Text of Irv Weissman's Comments Re Trounson Compensation

Stanford University stem cell researcher Irv Weissman has sent along the following comment in the wake of the publication of the Sept. 2, 2016, story concerning Alan Trounson's compensation from StemCells, Inc., a company co-founded by Weissman, who also served on its board of directors.

"I would like to correct some information that can be verified by CIRM officials and employees. I have known Alan Trounson for years before he came to CIRM both as a scientist and once on a fishing trip. After he got settled into his position at CIRM we met socially, and agreed to go on another fishing trip together. From that time forward he recused himself on all grants and CIRM related activities that involved either my lab or Stem Cells Inc. This was unfortunate for me, as there were times when he was the field expert and could have suggested appropriate reviewers, or mistakes in review, for grants coming from me at Stanford or Stem Cells, Inc. Although you mention the many successes we have had with CIRM grants, there were many more times when I failed to reach a funding score that was sufficient, sometimes with what I thought were inaccurate reviews,and sometimes with reviewers that I would have asked to be removed for conflicts outside of scientific expertise. I am happy to answer any questions on these issues for all grants on which I am a principal investigator, or as on the stem cell genomics grant, a participating but minor investigator who was the only person with purified stem and progenitor cells.

"I hope you dig into the actual current value of his or my stock, so that the public will know the real numbers. At least up to the wind-down of the company I believe I have never sold stock I hold, as I felt I always could have had information not generally available to the public, even when it was legal by SEC standards. In the early days of the company I contributed personal money to the company for stock so that the company could meet its payroll, and also I never sold those stocks. All of my SCI stocks are worth no more than and probably much less than 10% of that single contribution."

Alan Trounson, Former CEO of California Stem Cell Agency, Later Received $443,500 in Total Compensation from StemCells, Inc.

The Sacramento Bee this morning carried on its front page the following article about Alan Trounson and his relationship to StemCells, Inc. The piece was written by the producer of this blog. Following this item are the full texts of the comments made via email by Trounson and StemCells, Inc. (Irv Weissman of Stanford University submitted comments following the publication of this piece.) The complete text of comments from the state stem cell agency and Consumer Watchdog are contained within the article.
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By David Jensen
Special to The Bee

The former president of the $3 billion California stem cell agency received $443,500 in total compensation from the Bay Area stem cell company that appointed him to its board of directors only seven days after he left his state post.

The stock and cash were provided over a two-year period to Alan Trounson by Newark-based , a firm that was awarded more than $40 million in funding while Trounson headed the California Institute for Regenerative Medicine(CIRM), as the state stem cell agency is formally known.

Alan Trounson -- LATimes photo

StemCells Inc.

In 2014, when Trounson served less than six months on the StemCells, Inc.. board, his total compensation was more than double that of any other board member.

The surprise appointment of Trounson almost immediately after he left CIRM in 2014 generated allegations of conflict of interest. The size of Trounson’s total compensation, however, was not available at that time.

Conflict-of-interest allegations have dogged the agency since it was created in 2004 by California voters to use state bond proceeds to finance stem cell research.

In 2008, the respected scientific journal Nature warned about “cronyism” at the agency. In 2012, the Institute of Medicine, a division of the National Academies of Sciences, recommended in a $700,000 study commissioned by CIRM that the stem cell agency make sweeping changes to reduce the possibility of such conflicts.

Speaking about the agency’s board, Harold Shapiro, chairman of the Institute of Medicine team, told the Los Angeles Times,

“They make proposals to themselves, essentially, regarding what should be funded.”

The agency made some changes to deal with conflict questions but resisted the institute’s far-reaching proposals.

The latest news prompted John Simpson, who has followed the stem cell agency for Consumer Watchdog of Santa Monica, Ca., to say in an email,

 “Trounson’s joining the StemCells Inc. board a mere seven days after quitting as CIRM’s president at the time smacked of being a payback for a job well done on behalf of the company when he should have been looking out for the taxpayers’ money and interests. It was a blatant conflict that undermined the agency’s credibility. Now we know his price tag.”

In 2014, the stem cell agency said its “limited” investigation showed that no violation of law occurred. At the time, CIRM Chairman Jonathan Thomas described the issue as a “perception” problem.

The state’s Fair Political Practices Commission (FPPC) later investigated to determine whether Trounson “had made, participated in or influenced a governmental decision involving StemCells, Inc., after he began employment negotiations.”

A Feb. 6, 2015, letter to Trounson from the FPPC said there was “insufficient evidence to demonstrate” a legal violation.

Asked for comment, Robert Stern, the key author of the California Fair Political Practices Act and former president of the Center for Governmental Studies in Los Angeles, said in an email,

“It is an appearance problem when someone goes to work for a company that has benefited from huge contracts from the agency that he heads even if he had nothing to do with the decision to award the contract.”

The payments to Trounson were made in 2014 and 2015, according to Securities and Exchange Commission filings by StemCells, Inc. (See here and here.) The cash totaled $59,500 and the stock options totaled $384,000 for the two-year period. Trounson was appointed president of California’s stem cell agency in 2008. He was named to the StemCells, Inc., board July 7, 2014. The stock price has dropped precipitously since the award of Trounson’s stock options.

