LA Times Column Rips CIRM as Riddled with Conflicts and Sucking Up Precious Dollars

The first sentence in the article in the Los Angeles Times, California's largest circulation newspaper (1.2 million readers), says,

"In the annals of wrongheaded things done with the best intentions, the California stem cell program has always been in a category of its own."

And that's just the beginning. Next come rife conflicts of interest, spotty public disclosure, a "persistent ethical morass" and a multiplying potential for waste. Not to mention the 2004 ballot initiative that created CIRM through a political campaign of "exceptional intellectual dishonesty," led by the man who is now chairman of the $6 billion research program, Robert Klein (see photo).

The scathing piece was written by Times columnist Michael Hiltzik for Monday's edition of the Times, which says it has 1.2 million daily, generally well-educated readers. The home page of Times website, which has more than 11 million unique visitors a month, also linked to the article.

The activities of the California stem cell agency have rarely graced the pages of the Times. So CIRM is likely to be new subject to many, if not most of its readers, making it easier for a column such as Hiltzik's to have a significant, opinion-shaping impact.

Hiltzik makes his point of view abundantly clear. He writes that CIRM "threatens to suck up precious fiscal resources of a state with none to spare and is rife with conflicts of interest."

He continues,

"The institute is tangled in a persistent ethical morass. From the start, its safeguards against conflicts of interest by members of its 29-person governing board were sketchy, and provisions for vigorous debate over its goals and methods were nil."

Hiltzik says CIRM director John Reed should have been ousted from the board for attempting to overturn rejection of a grant to the organization he heads, the Burnham Institute. Hiltzik quotes figures from the California Stem Cell Report that show 18 institutions with representatives on the board (past and present) have received $552 million in CIRM grants as of last October.

Hiltzik writes,

"Lacking any truly independent members, the board is dominated by Klein and devoid of 'genuine debate,' observes UC Berkeley Law professor Kenneth Taymor, who spent months studying the body. Indeed, reading transcripts of the board's sessions, one sometimes gets the impression that the only vigorous debate among the members involves which historical figure Klein more resembles, Albert Schweitzer or Mahatma Gandhi."

Hiltzik also discusses the ongoing shift at CIRM towards product development. He quotes Arnold Kriegstein of UC San Francisco as saying he fears the move is motived by a "desire to come up with a real clinical triumph they could claim credit for. I'm concerned that in the rush to get there they may be spending a fair amount of funds on projects that are just not ready yet."

There is much more, including a defense of CIRM's strategy by its chief scientific officer Marie Csete.

Hiltzik's observations cannot be written off as the frothings of a journalistic lightweight. The author of three nonfiction books, he shared a Pulitzer Prize in 1999 for reporting on corruption in the entertainment industry. In 2004, he won a Gerald Loeb Award, one of the top national honors in financial journalism, for his columns. Earlier this month, he was a co-winner of another national business reporting prize for a Los Angeles Times series called "Shedding Risk."

It is safe to say that Hiltzik's latest column will not be warmly received by CIRM. It will add fuel to the state's Little Hoover Commission's investigation of CIRM. It will feed legislative efforts to ensure that Californians have affordable access to stem cell therapies that result from CIRM-funded research. And it will hamper both Klein's efforts to privately market state bonds to bail out CIRM and his lobbying efforts for a $10 billion federal, biotech stimulus package.

(Editor's note: What do you think about the Hiltzik column? You can make your comments by clicking on the word "comment" below. The comments are unmoderated and can be totally anonymous. Google, which houses this blog, makes it impossible to identify the authors in such a case. Or you can send your comments to djensen@californiastemcellreport.com for posting.)

More Info for This Week's CIRM Board Meeting

The California stem cell agency today posted additional information for its board of directors meeting this Thursday and Friday, including fresh links to the underwriting plan for its $500 million biotech lending program.

We previously linked to that information but it is now on the official agenda for the sessions in Burlingame. Yet to come is the revised loan administration policy.

Also posted are the names and bios of proposed new alternate grant reviewers: Charles Cox of the University of Texas in Houston, John Rasko of the University of Sydney stem cell program and Peter Zandstra of the stem cell bioengineering program at the University of Toronto.

Another offsite teleconference location for Friday has been added beside the one in Colorado. The latest one is at or near UCLA in Los Angeles. Addresses can be found on the agenda.

Fresh Details on $500 Million Biotech Loan Plan and Underwriting

For those of you looking for more information on the California state plans to start a $500 million loan program for the biotech industry, you can find the latest details stuck away in the Internet archives of the state's stem cell agency.

The biotech loan program and a proposal to hire a delegated underwriter to run it will come up at next Friday's CIRM board meeting in Burlingame, Ca., with an off-site, teleconference location in Broomfield, Co.

No significant information is available via the agenda for the board meeting, but eight documents related to the loan proposal can be found. They were posted on Wednesday just hours before the meeting of the Finance Subcommittee at which they were to be considered. The dilatory posting, a perennial problem at CIRM, basically denied the public or interested parties the ability to make any sort of thoughtful comment at the Wednesday session.

Following the meeting, the documents could only be found shunted off to the archives, five layers down from the home page. That's because the agency generally, but not always, moves agendas for past meetings to its archive site. At some point, CIRM may move the links to the documents to the agenda for the board meeting, three layers down from the CIRM home page.

