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. 

Stem Cell Agency Seeks Stronger Ties with Possible Industry Funding Partners

The California stem cell agency today triggered a new program aimed at recruiting major biotech and venture capital firms to assist in providing tens of millions of dollars for research by California enterprises.

The effort, part of an $80 million business-friendly initiative, was approved by the agency's governing board on a voice vote.

Participating companies will have a special relationship with the state agency, according to a staff document. The "industry collaborators" will have early input into concept funding proposals prior to their presentation to the agency's governing board. The companies will also be able to attend agency workshops and meetings involving hundreds of grant recipients. 

Other aspects of the proposal call for special event-hosting arrangements aimed at creating more collaborations along with posting of information from the selected collaborators on the CIRM website.

Implications of a Solar Power Debacle for the California Stem Cell Effort

What can the $3 billion California stem cell agency learn from Solyndra?

The topic came up at a staff meeting on Monday at the San Francisco headquarters of the agency that has pumped $1.3 billion so far into stem cell endeavors in the Golden State.

For those who have not followed the Solyndra debacle (see here, here and here), it involves the abrupt shutdown of the solar power enterprise in Fremont, Ca., and shuttering of a new, state-of-art manufacturing facility. It appears that the federal government has lost a $535 million loan to the company. The FBI is conducting an investigation along with Congress. Executives of the firm have refused to testify before Congress, citing their constitutional rights. Approximately 1,100 people have lost their jobs.

Where do CIRM and Solyndra converge? Both are involved in cutting edge technology. Both are engaged in financially risky areas of business. The stem cell agency, however, is on the funding side, as is the federal government in the case of Solyndra, which is/was engaged in development and production, much as are CIRM grant recipients.

In an interview Monday with the California Stem Cell Report, CIRM Chairman Jonathan Thomas said a staff member brought up Solyndra at the Monday meeting. The subject is increasingly important to CIRM as it engages the biotech industry more aggressively with grants and loans in a push to actually move research into the marketplace.

During the discussion, Thomas said he stressed the need for the agency to be "totally realistic" and "completely factual" about company plans. He said CIRM must have "excellent procedures" when evaluating stem cell enterprises. "Deep due diligence" is necessary, he said.

The stem cell agency has provided only 7 percent of its largess to business, but is likely to boost that amount by many tens of millions of dollars – if not hundreds of millions – in the next year or two. CIRM's funding will run out around 2017. It is seeking to come up with tangible results that will resonate with voters should it decide to ask for more multibillion dollar infusions of cash.

All that is occurring within the biotech industry, which has a business failure rate of 90 percent. Only a handful of biotech firms turn a profit.

But without taking risks that are nearly certain to make elected officials and policy makers uneasy(probably after the fact), CIRM is unlikely to spur the development that fulfills its mission. And that is not to mention the exceedingly high expectations fostered by the 2004 ballot campaign that created CIRM. How the tiny agency balances risk and research will be a key ingredient in how it is perceived by voters and whether they will give thumbs up to its continued existence.

Andy Grove on Medical Research's Great Pyramid of Egypt

Andy Grove and the $3 billion California stem cell agency need to talk.

Both have the same matter at the top of their minds – turning research into cures.

Grove, as many readers know, is the almost legendary former CEO of Intel whose interests have long spanned a wider arena than microchips.

Andy Grove

Currently, Grove is keenly focused on an area of science that he sometimes discusses in the context of a question: "key to progress or bridge to nowhere?"

It is an apt question for the California Institute for Regenerative Medicine, which will run out of funds by around 2017 unless it can come up with convincing evidence to persuade state voters that it deserves another multibillion dollar injection of cash. And that is not to mention the hopes and expectations of the millions of voters who approved creation of CIRM seven years ago.

What this is all about is translational medicine, an ill-defined term that generally means taking basic research, refining it, testing it further and developing a means to actually use it on people in clinics. Someplace in all that is the economic necessity to develop a plan that will generate profits for the enterprise that ultimately produces the therapy.

What nags at Grove is the egregiously slow pace of turning out new cures and treatments. He told a UCSF audience last month that 800,000 scientific papers related to new drugs are published annually, but only 20 new drugs come to market each year, according to a blog posting by Adam Mann of the California Institute of Quantitative Bioscience.

Grove said that the time and investment currently needed to create a new drug is about what it took, adjusted for time and inflation, to build the Great Pyramid of Egypt -- 20 years and $1.5 billion.

Grove's message is not new. In a Forbes magazine article in 2008, Kerry Dolan reported that in a speech at a neuroscience conference,

"Grove roundly criticized research funding at the National Institutes of Health, the unwillingness of researchers to share data and the lack of urgency in translating basic science into treatments that can help people. 'What is needed is a cultural revolution that values curiosity, follow-through and a problem-solving orientation and also puts the data being generated in full view, scrutinizable by all.'"

Heretical is what some might call his views, particularly regarding intellectual property. He says "trivial and obvious 'inventions'" are overwhelming the patent system. Overzealous pursuit of IP rights, which are ostensibly given out by the federal government for society's benefit, are keeping products off the market. The result is crippling innovation.