Last month, Trounson resigned from the StemCells, Inc.,  board as part of a deal in which the financially troubled firm was acquired by Microbot Medical Ltd. of Israel. StemCells Inc. said in an Aug. 15 SEC filing that the resignations of Trounson and Stanford University researcher Irv Weissman were not “the result any disagreement with the company on any matter.”

Irv Weissman, Stanford photo

Weissman was a co-founder of the company and also served on its scientific advisory board. Trounson served on the company’s strategic transactions committee.

Connections between Trounson and Weissman surfaced well before Trounson’s appointment to the StemCells, Inc., board. In 2013, a $40 million CIRM funding application round involving Weissman was postponed after it was disclosed that one of the application reviewers had a legal conflict of interest. The case involved Lee Hood of Washington state, who owns property in Montana with Weissman. Hood acknowledged the conflict of interest and resigned as a reviewer. Trounson helped to recruit Hood as a CIRM reviewer, the agency said.

In 2012, StemCells, Inc., was awarded $40 million in a single funding round, the only applicant ever to reach that level of success. One of the two $20 million awards was approved by the stem cell agency’s board despite being rejected twice by its grant reviewers. It is the only time that an application has been rejected twice by reviewers and then approved by the governing board. (See here.)

In 2013, the company declined one of the awards, which required a matching amount. In December 2014, the second $20 million award was terminated early because of poor results. That left StemCells, Inc., receiving a net of $9 million from the agency.

Trounson, a pioneering researcher in the field of in vitro fertilization, returned to his home in Australia after leaving the agency. Contacted by email, he said,

 “I was cleared by independent legal advice by CIRM and no conflict was found by a Californian government investigation. ... The share values are unknown – perhaps worth nothing. I actually pay monthly fees to hold them.”

Weissman, who has received $30.5 million from the agency, did not respond to a request for comment. (Following the publication of this piece, Weissman said in an email that some time after Trounson "got settled into his position" at the agency, "he recused himself on all grants and CIRM-related activities that involved either my lab or StemCells, Inc.")

The Trounson controversy surfaced shortly after C. Randall Mills was named to replace Trounson as president of CIRM. Mills then signed a pledge that he would not accept employment with any award recipient for at least a year after he leaves the agency. However, the agency did not set restrictions on future employment by other agency employees.

Asked for comment, Thomas, chairman of the agency since 2011, said in an email,

“Dr. Trounson’s financial involvement with StemCells Inc. occurred after his separation from CIRM in June of 2014, and we have not been in contact with him since. Two years later, CIRM is a very different and vastly improved organization – we’ve reduced the time it takes to review applications by 80 percent, recaptured $75 million from programs not meeting performance standards, and reinvested that money, doubling the number of clinical trials in our portfolio.

“In addition we are doing all this with the good governance, transparency and accountability the citizens of California deserve.”

The agency has about $800 million in uncommitted funds. It expects to run out of cash for new awards in 2020 unless it finds fresh sources of funding.

Text of Trounson Comments Re Compensation from StemCells, Inc.

Here is the text of Alan Trounson's email comments concerning the total compensation he received from StemCells, Inc., for service on its board. Trounson made the comments in response to an inquiry by the California Stem Cell Report regarding the matter and conflict of interest issues. The query did not involve reimbursement of travel expenses.

" I don't know what you think the conflict of interest is - I was cleared by independent legal advice by CIRM and no conflict was found by a Californian Government investigation. I was paid Directors fees and travel expenses to attend Board meetings. Do you expect me not to be reimbursed for travel and sitting as a Board Director? The share values are unknown - perhaps worth nothing. I actually pay monthly fees to hold them. I am no longer a Director of Stem Cells Inc and do not know what will happen to the shares. Stem Cells Inc has advised you the $ you quote for my reimbursement is inaccurate.
"Alan Trounson PhD
"Emeritus Professor"

The California Stem Cell Report followed up with an additional question regarding the matter and the state investigation. Trounson replied,

"Stem Cells Inc has told you exactly what I was paid and the state of the shareholding. You ought to do your own investigations into the Cal Government investigations and report like any reasonable journalist. The CIRM review was not 'limited' - external legal advice confirmed internal advice." 

Text of StemCells, Inc., Comments on Trounson Compensation

Here is the text of remarks from Ken Stratton, president of StemCells, Inc., concerning the $443,500 in total compensation from the company to Alan Trounson.

"As stated in our SEC filings, Dr. Trounson was paid total cash compensation of $59,550 for the years 2014 and 2015, consistent with board practice. He has also been provided stock awards which were to vest over time. Dr. Trounson currently owns fewer than 20,000 shares of our common stock and to my knowledge, he has never sold any of his shares. His unvested equity awards will not continue to vest now that he has resigned from the board in connection with the Microbot deal."

California's StemCells, Inc., Flatlines; A Look at the Implications

StemCells, Inc. stock price performance -- Google chart

Highlights
Layoffs, clinical trial closed
Conflicts of interest
Implications for CIRM
Risk and stem cell research
Twenty years ago, StemCells, Inc., was more than riding high. Its stock price (split adjusted) had skyrocketed to $2,160 in January of 1996. Its outlook was ebullient. But times have changed. Today the company's stock plummeted as low as 51 cents after it announced that it was closing its doors.