We asked Don Gibbons, chief communications officer for CIRM, what action was taken on the biotech loan documents. Here is the verbatim text of his reply:

"passed a motion to recommend the LAP to the board as is with the provision that council work with Roth, Goldberg and Penhoet between now and the meeting to refine language on page 9 (redline version) related to loan repayment when project is abandoned."

LAP refers to the loan adminstration policy.

We have not had a chance to digest all the information contained in the eight documents, but wanted to let interested parties know where they could be found. One document came from Silicon Valley Bank and another from Orix Venture Finance in response to a CIRM request for information on structuring the underwriting program.

The Silicon Valley document consisted of only a PowerPoint presentation, apparently a duplicate of one made last year to a panel of CIRM directors. Previously, however, the Silicon Valley presentation was not available via the CIRM website.

Other documents include various versions of the loan administration policy.


(If you have thoughts on any of these issues, you can comment by clicking on the word "comment" below. Anonymous comments are permitted. Or you can write CIRM directly via its web site and ask to have your comments made part of the public comment allowed at each CIRM board meeting.)

$500 Million CIRM Lending Program Up on Wednesday; Details Missing

With only two business days left before a key CIRM meeting, California's stem cell research agency is keeping under wraps important details of how it plans to lend $500 million to the state's riskiest biotech ventures and make $100 million doing so.

Directors of the agency have approved the concept for what amounts to a biotech bank that would cater to enterprises that cannot gain normal financing. Loan default rates of up to 50 percent have been predicted by the plan's backers. The specifics, however, remain to be resolved. On Wednesday, the directors' Finance Subcommittee will dive into that complex subject.

Just what is being proposed at that session is not available to the public on CIRM's web site – only this cryptic language from the agenda:

"Consideration of policies and implementation plan/processes for CIRM loan program, including but not limited to the Loan Administration Policy and the role of delegated underwriters/financial service providers."

The lending program is the brainchild of CIRM Chairman Robert Klein, who has been pushing it for more than a year. The idea behind it is to help to provide funding for companies through what is known as a financial "valley of death" and to generate additional funds (the $100 million profit) for CIRM to use as additional loans or grants.

The closest thing to a current, basic, one-stop overview of the lending program is the proposal approved by CIRM directors in September. No business plan for the enterprise has been produced.

The biotech bank program calls for delegated underwriting of the loans, a practice much criticized at Fannie Mae, which had to be taken over by the federal government. CIRM does not have the expertise to run a half-billion dollar lending program, so an outside contractor must be hired. An earlier draft of a "concept plan" for underwriting was discussed Nov. 19, 2008, at a Finance Subcommittee meeting. It is not clear whether an identical plan will be offered on Wednesday.

Also discussed in November was a 12-page loan administration policy for loans to businesses. Directors made a number of suggestions for changes in it. The version to be considered on Wednesday is not available to the public on the CIRM web site.

Only two companies offered comments on the plans at the November meeting, International Stem Cell of Oceanside, Ca., and DNAmicroarray of San Diego. Both expressed general support of what they heard although they had some criticism of details.

Earlier this month, CIRM posted a request for information concerning the criteria and compensation for an underwriter, including provisions for dealing with conflicts of interest. According to CIRM, only one business responded, Silicon Valley Bank of Santa Clara, Ca., which has been involved in CIRM discussions about the lending program for months. CIRM expects to have more than one underwriter in order to avoid possible conflicts of interest.

In response to a question, CIRM spokesman Don Gibbons said last Thursday,

"We are also in discussion with a few other institutions and hope to have comments from them prior to the Finance committee meeting."

Gibbons has not yet responded to a request for the names of those companies.

Silicon Valley Bank and its parent group, SVB Financial Group, have 27 offices worldwide and 11,000 clients, according to its web site. The bank says that "more than half of all venture-backed companies in the U.S. are SVB clients."

The bank says,

"With an unmatched network of relationships with life science VCs and a dedicated team of life science experts, we are the partner of choice for emerging and established medical device and biotech companies."

SVB presented a plan to the Finance Subcommittee in September that laid out a possible business relationship with CIRM. Directors discussed the possibility of having a similar presentation at a full board meeting but were concerned about leaving the appearance that a decision had been made to go with Silicon Valley Bank. They suggested that if the bank's slides were used that its name be removed from them. It is not clear whether such a presentation will be made at Wednesday's meeting or at the full board meeting later this month.

Teleconference locations (two in San Francisco, one each in La Jolla, Berkeley, San Carlos, Palo Alto and Irvine) where the public can participate in the Wednesday meeting can be found on the meeting agenda.

CIRM's Financial Status, $500 Million Lending Program on the Table

Directors of the California stem cell agency next week will discuss how to run its ambitious and novel $500 million plan to lend money to the state's riskiest biotech ventures as well as the agency's own finances in the light of the Golden State's budget crisis.

The meeting of the Finance Subcommittee is scheduled for Jan. 21 at eight teleconference locations throughout the state. Businesses and others interested in the biotech loan effort should not miss the session.