Grove's efforts go beyond rhetoric. He has pumped tens of millions of dollars into medical research in recent years, including stem cells. In 2010, he funded a $1.5 million program at UCSF and UC Berkeley to create a master's degree in translational medicine.

Currently, the California stem cell agency is acutely aware of the need to at least partially fulfill the promises of the 2004 ballot campaign that led to its creation. It has a new chairman, Jonathan Thomas, who is focusing on closer ties to industry in hopes that faster progress can be made. It is altering its grant review review process on its big-ticket rounds in hopes of generating better results. That includes its disease team rounds, which are designed to bring together a broad array of expertise in hopes of moving into clinical trials more quickly.

Grove's proposals are wide-ranging, including changes at the federal level, and not all possible to implement in a short timeframe. But fresh and innovative thinking is what any organization should be seeking. Grove's suggestions could well be of major benefit to California's unique experiment in stem cell research.

Some in the medical research establishment do not take kindly to Grove's suggestions. One writer a few years ago titled his commentary on the former CEO's proposals "Rich, Famous, Smart and Wrong." But clearly not all is well with the progress of drug development.

We do know that Grove, who had prostate cancer and has Parkinson's, is not going to drop his effort any time soon. Today, the latest edition of Science magazine published an article by Grove in which he makes specific recommendations for changes in the Byzantine clinical trial system. Fifty billion dollars a year for biomedical research to produce only 20 new drugs is not good enough. Grove is also to be a keynote speaker at next month's World Stem Cell Summit in Pasadena. The title of his speech? 
"Translational Medicine: Key to Progress or Bridge to Nowhere?"

(An earlier version of this item said that Science would publish the Grove piece tomorrow. The piece is behind a pay wall. If you would like a copy of it, please email a request to me at djensen@californiastemcellreport.com.)

Here is a copy of the slides that Grove used in his presentation at UCSF.

Andy Grove's Slides on Translational Medicine

CIRM Directors Probe New Directions for Stem Cell Agency

Directors of the California stem cell agency have just finished hearing the formal presentation of the report from the blue-ribbon review panel that recommended a strong push towards developing therapies and engaging the biotech industry, which has complained about its treatment by CIRM.

The directors took a short break and are scheduled to reconvene shortly. Some members of the public are expected to present statements.

CIRM directors this morning questioned the panel about engaging industry, improving communications  and proposals by the panel to reach out to find research any place in the world that could lead to therapies. Board members indicated that sort of "proactive" effort could be difficult given that CIRM funding is restricted to California. Review panelists said various kinds of collaborative efforts could be used without running afoul of the funding restrictions.

On relations with the biotechindustry, Alan Bernstein, head of HIV Global Vaccine Enterprise of New York and chairman of the review panel, said the group had "heard a lot of things from industry about things not working." He said,

"CIRM's management has to start talking with industry in a meaningful two-way dialogue."

CIRM Director Leeza Gibbons, a Hollywood entertainment figure and patient advocate, had a suggestion on improving recognition of CIRM among the California public. "We all want and need heroes," she said. Creating emotional connections is the way to win the hearts of the people, she said.

During its three-day review in October, members of the panel had wondered why the stem cell agency attracted so little attention in the mainstream media in California, a problem that relates as much, if not more,  to the nature of the state of the media as it does to CIRM.

Bernstein said greater use of patient advocates was important in communicating with the public, a suggestion that dovetailed into Gibbons' comment.

The panel reiterated its recommendation that the board should focus on strategic matters and clarify the conflicting roles of chairman and president, a longstanding problem created by the language of Prop. 71. 

Scientist George Daley of Harvard, one of the review panel members, said, "CIRM is in unique position" in the world "...because it has a bully pulpit, because it has tremendous influence."
He suggested that CIRM might want to assemble a "rapid strike force" to review outstanding research opportunities in the world to figure out how California can play a role.

Alan Lewis Joins CIRM as VP for Research and Development

The California stem cell agency today confirmed that that Alan Lewis, formerly of head of Novocell and the Juvenile Diabetes Research Foundation, will be joining its small band in in San Francisco.

Lewis was named interim vice president for research and development. He will be working two to three days a week and focus on  “identifying strategic opportunities and developing action plans to fulfill the mission of the Institute.”

In the CIRM news release, Patricia Olson, executive director of scientific activities for CIRM, said,

“His many years of experience in developing therapies for patient benefit in both for-profit and non-profit organizations will be valuable to CIRM as we expand our program to include clinical projects.”

The announcement from CIRM said Lewis will take direction from President Alan Trounson and Olson.

Trounson, who has been seeking to fill the VP slot for about a year, was not quoted in the release nor was CIRM Chairman Robert Klein.

CIRM did not immediately disclose Lewis' compensation. The VP position has a salary range that tops at $332,000. The news release did not say whether Lewis would be an employee or an outside contractor. However, a CIRM insider told us he would be a contractor. The agency is heavily reliant on outside contractors because it is limited by law to 50 staffers. Currently it has about 45 employees.

Lewis' old firm, now known as ViaCyte, has $26.3 million in awards from CIRM.

The California Stem Cell Report first reported Lewis' link-up with CIRM on Monday.