The company said yesterday that it is possible that its shareholders will wind up with nothing. Its 50 employees will lose their jobs this summer. And its latest clinical trial for spinal cord injury has been cancelled because the results do not merit spending any more money.

The company's sudden shutdown surprised and shocked some, but it also demonstrated the level of risk in stem cell research and offered implications for California's $3 billion stem cell agency, which is pushing aggressively to bring a stem cell therapy to market.

StemCells, Inc., was co-founded by two respected academic stem cell researchers, Irv Weissman of Stanford, and Fred Gage of the Scripps Institute. The Newark, Ca., firm, however, has a checkered history, particularly involving the $3 billion California stem cell agency, which once awarded StemCells, Inc., a record $40 million in 2012.

Conflict-of-interest controversies involving the business and the agency's former president, Alan Trounson, and its first chairman, Robert Klein, have surfaced in past years. Trounson was named to the StemCells, Inc., board seven days after he left the agency. In his first and only lobbying appearance before his former board, Klein was successful in winning approval of a $20 million award to the firm despite the fact that it was rejected twice by the blue-ribbon reviewers of the California Institute for Regenerative Medicine(CIRM), as the agency is formally known. It was the only time that the CIRM board has overridden its reviewers in such a fashion. (For more on Trounson and Klein, see the links at the end of this item.)

In its final days, StemCells, Inc., no longer enjoyed financing from the agency. The last award was terminated in 2014 because of poor results. But the outlook for the firm appeared brighter during the past 12 months when its stock climbed to $9.19 and stock analysts were bullish. So how did the company slip into liquidation?

The headline on an item on Barron's by Ben Levisohn said it was a "lesson in biotech risk."

Sam Maddox, writing on the blog on the Web site of the Christopher and Dana Reeve Foundation, which has a special interest in spinal cord injury, commented on the firm's final clinical trial,

"So what happened? You can read the full, depressing press release here. The gist of it is that yes, there was a measured effect of the stem cell injections but the 'magnitude' of effect over time did not trend well enough to spend more money running the trial." 

Larry Goldstein of UC San Diego told STAT reporter Meghana Keshavan,

“Biotech is like prospecting for gold — only a small fraction of companies make it through the gauntlet. Disappointing clinical trial results happen all the time. … You can’t get too alarmed when one thing, such as StemCells Inc., fails.”

One longtime observer of the stem cell world said the company's failure indicated that the state stem cell agency should be wary of  cozy engagement with industry, citing the profit imperatives that drive companies. The observer, who must remain anonymous, told the California Stem Cell Report,

"Academic institutions at least do not exist at the whims of investors, they can manage risk of failure (it happens all the time), and grant money goes much further."

UC Davis stem cell scientist Paul Knoepfler, writing on his blog The Niche, said the company's demise was "sad." He added,

 "A fair question today is how we should now process (the agency's) sizable investment in (the firm). Is there anything that can be learned from it for the agency and the field?"

Irv Weissman, who was on the StemCells, Inc., board at the end, said in a statement reported by the San Francisco Chronicle by Victoria Colliver,

“Given the collective strength of past data with these cells, we sincerely hope others will pick up the many questions we have about the variability of results seen in the Pathway Study (dealing with spinal cord injury).” 

And the California stem cell agency released this comment from Kevin McCormack, its senior director of communications:

"It’s always disappointing when a company that has been trying to pioneer treatments for diseases such as Alzheimer’s or conditions like spinal cord injury fails. We know how hard everyone at the company worked to develop treatments addressing conditions that right now have no viable alternatives. It is the nature of science that not every experiment will work yet even in failure we can learn a lot, and it’s our hope that the lessons learned from StemCells, Inc.'s work will help inform other researchers and ultimately lead to effective therapies." 

Here are excerpts and links to some previous articles dealing with StemCells, Inc., and the California stem cell agency.

Wednesday, September 05, 2012

StemCells, Inc., Wins Another $20 Million From California Stem Cell Agency

Following a second impassioned pitch by its former chairman, Robert Klein, the governing board of the California stem cell agency approved a $20 million award to a financially strapped biotech firm, StemCells, Inc., of Newark, Ca.

Thursday, September 06, 2012

Arm-twisting and Emotion: Stem Cell Directors Move to Reform Appeals on Multimillon Dollar Grants

Frustrated with politicking, “arm-twisting,” lobbying and “emotionally charged presentations,” the governing board of the $3 billion California stem cell agency today approved short-term changes in its grant appeal process and ordered up a study to prepare long-term reforms.

Monday, September 10, 2012

California Stem Cell Firsts: From Emotional Appeals to $40 Million Awards

During the last few months, the $3 billion California stem cell agency, which is approaching its eight-year anniversary, has chalked up a number of important firsts.

Wednesday, October 17, 2012

Los Angeles Times: StemCells, Inc., Award 'Redolent of Cronyism'

The Los Angeles Times this morning carried a column about the “charmed relationship” between StemCells, Inc., its “powerful friends” and the $3 billion California stem cell agency.

Friday, April 05, 2013

StemCells, Inc., Rejects $20 Million from California Stem Cell Agency

When does a financially struggling biotech company turn down a $20 million forgiveable loan?