Also on tap are plans to ask the Obama administration for loan guarantees that would, according to CIRM Chairman Robert Klein, enable CIRM to double its lending program to $1 billion.

No details are yet available on the agenda posted by CIRM on its web site.

Here is the information currently provided on the matters to be discussed:

"Consideration of policies and implementation plan/processes for CIRM loan program, including but not limited to the Loan Administration Policy and the role of delegated underwriters/financial service providers.

"Consideration of Stimulus Program topics

"Update on challenges of state finances and the impact on agency bond issues"

(Stimulus program topics are expected to include the loan guarantees.)

The loan program would target enterprises that cannot get normal financing because of their risk. Default rates are projected as high as 50 percent, but a $100 million "profit" is also expected. The excess is expected to be used for additional grants or loans.

Action taken at next week's meeting is likely to go before the full board of directors at its meeting on Jan. 29 in San Francisco.

The teleconference locations are in San Francisco(2), Menlo Park, La Jolla, Berkeley, Hillsborough, Irvine and Palo Alto. Specific addresses can be found on the agenda.

CIRM's $500 Million Loan Program: Lucrative Contract Looms

The California stem cell agency is seeking advice on its plan to have an outside contractor run a $500 million biotech lending program, and Friday is the deadline.

The information will play a key role in creating a potentially lucrative contract to administer the seven- to 10-year program for the $3 billion agency.

Banks, delegated underwriters and other financial service providers with an interest would be well-advised to weigh in with suggestions. The "request for information," however, is not limited to potential bidders but also solicits comments from "others with relevant experience or information."

CIRM is seeking information concerning the scope of services, models for relationships between "financial services providers/delegated underwriters" and CIRM, compensation structure and conflicts of interests.

CIRM is considering three possible models for the contractor:

"...a delegated underwriter model (delegated underwriter advances its own funds with CIRM guarantee), a hybrid model (delegated underwriter advances its own funds, but CIRM provides cash as collateral), and a fee for services model (CIRM originates loan and advances funds and pays financial services provider a fee for services)."

The stem cell agency states that its staff

"...does not have the internal expertise or capacity to manage all of the financial components of a loan program. CIRM therefore plans to externalize these tasks while maintaining ultimate control over the loan program. To ensure that CIRM obtains this expertise at the best value to California taxpayers, CIRM plans to issue a request for proposals to select two to three financial services providers/delegated underwriters. Because this is a start-up program, it is important to have at least two delegated underwriters at the outset. This would permit CIRM to learn from their different approaches and to refine our best practices. Furthermore, it would permit CIRM to transfer future transactions to another delegated underwriter if the relationship with one of the contractors is unsuccessful."

In February, CIRM plans to seek bids from potential contractors. The loan program is scheduled to begin this spring.

Differing Views on the Future of the Stem Cell Industry

The headline in the San Francisco Chronicle this morning read: "Drastic cuts among some biotech companies."

But just the day before, the Chronicle reported that "many in the stem cell field have a buoyant air these days."

The Chronicle is not alone in posing apparently contradictory views. Monya Baker carried links to some on her Nature magazine blog, The Niche. And here is the "good news" version of the stem cell biz from Midwest: "Why stem cell companies in Wisconsin and beyond will finally catch the eye of investors."

A couple of things are at work here. One is the optimism spurred by the Obama administration and its plans to ease restrictions on human embryonic stem cell research. A superficial assessment of that move generates an unrealistic, but rosy outlook for the stem cell business. The other factor involves the perennial optimism of the entrepreneur. They are a class given to always seeing the glass as half-full. What better time to invest in stem cells? Values are down. Bargains are waiting to be snatched up.

Indeed, financial bottom-feeders with strong stomachs and patience may do well. But the financial vulture business is tough. All the bad economic news has not yet sifted out. Realistically, it would seem to be a good time to be cautious about the prospects of any individual stem cell company.

We all should remember as well that the history of the biotech industry is littered with far more money-losing enterprises than successes.

An Unseemly Bid for Federal Help

California is running out of cash, and its governor has just called lawmakers kindergärtners.

That's in Sacramento, where government leaders have failed to deal with a $28 billion budget shortfall, and the state has cancelled bond sales.

In Washington, the win-at-any-cost battle against a possible economic depression is now running around $8.5 trillion, including loan guarantees.

In San Francisco, however, at the headquarters of the $3 billion California stem cell agency, all is financially well. The agency is assured of a constant stream of cash that cannot be touched by the governor or lawmakers, courtesy of the voters in 2004.

But CIRM Chairman Robert Klein wants more – specifically loan guarantees from the federal government for his proposed $500 milliion biotech bank. With guarantees, it could double in size, he believes, and help struggling biotech firms.

Klein will make his pitch to CIRM directors on Monday, seeking their support for an effort to convince the Obama administration to provide the financial assurances for the CIRM program. Certainly, a good case can be made to help out stem cell firms, which have had a hard time attracting cash. And since money is flying around in Washington, why not try to grab a few bucks. Everybody else is doing it.

But the question is whether it is appropriate? Do CIRM directors really want to put their hands out for help while the poor and elderly in California are seeing their government assistance cut? On the surface, it does appears a bit unseemly.

