly $2 billion) has private partners. The reason, he said, is that the private sector is put off by the financial risks involved in stem cell development.

The new effort would also allow the private partner to pick through the CIRM portfolio to select research that would be potentially profitable -- excluding research that already has a private partner.

Here are links to the presentation slides on the proposal, Littman's memo and the proposed term sheet. For earlier items on the initial discussion of the plan last December, see here and here.

Watch for more coverage of this plan next week here on the California Stem Cell Report.

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