Thursday, April 11, 2013

StemCells, Inc., Nails Down Controversial, $19 Million Award from California Stem Cell Agency

The stock price of StemCells, Inc., price today jumped as much as 9 percent after the company disclosed it had finally concluded an agreement with the California stem cell agency for a $19.3 million forgivable loan for research twice rejected by the agency's scientific reviewers.

Sunday, May 05, 2013

Cash and Favors: Robert Klein Gives $21,630 to the California Stem Cell Agency

A seemingly innocuous $21,630 gift to the California stem cell agency has kicked up new questions about a controversial $20 million research award and generated a wave of special favors for the donor that stretched out to include a gold mining multimillionaire from Canada.

Wednesday, May 15, 2013

Klein, StemCells, Inc., and $31,000 in Consulting Fees for Torres

The Robert Klein-StemCells, Inc., affair has taken another turn with the disclosure that a vice chairman of the California stem cell agency was paid at least $31,000 over a two-year period by Klein and also voted on behalf of Klein's effort to win approval of a $20 million award for StemCells, Inc.

Monday, July 07, 2014

Former CEO of California Stem Cell Agency Named to Board of Firm that Received $19 Million From the Agency

Alan Trounson, the former president of the $3 billion California stem cell agency, today was named to the board of a company that has received $19.4 million from the agency, raising fresh and serious questions about conflicts of interest at the state-funded research program.

Wednesday, July 09, 2014

California Stem Cell Agency Bans Some Communications with its Former President; Conflict of Interest Feared

The California stem cell agency today banned its employees and governing board from communicating with its former president, Alan Trounson, about matters involving StemCells, Inc., which holds a $19.4 million award from the state program.

Friday, July 25, 2014

Los Angeles Times: Flawed Investigation Magnifies California Stem Cell Scandal

The Los Angeles Times is carrying another column excoriating the $3 billion California stem cell agency, and it involves the same set of players, the agency’s former president and a San Francisco area stem cell company.

StemCells, Inc., 'Winding Down' Its Business; Shareholders Could Be Left in Cold

StemCells, Inc., a publicly traded firm that once held close ties to the $3 billion California stem cell agency, this morning said that it was going to close its doors and that its shareholders may not receive a dime in the liquidation.

The announcement was buried deep in a press release focusing largely on the termination of the firm's spinal cord injury trial, which the California company said was not showing sufficient benefit to patients to continue. The news release continued,

"The company also announced that, in light of the decision to terminate the Pathway Study, the company’s available strategic alternatives and its current cash position, the board of directors approved a plan to wind down the company.  As part of this process, the company will evaluate opportunities to monetize its intellectual property, including data collected in its studies and trade secrets, as well as the transfer of its proprietary HuCNS-SC cells and other assets through a potential sale. The company will not proceed with its earlier plans to conduct a rights offering, for which it had filed a registration statement with the SEC.

"As of May 31, 2016, the company had cash and cash equivalents of approximately $5.5 million. The company cannot determine with certainty the amount of any liquidating distribution to its stockholders and it is possible that there will be no liquidating distribution to stockholders. The amount of any cash distributed to its stockholders will depend upon, among other things, the company’s current liquid assets offset by its known and unknown liabilities as well as operating expenses associated with the wind down."

StemCells, Inc., was co-founded by Irv Weissman, a Stanford stem cell researcher. It was the only company to be awarded $40 million in a single round by the California stem cell agency. The awards followed vigorous lobbying by the former chairman of the agency, Bob Klein,

StemCells, Inc., also appointed Alan Trounson to its board just days after he left his post as president of the agency, triggering a controversy about conflicts of interest. 

The California Stem Cell Report will have more on the closure of StemCells, Inc., later. 

Eleven Percent Stock Price Drop for StemCells, Inc., on Bad News From California Stem Cell Agency

Six month performance StemCells, Inc., stock price
Yahoo chart

The stock price of StemCells, Inc., of Newark, Ca., plummeted nearly 11 percent today following a federal filing that it had lost its $19 million award from the California stem cell agency.

Termination of the Alzheimer’s research award to the publicly traded company was announced last Thursday by the $3 billion state agency. The publicly traded firm filed a report with the Security and Exchanges Commission on Friday, but it was not seen widely until today.

The price of the company’s stock fell 10.78 percent in heavy trading, 2.2 million shares compared to an average volume of about 676,000. It closed at 91 cents, still above its 89 cent low for the last 12 months. The stock continued to sink in after-hours trading. The 52-week high is $2.43. 

The award has been controversial since it was approved in 2012 on a thin, 7-5 vote by the 29-member governing board of the agency, formally known as the California Institute for Regenerative Medicine (CIRM). It was the first CIRM award approved that had been rejected twice by CIRM’s blue-ribbon grant reviewers. It was the first involving heavy, public lobbying by the first chairman of the agency, Robert Klein. And it was the first award involving a company that later appointed a top CIRM executive, former President Alan Trounson, to its board of directors. (See here and here.)

The company’s brief, SEC filing said the forgivable loan was cancelled because of a failure to meet a milestone it had negotiated with the stem cell agency. The filing echoed comments by CIRM.