Klein: Federal Backing Could Lead to $1 Billion CIRM Loan Effort

Chairman Robert Klein of the California stem cell agency is proposing that the Obama administration provide loan guarantees that he projects would allow the Golden State to mount an ambitious $1 billion lending program for the biotech industry.

He broached the proposal at a Nov. 19 meeting of the Finance Subcommittee of the CIRM board of directors and plans to bring it up at a special teleconference meeting of the full board on Monday.

Klein's plan would double the size of the proposed $500 million CIRM loan program that is his brainchild. The board of directors is yet to sign off on details of the plan, which have not yet been fully worked out.

The $3 billion state stem cell agency itself has no apparent financial problems, although the state is in the midst of a $28 billion budget crisis. The voter-approved law that created the agency guarantees a steady stream of cash that cannot be touched by either the governor or the legislature. But Klein believes that the federal guarantees would help the lending effort.

At the Finance Subcommittee meeting earlier this month, Klein noted the trillion-dollar bailout figures floating around in the nation's capital. According to the transcript, he said,

"In terms of our financial interest, the loan guarantees that are being considered for a number of sectors of the economy could include the biotech sector.

"And here, if there were a 50-percent loan guarantee provision for governmental loan biotech programs, it would mean that if we had allocated conceptually, and only conceptually, because it's subject to approval of every loan at that time at the board level, but if we conceptually approved a $500 million allocation for a loan program and there were a government program for 50-percent guarantee, we'd have the possibility, subject to a lot of detailed work and legal review, to create a billion dollar program with that. So it would substantially expand our capacity for funding."

Klein brought up the proposal to seek "early input" from CIRM board members. However, the Finance Subcommittee ran out of time and adjourned without discussing the matter. He asked board members and the biotech community to send comments to him.

Klein is also seeking to lobby the Obama administration on other biotech industry matters. They include removing unspecified small business loan restrictions, expanding the FDA staff and substantially increasing funding for NIH grants.

On the restriction issue, he said,

"I believe it would be beneficial if some of those restrictions were changed to make it more possible for companies that have received venture capital funding in the past to get SBIC (Small Business Investment Corporation) loans because with falling stock prices, doing another round of stock offerings is not feasible unless you're going to hedge funds, which are extraordinarily difficult to deal with and create tremendous pressure on these small companies to the extent hedge fund money is available at all."

Klein said a substantial increase in FDA staff is needed to avoid a "choke point" on moving stem cell therapies into the clinic. He said,

"Everyone is going to need expert advice on exactly what kind of data and what kind of preclinical work is going to be required for an IND to be approved for a phase I human trial. That advice is required three years or more in advance because this is an innovative area. And so it's going to be an early priority with a lot of lead-time importance to get FDA expansion that can deal with cellular therapies as they advance."

CIRM has not yet provided written background on Klein's proposal on its Monday agenda, which also includes a plan to help ease the problem of absenteeism at board of directors meetings.

The public can listen in and participate during the teleconference meeting from locations in San Francisco (2), Los Angeles (5), La Jolla (3), Elk Grove, Sacramento, Pleasanton, Berkeley, Menlo Park, Healdsburg, San Carlos, San Diego, Irvine (2) and Duarte. You can find the specific addresses on the agenda.

$500 Million Biotech Loan Program Comes Up Next Week

Some of the nitty-gritty of CIRM's proposed $500 million biotech loan program is scheduled to be revealed next week – a matter that may be a matter of great interest for financially starving stem cell companies.

So far, all we have are cryptic agenda items, but more information may be forthcoming, hopefully in time for interested parties to give them a serious look well ahead of next Wednesday's meeting of the CIRM Finance Committee.

Here is what is on the table next week:

"Consideration of policies and implementation plan/processes for CIRM loan program.
"Consideration of Loan Advance Program for approval of grants and loans."

We have yet to see a genuine business plan for the biotech lending proposal. And it is certainly a business and a risky one. Instead information has dribbled out over the last year or so, mostly becoming public only a day or two before the public meetings at which the proposal is to be discussed. One would hope that at some point CIRM Chairman Robert Klein, who originated the proposal, would put together a presentation of the sort that entrepreneurs typically submit to lenders and others when they are seeking cash for a start-up.

For the latest iteration of the biotech loan program, see four documents from the September CIRM board meeting and the transcript of the session. Mike Goldberg, a venture capitalist and chair of the Finance Committee, gave a lucid explanation of the proposal, although it was interrupted intermittently.

Next week's hearing is the last stop before the loan program goes to the full CIRM board for approval.

Also on the committee's agenda next week is the following item:

"Consideration of California requests to the US Presidential Transition team for CIRM programs and for general biotech community financial support programs."

Economic Woes: California, the Stem Cell Biz and CIRM

In a story that circulated today nationally and perhaps internationally, The Associated Press has painted a bleak picture for the stem cell industry despite the election of a president who is a friend of the cause.

The news came on top of the even more unpleasant news that California is facing a $28 billion budget shortfall. The state's leaders are now in a position of holding out a tin cup to the federal government, enviously eying the $700 billion bailout for the private sector.

California Assembly Speaker Karen Bass, the state's second most powerful elected official, did not exactly say, "Please, sir, can I have some," but her words were close.

