The Trounson Affair and its Financial Fallout

 StemCells, Inc., the California business founded by Stanford scientist Irv Weismann, seems almost certainly to have done a serious financial disservice to itself and its shareholders.

Alan Trounson
San Francisco Business Times photo

One week ago today, the publicly traded Newark, Ca., firm cast a dark shadow over its dealings with a $19-million benefactor, the California stem cell agency. The issue arose when the company appointed the former president of the research effort, Alan Trounson, to its board of directors, only seven days after the Trounson left the agency's employment.

Trounson earned $490,008 annually at the agency. Last year, directors of StemCells, Inc., received up to $99,800 each for their part-time efforts.

The Trounson announcement caught the agency by surprise, as it pointedly noted last week in a statement. Randy Mills, the agency's new president, expressed concern about a possible conflict of interest and ordered a “full review” of activities involving StemCells, Inc. Staffers and board members were banned from communicating with Trounson regarding StemCells, Inc.

Like most small biotech firms, StemCells, Inc., is in perennial need of cash. The firm has no products that generate significant income. Rather, it is in an almost constant fund-raising mode, either by selling stock, borrowing or securing awards, such as the $19.4 million “forgivable loan” from the $3 billion stem cell agency, formally known as the California Institute for Regenerative Medicine(CIRM). The award is basically a grant because it does not have to be repaid unless a product derived from the research reaches certain income thresholds.

But now StemCells, Inc., has damaged its relationship, probably irreparably, with the agency. The firm's chances of securing additional funding have to be rated nearly non-existent.  Putting aside purely business issues for the moment, the primary question for the agency now is whether it can trust StemCells, Inc. The company could not bring itself to notify – in advance – an enterprise with which it has a $19-million relationship about an event of importance to that enterprise. CIRM is likely to be wondering whether StemCells, Inc., can now be trusted to be forthright about other matters, such as results of its research or difficult problems that it faces in reaching the benchmarks laid out in its agreement with the agency.

Even prior to the Trounson announcement, StemCells, Inc., had a checkered history with the agency. The $19.4 million award  for Alzheimer’s research was rejected twice by CIRM’s prestigious reviewers. The 29-member CIRM board approved it on only a 7-5 vote in 2012 after heavy lobbying by the agency’s first chairman, Robert Klein. It was the first case of such public lobbying by Klein after he left the board.

It was also the first time the board had approved an application rejected twice by its reviewers. Almost universally, the board goes along with negative recommendations from its reviewers, saying it does not have enough information to override their decisions.

Pulitzer Prize-winning business columnist Michael Hiltzik of the Los Angeles Times later said the award was “redolent of cronyism.”

Approval of the award came during a grant round in 2012 that also saw StemCells, Inc., receive  another big award from the CIRM board -- $20 million. But that research received a high score from reviewers and was recommended by them.  Both awards required equal matching funds from the StemCells, Inc. – a total of about $40 million from a business that at the time was burning through $5 million a quarter and had only $10.4 million in liquid assets.   The financial capabilities of the firm were not discussed in public by the CIRM board. 

After eight months of negotiations with CIRM, the firm decided to take only the money for the project twice rejected by reviewers,  CIRM had no choice about whether it could fund the higher rated project, which is now in a clinical trial. That development came as the agency was urgently pushing to participate in clinical trials that would fulfill the promises to voters who created the agency in 2004 and help boost its drive for financing beyond 2017, when money for new awards runs out.

Trounson recused himself from the 2012 public discussions of the StemCells, Inc., applications because of his relationship with Weissman, who is a member of the company's board and chairman of its scientific advisory panel. Last January, Trounson strongly backed a $40 million award to a Stanford-led consortium that also involved one of Weissman's top associates. 

Beyond CIRM, the Trounson affair will also raise questions for StemCells, Inc.,’s efforts at private financing. The firm will now have to answer difficult questions about the appointment as it seeks loans or stock sales. The appointment could also play a role in the possible sale of the firm’s research to a Big Pharma company. One of the hopes of small biotech companies is that they will be purchased by a larger enterprise that wants to acquire their research. That is a common way for early investors to reap their profits.  But those big companies do not want unnecessary baggage in the deal.

The stock price of StemCells, Inc., last Monday hit $2.31. It dropped to $2.05 by the end of the week. The price has ranged from $1.15 to $2.43 over the last 52 weeks.

The company lists five analysts that follow its activities. Last week one recommended a buy and the others rated the stock as“outperforming.” Two of the analysts’ companies have financial relations with StemCells, Inc. The others may as well but that could not be immediately determined.

On July 2, prior to the Trounson announcement, The Street.com, which is not listed by the company as an analyst, said,

“TheStreet Ratings team rates STEMCELLS INC as a Sell with a ratings score of D-. TheStreet Ratings Team has this to say about their recommendation:

"We rate STEMCELLS INC (STEM) a SELL. This is driven by a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity and generally high debt management risk."

The California Stem Cell Report last Monday asked StemCells, Inc., and Trounson for comments on the controversy about his appointment. They will carried verbatim when they are received. 

Calimmune, the Berlin Patient and $20 Million from California Stem Cell Agency

UCLA Photo

An obscure Arizona company that is sharing in a $20 million HIV/AIDS research grant from the California stem cell agency has posted more details on the Internet about its origins and plans, which include a tie to the famous Berlin Patient.

The firm, Calimmune, Inc., disclosed that its chairman is David Baltimore, former president of Caltech, Nobel Laureate and former member of the stem cell agency's governing board. One of Calimmune's advisors is the German physician, Gero Hutter, who successfully treated the Berlin Patient, Timothy Ray Brown, the only person in the world who has been cured of HIV and AIDs and who now lives in San Francisco.