Last Thursday morning the California Stem Cell Report requested a comment on the CIRM announcement from Martin McGlynn, president of StemCells, Inc., which was co-founded by eminent Stanford researcher Irv Weissman and serves on its board of directors.  McGlynn responded this afternoon.

He said that the company had reported on its research Nov. 20 at an investor event in New York. He said that “we did not see the research showed an improvement in the predetermined measures of memory enhancement.”

The firm has collected $9.6 million from the state. In response to a question about whether the agency would be repaid any of the loan, Kevin McCormack, senior director of communications for CIRM, replied,

“We are in the process of winding down that loan so as we do that we'll get a better idea of the final financial picture.”

StemCells, Inc.,’s stock price has been falling since July 3, when it hit its 12-month high at $2.43.  On July 7, the company announced the appointment of Trounson to its board, only seven days after he left the stem cell agency. The move surprised the agency. Its subsequent limited investigation said that it could find no evidence of illegal actions. The California Stem Cell Report suspects that most investment analysts would not link Trounson's appointment to the price drop. 

Here is the text of McGlynn’s response.

"Thank you for your email, and your request for comment, which I have provided below:

"As you know, Alzheimer’s Disease is significant unmet medical need. The funding for our Alzheimer’s program was in the form of a forgivable loan. Thus, the loan would be forgiven in the event that certain predetermined preclinical milestones were not accomplished. Those milestones included a “go/no go” goal of replicating certain behavioral changes observed in mouse models of relevance for Alzheimer’s, obtained in a small pilot study that had been conducted by our collaborator, Dr. Frank LaFerla, Chancellor's Professor and Chair, Neurobiology and Behavior School of Biological Sciences, University of California Irvine, and described in detail in the original application for funding under the CIRM Disease Team RFA. It has become clear to both the CIRM and StemCells that this goal has not been achieved, so the parties have begun the process of winding down the program.

"We presented this data during our recent Analyst & Investor Event in New York on November 20th. The conference was webcast live and a replay of that event is available at http://www.media-server.com/m/p/m8h3mw5w. During the conference, the Company presented data showing that the Company’s proprietary human neural stem cells, HuCNS-SC® cells robustly engrafted into the hippocampus for up to 3 months post transplantation (the longest time point tested). The Company also presented compelling data derived during the preclinical testing, showing that HuCNS-SC transplantation significantly increased the number of pre- and post-synaptic hippocampal spines in the AD mice, suggesting an increase in synaptic density in this important brain region.

"Unfortunately, despite this compelling histological data, we did not see an improvement in the predetermined measures of memory enhancement and the Company stated that in the absence of consistent behavior modification in the animal models tested, pre-determined success criteria were not met, and that it would be working with the CIRM on an orderly wind down of the program.

"Importantly, we do not view this as a “loss”, rather, we believe we have made a significant contribution to the field. We are of course disappointed that we didn’t see the preclinical efficacy that we had hoped for, but we are grateful to have had the opportunity to collaborate with Dr. LaFerla and CIRM to pursue this worthwhile cause. It is possible that in the future, more reliable and validated animal models of memory enhancement will emerge, at which time StemCells, Inc. will be well positioned to reenter the arena.

"Thank you
"Martin McGlynn"

California Stem Cell Agency Cancels $19 Million Award to StemCells, Inc.

StemCells, Inc. has lost its controversial, $19 million award from the California stem cell agency, it was disclosed today.

Cancellation of the forgivable loan was revealed in slides posted on the agency's Web site as part of the presentation today by its new president, Randy Mills, to the agency's board of governors.

The slide said the Alzheimer's award was "discontinued due to lack of functional improvement observed in preclinical studies" after the agency had provided the publicly traded firm with $9.6 million. It was not immediately clear whether any of the money will be repaid.

The company has not yet announced the loss of the award but has been asked for comment.

The most recent cash infusion came last spring in a move that coincided with the appointment of former CIRM President Alan Trounson to the StemCells, Inc., governing board. Trounson joined the board only seven days after leaving the California Institute for Regenerative Medicine (CIRM), as the agency is formally known.  The move surprised and shocked the agency, but it said its limited investigation detected no illegal action in the disbursement to the company. (Also see here.)

The StemCells, Inc., application was approved by the 29-member CIRM board in 2012, on a 7-5 vote,  after being rejected twice by the agency's blue-ribbon reviewers. The approval followed heavy lobbying by the former chairman of the agency, Robert Klein. It was the first time that the board had approved an award that reviewers had turned down twice. It was also the first case of such public lobbying by Klein.

Later in 2012, Pulitzer Prize-winning columnist Michael Hiltzik of the Los Angeles Times wrote that the award was "redolent of cronyism."  Hiltzik asked rhetorically what was the company's secret in winning approval of the award. He then wrote,

“StemCells says it's addressing 'a serious unmet medical need' in Alzheimer's research. But it doesn't hurt that the company also had powerful friends going to bat for it, including two guys who were instrumental in getting CIRM off the ground in the first place.”

Hiltzik referred to Klein and eminent Stanford research Irv Weissman, a co-founder of StemCells, Inc., who still sits on its board and holds considerable shares in the Newark, Ca., company.