All this as the $3 billion California stem cell agency, which is constitutionally protected from budget woes, is looking to hand out tens of millions of more dollars in December and create a $500 million "bank," financed at taxpayer expense, to help struggling biotech companies. All of which may be good, but could lead to a ticklish image problem.

What the PR and policy problem boils down to is this: The state slashes medical assistance to the poorest Californians while millions and millions flow unfettered to CIRM-funded researchers.

First, the news from Associated Press reporter Matthew Perrone, writing out of Washington, D.C., He said that despite the election of a friendly president,

"Experts say struggling stem cell developers will face a new, equally daunting obstacle: an investment climate devastated by the financial crisis."

Perrone quoted WBB Securities analyst Stephen Brozak as saying,

"The good news is there will finally be freedom to operate, the bad news is there will be no more venture capital, which is the real freedom."

The AP story also said that investment in early stage stem cell companies was slumping even before this fall's financial meltdown.

"Venture capital investment in biotech startups — which includes stem cell developers — has fallen more than 65 percent to $443 million in the most recent quarter, from a high of $1.3 billion in late 1999."

According to Perrone, analyst Bill Tanner of Leerink Swann was even more pessimistic on hESC companies. Tanner said,

"Even if one of these companies was going to be successful, I doubt you'd have a new embryonic stem cell product on the market in the next 20 years."

The AP story appeared as California's Legislative Analyst posted a new estimate of California's budget shortfall -- $28 billion over the next 20 months. One recommendation from the analyst was for no new state borrowing, which could strike at CIRM's revenue source, California state bonds. Even before the new figure was released, State Treasurer Bill Lockyer said that the state will not be able to issue new bonds until 2009 because investors want to see how the state copes with its financial crisis.

The fiscal mess is so bad that Jim Sanders of The Sacramento Bee quoted Assembly Speaker Bass as saying "can we have $5 or $6 (billion?)" from the federal government.

The state's stem cell agency is all but immune from the California crisis because Prop. 71 locked in its funding sources and made it impossible for the governor or the legislature to cut its budget. However, if Lockyer refuses to issue bonds well into 2009, CIRM funding might hit a hard spot.

It is not clear what CIRM's current financial status is, although its chairman, Robert Klein, told directors on Sept. 25 that CIRM's cash situation at that point guaranteed "that this critical work to reduce human suffering and advance medical science is able to move forward."

He continued,

"The scientists and clinicians and patients counting on our progress need not be concerned about our work being interrupted."

Klein said that earlier this year he anticipated a troubled bond market and arranged for money from the state's "pooled money investment fund" that should be sufficient until late spring. But he noted,

"Maybe I should have drawn down three years of money."

There is no doubt that research cannot be done without a reliable source of funding. Nonetheless, CIRM must carefully consider how its operations, with salary ranges that exceed $500,000 annually and huge outside contracts, may be perceived by the public or elected officials. It is a time to tread with great care.

As for the $500 million biotech loan program, one could argue that it is needed now more than ever. At the same time, some might look askance at lending taxpayer funds to extremely risky ventures – ones that could not even find financing under the best of circumstances – while Californians who can least afford it will see health care, education and other vital services slashed.

The lending program will not make the slightest dent in the state's economic travails. As we have noted before, CIRM's activities currently have an infinitesimal, immediate impact on California jobs and businesses. CIRM's annual giveaway does not even exceed the $356 million budgeted for a new "condemned inmate complex" at San Quentin prison. That said, the lending program, which is yet to be fully explained, could well be a good idea.

We will know more after Nov. 19 when the CIRM Finance Committee will discuss it in greater depth.

Potholes in Freeways vs. Therapies in the Clinic

"Where are the cures?" is the headline on the piece in the Nov. 10 issue of Newsweek.

The article by science columnist Sharon Begley virtually cried out for a sidebar on California.

Begley wrote about the "valley of death," translational research and the need for industrial skills that can make the production of stem cell therapies economic.

She quoted Hans Kierstead of UC Irvine, mentioned Geron of Menlo Park, Ca., as well as a proposal to create a "center for cures" at the NIH. Along the way, she noted that scientists involved in basic research are wary of the "center" proposal – a feeling that has surfaced indirectly at the California stem cell agency.

But Begley said:

"The existence of such a center would free scientists to go back to making important discoveries, not figuring out large-scale pipetting, for goodness' sake."

All of what Begley wrote about is on the $3 billion plate at the California stem cell agency. And some of the CIRM actions are coming quite soon. The "valley of death," for example, is scheduled to be dealt with next month through a $500 million lending program. Waiting for action from the new presidential administration is not good enough for CIRM Chairman Robert Klein and company.

As Begley concluded:

"There is lots of talk these days about increasing the nation's spending on infrastructure, such as roads and bridges, to lift the economy out of its doldrums. Me, I'd be willing to put up with potholes in exchange for a new administration spending serious money to take the discoveries taxpayers have paid for and turn them into cures."

CIRM Directors Approve Biotech Loan Policy

Directors of the California stem cell agency Thursday gave the go-ahead to an outline of a far-reaching, $500 million biotech loan program, but many details remain to be worked out.

