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

By Dr. Matthew Watson

When does a financially struggling
biotech company turn down a $20 million “forgivable loan?”

When it is StemCells, Inc., of Newark,
Ca., and the cash is being offered by the $3 billion California stem
cell agency. The research program has handed out nearly 600 awards, and it is the first time that a recipient has rejected funding.

That's the latest development in a stem
cell saga that began publicly last July and that involved unusual personal lobbying by the former chairman of the Golden State's stem cell research agency. The high point of the saga may have come in
September when the agency's governing board finished awarding
StemCells, Inc., $40 million in two different awards. But there was a
catch. StemCells Inc., had to match that figure with $40 million of
its own.

Late last month, StemCells, Inc., threw
in the towel on the $20 million awarded on its cervical spinal cord
injury application. In comments to analysts March 21, Rodney Young,
chief financial officer of the publicly traded company, said:

“The funding would have been in the
form of a forgivable loan, however, we have elected not to borrow
these funds from CIRM(the stem cell agency).”

According to the Seeking Alpha transcript of the conference call with analysts, Young said,

“You may also recall that last
September, CIRM approved a separate application under the same
disease team program for Alzheimer's disease, which was also for up
to $20 million in the form of a loan. We remain in confidential
negotiations with CIRM regarding the terms and conditions that would
attach to this loan.”

The company provided no explanation for
rejecting the cash, either in the conference call transcript or in
its press release.

During the conference call, StemCells,
Inc., reported continuing losses. For 2012, net losses totaled $28.5
million compared to $21.3 million in 2011. Revenue for 2012 was $1.4
million compared to $1.2 million in the previous year.

The awards last year to StemCells,
Inc., founded by Stanford's eminent researcher Irv Weissman, stirred
up a bit of a ruckus. The spinal injury award was handed out
routinely in July. Scientific reviewers gave it a score of 79 and
recommended funding. It was another matter on the Alzheimer's
application. It was scored at 61. Reviewers said it did not merit
funding. But the company publicly appealed to the full board, which sent the
application back for more examination. It was rejected again.
Nonetheless, in September, the 29-member board approved the award on
a 7-5 vote, bypassing a rival Alzheimer's application scored at 63.
It was the first time in the eight-year-history of the agency that
its board approved an application that was rejected twice by
reviewers.

Approval came only after strong
lobbying by Robert Klein, former chairman of the board. Klein was
also chairman of the ballot campaign that created the agency, and
Weissman, who holds stock in StemCells, Inc., and sits on its board,
was a major fundraiser for the campaign.

The Los Angeles Times' Pulitzer
Prize-winning columnist, Michael Hiltzik, wrote in October that
the process was “redolent of cronyism.” He said a
“charmed relationship” existed among StemCells, Inc., its
“powerful friends” and the stem cell agency.

As for the remaining $20 million award,
Martin McGlynn, CEO of StemCells, Inc., expects “quick” action on
finally securing the cash.

Here is an exchange that came during
the March conference call between McGlynn and analyst Kaey Nakae of
Ascendiant Capital Markets.

Nakae: “Okay. Just 2 more questions.
I guess the first one, as it relates to CIRM.
In deciding to decline the funding for spinal cord yet continuing to
pursue the funding for Alzheimer's, is there a difference in what
you're getting from them in terms of potential terms and conditions
that allow you to proceed on one and not the other, or is it the fact
that you're already in human with -- in spine, and still very
preclinical with Alzheimer's?”

McGlynn: :”I think you're very
definitely -- you're getting at some important criteria when one
considers how to fund programs whether you use debt or equity,
etcetera. So I wouldn't disagree with anything that you've outlined
or surmised. But I just would pray your indulgence until we're
finished, the negotiations with CIRM, which are coming to a close and
we expect those to resolve pretty quickly with regards to the
Alzheimer's program. And then quite frankly, we can be way more
forthcoming and way more disclosive with regards not only to our
decisions, but to our thinking.”

StemCells, Inc., was trading at about $1.65 at the time of this writing, down slightly from the previous
day. Its 52-week high is $2.67 and its 52-week low $0.59.

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