Weissman was a key backer of the ballot measure that created CIRM in 2004 and helped raise money for the ballot campaign.  Trounson has recused himself on some matters dealing with applications connected to Weissman. Trouson has been a guest at Weissman's ranch.

Los Angeles Times: Flawed Investigation Magnifies California Stem Cell Scandal

The Los Angeles Times is carrying another column excoriating the $3 billion California stem cell agency, and it involves the same set of players, the agency’s former president and a San Francisco area stem cell company.

The headline on the column by Pulitzer Prize-winning columnist and author Michael Hiltzik says

 “California’s stem cell scandal gets worse.”

The piece is up on the Web site of the Times, which is California’s largest circulation newspaper, claiming 4 million readers online and in print on Sunday. Hiltzik's column is also circulated to other newspapers around the nation. 

Hiltzik dug into this week’s investigation by CIRM, as the agency is known, involving the appointment of Alan Trounson, the former president of the agency, to the board of StemCells, Inc.(SCI), earlier this month, just seven days after he left the agency. The publicly traded company has been awarded $19.3 million by the agency under unusual circumstances. Trounson is expected to receive compensation for his work on the board. Last years, members of SCI board received as much as $99,000 in stock and cash.

On Thursday, the agency’s new president, Randy Mills, reported the results of what he described as a “severely” limited investigation conducted by the board’s longtime outside counsel. Mills said there was no evidence that Trounson committed any illegal acts in May or June.

Hiltzik said the investigation itself was flawed by conflicts of interest. He wrote,

“To begin with, CIRM placed the investigation in the hands of its law firm, San Leandro-based Remcho, Johansen, and Purcell. The Remcho firm is the antithesis of an objective, independent party; its lead partner on the CIRM account, James Harrison, has been a CIRM insider from the start. He helped draft Proposition 71. He's been counsel to the agency or its governing board since 2005.

“As it turned out, Harrison couldn't conduct the investigation himself, because he was involved in some of the transactions with Stem Cells Inc. under review. Instead of hiring an independent law firm to do the job, CIRM allowed the review to be turned over to Harrison's own partner, Margaret R. Prinzing.

“Trounson hasn't been available for comment; Prinzing reported that he was back in his Australia home, and she herself communicated with him by email. Stem Cells declined Friday to our request for comment. We've reached out for comment to the law firm, and will update if we hear back.”

Hiltzik said the time frame was much too narrow. He said the probe should have gone back to the events of the summer of 2012, when StemCells, Inc., was awarded the cash with the help of the former chairman of the stem cell agency, Robert Klein.  It was the first time Klein lobbied the board after leaving it. It was the first and only time the board has approved an application rejected twice by its blue-ribbon reviewers.  

Hiltzik wrote,

 “Trounson didn't speak on the Stem Cells application during that September meeting. But he did weigh in on another Alzheimer's proposal from researchers at USC and UC Davis, which had received a higher score from the reviewing panel. That proposal, like the Stem Cells application, had already been rejected once by the CIRM board, and had come back on appeal.

“At the September meeting, Trounson told the CIRM board that the scientific reviewers had misgivings about whether the USC/UC Davis proposal was sufficiently stem-cell oriented to fit within CIRM's portfolio. He didn't speak out against the application, but merely passed along the grant reviewers' doubts. ‘It remains questionable, and I think you have to decide yourselves on it,’ he told the board.

“It isn't clear whether approval of that proposal necessarily would have killed the Stem Cells application--theoretically, both could have been approved. But the board then was looking for one Alzheimer's project to fill out its disease-therapy portfolio, and Stem Cells got the nod. The board rejected the USC/UC Davis application, 10-4.

“In any case, Trounson plainly was participating in discussions that carried possible implications for his future employer, as far back as 2012.”

Hiltzik also wrote that SCI “may be standing on shaky financial ground,” based on the details disclosed in the memo on the results of the investigation. Among other things, the memo said that the firm had failed to meet financial standards in its contract with CIRM but was still seeking a partial payment anyway.

Hiltzik’s summary:

“Here's what we know so far: A well-connected company with questionable finances and a research proposal of uncertain scientific validity has received favorable treatment from CIRM. An investigation of the relationship between the firm and CIRM's management was placed in the hands of a law firm inextricably entwined with management, and given an inappropriately narrow scope. The unanswered question burning a hole through CIRM's credibility is whether Stem Cells Inc. got its money because its research was promising, or because it knew the right people.”

(The Times also carried a short news piece late Friday dealing with the Trounson affair. The article by Amina Khan said the agency is continuing in "damage-control mode." It recounted Mills pledge not to accept employment with a CIRM grant recipient until one year after he leaves the agency. The story also referenced the Hiltzik column.)

(Editor's note: The above parenthetical material was not contained  in the original version of this item. An earlier version this item also incorrectly said the Hiltzik column was expected to be published in print on July 27.)

Los Angeles Times: California Stem Cell Agency Rife with Conflicts and Unrealistic Expectations

The Los Angeles Times, California’s largest circulation newspaper, is carrying a piece this weekend about “cronyism,” conflicts of interest and “inflated expectations” at the state’s $3 billion stem cell agency.

The column by Pulitzer Prize-winning writer and author Michael Hiltzik used this month’s Trounson Affair as a starting point to dissect the situation at the California Institute for Regenerative Medicine (CIRM), as the agency is formally known.