In apparently the only news story on the subject, Terri Somers of the San Diego Union-Tribune reported this morning:

"Biotechnology companies are expected to rush for the funding because most are perpetually hunting for money from investors. Banks typically won't fund biotech companies because they have little to no revenue, little collateral and a high risk of failure."

She wrote,

"'I am very excited,' said Babak Esmaeli-Azad, chief executive of San Diego-based DNAmicroarray, which is working on stem cell therapies. 'It's a step in the right direction.'

"Stem cell therapies are expected to come to market through companies, not research institutes. The institutes have very little capacity and experience in clinical trials or the process of turning a successful scientific experiment into a pill or injection that might eventually make it to market."

Somers said that companies have become "restless and skeptical" regarding funding from CIRM.

"'We've been waiting for a turning point for (the institute) to become very friendly and accessible by the corporations,' Esmaeli-Azad said. 'This may be that turning point.'"

Under the terms of what was approved by CIRM directors Thursday, Somers said there will be two types of loans:

"One will require the company to pay back the money no matter what happens, including failure of the product or company.

"The second does not require the company to pay the money back unless it has sufficient revenue. This type of loan would have a higher interest rate and give an equity stake to the state, which it would cash out if the product is successful."

The stem cell agency also issued a press release on the biotech loan program. It said that directors had approved a "program" and a "policy" for biotech loans. The news release declared that it was "an integral part of CIRM’s effort to strengthen California’s biotechnology industry and create collateral economic benefits such as high-paying jobs and increased tax revenues."

Somers reported that CIRM plans to "to add further detail to the policy as it receives comments and advice from industry executives, finance experts and the public." One of the key questions involves the use of delegated underwriting a la Fannie Mae as well as administration of the loan program, not to mention conflict of interest issues.

Earlier CIRM said that the plan would not be in place until December, when directors were expected to take final action. An additional hearing on the plan had been announced within the next 60 days by the CIRM Finance Subcommittee.

More Info Emerges on CIRM Biotech Loan Effort

The California stem cell agency has posted important details of its proposed $500 million biotech loan program, including the size of loans and information on possible interest rates.

The agency is considering $200 million in loans for the disease team grants that are scheduled for 2009 with individual loans exceeding $25 million. More details are also available on the delegated-underwriting proposal that CIRM is borrowing from Fannie Mae.

The "loan program overview" can be found here and loan portfolio information can be found here.

In addition to consideration at tomorrow's directors meeting in San Diego, the CIRM Finance Subcommittee will hold a hearing on the program within the next 60 days. It is scheduled to be approved by directors in December.

CIRM Spending Plans, More Details on Biotech Loans and Delegated Underwriting,

Directors of California's $3 billion stem cell research agency meet this Thursday to finish up work on its faculty grant program, deal with a proposed $500 million biotech loan program and act on a new plan to handle requests for reconsideration from rejected applicants.

The board will also discuss just how much cash is currently available for grants. A CIRM document shows that currently the agency has committed $1 billion through June 2009 and only has $1.9 billion left to give away. Its plan now calls for the research funding effort to continue through the first half of 2017.

The CIRM document also appears to project a $510 million "profit" from its biotech loan plan. CIRM plans to plow back the "profit" into more grants or loans. The agency has said defaults could be as high as 50 percent in the loan program. It has yet to lay out in a straightforward manner how it can generate "profits" of $510 million with default rates of that magnitude.

The CIRM board will also discuss the "business review" plan for the biotech loan program. It proposes contracting with delegated underwriters, mentioning their use by Fannie Mae. The business review plan cites the Fannie Mae delegated underwriting system for multi-family housing as a success as compared to "recent problems" with the single-family program.

Not provided in the business review plan are details about how the underwriters would be selected(other than issuing an RFP), how they would be paid and what provisions would be in place to avoid conflicts-of-interest in what is a tiny financial world.

The compensation plan is important because if it gives an underwriter major incentives for qualifying businesses for loans, it could also be encouraging lax financial standards.

The biotech loan policy can be found here. Missing is background material on "loan portfolio policies."

Also on the agenda for San Diego are names for CIRM funded labs, a petition to designate a "covered stem cell line" as acceptably derived and a project to consolidate nonprofit and for-profit IP regulations. Discussion of the $210 million disease team RFA is also scheduled, a session not to be missed by those who plan to vie for the cash.

As of this writing, three days prior to the directors meeting, background material is available on their agenda on five of the 13 substantive, public items to be discussed.

Coinciding with the meeting is the first ever Stem Cell Awareness Day. In a news release, CIRM President Alan Trounson said the day, which involves his old employer, Monash University, in Australia, is designed to "inform a broad audience of patients, clinicians, students and the general public about some of the many advances in the field that California is helping to accelerate through CIRM funding.”

The day will include a Webcast from the CIRM meeting location in San Diego involving juvenile diabetes presentation but not of the directors meeting itself. A live, interactive online Q&A is scheduled for the afternoon with California research scientists taking questions.

CIRM will preview its new Web site offline at the directors meeting. The new site is expected to be available to the public in October. Other events are scheduled in California, including ground-breaking at UC Davis on its new stem cell lab, which is partially funded by CIRM, and the launch of a new, stem cell Web site at Stanford.

