StemSource Struggles With Low Funding, Controversial Research By CARLOS MARTINEZ Staff Reporter StemSource Inc. in Thousand Oaks is every bit the struggling biotech startup its founders anticipated. Its offices filled with used furniture and second-hand computer equipment, StemSource is making do with the $2.5 million it raised last fall in its first round of funding. About half came from a medical device company, the rest from family, friends and individual investors. “We knew things would be tough at first and we expected that funding would be difficult,” said company CFO Terry Butler. StemSource had hoped to raise $4 million to $5 million during that first round, but it “just wasn’t there,” Butler said. The year-old firm is developing proprietary stem cell technology that Butler says could ultimately help heal damaged organs and tissues without the problems of rejection facing other types of stem cells. Stem cells are so-called “unprogrammed” cells that give rise to others in the body. They are considered a potential source of replacement cells and tissues to treat disorders such as spinal cord injuries, diabetes and stroke. But even as it undertakes research that could develop therapies the company says may be worth millions in potential revenue, the tiny startup is struggling to get a second round of funding off the ground. “We had an initial goal of $8 million,” Butler said, “but we felt $4 million would probably be more realistic.” “The problem today is that venture capitalists are focusing less on startup companies and more on their portfolio,” said Brent Reinke, managing director of Crosby Heafey. “Most of the investments I see in biotech are from family and friends and wealthy individuals that put a lot of faith in the individuals and the company.” Butler expects revenue of between $10 million and $20 million in the first year after the company’s products hit the market, hopefully in 2005. He believes those figures could double in every succeeding year. StemSource received about half of its initial funding from small San Diego-based medical device-maker Macropore Inc., which went public in 2000. “It’s much more difficult to have that kind of relationship with a larger company, They’re so much bigger and so there isn’t this equal negotiation,” Butler said. With funding trickling in slowly, StemSource went ahead last month with one revenue-generating idea it believes will raise about $1.5 million this year: a fat cell bank that stores fat tissue retrieved from liposuction patients for possible future use. The company, which began operations in January 2001, moved into new quarters in August, a 15,000-square foot building, about half of which is devoted to lab space. Even so, scant funding makes the company’s leadership choosy about how it spends its money. “Priorities change from day to day,” said CEO Mark Hedrick. “Without a lot of money and without a big staff you can’t get everything done that you want to do. “You do what’s most urgent and what’s most critical, but it is a juggling act.” StemSource’s nine employees saved money by doing their own interior renovations and by purchasing furniture at a dot-com auction several months ago. “You do whatever has to get done,” Butler said. “We come in on a Saturday and we’ll go into the different labs and hang phone wires and paint floors.” StemSource is seeking out individual investors and other such “angel investors” but, Butler said, he’s not averse to funding from venture capitalists as long as the terms are right. “What they usually want is more control over business decisions and more control over the strategic direction of the company,” he said. Some analysts see potential in StemSource. Others, like Eric S. Sharps of Four Square Partners, say biotech investments aren’t for everyone. “There’s a lot of risk involved, especially for small investors,” he said. The lure of potentially millions is what drives investors to these small biotechs, said Crosby Heafey’s Reinke. “StemSource is one startup that has a lot of potential and shows some good signs,” he said, “but biotech is funny. Something may look extremely promising, but then never make it.” That’s nothing new, said James Harber, director of Ventura College’s Central Coast Biotechnology Center, but investments involving stem cell research are perhaps riskier than most. Research like that conducted by StemSource offers the chance to perhaps eradicate maladies such as Alzheimer’s disease and diabetes, Harber said. But stem cell research has been the subject of great controversy in recent years as scientists and religious leaders debate the use of stem cells from fetuses. None of which applies to him, said Hedrick, who hopes his research into stem cells taken from fat would eliminate the need for fetal cells. Hedrick said that stem cells taken from fat can be engineered into various kinds of tissues bone, cartilage, muscle and fat with the same ease as those from fetal cells. Because fat is so abundant, it can be a major source of stem cells for scientific use. Such laboratory-engineered stem cells could be available within three years, Hedrick said. “Stem cells are really the best engine out there to drive healing,” he said. “Not only can they participate in the healing process, but they can handle every different tissue or organ in the body.” Today, the company is working with doctors and patients who wish to store their own stem cells in their cell bank where they are frozen and can be retrieved eventually to heal injuries or conditions. “That way, you don’t have rejection issues like you have in instances of transplants,” Hedrick said, adding that a person who may be in his 70s could use his own stem cells stored at age 30, and would thus have the tissue of a 30-year-old man to heal an injury rather than weaker cells of a 70-year-old.