 In 2009, CIRM's governing board awarded a $20 million disease team grant to UCLA researcher Irvin Chen and Geoff Symonds, an Australian who is chief scientific officer of Calimmune of Tucson, Ariz. Earlier information on the Internet reported that Chen and Baltimore were co-founders of Calimmune.

Baltimore was not on the CIRM governing board at the time the grant was awarded. He resigned June 6, 2007.

Calimmune said on its website that its "singular purpose" is to bring "a one-time, cost effective therapy to the HIV community." According to the website, the firm was established "to develop innovative cell-based therapies for HIV" based on work from Chen's and Baltimore's labs.

Delaware state records show that Calimmune was incorporated in that state in 2006 although the company's website reports that it was founded in 2007. We have queried the company concerning the discrepancy.

Calimmune said it is seeking "to provide HIV-positive patients with a similar type of genetic resistance to HIV that occurs naturally in 1% of the European population.  By treating a patient's own stem cells and T cells (cells specifically targeted by HIV), we aim to protect patients from the ravages of AIDS and eliminate the need for daily medication." Essentially, that would replicate the case of the Berlin Patient.

The company appears to have strong ties to Johnson&Johnson, or at least its executives have had in the past. Symonds worked in Australia for the firm from 1992 to 2009. Calimmune's chief financial officer, Bhavin Raval, was finance director for J&J Research in Australia from 2002 to 2009. Louis Breton, CEO of Calimmune, told the California Stem Cell Report in 2009 that none of the firm's funding originated with Johnson&Johnson.

Breton has not responded to queries from the California Stem Cell Report since 2009 including queries during the past week. The unanswered questions involve the number of its employees, whether the firm has any business beyond the CIRM grant activities and the address of the location where the CIRM work is actually performed. CIRM cannot fund work that is performed out-of-state.

Melissa King, executive director of the CIRM governing board, told the California Stem Cell Report that the firm "conducts its laboratory research at leased lab space on UCLA's campus." It also has laboratories in Australia, according to documents on the Internet. King said Calimmune's "corporate address" is on Wilshire Boulevard near UCLA. The Wilshire address appears to be only an address for service of process, according to California state records. Calimmune's Tucson address is the location of an investment firm, based on a visit by the California Stem Cell Report to the location last fall. We were told at the time that Calimmune rents space in the office.

In 2009, CIRM's grant reviewers scored the Chen-Symonds application at 79. They had high praise for the research team, but one reviewer expressed reservations. The summary of reviewer comments said,

"….the resources and investigators are outstanding and the team is superb, both scientifically and in therapy development. The Disease Team comprises a collaboration between two complementary groups, one academic and one corporate. Each brings unique expertise to the project, with the academic group providing scientific know-how and proof of concept and the corporate group providing expertise in biologics development and commercialization. The team leaders are accomplished, highly productive investigators with a demonstrated track record in the field of HIV research, gene therapy, and/or clinical drug development. Key members of this team made the initial scientific observations leading to their hypothesis and demonstrated proof of concept in tissue culture and relevant models....The principal investigator has built up a rich and well-considered network of collaborations and resources and there is no doubt that the environment will be sufficient for this task."

CIRM also said,

"Another reviewer expressed the view that although the treatment will likely find a significant niche, the complexity, cost and potential toxicity of the approach will likely limit its use, even if successful."

Escape Therapeutics: The Latest Business to Win a CIRM Grant

A firm founded by a part-time, but award-winning poet was the only company to receive a grant in last week's round from the $3 billion California stem cell agency.

The firm is Escape Therapeutics of Palo Alto, Ca. The principal investigator on the $1.5 million CIRM grant is Basil Hantash(see photo), founder of the firm and an Illinois native who held a biodesign fellowship in 2006-07 at Stanford.

Only one other company filed an application in the $25 million immunology round, originally budgeted for $30 million. That firm's name was withheld by CIRM, which is their general policy concerning unsuccessful applicants.

CIRM reviewers gave Hantash's application a 72 score. The review summary cited some weakneses in the application, but said it was “worthwhile and achievable.”  In the words of the reviewers, the research was “well designed, logical and an interesting approach to pursue.”

Founded in 2006, Escape does not have a Web site. But, according to a company document provided by Hantash, Escape is an early stage, privately held biotech firm “focused on accelerating the commercial availability of allogeneic stem cell therapies by solving the key translational hurdle preventing their clinical utility – immune mismatch and subsequent donor rejection.”

The information continued,

"Invented by Escape’s founder Dr. Hantash while at Stanford University, the company’s platform technology represents a significant potential breakthrough that can revolutionize the treatment of blood-borne disorders such as leukemia, type I diabetes, and autoimmune diseases. Escape’s innovative technology allows for the creation of the world’s first allogeneic, 'off-the-shelf' therapy capable of being used in any patient irrespective of their HLA profile."

In addition to the last week's grant, searches on the Web showed that Escape has other ties to CIRM. It is one of four internship sites for a CIRM training program run by San Jose State University. Asked for comment, Hantash said,

"Escape focuses the training process on translational stem cell research skills, rather than pure academic basic science research. Our interns were the first to publish out of all the interns in the program, so we feel they gain commercialization experience while retaining the rigor of academics. This is a marriage of a Stanford-like focus on entrepreneurship and an industry eye on developing life-saving products to alleviate patient suffering."

Hantash was a partner from 2007 to 2009 at Proteus Venture Partners, a San Francisco Bay Area investment and advisory firm focusing on regenerative medicine. Proteus was heavily involved in CIRM proceedings concerning the agency's $500 million biotech loan effort. Hantash said his responsibilities included fund-raising and deal sourcing and evaluation.

A number of references on the Internet refer to Hantash as an award-winning poet. We asked him to provide a sample of his work. It can be found here.

(Photo of Hantash from Proteus web site)