You can find a full rundown on the day's events here along with instructions on how to log on for the Internet activities.

Biotech Loan Proposal: Questions About Affordable Access

The proposal to create a massive biotech lending program – funded by the state of California – came under additional scrutiny at last month's meeting of the board of directors of the state's stem cell agency.

One director and an outside observer raised questions about the strength of the commitment to provide affordable access to any therapies resulting from the program, which could run $500 million or so. That figure and larger ones have been voiced by CIRM Chairman Robert Klein, who originated the loan plan concept. However, directors have yet to determine actual size of the program.. Klein also in August mentioned loans as large as $30 million but again directors have not yet set loan size ranges.

Those issues could likely come up at Saturday's meeting of the CIRM Finance Subcommittee.

In August, CIRM Director Duane Roth, chairman of the Biotech Loan Task Force, reviewed the program for his fellow directors, According to the transcript, he said the loans will target "funding gaps " where "there's virtually no alternative capital available to invest."

Roth, chairman and CEO of Alliance Pharmaceutical Corp., said,

"These are very, very open terms that no bank or no venture capitalist would offer....But that's part of fulfilling our mission, to fund those things that are very difficult and make it easy."

CIRM Director Jeff Sheehy, a communications director at UC San Francisco, raised questions about the strength of the "covenants" in the biotech proposal to provide affordable access to therapies.

He said,

"These are reasonable things to ask from industry if they're going to get our money."

Other directors, including Vice Chairman Ed Penhoet, assured Sheehy the commitment is genuine.

Penhoet, co-founder of Chiron, said the "covenants are real." He added,

"I certainly don't take what's in front of us here in the loan policy as (something) we're soft on."

John M. Simpson, stem cell project director of Consumer Watchdog of Santa Monica, Ca., also raised a cautionary note, based on CIRM letters to the Legislature concerning a measure (SB1565) aimed at ensuring affordable access. He noted that CIRM has repeatedly referred to the need for "flexibility" in requiring affordable access.

He said,

"The plea for flexibility comes across to me as, well, when push comes to shove, we're going to cave and give in to biotech."

Biotech Loan Information

Here are some links to information related to the CIRM biotech loan proposal.

Transcript of the Aug. 13, 2008, meeting of the CIRM board of directors.

Biotech loan policy document for Aug. 13, 2008, directors meeting.

Biotech terms and policy May 6, 2008, version

PriceWaterhouseCoopers report-(three parts)
Benchmarking analysis
Loan financial model
Loan model scenarios

Transcripts of the Biotech Loan Task Force

Transcript of Finance Subcommittee June 19, 2008, which dealt with size of loans and possible conflicts of interest

Agendas of the Biotech Loan Task Force
The agendas have links to additional documents dealing with the plan.

Biotech Loan Plan Up Again on Saturday

Followers of the biotech loan proposal from the California stem cell agency will have a another chance later this week to make suggestions and hear the latest permutations in the $500 million or so effort.

The CIRM directors' Finance Subcommittee canceled last week's hearing and rescheduled it for this Saturday. The agenda remains the same as we discussed earlier. And there is still no further explanation of the cryptic topics on the agenda.

As we mentioned previously, if you have something at stake in biotech loan program, now is the time to weigh in. It is likely to come up later this month at the directors' meeting, but that is a less propitious venue for making an impact. Teleconference locations are available in Northern and Southern California.

Big Money Issues Come Up Next Week at CIRM

A key panel of directors of the California stem cell agency next week will tackle three hefty financial topics, ranging from its proposed $500 million biotech loan program to the amount of money available for grants and loans.

No details of what is to be considered are yet available on the CIRM website for the Sept. 12 meeting of the Finance Subcommittee. But here is the text of the three items to be considered: "Consideration of portfolio policies for CIRM Loan Program," "Consideration of business review processes for CIRM Loan Program" and "Informational presentation on CIRM program budget and funds available for research grants and loans."

The meeting will take place at CIRM headquarters in San Francisco with teleconference locations in Menlo Park, La Jolla, Irvine and Berkeley.

If you have any interest in the biotech loan program, this is a meeting that you should attend at any of the locations(addresses on the agenda). Comments and suggestions can be made at the teleconference locations. If you have specific recommendations, send a letter as soon as possible to CIRM, explaining them and their rationale in detail.

The latest discussion of the biotech loan program can be found in the transcript of the August directors meeting.

Text of BioWorld Article on CIRM Loan Program

Here is the text of a piece on the CIRM biotech loan proposal that ran Aug. 7, 2008, in BioWorld Perspectives.

Red Flags Remain in Plan to Help Biotechs

By David Jensen
BioWorld Perspectives Contributing Writer

Editor's note: David Jensen is the publisher of the California Stem Cell Report and has written more than 1,700 items involving CIRM since 2005.

California wants to help biotech enterprises navigate through the industry's famed financial "valley of death" with a $500 million loan program.

It comes at a good time for the bio biz. Money is tight, but in the Golden State, one agency has $3 billion to spread around for research and clinical trials. The cash comes from the California Institute for Regenerative Medicine (CIRM), the state's unprecedented stem cell research funding organization.