Trounson was appointed to the board of StemCells, Inc., of Newark, Ca., on July 7, just seven days after leaving the agency. StemCells, Inc., holds a $19.4 million award from the agency.  CIRM has ordered a full review of the situation and barred its staff from communicating about StemCells, Inc., matters with Trounson. 

But even before Trounson’s appointment, there were issues involving StemCells, Inc.(See here and here.)  Hiltzik said,

 “The relationship already reeked of cronyism.”

Hiltzik wrote,

“Trounson's move comes as CIRM must begin looking to the future, but any discussions about extending the agency's life span will have to address the flaws created by Proposition 71 (the ballot initiative that created the agency in 2004). Among them is the program's very structure, and even its scientific goals.”

Hiltzik continued,

“How bad are the conflicts? When the board considered a proposal earlier this year to spend $16 million to attract three star scientists to California, so many members had to recuse themselves that only nine were left to vote. (Six ended up voting in favor.)

“When conflicts of interest are so rife that only one-third of your board can weigh in on a major policy issue, that's tantamount to not having any board at all.”

Some of the issues at the agency have to do with the ballot campaign that created it in 2004, an election in which California voters were led to believe that miraculous stem cell therapies were imminent.

Hiltzik wrote,

“Programs like CIRM are always susceptible to inflated expectations.

"”Since Big Science needs great public support it thrives on publicity,’ the physicist Alvin Weinberg, a veteran of the Manhattan Project, wrote in a famous 1961 article in "Science" about the drawbacks of big-money scientific research. He added: ‘The inevitable result is the injection of a journalistic flavor into Big Science which is fundamentally in conflict with the scientific method.... The spectacular rather than the perceptive becomes the scientific standard.’"

Hiltzik acknowledged the contributions that CIRM has made to stem cell science.

“CIRM-funded labs have produced genuine achievements. But the agency tends to delineate its progress in buildings built, papers published, and big-name scientists lured to California. But the specific cures promised by the Proposition 71 campaign haven't materialized, which doesn't surprise anyone steeped in the realities of the scientific method.”

Hiltzik concluded,

“Even if one believes the need for California to devote $3 billion to a narrow, extremely speculative field of science, the Trounson case and other CIRM administrative missteps have made clear that Proposition 71 created the wrong framework to manage a complex research effort. The initiative left the public with no way to tell if its money has been well spent, and no accountability if it hasn't.

“Moreover, the program deprived potentially more promising research efforts of resources and contributed to the general impoverishment of California's entire higher-education system. If its sponsors have the audacity to ask taxpayers for even more money under the same terms as Proposition 71, the reply should be a resounding ‘no.’ If the voters are gullible enough to repeat the same mistake they made in 2004, there's no cure for them.”

The Hiltzik column appeared online last night. It is scheduled to appear in the Sunday print edition of the Times, which says it has a combined print and online reach of 4 million readers. 

California Stem Cell Agency Examining Lawsuit Alleging Patient Endangerment and 'False Certification'

The California stem cell agency today said it is reviewing a lawsuit involving the recipient of a $19.4 million award that alleges the firm is manufacturing human cells in a process that puts “patients at risk of infection or death.”

The most serious allegations against StemCells, Inc., of Newark, Ca., involve its clinical trials. The stem cell agency’s $19.4 million research award to StemCells, Inc., does not involve human beings, only initial development of a possible therapy for Alzheimer’s over the next three years. Both the clinical trials and the Alzheimer’s research use the same proprietary cells, HuCNS-SC.

The company said in a 2013 press release,

"We know from the preclinical work that our proprietary HuCNS-SC cells survive in the toxic environment of the Alzheimer's disease brain and restore memory under the regulation of the host." 

The lawsuit was filed by a former senior manager, Rob Williams, of the publicly traded StemCells, Inc. He alleged he was fired after complaining about the cell problem to senior management.

In addition to possible injury, the lawsuit said that “the use of adulterated stem cells lots could skew patient test results, effectively jeopardizing data behind years of clinical trials and research.”  

The lawsuit said that StemCells, Inc., receives

“…millions of dollars in government funding, including grants from the California Institute for Regenerative Medicine (CIRM). As part of certifications that Defendants made and, on information and belief, continue to make, to the State of California in order to obtain such funding, Defendants represent that their manufacturing processes yield stem cells that are ‘safe for human stem cell transplantation.’ Additionally, in order to secure CIRM funding, Defendants represented and represent that the company follows current Good Manufacturing Practices (cGMPs) promulgated by the U.S. Food and Drug Administration (FDA), a set of standards designed to protect the public from dangers to consumer/patient health and safety. Plaintiffs protected activity, as described above, included efforts to stop, complaints about and refusal to engage in or cover up violations of these standards, and by extension the false certifications submitted to the government, certifications that the company used and uses in order to secure substantial funding.”

The lawsuit also alleged that StemCells, Inc., violated FDA standards and provided false information to the FDA, which has not yet responded to queries from the California Stem Cell Report.

In response to a query, Kevin McCormack, spokesman for the $3 billion stem cell agency, said the agency was carefully reviewing the lawsuit.

Williams attorney, Daniel Velton, has not responded to queries about whether he or Williams informed the FDA of the issues raised in the lawsuit.