It was created less than four years ago under Proposition 71, a California ballot initiative that surfaced in reaction to President George W. Bush's restrictions on human embryonic stem cell research. Using funds from California state bonds, CIRM has already handed out more than $554 million in grants. Today, the agency is the largest source in the world for funding for human embryonic stem cell research.

Biotech Loans and Controversy

But CIRM is not without controversy. Recently some disgruntled grant applicants have complained of unfairness in reviews. Some in the biotech industry object to CIRM's rules for sharing the wealth from any state-financed therapies. And there is at least one catch to CIRM's plans to loan $500 million to biotech firms. Recipients of the state's bounty are going to need a California connection — probably a fairly strong one — since state law says CIRM's cash must be spent generally in California. But it probably wouldn't be too hard for an enterprising business to accommodate those needs if it wants, let's say, a $25 million loan.

Policies for the biotech loan program are likely to get the go-ahead next week from CIRM's board of directors. The main reason for its expected approval is CIRM Chairman Robert Klein, a multimillionaire real estate investment banker who has served in his state stem cell role without pay since 2004. His real estate background has taught him the value of financial leverage, which is exactly what the loan program is about.

The loan effort is Klein's brainchild, conceived as a way to not only help biotech enterprises (both for-profit and nonprofit), but also to extend the life of the state's stem cell effort. It is limited by law to only 10 years of state bond funding and currently has no other source of income.

According to a PricewaterhouseCoopers report commissioned by the agency, Klein's plan could generate at least a $100 million profit, although state government delicately avoids the use of the word "profit." The earnings then could be channeled back into more grants and loans. With expectations that default rates could soar as high as 50 percent in some cases, that seems to be almost too good to be true. There are skeptics, but not many public ones.

Firms Found in the 'Valley of Death'

The reason for high defaults? The loan program would target firms that otherwise could not find financing because they are wallowing in the "valley of death," a loose term that describes the financially difficult period between grant and "angel" financing and funding from venture capitalists.

PricewaterhouseCoopers performed an analysis of the proposal based on assumptions provided by the agency. They included a $500 million portfolio, disbursed over a seven-year period, loans up to $5 million, interest rates ranging from prime plus 2 percent to 4 percent with possible warrant coverage from 10 percent to 100 percent. Pricewaterhouse concluded, "Total assets of the program could increase from $500 million to between $600 million and $1 billion over 10 years."

Klein, however, has indicated that changes are likely in those assumptions. During a May meeting of CIRM's Finance Subcommittee, he indicated larger loans should be given and other changes be made to improve the proposal.

"It may take a very significantly sized loan, even on a matching fund basis, for companies to get through the preclinical, Phase I, and Phase II and Phase IIb stage before private capital would be prepared to step in," he said.

Klein said he plans to bring in Ed Penhoet, vice chairman of CIRM, co-founder of Chiron Corp. and currently a venture capitalist, to beef up his call for hefty loans.

Reception of the loan program by industry has generally been favorable. But some have raised questions. Menlo Park, Calif.-based Geron Corp., for example, said the loan sizes initially assumed in the Pricewaterhouse analysis were too small.

Red Flags in an Innovative Plan

Other hurdles remain as well. The Consumer Watchdog group of Santa Monica, Calif., has expressed concern about potential conflicts of interest. The nonprofit advocacy organization cited the possible use of delegated underwriting. CIRM Director Duane Roth, as well, has raised a flag about potential conflicts involving underwriters. Klein had suggested the use of underwriters because of the small size of the CIRM staff (between 30 and 40 persons) and its lack of lending expertise.

At one point, Klein cited Fannie Mae as an example of how underwriting could be used with biotech loans. But given the recent financial news about the Federal National Mortgage Association, it seems unlikely he will mention that enterprise again.

CIRM's biotech loan plan seems innovative, filling an important need in the biotech industry. The plan, however, does involve a substantial risk of public funds that has not been fully explained in a straightforward manner. Given today's difficult economic times and unease about aggressive lending practices, a clear explanation is certainly in order. The public, California lawmakers and industry should understand how it is possible that CIRM can turn a profit with default rates as high as 50 percent and the risks involved.

CIRM is a young government department and should move with caution in order to maintain public trust. Major failures in a biotech loan program could damage CIRM's credibility and cast a pall over its other important activities, including grants, ethical research standards and intellectual property policies.

Notes:
Here are links to more information about the biotech proposal.
The California Stem Cell Report (search on the label "biotech loans"):
http://californiastemcellreport.blogspot.com
The California Institute for Regenerative Medicine:
www.cirm.ca.gov
PricewaterhouseCoopers report (in three parts):
Phase I (loan financial model): www.cirm.ca.gov/meetings/pdf/2008/050608_item_3a.pdf
Phase II – Gap Analysis, Capital Provider Feedback and Financial Model: www.cirm.ca.gov/meetings/pdf/2008/050608_item_3b.pdf
Phase III – Loan model scenarios: www.cirm.ca.gov/meetings/pdf/2008/050608_item_3c.pdf
Transcripts of the Biotech Loan Task Force: www.cirm.ca.gov/transcripts/default.asp
Agendas of the Biotech Loan Task Force: www.cirm.ca.gov/meetings/2008/default.asp
The agendas have links to multiple documents dealing with the plan.