StemCells, Inc., did not respond to queries about the matter. (Late yesterday, the firm said the allegations have no merit. See full text here.)

The company was founded by Stanford researcher, Irv Weissman, who sits on its board and is chairman of its scientific advisory board. His wife, Ann Tsukamoto, is executive vice president. Last week the stem cell agency announced that it was conducting a full review of its activities with the firm after it appointed the agency's former president, Alan Trounson, to its board seven days after he left the agency. 

Here is a copy of the lawsuit, which was first reported by Elizabeth Warmerdam of Courthouse News Service.

California Lawsuit Charges StemCells, Inc., with Putting Patients at Risk

A former senior manager at StemCells, Inc., which holds a $19.4 million award from the California stem cell agency, has filed a lawsuit alleging that “deficiencies in the company's cell lines put patients at risk of infection or death during clinical trials.”

The charges were contained in a suit by Rob Williams in Alameda County court, according to an article on Courthouse News Service written by Elizabeth Warmerdam. Williams is suing for wrongful termination, retaliation and violation of the California False Claims Act.

According to the article, the complaint said that StemCells, Inc., of Newark, Ca., says its stem cells are safe for human transplantation.  Warmerdam continued,

“Williams says he was hired as the company's senior manager of manufacturing in December 2013 to oversee its manufacturing facility, where stem cell cultures are cultivated for use in clinical trials.

“'Shortly after beginning his employment, plaintiff noted poor sterile technique, failure to adhere to current Good Manufacturing Practices in the company's manufacturing process, and substantial deficiencies in the company's Manual Aseptic Processing of HuCNS-SC (Human Central Nervous System Stem Cells) cell lines - failure and deficiencies that put patients at risk of infection or death during ongoing clinical trials,’ Williams says.

“Williams claims he also saw manufacturing deviations during cryopreservation of Working Cell Bank lots, leading to numerous stem cell lots with dangerously high numbers of damaged cells.

“'Knowing that these cells were to be injected into human patients, and that the high level of damaged cells and the possibility of contaminating microorganisms could cause serious harm to patients, plaintiff immediately took his concerns to upper management. He also noted that the use of adulterated stem cells lots could skew patient test results, effectively jeopardizing data behind years of clinical trials and research,’ the complaint states."

It was not immediately clear whether Williams’ allegations directly involve the work being funded by the California stem cell agency(see here, here and here), which has been asked for comment on the lawsuit.  The California Stem Cell Report has also asked the publicly traded company for a comment, although the article said the firm did not respond to a query by Courthouse News Service.

 (Late yesterday, the firm said the allegations have no merit. See full text here.)

The lawsuit said that Williams was told to conceal his finding from unspecified reports and that he was suspended shortly thereafter. It said that he sent emails to upper level management about his concerns and that he was fired a few weeks later.

Williams’ Linked In profile said that he has 15 years industry experience, including nearly six years as a senior manager at Alvine Pharmaceuticals and three at Johnson&Johnson.

Williams is seeking unspecified punitive damages from StemCells, Inc.

Courthouse News Service is a Pasadena-based national news service for lawyers and the news media.

San Francisco Business Times: California's Trounson Affair Damages Likelihood of Future Stem Cell Funding

The San Francisco Business Times yesterday said the Trounson Affair is the “latest embarrassment” for the $3 billion California stem cell agency and threatens its attempts at securing additional funding.

In an opinion piece, reporter Ron Leuty wrote,

“California's stem cell research funding agency needs a home run to score more public funding. Instead, a conflict-of-interest problem is giving it the wrong kind of attention.”

Leuty was referring to the appointment of Alan Trounson, the former president of the agency, to the board of StemCells, Inc., of Newark, Ca., which holds a $19.4 million award from the California Institute for Regenerative Medicine (CIRM), as the agency is formally known. The appointment came just seven days after Trounson left the agency.

Randy Mills, the new president of the agency, has ordered a full review of agency activities involving the publicly traded StemCells, Inc. Agency employees have been barred from discussing StemCells, Inc., matters with Trounson.

Trounson and the company gave no notice to the agency about the pending appointment. Leuty wrote, 

“He apparently never discussed the move, CIRM spokesman Kevin McCormack said, even as an agency attorney briefed him before his departure on what he could and could not do after leaving CIRM.”

Leuty continued,

“CIRM spokesman McCormack said Trounson's decision ‘had nothing to do with us. The conflict wasn't started by us.’ 

“That may indeed be the case, but religious and financial opponents of CIRM won't let voters see it that way. Despite the progress of various research programs but CIRM grant winners, that combination may force the Democratic Party and Gov. Jerry Brown not to support a 2016 ballot measure to re-fund the agency. 

“The Trounson Affair is yet another strike that deepens a perception problem that threatens to distract voters from the win CIRM desperately needs.”

The Business Times story comes as StemCells, Inc., this morning announced it planned to raise $20 million by selling more than 11 million shares to two "well-recognized biotechnology investors." The company's stock price dropped nearly 8 percent in trading this morning and stood at $1.86 at about 7:30 a.m. Pacific Daylight Time. The share price was at $2.31 last Monday when Trounson's appointment was announced.

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.